Oil Is Heading Back To $20s

[thackney]

Oil Is Heading Back To $20s
http://www.forbes.com/sites/panosmourdoukoutas/2016/11/13/oil-is-heading-back-to-20s/#376caa2a70cf

Oil bulls had a good ride in the last eight months. The black gold rallied, from mid-$20s in January to the mid-$50s in late October. But economic fundamentals have turned bumpy for oil bulls in the last couple of weeks, with oil heading towards the $40-mark rather than the $60-mark as some had expected.

And things will continue to be bumpy in the near future. Oil is heading back to the January lows, as hopes of an OPEC output freeze have been fading. In fact, OPEC members like Iran, Libya, Iraq, and Nigeria have been raising rather than cutting oil output since the Algiers meeting, according to recent industry reports.

Then there are American frackers, the new “swing producers” in the oil market—a role previously played by Saudi Arabia. And they are ready to fill in any supply slack, as soon as prices head north, by bringing oilrigs back on line.

That’s what happened back in July, as oil prices hovered near the $50 mark. Oil rigs were up for four weeks, according to Baker Hughes, which keeps a weekly tally on the number of rigs in operation—a trend that accelerated as oil continued to trade around $50 in September and October. Overall, 165 oil rigs came back to operation since the late January, helping raise US output and cut foreign oil imports in recent weeks.

American frackers’ role as swing producers will become even more important under the new administration, which is expected to ease fracking regulations.

To make matters worse for the bulls, global oil demand remains sluggish at best. The world economy continues to grow at a slow pace under an increasing debt burden.

We’re talking about debt accumulated in the aftermath of 2008-9 financial crisis (Great Recession), on top of debt that had been accumulated before the crisis with the help of the Federal Reserve and other central bankers.

And things may get worse on this end of the market, too. US long-term interest rates have been heading sharply higher recently—the US Treasury note yield reached 2.13%. And short-term rates are expected to follow suit, as the Fed is expected to raise the Federal Funds rate in the December FOMC meeting.

[thackney]

If Only These Two Things Come To Pass, Oil Prices Will Rise
http://www.forbes.com/sites/johnmauldin/2016/11/13/if-only-these-two-things-come-to-pass-oil-prices-will-rise/#23ae21bf560a

Will oil prices recover as Wall Street presumes? That depends on the balance of supply and demand.

Climate change agreements notwithstanding, the world still burns and will go on burning a lot of fossil fuel. Slowing economic growth has reduced energy demand growth, but the absolute numbers remain strong. This will change as greener technology spreads, but very slowly.

The real mystery is on the supply side.

We know OPEC is trying to agree on production quotas. They will meet this month to make a final decision. I’m not optimistic that they can reach a deal, and I have no illusions that they can enforce any deal they might reach. The vast majority of OPEC members will cheat.

There’s also non-OPEC Russia to consider. Putin is in no position to reduce cash flow right now. The situation is further complicated by the fact that the US shale industry is the pivot point now, filling the role formerly held by Saudi Arabia.

Our companies can dial production up and down quickly too.

Many observers have thought the shale industry would fall, as many debt-laden companies went belly up. It hasn’t turned out that way.

This Oct. 24 Wall Street Journal headline tells the story:

It appears that even bankruptcy can’t make these companies turn off the pumps. From the WSJ:

Energy investors have long hoped that falling prices would solve themselves by driving producers into bankruptcy and stanching the flood of excess supply. It turns out that while bankruptcy filings are up, they have barely impacted fossil-fuel markets.

About 70 US oil and gas companies filed for bankruptcy in 2015 and 2016. They now produce the equivalent of about 1 million barrels a day, about the same as before they declared bankruptcy, according to Wood Mackenzie. That represents about 5% of US oil-and-gas output.

That resilience has kept energy inventories flush and prices capped. Oil shot to $50 a barrel this summer, but has had trouble making much progress beyond that mark.

This is exactly the way chapter 11 was meant to work. The process is designed to save companies that can be saved. And many energy companies are using it to lighten their heavy debt loads, adapt to lean times, and keep producing.

