Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on May 4, 2014
The Case for Lower Oil Prices
Here’s a puzzle: The U.S. is producing the most crude oil in decades, domestic stockpiles are at record highs, yet oil prices are near $100 barrel. What’s keeping prices aloft?
The first piece of the puzzle is the way the U.S. prices its oil. The U.S. benchmark, known as West Texas Intermediate, or WTI, is based on delivery at a storage hub in Cushing, Okla. How much oil is stored in Cushing affects the price. At the moment, inventories of oil across the U.S. are at their highest going back to 1982, but Cushing has seen a steady drop since a new pipeline linking the hub to refineries along the Gulf Coast opened earlier this year.
The Cushing hub is “running on fumes,” according to Société Générale, giving the appearance of tight supplies, and leading prices higher.
Another boost is from money managers, including hedge funds diving into the futures market. Financial firms betting on higher prices outnumbered those betting on a slide by 322,788 futures contracts as of April 22, almost double the number a year ago, according to the U.S. Commodity Futures Trading Commission.
There’s more. The U.S. oil benchmark is also tracking global crude prices, which have been elevated by tensions between Russia and Ukraine. The threat of more-intense hostilities and the possibility of a supply outage will likely keep Brent crude, the global benchmark, higher until the situation is resolved, wrote Commerzbank in a recent report. Russia is the second-largest oil exporter after Saudi Arabia, and investors are concerned that Western sanctions in response to Moscow’s encroachment on Ukraine could hinder the flow of crude.
Currently, WTI trades about $9 below Brent. U.S. oil prices settled Friday at $99.76 a barrel, up 1.4% for the year.
BUT THAT’S ONLY THE story so far. Analysts see plenty of reasons for oil prices to slide in the weeks ahead. Oil inventories are piling up in the South as several Gulf Coast refineries have temporarily shut down for maintenance, writes Michael Cohen, an analyst at Barclays in New York. Oil continues to flow to the Gulf Coast because it fetches a higher price there—that’s the so-called Light Louisiana Sweet, or LLS—than it does in Cushing. But Cohen says transportation costs from Cushing to the Gulf Coast also add $3 to $4 a barrel.
However, the buildup of supplies on the Gulf Coast has started to weigh on the LLS price, and that will bring it closer to the U.S. benchmark price, Cohen says. As prices near parity, it makes less economic sense to send crude from Cushing to the Gulf Coast, which will help supplies at Cushing rebuild. When Cushing’s stockpiles grow, WTI prices are likely to soften.
A threat to prices is also “posed by a potential wave of hedge-fund liquidation of existing long positions,” Cohen wrote in March, referring to bets on higher prices. If hedge funds do dump a substantial part of those bets, $10 to $15 would be wiped off the price of a barrel, he wrote.
Finally, when the Ukraine crisis abates, Brent prices are likely to retreat, and with that, WTI prices may fall as well.
“It could be a while,” but eventually prices should capitulate, says Michael Wittner, a global head of oil research at Société Générale in a recent research report.
14 Comments on "The Case for Lower Oil Prices"
paulo1 on Sun, 4th May 2014 10:19 am
re: “Finally, when the Ukraine crisis abates, Brent prices are likely to retreat, and with that, WTI prices may fall as well.”
Funny, they have been high before the crisis. I wonder how that gets explained?
With refineries shut for maint., shouldn’t gas prices go higher in the short term?
I suppose prices will drop, but only because of economic deterioration. Oh wait, we are supposed to be really on the cusp of recovery according to CNN. What’s the problem? Recovery + more jobs and rising incomes, right? Right?
Bueller? Bueller? Anyone, Bueller?
Paulo
Northwest Resident on Sun, 4th May 2014 10:37 am
“…domestic stockpiles are at record highs.”
So, according to Barron’s, we have more oil than we know what to do with?
I doubt that premise.
Maybe one of the reasons “they” engineered the Ukraine crisis is to create a built-in excuse for keeping oil prices high, and even higher in the near future? I guess if you’re TPTB, that’s better than having to admit that you just flat-out mismanaged the world economy.
