Peak Oil is You
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Page added on October 9, 2014
Oil: More About Supply Than The Dollar
Summary
- The dollar has pulled back this week and oil prices are still falling.
- Saudi Arabia appears to have shifted its stance.
- US output is strong, inventories high, refineries slowing.
The US dollar’s upside momentum has faded, but oil prices remain depressed. Many observers try, too hard perhaps, to link the decline in commodity prices in general, and oil in particular, to the appreciation of the dollar. Yet the situation is considerably more complicated.
There is a case that can be made that the decline in commodity prices reflects slower world growth prospects in general. Demand in China, the key consumer of commodities, has softened, and its crackdown on using commodities to disguise capital flows, or use as collateral for loans, may also be weighing on demand. This weakness in the global economy stands in contrast to the US economy, which grew 4.6% in Q2, and appears to have ground around 3% in Q3. This contrast, or divergence has helped bolster the dollar.
However, this conventional narrative does not do justice to the supply side. From a high level, more often than not, dramatic moves in commodities seem to be a reflection of supply shocks more than demand shocks. For example, record harvests in the US explain the decline in grain prices more than the dollar or a slowing of the world economy can.
Oil prices have fallen by 17-20% since mid/late June. There may be some role for the global slowdown and the appreciation of the dollar, but this is not to say these are not the main drivers. We see two main forces. The first is Saudi Arabia. It usually acts as the swing producer, cutting output when prices are low and increasing output when prices are high. It is not cutting output presently. To the contrary, it looks to have stepped up its output. The key question is why?
As in many important developments, this too could be over-determined (meaning more than one cause or consideration). First would be Saudi Arabia’s domestic considerations. It depends on oil revenues to finance the government’s activities, including a generous welfare program. By boosting output, it can maintain overall revenues in a soft oil price environment.
Second, some suggest may also be a favor to the US in that a fall in oil prices adds to the pressure on Russia. I am sympathetic to arguments that it was the collapse in oil prices more than the Reagan-inspired arms race that ultimately led to the fall of the Soviet Union. While it is possible that Saudi Arabia changed tactics are part of some kind of pact with the US, it does not seem compelling and is contradicted by a third consideration. A decline in oil prices, especially if a move below $80-$85 a barrel can be sustained, it could change the dynamics of the US shale projects.
Fourth, the Saudi oil stance may be a warning shot to OPEC, which meets early next month. By boosting output, it may enhance its effort to reinstate discipline within OPEC. Its internal battle within OPEC means that if it does not pick-up market share, its rival Iran would. Some observers think there is a proxy war of sorts being fought between Saudi Arabia and Iran. Libya and Venezuela domestic considerations do not favor cuts in output. Separately, Russia may also be inclined to step up production to limit the decline in revenues.
US output is another supply side shock. In the week through October 3, US crude output was 8.88 mln barrels a day, and for the 48 continental states, it was the highest weekly figure since 2010. Since 2008, the EIA estimates that US oil output is up more than 70%. Its 2014 forecast of average daily output in the US this year of 8.53 mln barrels can be surpassed. During that same week, US oil imports were 7.71 mln barrels a day. This is about 1.5 mln barrels a day than the average in the 2011-2013 period. The EIA expects imports to fall to 6 mln barrels a day next year.
Through the week of October 3, US crude inventories rose by five mln barrels. The consensus had forecast a build of a little more than one million barrels. Crude inventories are about 2% above the five-year average, and refinery utilization has fallen to the lowest since June.
Talk of peak oil and the demise of the dollar spurred fantastic talk of a return to $150 a barrel and higher. It was supposed to support the shift in the world economic order, leaving aside the fact that China is a larger importer of oil, or that the world economy does better (at least in the short and medium term) with cheaper energy. While scenarios are high oil prices have been gamed out, we suspect not sufficient attention has been given to the opposite, and just as plausible a scenario of a further material drop in oil prices.
The 10-year average (120-month) of WTI is about $82.00 a barrel. In 2011 and 2012, it hit $75-$77. These do not seem like unreasonable medium-term targets. Technically, a break of $73 a barrel could send WTI toward $64, which corresponds with the 2010 low. A break of that would indeed be significant.
14 Comments on "Oil: More About Supply Than The Dollar"
Plantagenet on Thu, 9th Oct 2014 8:19 pm
Oil prices are still heading down. All the predictions that oil would peak in 2005 are falsified. Oil may still peak in the next few years, but it a continuation of very slow growth or another plateau in oil production may also be in the cards. With these falling oil prices, we certainly live in interesting times!
Northwest Resident on Thu, 9th Oct 2014 9:04 pm
Conventional oil peaked in 2005. That is a fact that you can put in your bong and smoke. All of the predictions that oil would peak in 2005 are truthified, not falsified. Now the oil industry is going after the scraps and dredges — shale oil. Saying that peak oil didn’t happen because we still have shale oil production increases is like saying Thanksgiving dinner isn’t over because there’s still grease in the pan and crumbs on the floor. Grovel and scrape for that fracked oil all you want, peak oil is here and now.
Makati1 on Thu, 9th Oct 2014 9:26 pm
There is obviously something happening that is NOT related to how much oil is left, but IS related to geopolitics.
The US took down the USSR by getting the price of oil to drop below the survival price the USSR needed and bankrupted them. Perhaps they are trying to do it again with Russia. Not going to work. China has their back this time, and said so. Russia has reserves, that it can use, to hold out. Not so last time.
Maybe it is just that it is election time in the US and gas prices always go down then. Hope it drops so low, that all of the ‘alternate’ oil sources are shut down. I guess time will tell.
