Crude Reality: How Long Can Oil Stay Down? 75 comments
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Tuesday was a violent day for oil once again. Oil prices fell to near $36 a barrel on the NYMEX setting a new low point for 2008. Of course, many are still betting on a rebound in oil prices.
Goldman Sachs calls for $30 oil due to “weak underlying economic fundamentals”. Yet still says it expects oil to average $45 a barrel this year and close out 2009 at $65 a barrel. Merrill Lynch is expecting oil to average $50 a barrel and average $70 in 2010.
Everything from between $20 a barrel to $100 a barrel has been thrown out there lately. A lot of pundits cite the cost of production of a barrel of oil at $60/barrel and anything less than that is “unsustainable” (we’ll take a look at why this propaganda gem is very misleading).
Oil is volatile and the volatility is causing a lot of uncertainty. But the question remains, how low can oil really go and how long can it stay there? As usual, it all comes down to fundamentals.
It’s Supply and Demand
On the demand side, the U.S. Energy Information Administration’s (EIA) latest Short-Term Energy Outlook stated U.S. oil consumption fell 5.7% in 2008. The EIA went on to predict oil consumption will continue to fall in 2009 by 2.0% and expects a modest uptick of 0.8% in 2010.
click to enlarge
Those are pretty rosy predictions considering the EIA is expecting a 0.6% increase in GDP this year and 3.0% in 2010.
It’s not just the U.S. though. The entire world is suffering through this downturn and oil demand is dropping by the month. The EIA lowered its 2009 forecast for global oil consumption to decline by 800,000 barrels per day (bpd) in 2009. That’s 400,000 bpd lower than its December estimate and shows this forecast could fall even further.
We all know the demand side of the equation will get pinched - global recession, financial crisis, etc. It’s the supply side which the market is reacting to now.
OPEC: Takes Credit Sometimes, Works None of the Time
As oil prices slide, we’d expect production to drop as well. Adam Smith’s “invisible hand” would naturally go to work, right?
It has, to a point. OPEC, has announced cutbacks of more than 4 million bpd. Despite OPEC’s relative ineffectiveness (combination of the OPEC cartel’s inability to move quickly and inability to prop prices up), Saudi Arabia has confirmed they cut production by 300,000 barrels a day. So far other members have stuck to the OPEC quotas – more or less.
Meanwhile, U.S. domestic oil production is increasing rapidly. In fact, domestic oil production will probably increase in 2009 for the first time since 1991. Domestic production is expected to increase 300,000 bpd to 5.25 million bpd - a 6% increase. Domestic oil production will likely increase again in 2009 by another 50,000 barrels.
All of this production coming on line is what has so many oil traders concerned. The groundwork for this growth was actually laid years ago.
Remember when Hurricane Katrina knocked out all of those oil rigs? Well, here we are two years later, and they’re coming back on line. For instance, BP’s (BP) Thunder Horse platform is on line and started producing 200,000 bpd a few weeks ago. BP expects Thunder Horse to further increase its production in 2009.
It took a few years, but the oil industry is reaching the final stages of recovery from Katrina.
The Marginal Cost of Production
The final thing is the cost of production. After all, when the cost of production is below the market price for any commodity, it’s usually a good time to buy (i.e. uranium at $7 per pound in the 90s while production costs were $15 to $20 a pound).
So if the cost of production of every new barrel of production is $65 a barrel, it would have to go up. Oil would be an easy win from here, right?
Not exactly. At the peak the world was consuming between 85 and 86 million bpd. That included the Canadian oil sands projects (whose cost of production is between $60 and $80 depending largely on natural gas prices) and marginal, deepwater offshore projects where the cost of finding and producing a barrel of oil can run as high as $60.
But hey, those are the marginal oil producers. They are needed for the 85 and 86 millionth bpd of oil. The costs are much, much lower to produce the 80 millionth bpd.
Take a look at the chart below:
The costs of production for the two main sources of U.S. oil are still very, very low. As of 2006 the costs of production were about $25 per barrel of foreign oil (remember Saudi Arabia can still produce at around $2 to $3 a barrel) and just under $20 per barrel for U.S. onshore oil.
Remember when oil was down around $10 a barrel in the late 90s? The world oil consumption was only about 75 million bpd and Exxon (XOM) and the oil majors were still profitable at that time, although much less so.
