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Page added on October 14, 2015
Oil: $20 Or $70
Summary
Goldman Sachs says that $20 oil is coming and to sell the current rally.
A UBS analyst said on Oct. 12 that $70 is around the corner.
The fundamentals remain bearish.
The Russian presence in the Middle East is very destabilizing.
The Shale Factory will cap rallies, but the bottom is in.
Goldman Sachs says that the price of oil is going to drop to $20 per barrel and thus one should sell this rally. Yesterday, an analyst from UBS opined that oil would rally to $70 per barrel some time in the next 12 months. Who is correct? Perhaps neither one. The macro fundamentals of the global oil market remain oversupplied and bearish, although there has been a marked improvement over the last few months. On the other hand, the geopolitical situation in the Middle East is worse than ever.
FUNDAMENTALS
Low oil prices seem to slowly be doing their work. Demand is up. US production is down. The US rig count is at a five-year low. US oil demand hit a peak in July of 19.98 million barrels per day, a 3.5% expansion year on year. With gas prices around $2 in many locations, I fully expect this trend to continue. US domestic oil production, on the other hand, hit a 12-month low in September of 9.01 million barrels per day, down from a peak earlier this year of 9.7 million barrels per day. The number of active oil rigs currently drilling in the US dropped to 605 last week, a five-year low. The low rig count is a confirmation of the drastic capital budget cuts at all oil production firms both large and small. The Chinese hard landing that was such a worry has not materialized. The Chinese stock market has stabilized and the economy in China continues to grow. That picture seems fairly rosy, and if one is tracking trends in the fundamentals, then indeed things seem to be improving.
Unfortunately, despite improvements, the overall fundamental picture is gray. Crude oil stocks in the USA, 460 million barrels as of last week, have essentially been the same since early July. Much worse, though, is a statistic that most non-energy professionals do not look at, total stocks of crude oil and petroleum products. Last week, that number was some 1.3 billion barrels. It has been rising slowly and inexorably since November 14 of last year. The glut of petroleum here in the USA has not gone down AT ALL. We have refined some oil into gasoline, jet, diesel and other things and stored them in turn. The overall oversupply of total petroleum has gotten worse not better. Yesterday, OPEC reported that its production was 31.57 million barrels per day, the highest level since April 2012 and well above its 30 million barrel target. Despite the IEA estimating that oil demand will rise by 1.7 million barrels per day this year, the global market is still oversupplied by at least 1 million barrels per day. The rally in the oil market from its low of $37 has not been driven by solidly bullish fundamentals. At best, fundamental improvements at the periphery have driven some market participants to hope that wholesale improvements in fundamentals are near.
GEOPOLITICS
The change in US-Middle East foreign policy is profound and profoundly destabilizing. Our abrupt reversal of a 40-year policy of keeping Russia out of the Middle East has deep and wide-ranging implications. Much very good analysis has been written on the net and blogosphere that I will not review. I will state the following: FOR THE OIL MARKET, THE BOTTOM IS IN. $20 oil is not in the cards.
After Russia intervened militarily in Syria, it took less than two weeks for there to be a very serious military dust-up with Turkey, a long-standing NATO member. Russia’s first bomb targets were not ISIS, but US-backed rebels. Russia’s goal is to prop up Assad’s government. In doing so, Russia will create a Shiite axis of Syria, its long-time ally Iran and Russia as the backer. It is worth noting that this makes Russia the direct sponsor of two of the worst terror groups on Earth. With the billions about to be returned to Iran from the nuclear deal, this axis will have more than enough resources to pursue its triple goals of death to Israel, death to the USA and subjugation of all Sunni Muslims.
ISIS has clearly proven it is not a flash in the pan group. They have conquered or control large swaths of two countries: Syria and Iraq. They continue to bomb production targets in Northern Iraq. They have shown that they do not follow the Marques of Queensbury rules. Russia would do well to remember its Afghan experience. When the first Russian soldier gets his head chopped off then what? Does Russia escalate and seek revenge? The Russian intervention and US foreign policy capitulation threatens to destabilize the entire region. There is now an increased chance of violence spreading to important production zones. In the oil market, all the black swans now fly above the market, not below it. A RISK PREMIUM OF $10-$15 PER BARREL IS CLEARLY WARRANTED IN THE OIL MARKET.
