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Page added on April 3, 2015
What Will Determine If Oil Prices Go Up Or Down
It appears as if oil prices could be on the verge of a rebound, with new data showing that the U.S. oil patch is hitting an inflection point. While specific shale regions – such as North Dakota’s Bakken and Texas’ Eagle Ford – have posted production declines, overall U.S. oil output managed to edge up in recent months.
But now that U.S. production has finally dipped, it may augur a new phase for oil markets in which production cutbacks could lead to higher prices. The Energy Information Administration reported on April 1 that total U.S. oil production fell for the week ending on March 27, falling 36,000 barrels per day to 9.38 million barrels per day.
The prior week’s production level of 9.42 million barrels per day was the highest level in three decades. If output continues to decline, mid-March 2015 could mark the peak of U.S. oil output, at least for the foreseeable future.
That would raise the possibility that oil prices have bottomed out. Where do they go from here? Is it possible that oil prices could dip any lower? If they are indeed about to rise, will they rise quickly or stay flat for a while before gradually ascending?
There are several major determinants of oil prices one should consider.
1. U.S. Production. The first and most important thing to watch is the aforementioned levels of U.S. production. Weekly figures come out from the EIA and we should get a better sense of where U.S. oil flows are going next week. Consistent weekly drops will put upward pressure on prices.
2. Iran Negotiations. In the very short-term, a lot depends on the outcomes of the Iranian negotiations. A breakthrough in negotiations on April 2nd sent oil prices down immediately but this will likely only be temporary. Oil prices will again correct themselves once the markets realize that Iranian oil won’t begin flowing overnight, as there are still several months before a final accord is signed and even more time before the U.N. Nuclear Agency confirms compliance. Still, over the long-term, new Iranian oil will keep prices from rising too much. On the flip side, a breakdown in the ongoing talks between now and June will raise geopolitical tension and ensure Iranian crude stays on the sidelines, resulting in higher oil prices.
3. Credit Crunch. Another significant development is the reevaluation of credit lines for distressed oil drillers. Banks typically readjust their credit facilities for oil and gas companies in April and October. With the onset of April, smaller oil producers will find that their assets are no longer worth what they once were in the eyes of their creditors. That will lead to a large cutback in credit as oil firms become unqualified for generous lending. As a result, junk oil firms could face a liquidity crisis as they run out of cash, pushing some into bankruptcy. Quicksilver Resources filed for Chapter 11 bankruptcy in March. Oklahoma-based Samson Resources hinted on March 31 that it may do the same. Bankruptcies could pick up pace in the next few weeks, and the quicker it happens, the quicker the supply side of the oil equation will begin to balance out, which will eventually push up oil prices.
4. Oil storage. Fears have arisen that oil storage is running out. Indeed, oil diverted into storage has skyrocketed, and key hubs have seen their storage tanks filling up rather quickly. More than 77 percent of storage capacity is used up in Cushing, Oklahoma. Yet with production slowing and a much improved pipeline network, storage will probably not reach its limits. Once that becomes apparent, investors will shed their fears and bid up oil prices.
5. Oil Demand. Demand is starting to look stronger as well. U.S. drivers drove a record amount of miles for the month of January, capitalizing on lower gasoline prices. Major U.S. oil refineries are also taking advantage of the glut. Normally a time for spring maintenance, refineries processed 15.7 million barrels per day for the week ending on March 27, a record level for this time of year. As we move through spring and summer approaches, refineries will ramp up processing even further, providing a lift to demand.
6. The Fed. Another influential development on oil prices will be the next moves by the U.S. Federal Reserve. The Fed is expected to raise interest rates, but a specific timeline is unknown. If and when interest rates rise, there will be two effects. First the dollar will appreciate, pushing down oil prices. At the same time, higher interest rates will raise the cost of capital for oil producers, potentially cutting into marginal oil production. The possible termination of cheap money could spell an end to a lot of oil production, although this would likely take place over time. It is hard to say how these two countervailing forces ultimately shake out. In the immediate aftermath at least, a stronger dollar will prevail, causing oil prices to sink.
