OPEC Sneezes, US Industry Gets the Flu and Canada Gets Pneumonia

Iranian Oil Minister Zanganeh presented a very important and revealing attitude today. He accused Saudi Arabia and the UAE of beginning a war within OPEC. While it is true that all OPEC members are, at heart, competitors behind the scenes, the appearance and actual performance of cooperation can, for a time, avoid the natural consequence of their competition -- a price war.  Zanganeh just announced, for those participants astute enough to recognize it, that the price war was about to begin.

The pecking order on pain, and the reason for the designation of sneeze, flu and pneumonia, is the reverse order of the cost of production, with a nod to reserve capacity. Canada is at the bottom of the world's totem pole.

Where will it end? My guess is in the $20's.  What say you?

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(edited)

Trident is a harbinger of what will happen if we get another dip to the 20s.  Venezuela will quit producing entirely as will the sands.  The companies in the sands won't have infinite access to losing infinite dollars.  KSA will disintegrate into lawlessness and death of the royals as their palaces are stripped of wealth and the oil stops flowing because they can't produce it in the 20s either.  They used up something like $250B of their reserves in just one year of lower for longer and we only had prices in the 20s for a day or two.  In addition, since the drop in oil prices starting in 2014, KSA has not been able to increase foreign reserves.  This is a clear indication that the current price of oil is well below the cost of production in KSA.

 

saudi-arabia-foreign-exchange-reserves.png

Edited by wrs
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2 minutes ago, wrs said:

Trident is a harbinger of what will happen if we get another dip to the 20s.  Venezuela will quit producing entirely as will the sands.  The companies in the sands won't have infinite access to losing infinite dollars.  KSA will disintegrate into lawlessness and death of the royals as their palaces are stripped of wealth and the oil stops flowing because they can't produce it in the 20s either.  They used up something like $250B of their reserves in just one year of lower for longer and we only had prices in the 20s for a day or two.  In addition, since the drop in oil prices starting in 2014, KSA has not been able to increase foreign reserves.  This is a clear indication that the current price of oil is well below the cost of production in KSA.

 

saudi-arabia-foreign-exchange-reserves.png

I might remind you, Mr Sullivan, that cost of production has NOTHING to do with futures prices in the short term. Nothing is impossible with futures prices.

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1 minute ago, William Edwards said:

I might remind you, Mr Sullivan, that cost of production has NOTHING to do with futures prices in the short term. Nothing is impossible with futures prices.

But starting a price war isn't a function of the futures markets and I think the royals in KSA pay close attention to the graph I posted.  KSA knows that they are losing money on every barrel they sell below $80.  Who is going to start a price war?  Iran?  I don't think so.  All the bluster about being able to handle low prices from Iran and KSA back in 2015 are words that have been eaten and caused massive indigestion as the KSA reserves graph suggests. 

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3 minutes ago, wrs said:

But starting a price war isn't a function of the futures markets and I think the royals in KSA pay close attention to the graph I posted.  KSA knows that they are losing money on every barrel they sell below $80.  Who is going to start a price war?  Iran?  I don't think so.  All the bluster about being able to handle low prices from Iran and KSA back in 2015 are words that have been eaten and caused massive indigestion as the KSA reserves graph suggests. 

We see things quite differently. In the current situation, all producers, including Aramco, sell at a futures-based price.

And you can be sure that Iran will be willing to sell oil at ANY price they can get. And the world producers will follow. Just wait and see.

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5 minutes ago, William Edwards said:

We see things quite differently. In the current situation, all producers, including Aramco, sell at a futures-based price.

And you can be sure that Iran will be willing to sell oil at ANY price they can get. And the world producers will follow. Just wait and see.

Wait and see what?  You are starting out with a guess and now it's certainty? 

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1 minute ago, wrs said:

Wait and see what?  You are starting out with a guess and now it's certainty? 

That is the role of a competent forecaster.

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(edited)

18 hours ago, William Edwards said:

Where will it end? My guess is in the $20's.  What say you?

Nah, not $20's.