I believe what’s happening here is that people are forgetting the concept of “sunk cost.” If you’ve already spent the money to locate oil and drill into it, pumping it out is not expensive.

Your creditors will want you to do exactly that too, so you can stay current on your payments. Go bankrupt and the court-appointed trustee will order you to pump....

[IsailedawayfromFR]

The center of the oil patch will shrink to only those places where it makes sense to produce oil at such low prices.  Wildcatting will not be plentiful, and new huge deepwater projects will remain scuttled as only those with sunk costs will be pursued.

A belt-tightening will take place in this country, but it pales in comparison to what OPEC countries will endure.

[Joe Wooten]

The center of the oil patch will shrink to only those places where it makes sense to produce oil at such low prices.  Wildcatting will not be plentiful, and new huge deepwater projects will remain scuttled as only those with sunk costs will be pursued.

A belt-tightening will take place in this country, but it pales in comparison to what OPEC countries will endure.

In the US, companies tighten their belts and get more efficient. The OPEC weenies, being governments, double down on stupidity.

[Weird Tolkienish Figure]

This usually foreshadows a recession right?

[Idaho_Cowboy]

Who would have thought years ago we'd ever be reading about oil going up to $20 a barrel? I wonder where all those 5 dollar a gallon gas is here to stay experts are? 

[IsailedawayfromFR]

Who would have thought years ago we'd ever be reading about oil going up to $20 a barrel? I wonder where all those 5 dollar a gallon gas is here to stay experts are? 

When I began working in the oil fields, oil was $3 per bbl.  $20s right now seems pretty good compared to that.

The 5 dollar experts, those wanting to severely restrict oil production and tax it to the hilt, were beaten in the last election.  You will likely see them on the news rioting in Portland or Berkeley against democratic elections.

Technology supplying abundant energy has driven oil prices to where they are now.  They will not return to the $100+ unless those same people intefere with the market or we have a ME war on our hands.

[Longmire]

Putin is in no position to reduce cash flow right now.

Actually Mr. Putin is in an excellent position to do exactly that.

The odds of a NATO war declined dramatically with the election of Donald Trump, as did the chances of EU sanctions against Russia being extended.

Still too early to take their foot off the pedal but Russia seems poised to bounce back from a couple of tough years economically, lessening their need to maximize oil production.

[InHeavenThereIsNoBeer]

Someone in the know please tell me why I'm stupid. 

It seems to me trading oil related stocks ought to be about the easiest thing in the world.  Oil under $30, back up the truck.  Oil over about $70, sell (maybe take some profits on the way up).  Short around $90, cover around $60.  [Note, I'm just making those numbers up, if I were actually going to trade I'd do some homework].

Oil is a huge part of our lives and is going to be while I'm still above ground.  Global demand should be pretty much constant (sure, if the economies suck we cut back on vacations, but most people are still going to have to drive to work).  Global supply can suffer short term shocks, but (IMO) our lives need a certain amount of oil and someone is going to find a way to sell it to us.  Of course there will be long term trends for supply/demand (both rising, but much more so for demand if I had to bet).  But what I DO NOT GET is why something which should, IMO, be relatively stable in price over the non-short term varies in price by hundreds of percents over few year periods.

Now here's my problem.  I'm not seeing something that other people are missing.  So what is it that *I* am missing?  Where are the errors in my assumptions?

Pointers to any good books on the subject of oil price history would be appreciated as well.   TIA.

[Weird Tolkienish Figure]

Who would have thought years ago we'd ever be reading about oil going up to $20 a barrel? I wonder where all those 5 dollar a gallon gas is here to stay experts are? 

Someone I know was a huge "Peak Oil" idiot back in the 2000's. If you didn't expect $10/gallon oil by 2010, then you were just an idiot and a moron.


Which describes him right now. Very stupid person.

[thackney]

Who would have thought years ago we'd ever be reading about oil going up to $20 a barrel? I wonder where all those 5 dollar a gallon gas is here to stay experts are? 

Up to $20?????