Where to From Here
My take on oil remains the same as it was in “A Slippery Slope Ahead for Oil”:
I just can’t think of many good reasons to buy oil or oil stocks right now. Massive stockpiles are building up. The oil production projects made during the oil bubble are still in place. Oil demand continues to drop as, for the first time in decades, Japan, Europe, and North America will all be in a recession at the same time.
The only real reason to go “all in” on oil stocks now is if you expect a sudden rebound in the global economy or expect Wall Street to take the long-term view. I wouldn’t bet on either happening anytime soon.
In the past few months we watched OPEC cut its production faster than any other time in history, Russia engages Ukraine in the latest round of “Gas Wars”, a cold December in the Northeastern U.S., and Israel takes a hard line offensive against Hamas. Despite it all, oil prices fell by more than 20%.
The chances of a “V” forming in the oil price chart ahead are very slim. And with every mortgage which falls “under water”, each mall shop that shuts its doors, every Chinese factory which closes down, and each dollar that is taken away from a profitable business to give to a hopelessly unprofitable one, the odds get lower and lower.
Sources
In the fourth quarter of 2003, for the first time, world average daily oil consumption rose above 12.7 million cubic metres (80 million barrels) per day, from 11.9 million cubic metres (75 million barrels) per day in 1999.
Goldman - $30 oil
- http://www.bloomberg.com/apps/news?pid=20602099&sid=a5M_0Cds8RhI&refer=energy
- http://www.eia.doe.gov/neic/infosheets/crudeproduction.html
- http://money.cnn.com/2008/08/21/news/economy/oil_price_floor/index.htm
Verleger 7.7 million barrels per day
Drop in consumption
Near-term oil consumption - China Saving for a Rainy Day
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This article has 75 comments:
US domestic production down in 2008. 25% fewer rigs are operating in US/Canada since last July. You can probably get oil for less than $40/barrel from an established field, but costs exceed $60 for offshore or non traditional sources, like oil sands.
The fact that people are buying at this price and selling one year out contracts, then storing it on supertankers means there is going to be a massive oversupply for at least a year.
Until China and India show signs of stabalising, and grow again, i see no light at the end of the tunnel.
"Dr. Leigh Price estimated that the Bakken formation was capable of generating between 271 and 503 Billion Barrels of oil with an average of 413 BBbls. Dr. Price also re-calculated the data previously presented by Schmoker and Hester (1983) and Webster (1984); the re-calculated values also fall within the range stated above. Price also states that 50% of this oil is recoverable (on average, 200 to 250 billion barrels of recoverable oil)"
The Bakken oil field has about the same amount of recoverable oil as all the oil fields in Saudi Arabia put together. The number of oil wells in the Bakken oil field has more than doubled in the past several years.
Saudi Arabia has producible reserves of 267 billion barrels (Wiki). Bakken has producible reserves of 200 to 250 billion barrels according to Dr. Leigh Price.
There are approximately 800 wells in the Bakken field either in production or drilling at this time.
Dr. Leigh Price's study of the Bakken field is the most thorough. He personally studied the field and then studied all the prior surveys of the field by both private and public entities. His conclusions are considered the most accurate and authoritative. His conclusions are also considered to be very conservative.
dmr.nd.gov/ndgs/Bakken...
grinzo.com/energy/inde.../
www.wealthdaily.com/ar...
Suppose you are paying interest, maintenance, amortization, insurance, and other fixed expenses to run an oil platform that was built at the height of the oil bubble and can produce oil at a total daily cost of $70/barrel. Your fixed costs are sunk costs - you will owe them whether you shut down or not. Your variable costs, a few extra salaries, parts, energy, etc. add up to maybe $10/barrel, and your fixed costs add up to $60/barrel. If you DO produce a barrel of oil and sell it at $40/barrel, you will lose $30 ($40 revenue-$60 fixed cost-$10 variable cost=$-30 profit). If you DON'T produce that barrel of oil, you will lose $60, your fixed cost. Which would you rather lose... $30 or $60? Easy decision: keep pumping and wait for prices to rise in the future.
At this point, many fields are operating at a loss because that's cheaper than not operating at all. It's a waiting game for the oil companies - a wait for competitors to go out of business or for prices to rise. Considering how flush with cash they are, that wait could go on a long time.
On Jan 14 10:36 AM RJMoran wrote:
> Maxe, it's 'wholeheartedly', not holehartedly/ 'stabilizing, not
> 'stabalising' Good grief! But yes, I agree...!
Thanks for detailed breakdown of fixed and variables costs.
I would add one more point. Losses can be carried forward and reduce tax liability on future profits.