Competition will start between all major producers. My "guess" is some time in 2020.  

Demand will start to decelerate but not in a meaningful way for 4 or 5 years. SUPPLY is what you need to watch. 

Oil markets have always traded on headlines, Mideast conflicts and OPEC propaganda. The reason being there is no transparency (except US EIA) in the markets.  OPEC consistently lies. It's hard to break old habits. 

However, the increase in supply will reach a point where it can no longer be ignored.  US refineries can't run anymore US oil.  ALL NEW PRODUCTION WILL BE EXPORTED. Even if more US refineries add condensate splitters to handle more light shale all the current imports (~6 mil) will then go back on international market. Too much supply.

India and China power the oil demand growth. That is where the competition will be focused.  This is when cost of production will be the key determinant of price. 

Edited by Falcon

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2 hours ago, wrs said:

Trident is a harbinger of what will happen if we get another dip to the 20s.  Venezuela will quit producing entirely as will the sands.  The companies in the sands won't have infinite access to losing infinite dollars.  KSA will disintegrate into lawlessness and death of the royals as their palaces are stripped of wealth and the oil stops flowing because they can't produce it in the 20s either.  They used up something like $250B of their reserves in just one year of lower for longer and we only had prices in the 20s for a day or two.  In addition, since the drop in oil prices starting in 2014, KSA has not been able to increase foreign reserves.  This is a clear indication that the current price of oil is well below the cost of production in KSA.

 

saudi-arabia-foreign-exchange-reserves.png

Not below the cost of production but below the price that would solve their huge deficits. They never saw this coming. Add the potential reduced need for petroleum due to natural gas and renewables. Also, China and India are NOT reducing coal dependence. 

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Just now, ronwagn said:

Not below the cost of production but below the price that would solve their huge deficits. They never saw this coming. Add the potential reduced need for petroleum due to natural gas and renewables. Also, China and India are NOT reducing coal dependence. 

Yeah, but just like royalties are a cost of production, I think political stability for the royals staying in control is part of the cost of production there.  So the taxes on the oil and the royalties paid to the royal family in order to maintain social order are a requirement for consistent production in a stable society.  To me, the social costs are a cost of production which if not paid will ultimately result in falling production.  Plenty of good examples, Nigeria, Libya, Venezuela and Mexico all come to mind.

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West Texas Intermediate (WTI) crude oil fell nearly three percent Thursday while the Brent benchmark declined at a more modest two percent.

The June WTI contract lost $1.79 to settle at $61.81 per barrel. The WTI fluctuated within a range from $60.95 to $63.68.

Brent crude oil for July delivery ended the day at $70.75 per barrel, reflecting a $1.43 decline.

“Global inventories have stabilized with modest draws in key producing countries and builds in key consuming countries,” Mario de la Ossa, energy specialist with Orbital Insight “Orbital Insight’s daily volume estimates show the global surplus at 134 million barrels.”

Last week, OPEC inventories decreased, added de la Ossa. He noted that Iran, which led in terms of falling oil stocks, may be moving extra crude out before the full clampdown on U.S. oil sales sanction waivers takes effect.

“We feel the global market is better supplied than the day-to-day headlines which rely upon lagged data suggest, contributing to increased volatility to the downside off of news events,” de la Ossa said.

Like oil futures, reformulated gasoline (RBOB) also ended the day lower. The June RBOB contract price lost nearly five cents to settle at $2.02 per gallon.

Henry Hub natural gas also declined Thursday. The June gas futures price shed three cents, settling at $2.59.

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(edited)

13 hours ago, ceo_energemsier said:


“Global inventories have stabilized with modest draws in key producing countries and builds in key consuming countries,” Mario de la Ossa, energy specialist with Orbital Insight “Orbital Insight’s daily volume estimates show the global surplus at 134 million barrels.”
 

Global surplus 134 million barrels.

Last month it was 84 million barrels

Month before that 60 million barrels.

Growing , not declining every month.

OPEC cuts plus Trump sanction have taken over 2 million barrels off the market. Hasn't reduced inventory.

Sooner or later the markets will see the trend.  

