Oil Prices May 2016

Oil markets are never in balance. Producers always misjudge demand and either over-shoot or under-shoot with supply. Balance is simply a zero-crossing from one state of disequilibrium to the next, from surplus to deficit and back again. __ Art Berman

Temporary Oil Outages Support Temporary Rise in Oil Prices

Supply Disruptions 2016

Supply Disruptions 2016

Why Oil Prices Won’t Likely Go Much Higher

Supply outages in North America and Africa have been largely responsible for the recent rise in oil prices. WTI oil prices gained 3.3% last week, but finished Friday’s session lower as some supply disruptions subsided. __ Marketwatch

Low oil prices have led to reduced exploration for new oil and less new production. And yet by some reliable estimates, oil inventories continue to risedue to reduced demand in a tepid global market. According to oil soothsayers, “resistance” is high at the $50 bbl level.

There are market concerns that a supply glut may return following news of Canada lifting evacuation orders for several oil production sites in fire-ravaged Alberta province amid cooler weather and light rain.

Prices were also weakened by comments from Iranian officials who vowed to keep up oil production after the lifting of Western sanctions in January.

High volatility in oil prices is expected by many to be “the new normal,” as previous rules for controlling global oil prices seem to have broken down. How have the rules of oil price control broken down?

The relationship between stockpiles and prices has broken down because higher inventories are now needed to meet surges in demand or disruptions to supply. That’s very different to what the global market had got used to over the past two decades, when these changes were met by a pickup in production, made possible by OPEC’s spare production capacity. __ http://www.bloomberg.com/gadfly/articles/2016-05-22/brimming-oil-inventories-arent-crashing-prices

The author seems to be claiming that surges in oil demand are being addressed on the after-production side, out of oil storage stockpiles, rather than by an increase in production. The claim is made that large producers are already pumping at full speed, and cannot pump any faster.

Back to the Issue of Markets Being “Overbought”

The oil rally is now at a make-or-break juncture. A growing number of oil traders warn that speculative purchases of “paper barrels” by hedge funds have decoupled from fundamentals. There is usually a seasonal slide in demand over the late summer.

… supply outages – chiefly in Nigeria and Canada – have held back 2m b/d and temporarily balanced the market, but this may not last. Canada should be back on stream by June.

US inventories are still hovering at record levels. Data from the US Energy Department showed a rise of 1.31 million barrels in the week to May 13. “The supply glut seems persistent. Oil could well fall to a new low for the year,” said Ben Combes from Llewellyn Consulting. __ http://www.telegraph.co.uk/business/2016/05/22/saudi-financial-crisis-could-leave-oil-at-25-as-contractors-face/

At oil prices between $40 and $50 per bbl, most global oil production can recover costs, and/or make a profit. Any rise in prices above the $50 level is likely to trigger significant new production — well before inventory gluts have cleared.

While production is increasing in Iran, Saudi Arabia, Libya, and Iraq, it has fallen below 9 million barrels per day in the U.S. Production in Canada, Nigeria and Venezuela has decreased for a variety of reasons and there are signs that Russian production will move lower. The oil price likely overshot to the downside in February and the current price between $40 and $50 per barrel represents fair value for oil. __ Commodity Opportunities

Keep in mind that petrostates are corrupt and economically inefficient. They tend to not maintain their oil production and transport equipment very well, do not fund exploration activity sufficiently, and misallocate income from oil production in many other ways. Fiscal breakeven costs for petrostates reflects these blatant inefficiencies and inherent corruption.

At current prices, the pressure is on oil producers to continue pumping to create cash flow for servicing debt. For oil trading companies and state owned oilcos that store large quantities of oil inventories on spec, the situation is particularly perilous. The built-in volatility of today’s oil markets can drown them in storage costs over time.

… the prompt Brent contract remains in contango, meaning that the spot price is cheaper than prices for future delivery. This is usually a sign that the market is oversupplied, and encourages traders to lock up inventories they can sell for higher prices later.

These so-called arbitrage trades have become unprofitable, Longson said. But they hide the fact that traders are making many of them with increasing amounts of debt, he said… many cargoes of oil are sitting on the world’s oceans with few willing buyers.

For years now, bullish oil traders and energy journalists have been telling each other that oil production is due to crash “any day now” due to the relatively low price per bbl. But in the calculus of “sunk costs” in oil production, a barrel sold at $40 to $50 bbl is far better than no bbls sold at all. Cash flow and market share are king in the oil business — without it, a lot of bad things happen.

In addition, thousands of wells in the US are already drilled and waiting to be fracked — the so-called “fracklog.” These wells can be brought into production rapidly, to take advantage of any rises in oil prices. This suggests that North American shale oil production is far more flexible than conventional energy analysts understand.

Venezuela, the Gulf kingdoms, and many third world petrostates have already been badly stung by current sustained “low” oil prices. Russia is experiencing profound economic trauma that its vaunted propaganda apparatus is struggling desperately to hide.

In the advanced world, big international oilcos are burdened with low profits and even losses, North Sea producers are struggling, and North American oil producers are experiencing a raft of tightening budgets and bankruptcies. And yet, in capitalist societies, such “creative destruction” is accepted and built into the system. Western nations are not built upon oil & gas export incomes like more primitive petrostates.

The peak oil delusion — the unshakeable belief in imminent collapse due to high oil prices that ruled minds and markets in the first decade of the 21st century — has lost much of its clout. But the bets that were made based upon that delusion continue to haunt the leaders of petro-states, and large numbers of oil traders, investment banks, sovereign funds, energy journalists, peak oil cult devotees, and others who fell into the tar pits of wishful doomer delusion.

More:

http://energytomorrow.org/blog/2016/05/23/why-leading-the-world-in-oil-natural-gas

Shale 2.0 PDF report on the economic impact of next-gen shale technologies

At present, break-even costs across U.S. shale fields range from $10 per barrel–$55 per barrel.

Delivering North Dakota oil to Gulf Coast refineries and ports by rail can add another $15 per barrel. Using analytics to double output, thus cutting oil costs in half, means that shale break even costs would drop to $5 per barrel–$25 per barrel. America’s shale fields would then be competitive in volume and in price with Saudi Arabia’s vaunted ultralow-cost oil fields.

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