There is as much recoverable oil in the Bakken field as in all the oil fields in Saudi Arabia. The Bakken oil is the best kind - light sweet crude.
This should certainly put a cap on the price of oil in the US. I think that the maximum sustainable price in the US will be in the $20.00 to $25.00 per barrel range for many years.
All this does is make the next leg up much more volatile.
Something to consider.
At that rate,we would have burned it all in 12 years. Truth is,US reserves haven't budged much in the last 25 years. What we've burned has been replaced by what new technology can get at. Ditto for Saudi reserves. The Saudi's bumped production capacity from 11 to 15M bpd,but are only pumping 8. They could stop producing those 8M bpd tomorrow,and the world would just reduce demand by a like amount. I'm not sure all those sick economies can recover with $35 oil. It might take $15 oil to make it happen. If that's what the world can afford to pay,that's what producers will have to settle for.
Hmm, good question, I would ask not how long it can stay down but why it will go down, please note the difference.
When someone says it stays down, he describes the current price level as support, on the opposite if one asks or says go down he means the prices will trend substantially lower.Got it?
As I said before, 9$ a barrel is a real test for Saudi Arabia or OPEC as you wish in 2010.Here again the reason why, the cartel members cheat each other and as they are squeezed till the neck now and drawning they will pump the heavy damn Crude Oil as it is going out of the ground anyway and they will sell it god damn them for any money as their countries are in the pre-revolution tate of mind, it can explode any moment, unemployment,bankruptc... name the few.
Not to waste our time, let me put it short and simple, 20-30$ is the price for Crude Oil the one quoted on the NYMEX, Light Sweet Crude Oil that is.
Hmm, good question, I would ask not how long it can stay down but why it will go down, please note the difference.
When someone says it stays down, he describes the current price level as support, on the opposite if one asks or says go down he means the prices will trend substantially lower.Got it?
As I said before, 9$ a barrel is a real test for Saudi Arabia or OPEC as you wish in 2010.Here again the reason why, the cartel members cheat each other and as they are squeezed till the neck now and drawning they will pump the heavy damn Crude Oil as it is going out of the ground anyway and they will sell it god damn them for any money as their countries are in the pre-revolution tate of mind, it can explode any moment, unemployment,bankruptc... name the few.
Not to waste our time, let me put it short and simple, 20-30$ is the price for Crude Oil the one quoted on the NYMEX, Light Sweet Crude Oil that is.
The reduction in production rates may cause a slight delay of the water encroachment.... or it may enhance water encroachment that will not be seen until production rates are increased again.
Supply destruction (depletion and reduced production rates) will be a more powerful market influence than demand destruction. People either ignore how tight supply and demand really is, or simply do not understand it.
I believe that we have already experienced the majority of "demand destruction" that will come from this economic slowdown. The reduction in supply will take a little more time to flow through the system and pull inventories down, however, It won't take as long as many seem to think.
Supply destruction, however, takes along time to regenerate. Russia may have some very serious financial problems if oil stays low. They have the means and the ethics to disrupt supply.
If pirates are menacing off Somalia, it reduces the availability of Mid-East oil. Perhaps "coincidentally" a pirate attack is coordinated with a submarine torpedo sinking.
A Shell oil platform was attacked off Nigeria a few days ago. Could more attacks occur, and possibly lead to fires on the platforms? Could Russian RPGs enable the attacks? Could some tankers in Nigeria collide and block the channel/damage the oil terminal? Could fanatical imams in Nigeria incite people to attack oil facilities? Could those imams be supported by Russia?
What if some tankers were attacked in the Straits of Hormuz apparently from the Iranian side. (Maybe it was actually a Russian submarine.) Could the Mid East have another war? Would the Israelis attack the nuclear facilities is Iran...
Look at www.eia.doe.gov/cabs/W... for a variety of oil choke points. How hard would it be for a bad actor to disrupt them.
I hope I am wrong.
On Jan 14 11:50 AM Bruce Vanderveen wrote:
> Oil demand may increase (Adam Smith's invisible hand) as gasoline
> prices drop. I know I am driving more. Also, truck demand is rising
> while hybrid demand is shrinking. Don't forget the cold winter.
> I am in Grand Rapids, Michigan, right now. Temperature this morning
> was 5 degrees F. Everyone -- employed or not -- will turn the heat
> up at these temperatures.
>
> Something to consider.