7. China. As with most things in the energy world, a lot hinges on China. China has been taking advantage of collapsed prices by stepping up its purchases of oil to fill its strategic petroleum reserve (SPR). That provided a bit of a demand boost in recent months, putting a floor beneath prices. But now China’s SPR is nearly full, so its imports could plateau for a while. Lower oil demand – or at least demand not growing as fast as expected – will keep oil prices from rising too much.
By Nick Cunningham of Oilprice.com
20 Comments on "What Will Determine If Oil Prices Go Up Or Down"
shortonoil on Fri, 3rd Apr 2015 8:43 am
The price of a barrel of oil depends on what the oil is worth to the end consumer. The consumer is not going to pay any more for it than what it is worth to them. That is dependent on how much work that barrel can provide to them. Outside of being able to provide work, oil doesn’t have a lot of value.
In 2015 the amount of work a barrel of oil can provide the average consumer will be $77. In 2016 it will be $66. At the present price of $50 there is a little room for upward movement in the near future, and chances are that will be the direction it will eventually take.
http://www.thehillsgroup.org/depletion2_022.htm
The shale industry is now going bust, but since it wasn’t worth much to begin with that will only mean that money will stay where it is, and not be shuffled off to North Dakota. Hopefully, for the few producers that are still producing crude, and not just liquid hydrocarbons that aren’t very useful the market will stabilize, and go into a slower downward trend.
The end of shale will be a benefit to the rest of the economy. It has basically been a parasitic creature that has fed on the pensions, and life savings of everyone else. It now has $1 trillion in debt that it can not repay, so everyone else will have to fork up the difference. Once we have paid their bills, we can begin investing in the day when the oil age comes to its end.
http://www.thehillsgroup.org
Nony on Fri, 3rd Apr 2015 9:03 am
Massively stupid. Bakken oil is active on the market. Is 1 million bpd supply. Is known to every refiner in North America. It’s not useless. Neither is 47 API EF. They are actually preferable grades to heavy sour oil.
steve on Fri, 3rd Apr 2015 9:16 am
Wait! Wait! The economy is doing so well we need to raise interest rates to sloooow it down. How long before the masses get it! Ok…Job numbers are disappointing in the U.S cue the FED to by billions of stock to keep the market up! Nothing to see here folks…keep going about your day! Such a crazy world today…
shortonoil on Fri, 3rd Apr 2015 10:59 am
Williston Basin Sweet opened for $32.94/ barrel today, Sour $23.83. Since drilling cost run an average of $53/ barrel, the only purpose of this stuff is for piling up massive debt for which the rest of the economy will have to pay. Anyone supporting this industry probably does not intend to be among those who will be paying this soon upcoming bill. For the most part, they are there to help someone part you from your money.
Nony on Fri, 3rd Apr 2015 12:02 pm
For the people buying the oil, they have value for it. They could care less if the producers sold at a loss or a profit. They are just comparing crudes and making purchases.
Oh…and I assume those prices are based on MN or ND purchase. IOW, value is more at the coast (net transport).
Plantagenet on Fri, 3rd Apr 2015 12:09 pm
Since OPECE and Russia aren’t cutting their production, its almost inevitable that the US production will fall. Whether or not that ends the oil glut is another matter, with Russia achieving a new post-USSR high just last month and Iran poised to begin openly selling oil into the world market.
shortonoil on Fri, 3rd Apr 2015 3:46 pm
For the people buying the oil, they have value for it. They could care less if the producers sold at a loss or a profit. They are just comparing crudes and making purchases.
They are going to care a lot when the banks start confiscating their deposits to cover their losses. It has already happened in Cyprus, and the whole EU is preparing for it. Of course, let’s not grieve for the stupid windows, and orphans that have been ripped off. The average Bakken well hits the dead state in about 10 months. After that its a hole in the ground that spits out high test camel pea. The shale industry doesn’t care as long as some CEO can cash his $1,000,000 per year salary check. $1,000,000 that was borrowed, with no intention of every paying it back, from some pension fund.