The average price of oil has been above $20 for almost 15 years.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=rclc1&f=m

[Smokin Joe]

Someone I know was a huge "Peak Oil" idiot back in the 2000's. If you didn't expect $10/gallon oil by 2010, then you were just an idiot and a moron.


Which describes him right now. Very stupid person.

I have a book in my office: "When the Oil Runs Out", published in 1947.
I keep it as a reminder that the one thing in ready supply always is panic.
Someone is always selling that.
There have been many periods of "peak" oil, only to succumb to new discoveries, new technologies, or both. In the area I have worked most of the wells I worked in my career, there are over 20 different potential major oil and/or gas producing zones between the surface and the crystalline basement rocks. For a good part of my nearly 40 years in the industry, I found oil in wildcat wells and in infield wells, too. I really got a kick out of infield discoveries (oil others had missed, for whatever reason), but frankly, cannot say with certainty that we found it all, either.

[thackney]

But what I DO NOT GET is why something which should, IMO, be relatively stable in price over the non-short term varies in price by hundreds of percents over few year periods.

I don't know why you think it should be a stable price when decades have shown it is not?  Changes in supply and demand of a few percentage points can drive large price changes.  A five percent increase in demand of a product that doesn't change supply just as quickly is not a 5% change in price.

[Smokin Joe]

I don't know why you think it should be a stable price when decades have shown it is not?  Changes in supply and demand of a few percentage points can drive large price changes.  A five percent increase in demand of a product that doesn't change supply just as quickly is not a 5% change in price.

True.  When there is plenty of excess supply, prices are lower and stable. When that excess capacity is threatened by demand, accident, or geopolitical factors, the price rises rapidly as that excess supply decreases.

[IsailedawayfromFR]

Someone in the know please tell me why I'm stupid. 

It seems to me trading oil related stocks ought to be about the easiest thing in the world.  Oil under $30, back up the truck.  Oil over about $70, sell (maybe take some profits on the way up).  Short around $90, cover around $60.  [Note, I'm just making those numbers up, if I were actually going to trade I'd do some homework].

Oil is a huge part of our lives and is going to be while I'm still above ground.  Global demand should be pretty much constant (sure, if the economies suck we cut back on vacations, but most people are still going to have to drive to work).  Global supply can suffer short term shocks, but (IMO) our lives need a certain amount of oil and someone is going to find a way to sell it to us.  Of course there will be long term trends for supply/demand (both rising, but much more so for demand if I had to bet).  But what I DO NOT GET is why something which should, IMO, be relatively stable in price over the non-short term varies in price by hundreds of percents over few year periods.

Now here's my problem.  I'm not seeing something that other people are missing.  So what is it that *I* am missing?  Where are the errors in my assumptions?

Pointers to any good books on the subject of oil price history would be appreciated as well.   TIA.

If one looks at the chart below, you will see that the first time prices starting deviating wildly was in the early 1970's.

Prior to that time, oil prices followed market supply/demand and fluctuations came when new oil was discovered(like the East Texas field in 1930, the largest ever in lower 48), wars occurring(like WWI) or some new technology breakthrough happened (like seismic in the 40s which opened up the largest oil basin in the US, the Permian).


Then came the period which we are still in of political interference caused by OPEC.  Wild changes can be traced to monopolistic practices.


Most recently, technology breakthroughs of targeting previously difficult to access zones by deploying horizontal drilling and stage fraccing has caused the marketplace to disturb the monopoly's practices and oil price better reflects the true value of the marketplace, not a price propped up by interference of politics.

[InHeavenThereIsNoBeer]

I don't know why you think it should be a stable price when decades have shown it is not?  Changes in supply and demand of a few percentage points can drive large price changes.  A five percent increase in demand of a product that doesn't change supply just as quickly is not a 5% change in price.

I think it should be relatively stable over the long term.  History says I'm wrong.  THAT is what I'm trying to work out.  I'm not the kind who can just accept that he's wrong, I have to understand why.

