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Page added on March 10, 2015
Why oil decline could get ugly again
Still drilling at four-decade highs, the U.S. oil industry could help drive another price collapse in crude this spring.
OPEC Secretary General Abdalla Salem el-Badri told a conference this past weekend that the cartel’s policy has hurt the U.S. shale oil industry and triggered a global reduction in capital spending that could ultimately lead to a shortage—and higher prices.
The U.S. industry, however, has not slowed its high levels of oil production, despite OPEC’s best efforts to curb drilling with lower prices. The U.S. has pumped more than 9 million barrels a day since early November, and last week it produced a multidecade high of 9.32 million barrels. Industry output has not been at such a level on a sustained basis since the 1970s.
Oil analysts say the strong production in the U.S. should ultimately wind down, as the output of some wells in operation declines and more wells are shut in. But for now, as seasonal factors like refinery maintenance affect demand, U.S. production could be a catalyst for even lower prices and a new bottom for crude.
“You could touch a surprisingly low price sometime in the next month or two,” said Citigroup energy analyst Eric Lee. “As we get into summer, refineries come back from maintenance. Demand could pickup stronger than it was before the rig cuts and capex cuts, and globally there will be capex cuts starting to have an effect.”
Lee and other analysts said West Texas Intermediate crude, at $50 per barrel Monday, could easily head toward $40 a barrel.
“WTI could take another leg down,” said Lee. “If there’s enough distress, if imports into the U.S. don’t budge, which they wont … if exports don’t rise quickly enough, which is a wild card, then producers at various locations need to shut in pipelines or run at low utilization so it doesn’t come to Cushing.”
Lee said if the market becomes very distressed, then the price could head to $40 per barrel and there is a chance it could see a price in the $20s before bouncing back to higher levels. West Texas Intermediate closed at a low of $44.53 per barrel Jan. 29, before moving higher during February.
Traders have been focused on the high level of oil storage capacity being used in the U.S., particularly at Cushing, Oklahoma, the storage hub for the benchmark West Texas Intermediate oil futures contract.
U.S. crude supplies are reported at their highest levels in 80 years, and analysts say as storage gets tight, prices for storage get higher, and that could result in more oil coming onto the market.
According to The Wall Street Journal, data service Genscape reported Monday that oil inventories in Cushing climbed by 1.7 million barrels from the prior week. The smaller-than-expected build was a positive for prices, and WTI rose 0.8 percent to $50 a barrel.
Cushing is the physical delivery point for the benchmark Nymex oil-futures contract, so futures prices are sensitive to supply levels there.
Andrew Lipow, president of Lipow Oil Associates, also expects to see $40 WTI before the shakeout is over.
“The catalyst is going to be over the next four to six weeks. We continue to build inventory here in the U.S. due to refinery maintenance, but as we exit the maintenance season, demand will pick up and we’ll turn this crude into petroleum products,” he said.
Lipow said he does not see a storage issue. “I think there’s more space than people think. We could store well over 500 million barrels of crude oil,” he said.
A slowdown in U.S. oil production should ultimately materialize but Lipow said it may not be as big a hit as expected.
“While the rig count would lead me to believe toward the third and fourth quarter, we’d see a slow down in production growth, we have companies saying they’re moving their rigs toward the best locations and best prospects,” he said. “It may turn out to surprise the industry and not be as low as expected.”
Baker Hughes on Friday reported that the number of rigs exploring for oil and natural gas in the U.S. fell to 1,192, a decline of 75. That is down from 1,792 rigs a year ago.
Analysts say one wild card for oil is Iran, and if there is a nuclear deal it could boost prices as traders anticipate more oil on the market. Lee said, however, Iran’s ability to produce more oil is limited and it would not be able to increase production quickly.
However, if there were a deal with the West to end its nuclear program, Iran could move oil that it may have in storage into market, spurring a temporary jump in prices.
34 Comments on "Why oil decline could get ugly again"
forbin on Tue, 10th Mar 2015 5:42 am
“However, if there were a deal with the West to end its nuclear program, Iran could move oil that it may have in storage into market, spurring a temporary jump in prices.”
Wut ?
more oil means higher prices ?
I think they meant lower prices but who knows with MSM these days …..
copy and paste and more scribble than ever
Forbin
Westexasfanclub on Tue, 10th Mar 2015 5:51 am
Two things I don’t understand:
“…we have companies saying they’re moving their rigs toward the best locations and best prospects,””
Why sould companies drill in less Productive areas BEFORE drillin in the best ones?