THE SHALE FACTORY
Most people inside the oil industry, let alone analysts on Wall Street, do not understand how profound the shale revolution is here in the US. Low prices have not killed or stopped it. It is simply, retrenching, retooling and taking a breather. Economically unfeasible projects are being shelved for a later date. In the old oil business, the wildcatter was king. He was a Las Vegas gambler who knew that the ratio of winners to dry holes was 1 in 10 or even 1 in 20. The shale revolution has changed all of that. Engineers know where the shale deposits are, know exactly how deep and thick they are and have a good estimate of how much oil is there. The only question that remains is how much will it cost to get out the oil? There are few, if any, dry holes anymore. The mentality is now a factory mentality driven purely by the economics.
This is a very important concept. US oil production is down about 700,000 barrels per day in the last 6 months. The price of oil only has to rally a little bit, perhaps into the low $60s for this to reverse itself very quickly. Using the factory metaphor, all that has happened in the last 12 months is that the third shift and part of the second shift have been temporarily furloughed. If the price rises just a bit, the factory managers call them back. We know where the oil is: it is in the 3 ultra giant oil fields is the US. The mineral rights have been leased, and the infrastructure in these gigantic fields has been and continues to be built out. The process of going to drill for and then produce more oil is one that now takes months not years.
Moreover, the cost of production is constantly dropping. Engineers do not stand still. They are constantly working to lower the cost of these expensive horizontal wells. Longer laterals, more efficient fracturing techniques, cheaper steel and better chemicals all work to lower costs. In all three major fields, the total cost of production in the “sweet spot” is at or under $40 per barrel. THE SHALE FACTORY IN THE USA PUTS AN EFFECTIVE CAP ON ANY SUSTAINED RALLY IN THE PRICE OF OIL.
INVESTING FOR THE FUTURE
There are equal reasons to be both bearish and bullish on the price of oil. The fundamentals are not bullish. Geopolitics is quite bullish. While the fundamentals are not in balance, I believe that the price will be roughly balanced for some years to come. The US foreign policy abdication and general state of upheaval in the geopolitics of the Middle East should render oil prices very volatile. Nonetheless, prices should trade in a wide range between $40 and $70 per barrel depending on which group, bulls or bears, holds sway.
Whether you are trading oil ETFs (USO, UWTI, UCO, DBO, OIL) or equities, all dips in the oil price are a buy now. In the range bound, but volatile environment of the next several years, the supermajors like Exxon (NYSE:XOM) and Chevron (NYSE:CVX) should do particularly well as they are purpose built to withstand price volatility. Moreover, they both have super dividends which are in no danger of going down.
If one is of a very speculative bent, buy long-term (1 year or more) deep-out-of-the-money call options on oil. These are classic lottery tickets, but with a better asymmetrical chance of payout. If the unrest and other mayhem caused by a budding Syria, Iran and Russia axis spreads to vital areas, say, Saudi Arabia, then prices will explode.
12 Comments on "Oil: $20 Or $70"
rockman on Wed, 14th Oct 2015 8:34 am
“There are few, if any, dry holes anymore. The mentality is now a factory mentality driven purely by the economics.” More ignorant or intentionally misleading BS. As I recently posted during the last year upwards of 20% of Eagle Ford wells depleted just as they recovered their cost or produced much less. No exploration risks??? Ask the companies that drilled 4 EFS wells that each produced about 5,000 bbls of oil before depleting and being abandoned. And the companies that drilled so many more wells that recovered less than 100,000 bbls. Just because a well isn’t a dry hole doesn’t mean the company didn’t lose their ass.
“Most people inside the oil industry, let alone analysts on Wall Street, do not understand how profound the shale revolution is here in the US.” What an outstanding asinine statement. What an inflated ego to think they understand the business better then those that actually do the work.
“Using the factory metaphor, all that has happened in the last 12 months is that the third shift and part of the second shift have been temporarily furloughed.” More utter bullsh*t. More the 100,000 have been fired… not “temporarily furloughed”. More important hundreds of service companies required to develop that shales have gone out of business. It would take years of sustained higher oil prices for this segment to reconstitute itself. And even if that were to happen the operating companies have amassed a debt that will never be completely repaid even if those higher eventually develop. The capex sources and ivestors that are currently facing 100’s of $BILLIONS of potential loses will not as readily pullout their checkbooks as fast as the last round of unrealistic optimism.