It's the supply surplus.  US has consistantly been exporting over 3 million barrels a day since March. It's only going to increase.

Competiion for India's and China's business will eventual effect price.

Saudi Arabia needs $85 to keep social unrest at bay.

However, Free Markets don't recognize social needs. Nor should the world pay for Saudi budget requirements.

Only hope for OPEC is if Saudi's can talk the US into joining OPEC+ .  IT's not as if they aren't trying.

Edited by Falcon
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15 minutes ago, Falcon said:

Global surplus 134 million barrels.

Last month it was 84 million barrels

Month before that 60 million barrels.

Growing , not declining every month.

OPEC cuts plus Trump sanction have taken over 2 million barrels off the market. Hasn't reduced inventory.

Sooner or later the markets will see the trend.  

It's the supply surplus.  US has consistantly been exporting over 3 million barrels a day since March. It's only going to increase.

Competiion for India's and China's business will eventual effect price.

Saudi Arabia needs $85 to keep social unrest at bay.

However, Free Markets don't recognize social needs.  Nor should the world pay for Saudi budget requirements.

Only hope for OPEC is if Saudi's can talk the US into joining OPEC+ .  IT's not as if they aren't trying.

US cant join OPEC

1) We have laws that would prevent becoming a member of a foreign volume/price controlling group (even though they may not be very effective in doing the price controlling)

2) The US production comes from a diversified and wide range of type of companies, including majors, integrated oil companies, indies and small operators, family owned companies etc. Getting everyone on board will not be possible to run and join OPEC

3) Current US congress will not allow it to happen, and the US oil industry will be further vilified for even putting forth such a proposal

4) US has nothing to gain from joining such a group

 

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13 hours ago, ceo_energemsier said:

US cant join OPEC

1) We have laws that would prevent becoming a member of a foreign volume/price controlling group (even though they may not be very effective in doing the price controlling)

2) The US production comes from a diversified and wide range of type of companies, including majors, integrated oil companies, indies and small operators, family owned companies etc. Getting everyone on board will not be possible to run and join OPEC

3) Current US congress will not allow it to happen, and the US oil industry will be further vilified for even putting forth such a proposal

4) US has nothing to gain from joining such a group

 

I agree 100% with everything you say.  But like I said, it's not like they aren't trying. The money being spread around Washington DC Lobbying firms and Think Tanks by Saudi Arabia and Emirates this year is off the charts.

Other topic: Libya's GNA, UN backed government,  just hired Lobbying firm Mercury.  They may be a little late.

Edited by Falcon
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23 minutes ago, Falcon said:

I agree 100% with everything you say.  But like I said, it's not like they aren't trying. The money being spread around Washington DC Lobbying firms and Think Tanks by Saudi Arabia and Emirates this year is off the charts.

Other topic: Libya's GNA just hired Lobbying firm Mercury.  They may be a little late.

An avenue for KSA and UAE to gain "control" and I use that term very loosely, is to form numerous JVs with US shale players. Not that that would have a control directly on the production but they would gain access to the US light sweet crude and shale gas.

Qatar is doing is already for NG usptream in the US and LNG, and ARAMCO has various "projects" in the works with US majors and shale companies upstream, midstream and in tech

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6 hours ago, wrs said:

Yeah, but just like royalties are a cost of production, I think political stability for the royals staying in control is part of the cost of production there.  So the taxes on the oil and the royalties paid to the royal family in order to maintain social order are a requirement for consistent production in a stable society.  To me, the social costs are a cost of production which if not paid will ultimately result in falling production.  Plenty of good examples, Nigeria, Libya, Venezuela and Mexico all come to mind.

^ Nailed it.

All this talk about Saudi Arabia being a lowest cost oil producer is hooeey.  Nonsense.

That oil royalty payment to the tens of thousands of royal princes (who basically do next to nothing productive) is required to keep the country from civil war and total, utter collapse.