I do expect oil to be quite volatile in the short term.  Particularly, I'd expect sharp, sudden price spikes, followed by long term corrections back to the "mean" (which would also vary over the long term).  But I would expect that as we start looking at prices measured in year over year time frames the graph would start to smooth out.  I have no problem with oil going from $40-50 overnight.  I have a big problem with it going from $20-120-20-140-30? in my lifetime (or roughly halving, doubling, and halving again in what, the last year or so -- admittedly I don't pay that close attention).

I look at oil as a rather unique good, in that the value we get from it is relatively constant.  When the first VCRs came out they cost thousands, a few years later everyone had one, and now you probably have to pay to throw them away in some places.  That makes perfect sense, first a novelty, then a commodity, then supplanted by better technology.  The value, the benefit, you got from a VCR changed, and the price moved with it accordingly.  But the value that I get out of a barrel of oil really hasn't changed much in the same time frame, so I don't understand why the price has varied so much (though one could argue that it has returned to about where it was, but it still took a darn odd path getting there). 

Clearly, I don't understand the non-short term (extreme, IMO) volatility in oil prices.  But back to my original question, why can't I buy up oil stocks when oil is at $30 and get rich when it goes back to $100?  If I can see this opportunity, someone else should have beat me to it, so it must not exist.  I think I get it now.  Just because oil prices fluxuate doesn't mean stock prices don't have said fluxuation factored in, and even if I could just buy and sell oil itself where am I going to put it?

[Idaho_Cowboy]

I think it should be relatively stable over the long term.  History says I'm wrong.  THAT is what I'm trying to work out.  I'm not the kind who can just accept that he's wrong, I have to understand why.

I do expect oil to be quite volatile in the short term.  Particularly, I'd expect sharp, sudden price spikes, followed by long term corrections back to the "mean" (which would also vary over the long term).  But I would expect that as we start looking at prices measured in year over year time frames the graph would start to smooth out.  I have no problem with oil going from $40-50 overnight.  I have a big problem with it going from $20-120-20-140-30? in my lifetime (or roughly halving, doubling, and halving again in what, the last year or so -- admittedly I don't pay that close attention).

I look at oil as a rather unique good, in that the value we get from it is relatively constant.  When the first VCRs came out they cost thousands, a few years later everyone had one, and now you probably have to pay to throw them away in some places.  That makes perfect sense, first a novelty, then a commodity, then supplanted by better technology.  The value, the benefit, you got from a VCR changed, and the price moved with it accordingly.  But the value that I get out of a barrel of oil really hasn't changed much in the same time frame, so I don't understand why the price has varied so much (though one could argue that it has returned to about where it was, but it still took a darn odd path getting there). 

Clearly, I don't understand the non-short term (extreme, IMO) volatility in oil prices.  But back to my original question, why can't I buy up oil stocks when oil is at $30 and get rich when it goes back to $100?  If I can see this opportunity, someone else should have beat me to it, so it must not exist.  I think I get it now.  Just because oil prices fluxuate doesn't mean stock prices don't have said fluxuation factored in, and even if I could just buy and sell oil itself where am I going to put it?

You don't really buy Oil as a stock to attemtp what you are suggesting you have to invest in Oil Futures. Here's some info on how those are traded, I'm not an expert. If you mean buying stock in the oil companies I'm not sure how closely that is tied to price of oil alone versus other factors.
http://www.telegraph.co.uk/finance/newsbysector/energy/2790647/Oil-price-QandA-What-are-oil-futures-and-how-are-they-traded.html

[InHeavenThereIsNoBeer]

If one looks at the chart below, you will see that the first time prices starting deviating wildly was in the early 1970's.

Thanks.  I believe I made a pretty serious error in considering too short a time frame (I was only thinking about how things had gone in my lifetime).  I may have (probably did) try to "draw a curve from two data points". 

I hope it does stabilize as much as possible.  Booms and busts claim too many victims.

[thackney]

Clearly, I don't understand the non-short term (extreme, IMO) volatility in oil prices.  But back to my original question, why can't I buy up oil stocks when oil is at $30 and get rich when it goes back to $100?  If I can see this opportunity, someone else should have beat me to it, so it must not exist.  I think I get it now.  Just because oil prices fluxuate doesn't mean stock prices don't have said fluxuation factored in, and even if I could just buy and sell oil itself where am I going to put it?