I have to wonder if such stories are posted here to give us some red meat to feast upon or if someone actually thought there would be any value in reading such crap.
shortonoil on Wed, 14th Oct 2015 8:57 am
“Moreover, the cost of production is constantly dropping. Engineers do not stand still. They are constantly working to lower the cost of these expensive horizontal wells.”
Oil firms have been squeezing drilling firms, who have been squeezing service companies, who have been squeezing suppliers, and etc. Seeking Alpha apparently can’t tell the difference between cutting cost, and passing on losses! They also apparently can’t tell the difference between LTO, which has 38% of its fractions above an API of 50, and conventional crude. Being the hired pimp for a dying industry is hardly the signature of job security.
BobInget on Wed, 14th Oct 2015 9:05 am
Oil Wars are proving more expensive then Royal’s thought:
Saudi Arabia’s finance ministry is closing the national accounts one month earlier than usual this year, suggesting it is tightening its control over spending as low oil prices create a record state budget deficit.
The world’s top oil exporter is grappling with a budget deficit which economists estimate could total $120 billion or more this year, and the finance ministry has taken other unusual steps recently to clamp down on excess spending.
In its latest step, a document sent by the ministry to government bodies this week and seen by Reuters instructs them to “bring forward the final date to make payments from budget allocations and other accounts for the current fiscal year.”
Saudi Arabian riyals
Why China’s not the only one selling FX reserves
A flame from a Saudi Aramco oil installion known as ‘Pump 3’ is seen in the desert near the oil-rich area of Khouris, 160 kms east of the Saudi capital Riyadh.
Oil: No gain without pain for Saudi Arabia
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The new deadline to make payments is Nov. 15, the document says. In past years the deadline fell in mid-December; last year it was Dec. 18.
The document does not elaborate on the reasons for the change, or say how government bodies are expected to cope with the earlier deadline. Calls to the finance ministry seeking comment were not returned.
Earlier this month, the ministry told government bodies that if budget allocations were not fully spent on the projects for which they were originally earmarked, the remaining money must be sent back to the Treasury. Previously, government bodies were free to transfer money from one project to another as they wished.
Since August last year, the government has sold more than $80 billion of foreign assets via the central bank.
Last month Finance Minister Ibrahim Alassaf said his ministry was “working on cutting unnecessary expenses.”
Many economists expect next year’s national budget to include spending reductions in some areas.
BobInget on Wed, 14th Oct 2015 9:12 am
I believe ROCKMAN when he says there are fewer ‘dry holes’. This will be good news for
explorers following Shell into the Arctic.
Brazil, another perfect model for “there’s oil down-there” but we simply can’t get at it with CURRENT technology.
The awful truth remains on the floor for any to mock. No New Elephant Fields are in place ready to exploit.
BobInget on Wed, 14th Oct 2015 9:26 am
TANKER NEWS
China adding to SPR ~70% faster in next 18 months vs prior 18
Tanker rates expected to climb, as many vessels will soon need to be fitted with Ballast Water Treatment Systems, limiting tonnage supply
in Hellenic Shipping News (30) 13/10/2015
(China, China, how about India? With twice the growth in oil consumption…..)
Poster’s note:
In ten I’ll post last week’s EIA repore here about’s.
This, most certainly will be wide open for coment.
In another significant development, CR Weber said that “the IEA estimated that over the next 18 months China would add 132.2 MnBbls to its Strategic Petroleum Reserve. This would represent a marked increase from the 78 MnBbls the agency estimated were added to the reserve during the preceding 18 months. The volumes are part of the second stage of China’s SPR builds, which were originally planned to total 169 MnBbls but have likely scaled up to take advantage of low oil prices. The increase, equal to around 100,000 b/d, or an average of 1‐2 additional VLCCs per month, represents 1% of 2015’s total ton‐miles. As the EIA also expects that China’s SPR builds will be more heavily centered on the final months of 2015 and taper through 2016 and early 2017, a correlating support for VLCC rates can be expected. As well noted, a record number of units fixed to China last week likely comprising some SPR‐bound cargo volume had an observable impact on the spot market with VLCC earnings rallying simultaneously to over $100,000/day”.
BobInget on Wed, 14th Oct 2015 9:32 am
Summary of Weekly Petroleum Data for the Week Ending October 2, 2015
U.S. crude oil refinery inputs averaged about 15.6 million barrels per day during the
week ending October 2, 2015, 403,000 barrels per day less than the previous week’s
average. Refineries operated at 87.5% of their operable capacity last week. Gasoline
production decreased last week, averaging 9.3 million barrels per day. Distillate fuel
production increased last week, averaging about 5.1 million barrels per day.