The current scientists at the USGS disagree with Leigh Price's assessment of the Bakken field potential. A more conservative estimate (less than 4 billion bls are recoverable) can be found in Wikipedia. Sure, that's a lot of oil, but it won't put the Saudi's out of business
en.wikipedia.org/wiki/...
"In April 2008 the USGS released this report, which estimated the amount of technically recoverable, undiscovered oil in the Bakken Formation at 3.0 to 4.3 billion barrels (680,000,000 m3), with a mean of 3.65 billion.[2] Later that month, the state of North Dakota's report [3] estimated that of the 167 billion barrels (2.66×1010 m3) of oil in-place in the North Dakota portion of the Bakken, 2.1 billion barrels (330,000,000 m3) were technically recoverable with current technology."
On Jan 14 09:54 AM Michael66 wrote:
> Here is information regarding the Bakken oil formation in North Dakota
> and Montana. The following is quoted from a web site:
>
> "Dr. Leigh Price estimated that the Bakken formation was capable
> of generating between 271 and 503 Billion Barrels of oil with an
> average of 413 BBbls. Dr. Price also re-calculated the data previously
> presented by Schmoker and Hester (1983) and Webster (1984); the re-calculated
> values also fall within the range stated above. Price also states
> that 50% of this oil is recoverable (on average, 200 to 250 billion
> barrels of recoverable oil)"
>
> The Bakken oil field has about the same amount of recoverable oil
> as all the oil fields in Saudi Arabia put together. The number of
> oil wells in the Bakken oil field has more than doubled in the past
> several years.
>
> Saudi Arabia has producible reserves of 267 billion barrels (Wiki).
> Bakken has producible reserves of 200 to 250 billion barrels according
> to Dr. Leigh Price.
>
> There are approximately 800 wells in the Bakken field either in production
> or drilling at this time.
>
> Dr. Leigh Price's study of the Bakken field is the most thorough.
> He personally studied the field and then studied all the prior surveys
> of the field by both private and public entities. His conclusions
> are considered the most accurate and authoritative. His conclusions
> are also considered to be very conservative.
>
> dmr.nd.gov/ndgs/Bakken...
>
>
> grinzo.com/energy/inde.../
>
>
> www.wealthdaily.com/ar...
>
I wrote much more on this topic in a late December article:
seekingalpha.com/artic...
1) Increasing US Production....nope....... 27,2007 5106 mbod:Dec 28 2008...5018 mbpd. (Jan number 4951)
Source: tonto.eia.doe.gov/dnav...
2) 7-8% decline would "would have burned it all in 12 years". You need to get your math checked. 5000 mpd-8% di = 12 year..2100 mpd, after producing 15.368 Billion BO.
3) "It's a waiting game for the oil companies ". No it isn't. You are confusing -keeping currently producing fields producing- with -investing in future supply. Basically you are mixing "lifting costs" with "F&D" cost. Lifting cost is about $20 US onshore. The author got that right. But exploration costs in the deepwater gulf is nowhere near $20/b. Marginal microeconomic factors are in play with your example of 30-60. But fall apart when applied to exploration and exploitation activities.
I am not employed by the "industry" I am an economist. Not one person who is a bear on oil I have ever talked to know the difference between rates and reserves or has the slightest understading of math or statistics.
They are right on one thing, oil prices will be depressed this year. They are all wrong on the reasons why though.
Just my opinion.
PooBah
"In volume terms, the amount of oil imported declined 19.3% to 261.60 million barrels in November from 324.19 million in October."
www.forexpros.com/news...;-oil-demand-falls-sha...
That's 63M barrels,or 2.1M bpd folks. No telling how much world demand cratered. A similar 10% would give us around 8.5M bpd though.
One cannot use a supply statistic and use it as a measure of demand. Use what you are supposed to use..EIA Products Supplied. Here is the link:
tonto.eia.doe.gov/dnav...
You are correct in that demand has dropped. In October the number is so low due to the Hurricans, that snapped back But we are still on a downward trend on demand.
Imports droppping can be any number of reasons, one being that OPEC has cut production.
One has to compare apples and apples. The IEA is very good for global stuff, the EIA for US stuff. That drop in imports you quote is a very bullish indicator for prices, not bearish. It shows OPEC compliance.