And:
“…if there were a deal with the West to end its nuclear program, Iran could move oil that it may have in storage into market, spurring a temporary jump in prices.”
So there would be more oil and prices therefore would go up?
Westexasfanclub on Tue, 10th Mar 2015 5:52 am
Hello Forbin, you won! 😉
rockman on Tue, 10th Mar 2015 6:46 am
“The U.S. industry, however, has not slowed its high levels of oil production, despite OPEC’s best efforts to curb drilling with lower prices.” Once again the inept comparison of apples (production rates) to oranges (drilling activity). We’ve discussed the time lag between drilling and producing a well. So I’ll skip. As to not “curbing drilling” I would offer that a 40% drop (and till dropping) in rig count qualifies as “curbing”.
“…we have companies saying they’re moving their rigs toward the best locations and best prospects,” of course: that’s always the best business plan: drill your poorer prospects first when oil prices are high and save your higher potential wells for when prices are lower. I wonder if these folks ever really think about what they write. LOL.
“…the number of rigs…the U.S. fell to 1,192, a decline of 75. That is down from 1,792 rigs a year ago.” A more pertinent number with respect to shale drilling: in Texas Districts 1 and 8 (the heart of the Eagle Ford play) just since last Oct the rig count dropped from 466 to 288 currently. That’s about a 40% decrease in rigs drilling for the EFS. Again with the time lag, we won’t see the associated production drop until mid to late summer. And given the high initial decline rate production from wells drilled in the last 12 months that loss is already beginning to kick in. Between the high declines of wells that just pushed EFS to a peak and the decrease of new wells by 1Q 2016 there will be a significant decrease in total EFS production. That’s a mathematical certainty.
shortonoil on Tue, 10th Mar 2015 7:33 am
If one takes a trip to the Bakken, or the Eagle Ford you’ll see trucks running everywhere; thousands of them. Hauling rigs, water, oil, pipe, cheeseburgers, thousands, and thousands of tons of supplies, and every one of those trucks is burning fuel!
The amount of oil it takes to produce oil is huge. In 2012 it was half of the oil produced at the well head. When Whiting Petroleum, and EOG finally shut their doors the demand for petroleum is going to go down. Waiting for the shale industry to give its last gasp, and die so that oil prices can go back up is a fools errand.
The dynamics driving petroleum prices is a little more complicated than the parrot heads at the MSM realize. It is fundamentally founded on the ongoing depletion event we are now experiencing. Petroleum is losing its capacity to power the economy as the energy to produce it keeps increasing. With less economy there is less demand for petroleum, and the price goes down. It is the consumer, and not the producer that controls the price of oil. The oil industry is now learning this simple fact of life with $50 oil.
We have put up a page describing what is happening to the price of oil:
http://www.thehillsgroup.org/depletion2_022.htm
If you notice there is not one mention of Iran, the Keystone, EOG, Continental, or Chinese demand on the whole page. Those are external factors that no one can calculate. If there is no way to know what impact they will have; why bring them up in the first place?
http://www.thehillsgroup.org/
Davy on Tue, 10th Mar 2015 7:42 am
Well, we know the oil patch and the MSM are not going to crow “it’s the economy stupid” or “its QE stupid” They are crow the traditional MSM cornucopian porn of econ 101. The pseudo-science of the BAUtopians.
The global economy is a mess with tensions and irregularities. The “Fun” dermentals are a mess by historical measurement. What continues is a well-documented wealth transfer and cannibalization of public wealth for private profit. Infrastructure is not being maintained properly. Social fabric ripped apart in job loss and welfare servitude. Unfunded liabilities are a normal.
My opinion is the oil markets are in a faux state of normal supply demand but in reality in a bumpy descent of oil demand and supply in a vicious cycle of destruction per POD with relentless ETP. This coupled with a sick economy from the side effects of financial repression and excessive debt. This spiral down is shallow but perceptible to those who can connect the dot.
IMHO we will see a big event in this year or next as these supply and demand issues further destabilize along with financial problems baked into the QE cake with Ponzi icing. I cannot tell you a time frame much of this is human nature driven with confidence and liquidity. Oil markets will be driven ultimately by the economy short term but longer term a POD & ETP brick wall. A poor economy will continue to likely lead to adequate declining supply per declining demand.