Plantagenet on Sun, 4th May 2014 10:48 am
@Northwest Resident
“they” didn’t engineer the Ukraine crisis. Putin engineered the Ukraine crisis. They price of oil doesn’t reflect mysterious secret cabals who efficiently “manage” the world economy. The price of oil reflects the messy and conflicted real world.
paulo1 on Sun, 4th May 2014 10:56 am
Plant
I think it is obvious many parties engineered the crisis. Putin just holds more cards.
Paulo
rockman on Sun, 4th May 2014 10:57 am
NR – We don’t need any excuses: we are free to sell our oil for what ever we and the refiners agree to. We don’t care if you like the price or not as long as your keep buying. We don’t have to justify nuthin to nobody. LOL.
Cushing is not running on fumes. The inventory is half of what it was when the same fools were saying they were drowning in oil at Cushing.
“Financial firms betting on higher prices outnumbered those betting on a slide” More ignorance: for every bet made on higher future prices someone has to take that bet assuming it to be wrong. And the vast majority of bbls bet on only exist on paper and don’t represent the real world of oil purchases. Last time I saw the metric there were around 1 BILLION BBLS OF OIL at play in the futures market. Other than a few some physical oil buyers trying to stabilize their future cash flow there’s no connection between the oil futures and the physical oil world.
It’s really isn’t that complicated: the refiners pay me based upon their expectation of what they think they’ll sell the products for. And that’s a function of demand and what buyers can afford to pay. If there weren’t enough buyers to pay at the current price of oil it wouldn’t be selling for what it is today.
bobinget on Sun, 4th May 2014 10:59 am
24,000,000 CARS (not including trucks, buses etc)
will have been manufactured worldwide SO FAR this year.
2014 auto vehicle production could easily top
72,000,000 units.. (under a million electric and CNG)
In 2013 over 60,000,000 (sixty million) cars were manufactured.
Back in 1999 (only) 39,700,000 autos were made.
Not to be boring but oil is internationally traded and is in large part considered fungible. Comparisons to earlier inventory stocks are therefore suspect.
Don’t forget, as some of that bulging GOM inventory gets refined, a huge percentage will be exported.
We are using 18.5 Million Barrels daily here in US alone. IMO that number will rise to over 19/ 20 million barrels as weather permits. WE know this from earlier year.
What few in power are not admitting, no new-found
oil can be produced at a profit for under $100.
In the old days most autos were junked out before 20
years. Today, because manufacturing standards are higher, a higher percentage are still on the road.
Because most fuel hungry older cars are still in use,
those new car numbers are even more meaningful.
westexas on Sun, 4th May 2014 11:04 am
As I noted on the Cushing post, I suspect that an increasing percentage of total US Crude + Condensate inventories consists of condensate.
And it seems likely that actual global crude oil production (generally defined as 45 or lower API gravity crude) has not shown a material increase since 2005.
And then we have seen a material post-2005 decline in Global Net Exports of oil (GNE, calculated in terms of total petroleum liquids + other liquids, EIA), with the developing countries led by China, (so far at least) consuming an increasing share of a post-2005 declining volume of GNE.
Nony on Sun, 4th May 2014 11:24 am
I think the article is poorly stated, but can see a rationale why the increased takeaway from Cushing led to apparent sustained high price. With low takeaway, what you may have had was a local glut previously (per Rock’s point). Now the situation is changed, but basically back to something normal (essentially adequate transport from Cushing to the Gulf). So the spread of Cushing to Gulf would have changed after that pipeline opened.
Note that transport costs and limits still play a role in other places. For example Bakken oil priced in Minnesota is significantly cheaper than Bakken oil at the end markets. Also, we have seen Brent (London) to WTI (Cushing) spread issues for the last few years, partially because the US is close to running out of refineries optimized for high API crude (and exporting no more Brent).
Obviously, also even with the spread issues, the US and World are still linked. Still a bit of Brent coming in and still significant heavy coming in. So world pricing has impacts here.
Nony on Sun, 4th May 2014 11:29 am
WT, you’re big on suspicion but low on proof. How about doing some research and proving/disproving your suspicion?