PooBah
To illustrate this point, let's look at the Bakken. Regardless of how much oil is truly recoverable there (in this stream of comments alone we range from 3-220 Bbbls), none of it is relevant if the price doesn't support drilling for it. I agree about the difference between fixed and variable cost, but I think many are misunderstanding the nature of these costs with regard to drilling. A typical Bakken well costs $6mm to drill and complete; at WTI $35/bbl (you must include at least a $5/bbl differential due to where Bakken oil is sold), a typical Bakken well that makes 420 mboe will make less than a 2% rate of return, on a succsessful single well basis. The PV10 of one of these wells is less than negative $1mm per well; throw in a couple of mechanical failures and the point is you just wouldn't drill one, unless you could leverage it up, which you can't. And, consider that the Bakken is one of the very best oil resource plays out there (on a F&D/bbl cost basis); most others require substantially higher oil prices.
Further, and a valid point, of course you're going to continue producing your already producing wells; they cost very little per bbl to keep on production. Most conventional onshore wells decline by 6-20% per year and shale wells (like the Bakken or Wolfcamp) have 60-80% first year decline rates, followed by 30+%, then 20% then 15%, down to about 4-7%/year. The point is, w/o new drilling (while continuing to produce your existing producing wells) you will see declines in production of 6-60%/yr, w/ an estimated average of 30-35% for the U.S.
Supply destruction is real, it may be somewhat delayed b/c companies will want to continue to drill to hold land by production (if you hold the lease w/ production, after 3-5 years, you lose it) or b/c they're hedged, but that will burn off and supply will suffer.
Storage buildup just reflects this, and does not say anything about demand.
I seriously doubt that very many new barrels will be lifted in the Bakken at all as long as the prices is so low.
Reserves are a function not only of the amount of oil in the ground but also the cost to lift it. At today's prices virtually all of the Bakken oil is not economic.
Storage is rising, and that is the truth. Cushing is at historical levels. Stocks of crude have been rising since June/July from 288 MMBO to 325 MMBO.
However, imports dropping coupled with rising stocks does not indicate lowering demand more or less than the official statistic for measureing demand. Product Supplied. That is how much crude is made available to the market. When the market demands more, the amount supplied rises. What you will see in the imports is that they will drop until stocks drop. I have graphs that I have used for years and they are pretty realiable and when you see the crude oil stock number, take a 5 year rolling average. Then take the average number and look at the variance to the current month. Chart that over time. Currently, we are 17 MMBO over our five year rollling average. In June, we were 24 MMBO under our five year average. That over/under graph and oil price are almost perfect mirror images of one another over 5-6 years.
I am not saying you are wrong about 15 dollar oil. But not because inports are lowering. Eventually, if imports are lowering, we will see a draw down in crude stocks. (if they keep lowering) When the draw down in stocks is consistance for three or four weeks, price will rally as it is a clear indicator that more crude is being consumed than produced+imported.
All very simple really. But to often people think these issues have a political tint to them. They might, I don't listen to politicians, I look at data...
PooBah
This is the type of article I like to read. It is well researched and seems logical to me when I consider it within the framework of all that is happening now.
Well done.
i would add to it that companies maximize profit when the marginal revenue obtained from the last unit sold equals the marginal cost of producing that last unit. companies that insist on covering their fixed costs are hurting themselves and their shareholders.
fixed costs are generally relevant to production and sales decisions only in the long run. variable costs are relevant all the time.
On Jan 14 10:42 AM Chris B wrote:
> Using "production costs" to justify a price for oil without separating
> fixed and marginal expenses will only lead to confusion. Remember
> microeconomics? A firm will continue to produce - at a loss - as
> long as the price is less than or equal to the marginal cost to produce
> that one extra unit, regardless of fixed costs. This is because at
> that level, you lose less money producing that extra unit than you
> would by completely shutting down but still having to pay your fixed
> costs.
>
> Suppose you are paying interest, maintenance, amortization, insurance,
> and other fixed expenses to run an oil platform that was built at
> the height of the oil bubble and can produce oil at a total daily
> cost of $70/barrel. Your fixed costs are sunk costs - you will owe
> them whether you shut down or not. Your variable costs, a few extra
> salaries, parts, energy, etc. add up to maybe $10/barrel, and your
> fixed costs add up to $60/barrel. If you DO produce a barrel of oil
> and sell it at $40/barrel, you will lose $30 ($40 revenue-$60 fixed
> cost-$10 variable cost=$-30 profit). If you DON'T produce that barrel
> of oil, you will lose $60, your fixed cost. Which would you rather
> lose... $30 or $60? Easy decision: keep pumping and wait for prices
> to rise in the future.