Nony on Thu, 9th Oct 2014 9:39 pm
At one time offshore oil or Alaskan oil might be considered unconventional. Shale oil is becoming more and more normal. [Shale gas actually is squeezing out conventional gas!]
Perk Earl on Thu, 9th Oct 2014 11:47 pm
How can oil price dump as far as it has simply on higher recent supply?
The value of something in the near or far future is based on ‘perception’ of where the economy is going. The last thing oil traders want to do is get caught flat-footed like they did in 08 when oil dropped precipitously. What they’re looking at is with QE ending later this month (and at some future point selling those bonds will increase interest rates), EU in deep recession which now also includes Germany, China in slowdown mode particularly regarding commodities, all arrows point to world stock markets correcting downward. Today the Dow went down 335 points. With oil having dumped down 20% the stock market is poised to have a major correction along a similar percentile drop, either over several days or weeks or maybe another historical one day drop.
Jerry L on Fri, 10th Oct 2014 4:44 am
Maybe all of us retiring baby boomers are no longer commuting to work? Maybe we now have the time to putter around in our veggie gardens and no longer need to buy over-packaged food from far-off places? Maybe we are satisfied with a vacation closer to home and not flying to an exotic island on the other side of the globe?
forbin on Fri, 10th Oct 2014 6:40 am
Brent a tad under $90 and WTI a tad under $85
Shale oil from a previous post possible at $68 , in USA , so a margin of $17 is pretty good , Mind you if the previous figure for shale of $85 is the real one then in the next six months shale will wither
Time to sell up lads !
Forbin,
PS : I ‘m kinda with Mak on this one , smacks of political meddling but we shall see
Bil C on Fri, 10th Oct 2014 7:06 am
How low will prices go,perhaps past the 40 dollars a barrel reached in 2008 ,this will likely lead to World War 3 and the resumption of growth along with a cull in numbers.Perhaps Ebola will contribute to the die-off.All bets are off now its all downhill from here.Stock up on whatever will make you happy food ,alcohol,reading material were gonna need shitloads of this stuff to keep us company during man’s descent into the post-peak oil age
JuanP on Fri, 10th Oct 2014 7:58 am
Mak, The two points you raised are very valid. It is likely that prices are being manipulated for political reasons related to the upcoming US elections and the USA-Russia war. What is hard to tell is how much of this price fall is due to supply and demand and how much to manipulation. I agree that this tactic is very unlikely to work with Russia this time around, because the USA is in a more fragile economic, social, and political situation than Russia is.
Davy on Fri, 10th Oct 2014 9:15 am
Juan, I see these price movements as a product of market instability benefiting the mad men in DC not their handy work. I disagree with you on Russia. They are looking into the abyss economically. Their economy is just not diversified enough and the transition to a brics economy incomplete. You just don’t switch these grand policies on and off like a light. True the US is in dangerous waters also. China is in worse shape with hidden economic demons. Europe is the worst being insolvent and facing an energy war. The sad truth is all the above will contribute to a route to global BAU. The interconnected nature of the trading system that has developed cannot be changed without unintended consequences. The motivation for the changes are not positive they are trade war tactics. This is on both sides of the war and both sides have good trade weapons. The market and debt bubbles are about to pop and trade wars will guarantee this. China is set for a hard landing. Russia will find itself in drastic economic shape. The US and Europe are heading for an economic contraction on par with 2008 at a minimum. The rest of the world will follow as usual. These economic events will converge and reinforce each other globally. Trade wars are a race to the bottom. If a hot war breaks out that bottom will be assured. You can claim manipulation from the mad men in DC. I would agree around the edges. I see no evidence of the power of policy here. I see every indication of economic bifurcation with bubbles of all kinds going critical. These just happen to benefit the mad men in DC in relation to Russia.
rockman on Fri, 10th Oct 2014 9:39 am
Davy – Exactly. The politicians in DC or anywhere else neither buy nor sell oil. Refineries buy oil and produces sell oil. The price is set between those two. The politicians might have some minor impact on that dynamic by various policy changes but they hardly control the situation. Of course that doesn’t mean some of them will be trying to take credit for lower oil prices. Just as they’ll point fingers at others when prices eventually increase.
And I try not to be too repetitive but based on statements above I’ll remind folks: in the oil patch (i.e. the real world) there are no such animals as “conventional” oil or NG and no “unconventional” oil or NG. There are conventional and unconventional “RESERVOIRS”. So when you read bizarre statements such as “Shale gas actually is squeezing out conventional gas!” don’t get confused. NG is always NG and oil is always oil. And both can be produced from conventional and unconventional RESERVOIRS. I’ll pass on explaining those definitions…plenty of help on the net. And the definition sure as hell don’t depend on the geographic location of the well…be it Alaska or offshore.
The oil patch is a highly technical arena with precise nomenclature that helps us navigate thru the complexity. I let a lot of the misstatements here slide because such corrections often wouldn’t aid the conversations too much. In this case I felt it was appropriate before the discussion got sidetracked into irrelevant debates.
Davy on Fri, 10th Oct 2014 9:51 am
Rock, I always appreciate your clarifications from concrete experience. I am guilty of abstracting here and I am always looking for improvements in my understanding from facts.
Nony on Sat, 11th Oct 2014 6:51 pm
The Marcellus tsunami!
http://seekingalpha.com/article/2554655-natural-gas-marcellus-pipeline-boom-sets-stage-for-a-30-bcf-a-day-tsunami
Nony on Sat, 11th Oct 2014 6:53 pm
Check out the futures curve, hallway down this linked article. Gonna be a long wait for Rock, Berman, Rogers, et al for that $8 gas.
http://seekingalpha.com/article/2537605-natural-gas-the-goldilocks-storage-picture-is-masking-deep-containment-in-the-marcellus