Sooner or later we will likely see a price spike because that is part of the human nature variable in the financial system and oil complex. A price spike will be short lived because we are at limits of growth and diminishing returns in a bumpy descent down. Growth is faux and per reality dead. You can use your Freddy fluff charts and listen to how China is growing if it gives you that great hopium feeling sheeples like. If you have gonads bigger than acorns then hear the thunder. This thunder is a shit storm in the distance heading our way.
American Idiot on Tue, 10th Mar 2015 8:07 am
These guys are focusing on a wrong issue. They need to start focusing on Water.
https://www.youtube.com/watch?v=FX9SqHsWcdw
paulo1 on Tue, 10th Mar 2015 8:53 am
But Davy,
The economy is improving every day and unemployment keeps dropping!! (sarcasm switch now turned off)
I was going to send your comment, Rocks, and Shorts to a couple of friends. You know what? I have given up doing that. I am in a wait and see mode and continue to watch everything unwind.
When can we start making election predictions? Another fun pastime.
Kenz300 on Tue, 10th Mar 2015 9:08 am
Fossil fuel investors are losing their shirts……
Time to rethink investment opportunities………
Wind and solar provide safer, cleaner and cheaper energy production with better investment returns.
U.S. Solar Energy Industry Achieves Record-Shattering Year
http://www.renewableenergyworld.com/rea/blog/post/2015/03/u-s-solar-energy-industry-achieves-record-shattering-year
Might be time for fossil fuel companies to diversify into “ENERGY” companies and reduce their exposure to volatile fossil fuel prices. Investments in wind and solar will provide more stable “positive” returns.
Davy on Tue, 10th Mar 2015 10:50 am
Paulo, here is a good link on a logical way to gauge the economy using energy consumption trends. It is something logical for us here who know efficiency is not increasing that much. It is a reading between the lines of the BS Freddy Fluff and MSM hopium of happy days are here:
http://charleshughsmith.blogspot.com/2015/03/why-is-per-capita-energy-consumption-at.html
Plantagenet on Tue, 10th Mar 2015 11:11 am
The CNBC article was mostly BS, but its right about one thing—the oil glut continues to worsen and we may see another drop in oil prices before this glut is ended.
GregT on Tue, 10th Mar 2015 11:26 am
Sunweb posted a link yesterday that is worth watching for anyone that hasn’t quite wrapped their heads around the disconnect between energy and the economy, and the reason why the economy can no longer recover.
https://www.youtube.com/watch?v=M9YRNqewGIY
For those that already understand Al Bartlett’s lecture on exponential growth, skip the first part. The part on EROEI starts at 14:18. The end of the oil age is already upon us. We have already passed peak, and are on the downward slope.
GregT on Tue, 10th Mar 2015 11:29 am
planter,
Give up playing the dummy already, it’s beyond old.
BobInget on Tue, 10th Mar 2015 11:34 am
Shortonoil, you’ll be happy to hear oil just dropped below $49.50
I want to award you and your ‘group’
my personal ‘Razzi’ for this amazing sentence.
“If you notice there is not one mention of Iran, the Keystone, EOG, Continental, or Chinese demand on the whole page. Those are external factors that no one can calculate. If there is no way to know what impact they will have; why bring them up in the first place”?
You forgot India:
CountryConsumption (pre-price war)
United States18,9612
China10,3033
Japan4,5314
Russia3,5155
India3,5096
Brazil2,9987
Saudi Arabia2,9688
Canada2,4319
Germany2,40310
Korea, South2,32411
Mexico2,04412
Iran1,87013
France1,76714
Indonesia1,63515
United Kingdom1,508
India’s oil demand has grown faster than China’s so far this year, highlighting slowing energy demand in the world’s most populous country and fueling expectations that India may pick up the slack over the medium-to-long term. The pace of India’s demand also reflects optimism about India’s economic growth under Prime Minister Narendra Modi.
In absolute terms China is Asia’s largest oil consumer, having burned 10.76 million barrels a day of oil and accounting for 12.1% of global oil consumption in 2013, according to BP PLC. The second-largest oil consumer in Asia is Japan, though its oil consumption has been declining as its economy has matured.
India ranks third at 3.7 million barrels a day and accounted for about 4.2% of global oil consumption in 2013.