Similarly, the massive amounts of oil revenues required to pay off (social bribe) the lower-ranking non-royal citizens is necessary to keep the non-royal citizens from hauling the royalty to chop chop square and reducing the ranks of the royal elite by a head, and plunging the absolute dictatorship into a huge civil war bloodbath.

Factor in those absolutely required "social payment obligations" and the Saudi government needs somewhere around $85 - $95 oil to remain a country in the medium to longer term.

If you want to clearly see what happens to a country when the oil revenue runs out, when that oil revenue is required to bribe a country's citizens to keep a government in power, just look at Venezuela.  It has the largest *proven* oil reserves on earth, but the government ended up being too incompetent to successfully keep the flow of oil revenue flowing to bribe its citizens into social submission and keep the government in power.

Old 2013 pic related.

https_%2F%2Fs3-us-west-2.amazonaws.jpeg

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18 minutes ago, Tom Kirkman said:

^ Nailed it.

All this talk about Saudi Arabia being a lowest cost oil producer are hooeey.  Nonsense.

That oil royalty payment to the tens of thousands of royal princes (who basically do next to nothing productive) is required to keep the country from civil war and total, utter collapse.

Similarly, the massive amounts of oil revenues required to pay off (social bribe) the lower-ranking non-royal citizens is necessary to keep the non-royal citizens from hauling the royalty to chop chop square and reducing the ranks of the royal elite by a head, and plunging the absolute dictatorship into a huge civil war bloodbath.

Factor in those absolutely required "social payment obligations" and the Saudi government needs somewhere around $85 - $95 oil to remain a country in the medium to longer term.

If you want to clearly see what happens to a country when the oil revenue runs out, when that oil revenueis required to bribe a country's citizens to keep a government in power, just look at Venezuela.  It has the largest *proven* oil reserves on earth, but the government ended up being too incompetent to successfully keep the flow of oil revenue flowing to bribe its citizens into social submission and keep the government in power.

Old 2013 pic related.

https_%2F%2Fs3-us-west-2.amazonaws.jpeg

Adding all the "royalties" paid to the "ROYALS", and I have seen first hand how they spend it :D, plus all their "social security" to the citizens to secure the House of Al-Saud, would probably bring their cost to around 62-70$/bbl initially and may then bring it down to 48-58$/bbl for sustaining all those

Not to neglect the amount of $$ they have to spend for security and safeguarding all the oil and gas related sites and infrastructure.

I wonder how much oil did Michael Moore get for 2$/bbl. Hugo was sending "token" 2$/bbl heating oil to the NE.

Edited by ceo_energemsier
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9 minutes ago, ceo_energemsier said:

I wonder how much oil did Michael Moore get for 2$/bbl. Hugo was sending "token" 2$/bbl heating oil to the NE.

You are misreading the tweet shorthand (Twitter character limits used to be much smaller, only 140 characters.)

What Michael Moore tweeted if he actually used full words was:

"Hugo Chavez declared the oil belonged to the people.  He used the oil money to eliminate 75% of extreme poverty, provide free healthcare and education for all."

https_%2F%2Fs3-us-west-2.amazonaws.jpeg

 

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This article refers to the buyers of term Saudi crude buyers requesting additional volumes on top of their contracted volumes. These are built into a contract for emergencies as a contingency.  Also note that buyers are asking for the extra crude even before the producer sets their OSP.

So the producer is now able to set an asking price and volume as well, as Aramco will be the one approving the additional volume of oil to these buyers. This was discussed at great length under a different topic as to which party is capable of price and volume setting. It is obvious here that the producer is doing or will be doing both.

-----------------

Top Oil Buyers Want More Saudi Crude

by  Bloomberg
Thursday, May 02, 2019

(Bloomberg) -- Oil refiners in Asia are asking Saudi Arabia for more crude as the world’s top consuming region deals with supply disruptions from Iran to Venezuela, according to people with knowledge of the matter.

Customers are seeking additional cargoes for loading in June and July from OPEC’s biggest producer, the people said, asking not to be identified because the information is confidential. The requests are for supplies on top of what the refiners are due as part of term contracts with state-run Saudi Aramco, they said.

