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Page added on June 3, 2015
Forget the Noise: Oil Prices Won’t Crash Again
Oil rising to $60/bbl is displeasing some people, particularly the shorts. Some of the more extreme –those calling for oil in the $20’s – have wisely fallen silent. Others, like Goldman Sachs, who a few months ago had set their flag in the 30’s, have unfortunately not gone so silent. They recently moved their flag into the 40’s but they continue to talk a lot. A better strategy – though one that would require some humility — would be to stop talking and listen.
Recent and compounding data will soon wash away the walls of worry erected by the experts. Four consecutive weeks of inventory draws, each one larger than the last is irrefutable proof that a 60% decline in the rig count means something.
Shorts will downplay this trend and point to last week’s surge in US production. But this could have had as much to do with sales as it did with production. I don’t fully understand all the criteria used by the EIA in assembling weekly data, but I do know what some well-heeled operators have been up to. Those who could afford to store oil in leasehold tank farms began selling long held inventory when oil touched $60. Wall Street would call this arbitrage, but to an oil operator this is known as calling in a load. This is a one-off event but when you factor it into last week’s 2.8 million bbl draw, you will see a clear path towards large inventory draws in the very near future.
Well site storage levels will decrease as will production. The X-axis on all decline curves marks time, Y is volume. The IP (initial production) rates right after a completion may be high with shale wells, but there is a very steep precipice that immediately follows. As we move through time, more and more wells are slipping down this curve that bottoms out at 15% to 20% +/-of initial production rates. And this only takes a handful of months. The flat section a year or so out is known as the tail. The tail is good money, but the upfront flush is what pays for wells.
The rig count went into free fall after OPEC’s Thanksgiving Day announcement. Frack jobs continued, with some sand suppliers booming right through January of this year. But by February, the free fall began there too. That was 4 months ago, which means the sled ride down the decline curve is on.
Another factor to consider is that the EIA weekly production numbers are estimates. As oil producing states begin to report real numbers in 60 to 90 days, you will see markdowns.
Inventory draws of 4 million plus, which will begin shortly, may finally see some of the media saturated shorts stop pontificating for a moment and possibly even consider a short period of quiet introspection. Maybe. Or they may stick to the newest argument—the “fracklog”.
Drilled, though uncompleted wells are nothing new. They’re a common occurrence when mid stream infrastructure is not yet in place or when there is the need to secure a lease. There is also not much of a worry that wells will have to be completed due to state regulations requiring so.
No one is going to rush into their back log of completions either. Everyone in the business is holding cash tightly—really, really tight. And no one is going to run to the debt markets to finance a burst of activity. Completions will occur, but they will occur methodically. For service companies, frack logs will create work but they will not create a boom.
Then there is the issue of TV commentators using the term “efficiency”. Do your best to ignore this. There is no discernible difference between a July 2014 frack job (when oil was around $100) and one that is scheduled for today—other than the fact that the service company is more appreciative and the operator is cheaper.
Ignore the noise and stick with the data. Most walls of worry erected in the last few months have been built on clay. Most have or will fall, particularly within the US and Canada. That said, outside of North America there are real concerns. Chiefly, there is the upside of Saudi production potential and there is increasing Iraqi, Libyan and Russian production. Those are the big issues.
But on balance, these concerns seem to be offset by the wars, skirmishes and terrorist strikes that are increasing in the area, not declining. Watching monthly production out of Libya has the same relative curve as a kid on a pogo stick. And the Chinese economy at 7% growth in 2015 is a bigger consumer of oil than it was at 10% in 2010. Note too, that Asian demand is increasing and Europe is starting to look like it has put in a bottom.
U.S. demand is also better than predicted. The “tax break” that every commentator on every cable station detailed to death is finally showing up in the data. But rather than appearing in retail and hospitality sales as most predicted, it is showing up in oil and gas consumption. Go figure, cheaper gas means people are driving more. Hard to believe, but I think a lot of us missed that one too.
The big story in oil prices was the rig count on the way down. The big story on the way up will be inventory. Look for WTI to make a move towards and maybe into the $70’s as clarity strikes the market. Look too for more walls of worry but remember to consider the source.
17 Comments on "Forget the Noise: Oil Prices Won’t Crash Again"
rockman on Wed, 3rd Jun 2015 8:36 am
“Oil Prices Won’t Crash Again”. Of course they’ll crash again. And they’ll boom again. And crash again. Etc. It ain’t rocket science: all one has to do is look at the oil price history over the last half century.