BobInget on Tue, 10th Mar 2015 11:51 am
The closer we get to realizing we’ve ‘lost’
Venezuelan, Iranian, Iraqi, Russian, Libyan,
Nigerian, oil exports the greater volume
gets from Saudi Arabian and Israeli minions.
Soak up these few days folks. No matter what your personal politics, one thing is quite certain, this era is absolutely historic.
Oh, on oil prices, I’ll stick with an earlier
prediction of an inter-day high of $200+
closing out 2015 around $140/$160 per barrel. That’s if we actually are still trading oil in 2016.
Crude is below $48.50 on pure nonsense.
GregT on Tue, 10th Mar 2015 12:03 pm
Crude priced at $48.50 is still above the goldilocks range that allows our economies to grow. Financialization and debt are merely illusions of growth.
Man the lifeboats, the ship is going down.
Plantagenet on Tue, 10th Mar 2015 12:18 pm
@ Crude isn’t below $48.50 on “nonsense”
Crude is below $48.50 because we are in an oil glut that may grow even worse.
Davy on Tue, 10th Mar 2015 12:32 pm
Planter, listen to Greg he is talking sense. The so called Planter oil glut is not your daddy’s Econ 101 style glut. This glut is driven by a POD of demand destruction which will kill supply and likely signal the terminal nature of the the oil age. Be happy Planter you are living POD history.
GregT on Tue, 10th Mar 2015 12:43 pm
Wrong again planter.
Crude is actually at $48.61. Which happens to be above $48.50, not below, and is still ~ $18.00 above prices that have historically caused recession.
Perk Earl on Tue, 10th Mar 2015 12:53 pm
http://www.bloomberg.com/energy/
Crude Oil (WTI) USD/bbl. 48.75 -1.25 -2.50% Apr 15 13:05:23
Crude Oil (Brent) USD/bbl. 56.86 -1.67 -2.85% Apr 15 13:05:22
In today’s news the Fed is remaining steadfast regarding interest rates, which converts to a higher dollar, which in turn lowers oil price. The more that is done to prop up the stock market, the more the dollar rallies, the lower oil price drops.
Affordability and depletion are having their effect, but currency value of the dollar in relation to other currencies is also influencing oil price.
Perk Earl on Tue, 10th Mar 2015 12:59 pm
Correction on post above: Oops, screwed up. Evidently the Fed are angling towards a rate hike and stocks sold big, but the dollar rallied which sent oil lower.
http://www.reuters.com/article/2015/03/10/markets-global-idUSL1N0WC1PO20150310
GLOBAL MARKETS-Stocks, oil sell off as dollar rallies on Fed views
NEW YORK, March 10 (Reuters) – The U.S. dollar rallied across the board on Tuesday as the prospect of the first rise in U.S. interest rates in almost a decade stoked global volatility, hitting stocks and commodities.
Perk Earl on Tue, 10th Mar 2015 1:06 pm
Short, ‘The price of petroleum’ graph is a great one, but unless I’m not seeing something, the red dots for oil price could be updated?
Plantagenet on Tue, 10th Mar 2015 1:51 pm
@Davy
The fantasy that you and Gregter are pushing about “demand destruction” isn’t supported by the facts. Global oil consumption is at record highs.
If there is “demand destruction” then oil demand would be going down. Thats what the word “destruction” means. Thats not whats happening. The numbers just don’t support your claims.
Get it now?
rockman on Tue, 10th Mar 2015 2:13 pm
Plant – That’s the tricky thing about pointing to demand destruction. If I price my widgets at $100 each the demand drops to zero. If I price them at $30 each can sell every one I have in stock. So if I say I lowered my price because of demand destruction and then I sell out my inventory it will look contradictory.
You can’t look at current oil consumption at $50/bbl and say there wasn’t eventual demand destruction at $100/bbl. It’s like I said once before: we appear to have big surplus of $100/bbl oil because no one is buying it. OTOH we have just enough $50/bbl oio to meet current demand.
Plantagenet on Tue, 10th Mar 2015 2:27 pm
Rockman –
The question of “demand destruction” is simpler then you are making it. You just have to look at the numbers and then accept reality. If high oil prices are producing “demand destruction” then oil consumption will go down. If there is no demand destruction then oil consumption will go up.
