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Richard Zeits

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  • Four 'Cures' On Their Way To Help The Oil Price [View article]

    I agree with you, contango does not increase long-term demand. But it may assist in the very short term creating effective demand from the inventory build.

    In a backwardation environment (similar to what we experienced recently) the incentive is the opposite - to reduce the inventory whenever possible. A steep backwardation probably indicates that inventory levels have already achieved a level that is low or very low relative to the system's operating requirements.

    Once we go from steep backwardation to contango (as it happened between early this year and September), inventory demand is effectively created in the short term.

    This may not be a huge factor, but every little bit helps, given that oversupply is not huge (in my opinion).
    Nov 20 09:44 PM | Likes Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]

    I am not sure I agree. I remember several years ago VLCCs were parked in the Gulf of Mexico for months, effectively being used as storage alternative several years ago. That was an extreme contango. Marketers do not need that much of a spread to begin filling up storage at liquid trading hubs.
    Nov 20 07:17 AM | 1 Like Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]

    It is still too early to measure the behavioral impact of the lower oil price on North American unconventional oil producers, but I am convinced it will be very visible with time in the event there is no meaningful recovery from the current levels. There is a natural (which I estimate at about nine months at this point). Production may still grow from year-end 2014 to year-end 2015, but at a much slower rate.

    On SA, I am not sure they have necessarily been defending their market share. OPEC and Saudi production have been fairly flat over the past four years, and I suspect OPEC has been selling everything they could produce without stressing their assets.
    Nov 20 07:10 AM | 1 Like Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]

    With regard to substitution. My premise is that oil price has remained relatively stable for a long time. That created a certain balance point as it relates to specific feedstocks being used by power generation, petrochemical complex and heating/cooling. While the system's ability to increase the use of crude oil to replace other sources is limited nowadays, it is nonetheless not zero. So when oil price drops by 20%, some substitution on the margin will inevitably occur.
    Nov 20 07:01 AM | Likes Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]

    Based on the oil price and stable OPEC volumes.
    Nov 20 06:48 AM | Likes Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]

    There is on empirical fact that contradicts your "marginal cost" model - oil has traded at over $100 per barrel (and even higher) for an extended period of time. What defines the transition to that marginal cost of supply pricing that you outline?
    Nov 19 11:26 PM | Likes Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]

    While I agree about near-term WTI flatness (let's keep in mind, storage is ample there at the moment), Brent's Jan 15-Jan 16 is $4.60.

    What I mean by substitution, there are situations where nat gas may actually be more expensive than oil (plus some incremental demand from sharply lower oil price may also occur).
    Nov 19 10:55 PM | Likes Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]
    Flash Crash Gordon,

    I thought that was the purpose of OPEC - to coordinate current production volumes (and reduce them as needed) to maintain price stability as it is viewed important for maximizing future demand. Or am I wrong?

    Also, I don't think that the sacrifice for OPEC would be that huge at the moment - let's not forget that for almost five years now, OPEC has been selling everything it could produce (at $110 per barrel, which is nothing to cry about). So cutting back a little on volumes at $75 may not be a poor strategic decision. Besides, Ghawar needs to "breathe" from time to time, some people would say.
    Nov 19 02:08 PM | 1 Like Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]
    Vegas Brit,

    "$70 is a fair price in the current economic environment. At this price the USA can punish Russia, and not kill the oil boom in the USA."

    Your statement implies that the U.S. has some sort of a tool to set the price price of oil. Really?

    Also, the term "fair" is in the eyes of the beholder. When I fill up my tank I may think that $35 is fair. Someone else who drills a dry hole in the Arctic may think that $135 is not fair enough. The market does not know the word "fair," I don't think.
    Nov 19 01:14 PM | 7 Likes Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]

    Please promise not to tell anybody, but I heard the author has been accumulating cash to make a bid for a stake in Ghawar Field.
    Nov 19 12:44 PM | 5 Likes Like |Link to Comment
  • Oil & Gas Stocks: 'Stability At The Bottom' May Be A Positive Sign [View article]

    I personally think that an intentional policy by OPEC aimed at suppressing North American oil production is highly unlikely. Because it would be highly ineffective and costly. Even if OPEC flooded the market with oil (intentionally or inadvertently), it would only postpone growth from the US and Canada. Shale production is flexible (due to very rapid natural declines), but shales will not go away. There are over a 1000 highly productive rigs in North America. Even if all of them went idle for a year, activity would resume the moment oil prices recover. Without the shales, I do not see how global demand and supply can balance, particularly with a price below $80.
    Nov 19 11:41 AM | 5 Likes Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]
    Lionel Yeo,

    "The drop in oil prices is largerly to do with the shale oil production."