Ron (and before him Blanchard and even now Berman) was suspicious of the RRC revisions and thought oil was peaking. He’s basically finally realized this is the update cycle (DC has been very nice about not grinding the mistake…but really you all should have listened to him from the beginning). Ron also made some big assumptions about EF condensate which were flawed (when DC ran the numbers it showed the play is shifting to LESS % condensate recently, not a constant or increasing percentage).
Northwest Resident on Sun, 4th May 2014 2:56 pm
“…there’s no connection between the oil futures and the physical oil world.”
rockman — That’s what I read in several (or more) credible articles, what an investment counselor told me one time, and IMO it is the truth. Add to that base fact that the entire stock market — futures included — is hyper-inflated, and you get an oil/NG futures price that has no bearing on reality — it is just a number. But don’t tell that Nony, the guy who “backs up” his optimism by quoting NG futures price as if it means anything. Actually, it does mean something — it means whatever Nony wants it to mean.
Nony said: “How about doing some research and proving/disproving your suspicion?” Just like you, Nony? You post links to financial/banking investment promo propaganda pieces as “proof” of the bright oil/NG future that lies ahead for America thanks to wonder technology and vast reserves of shale oil. The reality is, Nony, those same articles are intended to reel in the suckers — and you bite every time. WT is a knowledgeable and experienced source of info on the oil business — you, you’re just a parrot for the financial/investment lies and propaganda.
rockman on Sun, 4th May 2014 3:32 pm
NR – There’s only one slight connection to the futures market and the physical oil market. Sometimes a producer will buy futures contracts to guarantee a certain cash flow. If prices for physical oil goes up he’ll make money there but will lose some on his futures bet. And if prices go down he get less revenue from the real oil but make money on the futures. It’s a way to guarantee a minimum cash flow. I’ve had to make such hedges in order to secure bank loans. The bank doesn’t care if the hedge causes me to lose a little money (win or lose you have to pay brokerage for a hedge). But this way the bank can be certain there will be sufficient revenue to service the debt. A hedges can be designed much more complex than just the simple strike price of a futures contract.
There’s very simple comparison: everyone expects Team A to win the Super Bowl. So 90% of the bets are on them. But if they do win it doesn’t mean all those bets caused it to happen. Same thing for all the folks who bought oil contracts at higher prices because of the Ukrainian situation. So what happens if Putin backs off and cries like a little girl? A lot of folks are going to lose their assed on those future contracts. Or serious shooting starts, oil prices jump and a lot of money is made. But remember how futures work: for every $ someone makes some lost a $. Actually a little less because both sides of the futures bet has to pay the broker.
westexas on Sun, 4th May 2014 4:44 pm
Texas RRC Condensate and Crude + Condensate (C+C) Data
2005:
Condensate: 0.12 mbpd
C+C: 1.08 mbpd
Condensate/(C+C) Ratio: 11.1%
2012:
Condensate: 0.30 mbpd
C+C: 1.95 mbpd
Condensate/(C+C) Ratio: 15.4%
The 2013 Ratio (more subject to revision than the 2012 data) shows that the ratio fell slightly, down to 14.7%, which probably reflects more focus on the crude oil prone areas in the Eagle Ford.
The EIA shows that Texas marketed gas production increased at 5%/year from 2005 to 2012, versus a 13%/year rate of increase in Condensate production. So, Texas condensate production increased 2.6 times faster than Texas marketed gas production increased, from 2005 to 2012.
The EIA shows that global dry gas production increased at 2.8%/year from 2005 to 2012 (up 22% in seven years). Global condensate . . . . ?
GregT on Sun, 4th May 2014 11:52 pm
Nony reminds me of a friend of mine, constantly pointing to the markets as an indicator of reality. He was pretty mouthy, and overconfident, until he lost his home, and most of his life savings.
James on Mon, 5th May 2014 7:21 pm
If this is true. Then the U.S. and the world had better use this time of abundance to wean people off of oil, develop renewables, and get people used to life without oil.