Global oil consumption is going up. It hit an oil time high last year, ergo there is no demand destruction. Look at the data and see for yourself:
http://www.indexmundi.com/energy.aspx
GregT on Tue, 10th Mar 2015 2:42 pm
“The question of “demand destruction” is simpler then you are making it.”
Wrong yet again planter. It is more complicated than you are able to comprehend. Our economies must continually grow, or they will collapse. It is the growth in demand that has slowed, not overall demand.
“The recent slowdown in demand growth is nothing short of remarkable,” the International Energy Agency (IEA) said in its monthly report, revising down its oil demand growth projections for both 2014 and 2015.
The IEA said demand growth in the second quarter of 2014 alone eased back to a near two-and-a-half year low.
For the whole of 2014, the IEA reduced its oil demand growth projection by 65,000 barrels per day (bpd) to 900,000 bpd while for 2015 it cut its estimate by 100,000 bpd to 1.2 million bpd.
“Euro zone economies, already struggling with stagnation, are getting perilously close to deflation. The risk being that falling European prices trigger a deflationary spiral that causes further reductions in economic activity, as market participants delay investment/purchasing decisions,” it said.
http://www.reuters.com/article/2014/09/11/iea-oil-idUSL9N0O800F20140911?feedType=RSS&feedName=rbssEnergyNews
Davy on Tue, 10th Mar 2015 3:00 pm
Planter will you please repeat after me to Greg:
“tou·ché” Greg you cleaned my clock.
Planter I sense you have been humbled. You should no longer have glutster thoughts.
You are almost cured of your obsessions. You just need work on you Obamaphobia. Then Plant I believe you will be a new man.
Plantagenet on Tue, 10th Mar 2015 3:03 pm
@gregter
Once again you show that your reading compression skills and your vocabulary just aren’t up the task. You blabber on about “demand destruction” but the link you cite and quote in your post is all about “demand growth”—the words “demand destruction” don’t even appear in your own quotes—-didn’t you even notice that? Yes, demand growth is slowing, but a reduction in the rate of growth in demand is not the same as demand destruction. As long as there is demand growth there isn’t demand destruction. The two things are opposites.
Get it now?
Face facts—More oil has been consumed every year since 2009—we are currently at a record high as shown in the figure below
http://www.indexmundi.com/energy.aspx
Yes, there was demand destruction in 2009 when the global economic slowdown reduced global oil demand. But in 2010, 2011, 2012, 2013, and 2014 we’ve seen demand growth and rising global oil consumption.
Cheers!
Davy on Tue, 10th Mar 2015 3:07 pm
Alright planter poo. demand growth destruction. Got it????
Cheerios
Plantagenet on Tue, 10th Mar 2015 3:08 pm
@Davy
I don’t have obamaphobia. I criticize obama where I think he has screwed up (the wars in Libya, Iraq, Syria,etc. the lack of energy policy, etc.) and I praise him where he deserves praise (master politician, great orator when reading a teleprompter, intense partisan). Dissent is patriotic and free thinking without being stuck in the old R vs D straightjacket is a delight—-you should try it.
IMHO the people who have obama problems are those who mindlessly approve of everything obama does.
Cheers!
Plantagenet on Tue, 10th Mar 2015 3:13 pm
daver—repeat after me.
Even if a reduction in demand growth occurs there is still some demand growth.
Get it now?
GregT on Tue, 10th Mar 2015 3:13 pm
If you don’t have Obamaphobia, as you call whatever it is that you have against Obama. Why do you refuse to capitalize the first letter of his last name?
Or simply more childishness.
GregT on Tue, 10th Mar 2015 3:19 pm
“You blabber on about “demand destruction””
Holy crap planter! Wrong yet again. You’re batting a zero here little guy. I have never “blabbered on” about demand destruction. I actually understand what is happening here, which you have repeatedly proven time and time again that you do not.
Are you really this dumb, or are you going out of your way to make yourself look even dumber than you actually are?
Makati1 on Tue, 10th Mar 2015 11:02 pm
UFSA 2016 ‘elections’ will be between two lying, hypocritical, psychopathic war mongers, nothing new there. Oil will be where it will be, Nothing new there either. Up or down, the game is over. If you are not at least 80% into your post THSTF preps, you are probably too late. And, if you plan on leaving the 50 states, I suggest that you do it before the 2016 election season. There may be a police state lockdown.