    It is interesting that shale oil production growth was obviously no issue until July of this year, from the oil price impact perspective.

    "Most shale companies are not making money and are cash flow negative after allowing for capex."

    This is a generalization and simplification. Please do not forget that many oil companies employ a different business model - they explore and capture new plays and re-sell them at a higher price. So if you miss to factor in asset value appreciation, your cash flow picture would not tell the entire story.

    "$75 oil is disastrous for them." Isn't it disastrous for everybody, for that matter? Could it in fact be more disastrous to everyone else? Let's not forget that NA shales was the area where growth has been the strongest. If prices have been so favorable, where is growth from other areas? Maybe they need a higher price than the shales?
    Nov 19 11:09 AM | 10 Likes Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]

    It is difficult for me to say. Smaller companies tend to hedge more (compare to XOM). However, the past two-three years were unfavorable for long-term hedging due to very strong backwardation.
    Nov 19 11:01 AM | 2 Likes Like |Link to Comment
  • Four 'Cures' On Their Way To Help The Oil Price [View article]

    Thank you for reading.
    With regard to the exports impact, I don't think it is a factor at the moment. It could become more pressing, however, few years from now if North American unconventional production continues to grow at its current rate. The US refining system is traditionally configured to process heavier/more sour grades, so it would make sense to continue to import those grades and export light sweet grades.
    Nov 19 09:32 AM | 3 Likes Like |Link to Comment
  • To Understand The Oil Price Drop, One May Wish To Look At The Term Structure [View article]
    Flash Crash Gordon,

    With regard to Cushing, if I understand your comments correctly, your presumption is that the decline in Cushing inventories at the time of the Seaway pipeline coming in service created an appearance of a very wide backwardation while really there was no backwardation? I am not sure facts support that.

    Prior to June 2013, Cushing was extremely congected and inventories were at abnormally high levels, suppressing the price (i.e., the backwardation was not visible enough). As I wrote above, once Seaway came in service in May 2013, the WTI price quickly came back to what appears to be a more normal level. Again, let me point out that the graphs in the article represent "normal" WTI after July 2013, not a bottleneck-distorted picture prior to May 2013.

    Your second presumption appears to be that the current WTI price is distorted because inventories at Cushing are too low, if I understand you correctly. Again, I don't think that facts support that. If Cushing inventories were "too low" structurally, why is WTI trading at a more or less stable spread to waterborne crudes?

    The fact is, Cushing has continued to be debottlenecked since Seaway. The reason why inventories at Cushing declined so much this year is the addition of Marketlink in January that helped to move inventories to refineries, as well as the additional of several other infrastructure venues, including Longhorn pipeline, Permian Express, etc. And please do not forget crude by rail (and high refinery run rates in PADD 2 and PADD 3). The combined net effect is that Cushing is really no longer a bottleneck or a monopoly transit route.

    In your argument, you appear to implicitly equate low inventories at Cushing to an ensuing price effect. I don't see the mechanism and I don't see an indication in the market prices. The distortion existed when there was a bottleneck. Now there is no bottleneck.

    I keep repeating, you have to look at something like Brent/WTI spread to see whether Cushing inventories are indeed "too low" in a structural sense and whether it leads to a price distortion. If the inventories were indeed "too low," you would see the Brent/WTI spread contract very noticeably throughout 2014 (when the most dramatic decline in Cushing inventories occurred). "Very noticeably" probably means that WTI would have traded through Brent. Did not happen. Could this mean that "historically low" inventories at Cushing that you focus on is a new normal? Maybe the cost of renting storage tanks at Cushing should come down a bit since there are more alternatives available?

    I understand what you are saying about WTI being a local pricing point, but I am not sure in this specific case it is that big of a concern.
    Nov 16 04:26 AM | 1 Like Like |Link to Comment