U.S. crude oil imports averaged about 7.1 million barrels per day last week, down by
486,000 barrels per day from the previous week. Over the last four weeks, crude oil
imports averaged over 7.2 million barrels per day, 3.3% below the same four-week period
last year. Total motor gasoline imports (including both finished gasoline and gasoline
blending components) last week averaged 543,000 barrels per day. Distillate fuel imports
averaged 111,000 barrels per day last week.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum
Reserve) increased by 3.1 million barrels from the previous week. At 461.0 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 increased by 1.9 million barrels
last week, and are above the upper limit of the average range. Finished gasoline
inventories decreased while blending components inventories increased last week.
Distillate fuel inventories decreased by 2.5 million barrels last week but are in the middle
of the average range for this time of year.
Propane/propylene inventories rose 1.6 million
barrels last week and are well above the upper limit of the average range. Total
commercial petroleum inventories increased by 2.3 million barrels last week.
Total products supplied over the last four-week period averaged 19.3 million barrels per
day, down by 0.3% from the same period last year. Over the last four weeks, motor
gasoline product supplied averaged 9.0 million barrels per day, up by 4.0% from the
same period last year. Distillate fuel product supplied averaged over 3.9 million barrels
per day over the last four weeks, up by 3.7% from the same period last year. Jet fuel
product supplied is up 6.9% compared to the same four-week period last year
BobInget on Wed, 14th Oct 2015 9:42 am
OKAY.
Its bearish that storage increased 3.1 million barrels. I’ll blame refineries not operating at full capacity and speculators larding on oil ‘we don’t need…today’
I’ll also predict next week will also show a surplus for the same reasons.
The last paragraph, consumption, not bearish at tall.
Gasoline, diesel use– up 4%
Jet fuel (excellent indicator) up almost 7% over last year. Means more people flying with the help of aircraft.
BobInget on Wed, 14th Oct 2015 11:04 am
Russian Energy Minister Alexander Novak said on Wednesday that Saudi Arabia’s entry into East European oil markets, traditionally dominated by Russia, was the “toughest competition”.
“Every country has the right to sell where it thinks necessary. This is a competition, the toughest competition is going on now,” Novak told reporters.
Saudi Arabia has started supplying crude to Poland, the head of Russia’s biggest oil company, Rosneft, said on Tuesday, becoming another Middle Eastern producer to enter a market traditionally supplied mostly by Russia.
A global battle for market share is under way among oil exporters. Those with the deepest pockets, such as Saudi Arabia, are using low prices to enter new markets – often at the expense of Russia, one of the world’s top crude producers.
“We see that Saudi Arabia has been implementing its strategy of participating in oil-market competition,” Novak said.
Novak also said the ministry’s envoys will travel to Vienna for a “technical meeting” with officials from the Organization of the Petroleum Exporting Countries planned for Oct. 21.
(Reporting by Olesya Astakhova; Writing by Vladimir Soldatkin; Editing by Jason Bush and Dale Hudson)
Roman on Wed, 14th Oct 2015 12:22 pm
“Russia is destabilizing the middle east”. That is the stupidest statement i heard this year. what is destabalizing that shit hole is:islam cult, america, israel
Davy on Wed, 14th Oct 2015 12:57 pm
It was never stable to begin with. It is a playground of instability, chaos, and mayhem.
BC on Wed, 14th Oct 2015 1:02 pm
Technically, $32-$37 WTI is support/stop. There is no major support below that until the mid-$20s.
World trade is not growing. World real GDP per capita has decelerated to below “stall speed” since Q4 2014, implying recession-like conditions.
The Juglar cycle coinciding with the oil/commodity cycle is turning negative, suggesting that the 3-, 5-, and 10-year average prices of oil will trend lower hereafter, and not inconceivably eventually to below $40, especially if we experience another deflationary global recession.
makati1 on Wed, 14th Oct 2015 9:40 pm
Looking for Alpha is another joke.
No matter what happens in the world (ME/Ukraine/etc.), oil will sell for the price the consumer can afford. Nothing more. And that price is decreasing daily. Oh, oil may go to $1,000,000/bbl when the printing presses go Weimer on us, but that too is a sick joke. We are fast approaching the point where few wells will be profitable and in a capitalist world, that will end the Age of Petroleum.