Plantagenet on Wed, 3rd Jun 2015 11:13 am
In the near term a lot depends on whether or not Iran sanctions end. If Iran is allowed to bring 1 million barrels per day of new crude onto to the open market, the oil glut may get worse and prices may crash even lower.
penury on Wed, 3rd Jun 2015 11:24 am
Prices will rise, prices will fall, utilization will increase. utilization will fall. Some countries will increase production, some countries will have production fall. For those with money, there will be an oil glut, for the poor an oil shortage. However, I am afraid that the trend is not our friend the trend is always to the downside, no forecasts from me. Reading these is usually tedious and non-rewarding.
GregT on Wed, 3rd Jun 2015 11:37 am
In the long term it will matter little what oil prices are at. What will matter is the state of the economy, and whether or not a person still has a big enough income to afford oil, at any price.
Bob Owens on Wed, 3rd Jun 2015 11:45 am
No one, not even the Pope, predicted the oil price crash. No one, not even the Pope, should be predicting future prices, either. Buy a fuel efficient car, get a bike, combine trips, take a stay-cation, install insulation in your home and you will be able to predict your costs for fuel: lower. Taking action on your own beats all the predictions of the future.
Perk Earl on Wed, 3rd Jun 2015 12:13 pm
What matters most is what’s the maximum price the global oil consumer can handle and whether that is enough for most oil producers. If it consistently remains too low, then many go out of business or sell their business and the number of players reduces, in turn reducing future supply.
BobInget on Wed, 3rd Jun 2015 1:00 pm
Speaking of those Numbers;
Summary of Weekly Petroleum Data for the Week Ending May 29, 2015
U.S. crude oil refinery inputs averaged 16.4 million barrels per day during the week
ending May 29, 2015, 43,000 barrels per day less than the previous week’s average.
Refineries operated at 93.2% of their operable capacity last week. Gasoline production
decreased last week, averaging 9.4 million barrels per day. Distillate fuel production
increased last week, averaging over 5.0 million barrels per day.
U.S. crude oil imports averaged nearly 7.4 million barrels per day last week, up by
677,000 barrels per day from the previous week. Over the last four weeks, crude oil
imports averaged over 7.0 million barrels per day, 1.3% below the same four-week period
last year. Total motor gasoline imports (including both finished gasoline and gasoline
blending components) last week averaged 692,000 barrels per day. Distillate fuel imports
averaged 64,000 barrels per day last week.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum
Reserve) decreased by 1.9 million barrels from the previous week.
At 477.4 million
barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at
least the last 80 years. Total motor gasoline inventories decreased by 0.3 million barrels
last week, but are above the upper limit of the average range. Finished gasoline
inventories increased while blending components inventories decreased last week.
Distillate fuel inventories increased by 3.8 million barrels last week and are in the middle
of the average range for this time of year. Propane/propylene inventories rose 3.8 million
barrels last week and are well above the upper limit of the average range. Total
commercial petroleum inventories increased by 7.4 million barrels last week.
Total products supplied over the last four-week period averaged over 19.9 million barrels
per day, up by 4.3% from the same period last year. Over the last four weeks, motor
gasoline product supplied averaged about 9.3 million barrels per day, up by 1.1% from
the same period last year. Distillate fuel product supplied averaged over 4.0 million
barrels per day over the last four weeks, down by 1.6% from the same period last year.
Jet fuel product supplied is up 7.8% compared to the same four-week period last year.
Looks as we expected, mildly bullish. Import numbers grew again proving, once again,
how close we have come to Just In Time Deliveries. W/O that EXTRA 700,000 B’s p/d
where would we be?
I’m so pumped about consumption, I’ll dare say we used more oil last week then last May week 1935* (when inventories stats began, not as insinuated, we had more crude in storage.
19.9 M B’s p/d isn’t 20 million as I predicted.
But, it’s the most consumed in one week as far as I can recall.
* Only baby oil was consumed that year by your poster.
Davy on Wed, 3rd Jun 2015 1:23 pm
I have to agree with Greg and Perk “it’s the economy stupid said Bill Clinton to then sitting President George H. W. Bush. Oil has to run something to fetch a price. It is appearing more and more likely we are in the beginnings of an economic correction of some kind.