There are those that do buy actual oil for storage for future sale, but it costs $0.5~1.0 a month to store it, plus whatever you pay to transport if buy/sell at different locations.

We can be sure oil is going to go up in price, and down in price.  But the question of when and how much involves far too many variable to believe we can predict with reasonable certainty, and repeatably.

Wars, elections, weather, changes in technology and in personal priorities all significantly impact the pricing.  And in separate items not directly related to oil.  Build a much better battery and the demand for gasoline/diesel can drop.  India and China have a 5% increase in their standard of living and worldwide demand for vehicle fuel could go up 10%.

The other item more unique to oil/gas supply is the ratio of up front cost compared to production cost.  A producer may spend 90% of their total cost for a field before oil is ever produced.  So while the price of oil is high, lots of outside dollars gets invested in producing more oil.  If the market overshoots demand, because it lags in the decision to invest more to the actual production of more oil, it often drives the price spiraling the other way.  To top that off you have seasonal swings that vary from year to year weather, to make it harder to judge if the market is really over-supplied or under-supplied year round.  And by the time you get reasonable amount of the seasonal data, you are already out of that season.

Some things to consider:

[IsailedawayfromFR]

I hope it does stabilize as much as possible.  Booms and busts claim too many victims.

Having worked in the oil industry my entire life, I can attest to that.  Laid off after 27 years at one company, among other things.

Riding the oil roller-coaster as a career means you are at one time considered a fat-cat making a lot of money, then at another time scrambling for a job.

Wish it was more even like a utility company, but it is not.

I would not have traded those years of my life for anything else.

[IsailedawayfromFR]

@InHeavenThereIsNoBeer

One other thing to consider if you are interested in learning more about how energy can become cheaper, more sustainable and the rewards that can be reaped from this country's abundance in it, I direct you to the Heritage Foundation.  Here's one of its excellent articles:
http://www.heritage.org/research/reports/2007/06/twelve-principles-to-guide-us-energy-policy

[InHeavenThereIsNoBeer]

Thanks.  Very interesting stuff.

But that chart #5 "World consumption and non-OPEC growth" just isn't getting through my head.  I was trying to figure out if that price dip was caused by a period of non-OPEC growth, or caused the (lagging) falloff in non-OPEC growth, both, or neither.  Figuring I'd need to know what was going on with OPEC at the time, I also consulted chart #1 "World liquid fuels production and consumption balance".  As close as I came to finding any sort of pattern was a rather weak correlation between the price dip and the "glut", but the glut seems to last longer than the price dip, and while I'll buy one lagging the other I'd think the durations of the events should be closer if they have any real relation.  It's also not clear to me just exactly where, for example, Q1/2015 is supposed to be on each chart (more on that later).

What I did note was that chart #5 shows world consumption growth positive every quarter, while chart #1 shows total consumption falling four or five times in the same period.

Looking at your original article in this thread for clues, I find prices of around $25 in 01/16 and $55 in 10/16.  If chart 5 is labelled the way I would label it, with Q1/16 being  the one quarter where non-OPEC growth is 0, we don't have a $30 change over three quarters, and that would also imply that a few quarters before the price was negative.  If it is labelled with Q1 two quarters to the left, such that Q3/16 is the quarter where non-OPEC growth is 0, we get our (roughly) $30 change and no nasty negatives, but then the graph includes data from two quarters that haven't happened yet to the left of the forecast line.  I could be reading the "change in WTI price" incorrectly (I assume it is change since some arbitrary and unlabelled time, probably the time of the last data, though that seems a little silly vs just graphing the price), maybe it is change year over year or something?

What am I not seeing?

[thackney]

What am I not seeing?

That the market price is also driven by anticipation and expectation.

When the traders, regardless if they are speculators, consumers like refiners, producers of oil, etc, but out bids for next month and next quarter oil, they don't have that current data yet.  They are betting on their expectation of what they believe is coming.