The scramble for shipments comes just as the U.S. tightens its squeeze on Iranian flows, with sanctions waivers for several buyers such as China and India coming to an end on Thursday. Unexpected disruptions to supply from Russia and Nigeria as well as turmoil in OPEC member Venezuela are also adding to fears of a crunch.

Prices have seesawed in the past week on uncertainty over how Saudi Arabia will respond. The U.S. administration has said the kingdom will pump more, but Saudi Oil Minister Khalid Al-Falih has been less clear-cut. He has pledged to keep the market balanced, but also signaled that OPEC and its allies including Russia could extend output curbs until the end of this year.

Some Asian refiners are asking Aramco, known officially as Saudi Arabian Oil Co., for more crude even before the producer sets the cost for the cargoes, the people said. The end of the U.S. exemptions that allowed purchases from Iran has caused a headache for processors in the region, who are being forced to seek potentially costlier alternatives.

“The market looks well supplied right now, but we’ve yet to see the full impact of what happens with Iranian volumes,’’ said Mohammad Darwazah, a director at Medley Global Advisers in New York. “Saudi Arabia will likely push more exports to Asia in June.”

Official selling prices for June-loading shipments are expected to be announced only by the end of this week. Usually, buyers will request supplies a few days after the company sets prices for the month.

Aramco’s press office declined to comment.

The market could suffer a loss of as much as 900,000 barrels a day of Iranian oil, according to Goldman Sachs Group Inc., after the U.S.-issued waivers expire. The resulting shortfall is expected to be offset by higher production from core producers in the Organization of Petroleum Exporting Countries and Russia, the bank said, while warning of higher price volatility in coming months.

In a Twitter post last month, U.S. President Donald Trump reassured global markets that “Saudi Arabia and others in OPEC will more than make up the oil flow difference in our now full sanctions on Iranian oil.”

Last month, the kingdom cut production by about 500,000 barrels a day more than required by the pact with fellow OPEC members, so it could increase output significantly without violating the deal.

“They’ve got some room for maneuver,” said Darwazah. “The U.S. can push Saudi Arabia to take away Iranian market share in Asia, and they will do that when needed. Politically, the Saudis are probably quite happy.’’

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1 minute ago, Tom Kirkman said:

You are misreading the tweet shorthand (Twitter character limits used to be much smaller, only 140 characters.)

What Michael Moore tweeted in full words was:

"Hugo Chavez declared the oil belonged to the people.  He used the oil money to eliminate 75% of extreme poverty, provide free healthcare and education for all."

 

https_%2F%2Fs3-us-west-2.amazonaws.jpeg

Oh I knew the context, I was just making a statement as to how much was Michael paid for parroting the Chavista Greatness Song LOL

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1 minute ago, ceo_energemsier said:

Oh I knew the context, I was just making a statement as to how much was Michael paid for parroting the Chavista Greatness Song LOL

I though Michael worked for doughnuts 🤔

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1 minute ago, Tom Kirkman said:

I though Michael worked for doughnuts 🤔

He would trade the 2$ oil for doughnuts O.o;):D

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1 hour ago, Falcon said:

Global surplus 134 million barrels.

Last month it was 84 million barrels

Month before that 60 million barrels.

Growing , not declining every month.

 

Not sure what you view as surplus but the OECD inventories are right around the 5 year average according to this.

https://www.erce.energy/graph/oecd-us-oil-inventories

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6 hours ago, William Edwards said:

Where will it end? My guess is in the $20's.  What say you?

I say it sinks to twenty seven bucks. How's that for sticking my neck out?

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The Saudi Royals are part of the government as is any royalty or tax structure in the OPEC countries. In the short term prices can drop or rise to unimaginable levels, but can not stay below the real marginal cost of production for any meaningful time period. Right now US shale is the largest global marginal producer and many shale producers are having difficulty generating positive cash flow at current prices. Under $40 for a sustained period half of US shale producers would fold. The market works and the cure for low prices is low prices. Baring geopolitical disasters I suspect that WTI will range between $40 and $80 for the foreseeable future. $20 is a pipe dream

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