I personally feel it is the economic end game but an end game could play out over some years. The important point is demand is not there as it should be for a healthy economy and oil supply is of lower overall quality IOW macroeconomic affordability. Another way to look at this is a cycle of demand and supply destruction. Once in motion this cannot be changed.
Just as the growth process had momentum upwards this descent process will have momentum downward. The momentum will be maintained negatively by systematic economic stagnation through excessive debt and the relentless oil depletion process. These two conditions will be terminal. One related to the molecular energy value to the economy of our foundational commodity oil and the other indebtedness.
The economy is at the terminal point of debt effectiveness in a healthy global economy. The amount of debt in the global system can never be repaid. Debt levels are now nothing more than an abstraction in no way relating to the physical reality of our global system.
The system cannot be reformed, de-growth’d, or a new one created without catastrophic bifurcation of the global system we all depend upon. This is a catch 22 situation of fixing the system destroys the system. We are in the process of collapse and nothing can change that, nothing!
Davy on Wed, 3rd Jun 2015 1:29 pm
Bob said “Buy a fuel efficient car, get a bike, combine trips, take a stay-cation, install insulation in your home.” Bob great actions to live by. I have and do all of the above. Yet, this is too little too late for the global economy. On the local and individual level it can make a difference. A local that practices what you mentioned will be more resilient and sustainable if a critical mass of people follow these actions. Individually these actions are critical as the pie continues to shrink and we are faced with less with less in the future.
kiwichick on Wed, 3rd Jun 2015 2:07 pm
@ bob o and davy
+1
Speculawyer on Wed, 3rd Jun 2015 2:54 pm
They certainly might crash again. Just not in the near future. The current financial losses from the recent oil crash are too recent for people to invest heavily into oil again in the near future.
We need to forget the last crash before we can have a new crash.
Apneaman on Wed, 3rd Jun 2015 3:09 pm
GAS TANKS AND PIGGY BANKS
Americans still aren’t spending their gas savings
http://qz.com/416555/americans-still-arent-spending-their-gas-savings/
GregT on Wed, 3rd Jun 2015 3:48 pm
Spec,
The recent oil crash is due to financial losses. Not the other way around. If finances were doing fine, the world’s economies would be growing, and would have more than sucked up the increase in production.
Makati1 on Wed, 3rd Jun 2015 11:13 pm
It was brought home to me just how car/oil dependent the US is these days. My mother lives 3 miles off of a bus route from the nearest town to the next town. My sister lives 7 miles off of a different bus route from the same town. Neither connect. If I wanted to stay at my sisters and visit my mom, I would have to walk, a distance of 12 miles each way. To visit my daughter, I would have to walk 7 miles to take a bus and walk another mile when I got close. Or, I could drive my sister’s car and make all of the trips easily, which is what I did. And this is a better area of the state with buses and connecting roads.
Now, what is going to happen when those cars are no longer affordable? Not to mention the gasoline, repairs, inspections, licensing, insurance, etc. that are a part of owning a car in the Empire of Chaos.
Not going to happen you say? LMAO! And what is happening to jobs and incomes there? I can tell you, again from my visit and my family and friend’s experiences. They are sliding down the steep slope to the 3rd world where a car is a dream and shoe leather replaces tires.
GregT on Wed, 3rd Jun 2015 11:48 pm
Not only in the US Makati. The same is true in Vancouver BC. Unless of course you prefer to live in the downtown core, in a 20 floor concrete apartment building, everywhere that you want to go is a 45 minute drive away, in insane traffic congestion. One of the most desirable cities to live in on the planet Earth, and green to boot.
Revi on Thu, 4th Jun 2015 9:48 am
I agree with you Makati1. Where I live in the summer there is a bus that runs around and takes you where you want to go. There is a ferry that connects to it, but the bus leaves a minute before the ferry gets there!
Almost nobody understands transportation. Why not have the bus wait for the ferry? Because the administrators have no clue how it works in the world of people who take the bus.
shortonoil on Thu, 4th Jun 2015 4:08 pm
“No one, not even the Pope, predicted the oil price crash.
We predicted it over a year ago, and put this page up last September (the date is on the second graph):
http://www.thehillsgroup.org/depletion2_022.htm
If you don’t believe your own eyes, try braille! Maybe you can “feel” your way to reality.