>
> At this point, many fields are operating at a loss because that's
> cheaper than not operating at all. It's a waiting game for the oil
> companies - a wait for competitors to go out of business or for prices
> to rise. Considering how flush with cash they are, that wait could
> go on a long time.
here's an interesting set of numbers
at the end of December 2006, the US had a 20.7 day supply of oil on hand
at the end of December 2007, the US had a 19.0 day supply of oil on hand
at the end of December 2008, the US had a 21.9 day supply of oil on hand
these "massive stockpiles" represent just a few days use - they don't seem so big to me now
source: tonto.eia.doe.gov/dnav...
On Jan 14 10:42 AM Chris B wrote:
> Using "production costs" to justify a price for oil without separating
> fixed and marginal expenses will only lead to confusion. Remember
> microeconomics? A firm will continue to produce - at a loss - as
> long as the price is less than or equal to the marginal cost to produce
> that one extra unit, regardless of fixed costs. This is because at
> that level, you lose less money producing that extra unit than you
> would by completely shutting down but still having to pay your fixed
> costs.
>
> Suppose you are paying interest, maintenance, amortization, insurance,
> and other fixed expenses to run an oil platform that was built at
> the height of the oil bubble and can produce oil at a total daily
> cost of $70/barrel. Your fixed costs are sunk costs - you will owe
> them whether you shut down or not. Your variable costs, a few extra
> salaries, parts, energy, etc. add up to maybe $10/barrel, and your
> fixed costs add up to $60/barrel. If you DO produce a barrel of oil
> and sell it at $40/barrel, you will lose $30 ($40 revenue-$60 fixed
> cost-$10 variable cost=$-30 profit). If you DON'T produce that barrel
> of oil, you will lose $60, your fixed cost. Which would you rather
> lose... $30 or $60? Easy decision: keep pumping and wait for prices
> to rise in the future.
>
> At this point, many fields are operating at a loss because that's
> cheaper than not operating at all. It's a waiting game for the oil
> companies - a wait for competitors to go out of business or for prices
> to rise. Considering how flush with cash they are, that wait could
> go on a long time.
On Jan 14 10:29 PM Dr. C. wrote:
> "Massive stockpiles are building up"?
>
> here's an interesting set of numbers
>
> at the end of December 2006, the US had a 20.7 day supply of oil
> on hand
> at the end of December 2007, the US had a 19.0 day supply of oil
> on hand
> at the end of December 2008, the US had a 21.9 day supply of oil
> on hand
>
> these "massive stockpiles" represent just a few days use - they don't
> seem so big to me now
>
> source: tonto.eia.doe.gov/dnav...
>
>
>
>
Problem - most of these 'depletion replacement barrels' are in the deepwater, the Arctic, Canadian tar sands or difficult foreign countries where it will take the promise of $60/BBL to justify development.
Storage offshore is irrelavant, save in the context of market pyschology. In effective terms floating storage is like having it in the ground, the company has just moved the reservoir. Remember that contango is caused by a two factors....
1) near term demand drop (check)
2) future expectation of shortage (maybe)
When those come together you get contango. Sometimes, only one is needed if it is severe enough.
While irrelavant, the less sophisticated pundits use this as support for pre-exisiting positions. No serious economist sees contango as a long-term driver, its only opportunistic money making.
That said, there is enough chicken little pyschology to drive the price to 10. I hope so, in a way, that would almost snap the overall market out of recession almost single handedly. But then when demand resurfaces, we will have the supply problem again.
And Venezuela is much worse than anyone thinks.
PooBah
On Jan 15 08:58 AM Mmarrkk wrote:
> Dr. C: look offshore! Vast number of tankers full of oil are sitting
> on the high seas. Folks are buying at these low prices and waiting
> to dump the oil on to the market when it recovers just a little bit.
> Arbritrage!
Obviously, majority of the invested cost are sunk cost, i.e. money spend on building that rig, but I estimate it does cost a lot more, (i.e. like at least $40) for BP to drill, pump those crude, and hire a super tanker to haul those crude back to shore. If price drops future, BP will be better off shut down the operation and focus on the low cost drilling.
That is what I can think of logically. I would say $30 should be the philosophical floor for crude. It may go down below that, (when Hedge Fund, pension funds started to short them, just like when there push them to $147), but if you are a long term investor, I think it is a good entry point now.
That's just observed behavior, without any statistical backup. Global statistics are hard to come by, anyway.
Demand will continue to rise as the developing countries emerge from poverty. The obvious example of this is China, which went from being a net exporter of oil to a net importer.
We're looking at a temporary dip in demand as if it were a permanent development. What is more likely is a surge in demand as we start up our economies again sometime this year and starting burning that $1.50 a gallon gas.
I also hear rumours of war, which can change everyone's opinion of oil overnight. I am waiting to see what happens on the heels of O taking office, and ready to deploy cash as needed.
Could come up again as fast as it came down. And all this w/o any fundamentals-- or me with any real understanding of anything!
But again-- I am just operating under a learner's permit!
All you have to do is look at the financials of the producers in the play. If you drill a successful Bakken well at $16/bbl for a well cost of $6mm, you will lose $4.2-$4.3 mm over the 20+ year life of the well. If you think about this on an overly-simplistic, totally undiscounted basis, this makes sense. Think about it this way, spend $6mm, produce 420 mbbls, get 336 mbbls after a 20% royalty, get $5.3 mm - that's a $700k loss w/ no production costs, production taxes, allocated g&a, dd&a, etc and assumes that you get all the revenues on day one. Your math, or your geologist's math, just doesn't work.
I think what is more likely is that you are confusing the cost of continuing to produce an existing well with the cost of making a new well. I think also that the author of this piece suffers from the same mistake. Certainly, the cost to continue producing existing wells is much lower than $60/bbl, and yes, there are many plays that are profitable at lower oil prices, but there are not nearly enough of those to offset the 7% global yearly decline rate. That is 6 mmbopd per year. The author's argument that the 80th mmbopd represents the cheaper oil and the bbls above that to stretch supply to 85-86 mmbopd are the bbls that cost the most is not valid. The reason why is that the base 80 mmbopd is not static, it too is declining. Let's suppose that they are the better bbls from the better reservoirs and are only declining at 3.5%/year; that is still 2.8 mmbopd/yr that is coming out of the supply chain and will need to be replaced w/ something. It doesn't seem logical that if someone had very low cost bbls to produce that they wouldn't have been producing them, but let's assume that makes up 0.8 mmbopd. Still, 2.0 mmbopd needs to come from the higher cost oil to keep production flat.
Next step, let's assume that global demand for oil goes down 2 mmbopd to 84 mmbopd and that excess supply (defined by the OPEC cuts) is 4 mmbopd. Take the 2 mmbopd decline from the existing good/cheap fields/year, and you're left w/ some period of time of less than 2 years to chew through the excess supply. (Unaided by additional drilling capex, but aided by existing field level capex, global crude oil declines will be somewhere between 2 and 6 mmbopd.) We all know the markets are forward looking, it's just a matter of how far forward before we see the rebound to the true marginal cost of oil once again being the spot price. Six months seems to be a consensus number, so I will go on record as calling for $65+ WTI by the end of the year.
More DXO for me.
Don't confuse reserves w/ potential reserves. Oil in the ground only becomes "reserves" when it is both proven to be there (as opposed to estimated) and can be retrieved economically. If you haven't noticed, there are literally no new greenfield (starting from scratch vs brownfield which is continuing to produce existing reserves or extending existing production plans). Why? Because Canuck tar sands are not pipeline quality and need to be upgraded in order to move them, or (and it's usually a combination of both) they can be mixed w/ diluent, which is simply high quality crude. These facilties are extremely upfront capital intensive and at prices this low, these projects are not economically feasible. Thus, reserves in Canada at YE2008 from the tar sands will actually likely decline significantly. As for probable and possible quantities, I can not say, but, again, please don't confuse those with reserves.
Yes, there are tankers being hired to act as floating storage facilities. How much oil is stored at sea?
"Oil companies and traders are storing 80 million barrels of crude oil at sea, the most in at least 20 years, according to Jens Martin Jensen, interim chief executive of the management unit of Frontline Ltd., the world's largest supertanker owner."
This article also states that...
"The cost of hiring supertankers to collect crude oil from the Middle East jumped as the biggest oil-storage program at sea in at least two decades eliminated the supply of ships available for deliveries."
Source:
www.canada.com/calgary...
So this suggests that the 80 million barrels is just about the maximum tanker storage space available and the cost of leasing these ships are rising.
So how much is 80 million barrels of crude?
EIA estimates global demand for 2009 to be about 86 mbd.
Source:
uk.reuters.com/article...
So we see that the "Vast number of tankers full of oil" won't hold enough oil for 1 days' global consumption.
Sorry - I'm still not convinced that the current "glut" will have a significant impact on price over the next year or two.
I may be wrong - but then, I may be right.
I'm long DXO with a 1-2 year planned holding period
Most of the position was put in place on days oil traded below $40
On Jan 15 08:58 AM Mmarrkk wrote:
> Dr. C: look offshore! Vast number of tankers full of oil are sitting
> on the high seas.
The point is Supply and Demand are out the window with this deregulated commodity market!
On Jan 14 08:52 AM pockyclips 2020 wrote:
> I don't know where you got your data from. IEA's report from last
> week shows
> US domestic production down in 2008. 25% fewer rigs are operating
> in US/Canada since last July. You can probably get oil for less than
> $40/barrel from an established field, but costs exceed $60 for offshore
> or non traditional sources, like oil sands.
Forget the rest of these rambling dissertations!
On Jan 14 11:24 AM ZepDallas wrote:
> Oil is in the thirties today. Within two years oil will be at least
> in the sixties, if not higher. Thats not a bad return. If oil dips
> into the twenties I will mortage the farm. See ya in 24 months fellows!
Maybe they price into it the CEO/Exec's 50 Million dollar salaries ?
On Jan 14 08:55 AM maxe wrote:
> I agree holehartedly with your story. I never bought this "but it
> costs $60 to produce" story. I mean have you ever met a poor oil
> executive?
>
> The fact that people are buying at this price and selling one year
> out contracts, then storing it on supertankers means there is going
> to be a massive oversupply for at least a year.
>
> Until China and India show signs of stabalising, and grow again,
> i see no light at the end of the tunnel.
I always love to hear opinions.
On Jan 15 08:37 PM A Peak Oil Believer wrote:
> ZepDallas just took three lines to say everything
> Forget the rest of these rambling dissertations!
Oil is like food and electricity. People use lots of it and over time, the price for it goes up.
Where that leaves you today, I can't say.
But I can tell you where oil will be 5 years from now: Up!
The odds are just too favorable for crude oil to rise significantly than to continue to drop to 20s.
Personally, I rather invest in this commodity than stocks right now. May be with the exception of agricultural ETFs.
On Jan 15 05:50 PM henarl wrote:
> Wow, lots of comments on this subject. Here's one more: Since perception
> is as important as reality to the short term price of oil, how about
> the perception of a possible war in the whole middle east. If Hezbollah
> starts lobbing more rockets into Israel in sympathy with Hamas and
> in an effort to eliminate Israel once and for all (after all, they
> are both controlled by Iran), and then Israel in desperation bombs
> Iran - Hello WW3. What effect do you think that would have on the
> price of oil?
On Jan 14 11:28 AM Michael66 wrote:
> The cost of production for the Bakken oil field in North Dakota is
> less than $16.00 per barrel.
>
> There is as much recoverable oil in the Bakken field as in all the
> oil fields in Saudi Arabia. The Bakken oil is the best kind - light
> sweet crude.
>
> This should certainly put a cap on the price of oil in the US. I
> think that the maximum sustainable price in the US will be in the
> $20.00 to $25.00 per barrel range for many years.
>
>
On Jan 14 09:54 AM Michael66 wrote:
> Here is information regarding the Bakken oil formation in North Dakota
> and Montana. The following is quoted from a web site:
>
> "Dr. Leigh Price estimated that the Bakken formation was capable
> of generating between 271 and 503 Billion Barrels of oil with an
> average of 413 BBbls. Dr. Price also re-calculated the data previously
> presented by Schmoker and Hester (1983) and Webster (1984); the re-calculated
> values also fall within the range stated above. Price also states
> that 50% of this oil is recoverable (on average, 200 to 250 billion
> barrels of recoverable oil)"
>
> The Bakken oil field has about the same amount of recoverable oil
> as all the oil fields in Saudi Arabia put together. The number of
> oil wells in the Bakken oil field has more than doubled in the past
> several years.
>
> Saudi Arabia has producible reserves of 267 billion barrels (Wiki).
> Bakken has producible reserves of 200 to 250 billion barrels according
> to Dr. Leigh Price.
>
> There are approximately 800 wells in the Bakken field either in production
> or drilling at this time.
>
> Dr. Leigh Price's study of the Bakken field is the most thorough.
> He personally studied the field and then studied all the prior surveys
> of the field by both private and public entities. His conclusions
> are considered the most accurate and authoritative. His conclusions
> are also considered to be very conservative.
>
> dmr.nd.gov/ndgs/Bakken...
>
>
> grinzo.com/energy/inde.../
>
>
> www.wealthdaily.com/ar...
>