Perk Earl on Fri, 3rd Apr 2015 3:53 pm
I don’t know how accurate this article is, particularly since my understanding is certain things still have to happen with the agreement with Iran for them to export more oil. Anyway, here’s the article:
http://www.zerohedge.com/news/2015-04-03/ahoy-oil-tankers-form-four-mile-line-persian-gulf-iran-talks-stoke-supply-glut-fears
Ahoy! Oil Tankers Form Four-Mile Line In Persian Gulf As Iran Talks Stoke Supply Glut Fears
With Tehran sitting on 9% of the world’s proven reserves, the lifting of sanctions and opening of the country’s oil fields to foreign investment could trigger a dramatic decline in crude prices as an extra million bpd gets set to be unleashed on an already saturated market.
Nony on Fri, 3rd Apr 2015 6:04 pm
You continue to confuse the producers of Bakken oil with the oil’s value to a customer. The oil is kissing cousins to WTI in terms of utility. If someone produced it at a loss, the buyers could care less. And it doesn’t make the sales price of the barrel less.
If it costs me 2 million dollars to mine a 1 million gold nugget (based on world price), then the nugget is still worth 1 million dollars. You are a moron for not understanding this.
Speculawyer on Fri, 3rd Apr 2015 6:38 pm
So supply (production) and demand affect price! Wow, what an amazing insight. They should get a Nobel economics prize for that.
tk on Fri, 3rd Apr 2015 9:18 pm
Sorry, but demand and supply does NOT any longer determine the price!
You probably won’t believe me, but the price system is broken since the crash 07/08.
Now the entire global price setting is rigged by trading algorithms upon FUTURE EXPECTATIONS,
the same goes for food, gold, silver, etc. Humans have no longer oversight and play no longer any role in this:
https://www.youtube.com/watch?v=kFQJNeQDDHA
http://www.nanex.net/NxResearch/
http://www.theatlantic.com/magazine/archive/2010/07/monsters-in-the-market/308122/?single_page=true
rockman on Sat, 4th Apr 2015 7:28 am
“Now the entire global price setting is rigged by trading algorithms upon FUTURE EXPECTATIONS”. Well, yes and no. I sell oil to oil buyers. Da! And that oil is sold at a computed price that uses a variety of oil future bids with adjustments for transport, oil quality AND the competitive premium. The buyers compete with each other for my oil so I get to pick the best price: they commonly add a premium to the benchmarked price if they really want the oil. I can switch buyers anytime I choose. Today I sell a lot of oil produced in SE Texas that puts it in barges and ships it to refiners in Lake Charles, La. IOW I essentially sell WTI oil at the LLS benchmark (La Light Sweet) thanks to the competition premium.
BTW pricing oil based upon benchmarks is nothing new. Been done for decades. And it has always been based on competition of the buyers. And that competition is based upon the supply/demand dynamic. Always has been in the US. And always will be IMHO.
ghung on Sat, 4th Apr 2015 8:39 am
Nony: “If it costs me 2 million dollars to mine a 1 million gold nugget (based on world price), then the nugget is still worth
1 million dollarsnegative one million dollars to me (or the investors). You are a moron for not understanding this.”There; fixed it. $1 million (sales price) – $2 million (to produce) = -$1 million. Someone takes a haircut. Pretending this doesn’t matter is idiotic. What goes around eventually comes around.
Nony on Sat, 4th Apr 2015 8:56 am
As usual, you are confusing the issue of the producer with the production. If the wells were developed for too much cost, that is in the past. What flows out of the well is oil…and the BUYER doesn’t care about if the producer ends up at a loss or massive profit. All he cares about is the product itself.
Nony on Sat, 4th Apr 2015 9:03 am
You continue to confuse the value of the ASSET with the cost of production.
If I build a house that sells for 1 million bucks, that is the value of the house. It doesn’t matter if it cost me 100,000 or 1 million or 10 million. That’s the producers loss or profit. But the value of the house ITSELF is what the market will pay for it.
So building a house that sells for 1 million at a cost of 5 million is a bad business decision. But the house is NOT worthless. E.g. in the event of a bankruptcy, the asset will still be sold and still get 1 million.
This is crushingly obvious. And you peakers miss it. Then again, you have had your ASSES KICKED by the last 10 years of peak oil not happening.
Davy on Sat, 4th Apr 2015 9:25 am
NOo you confuse your pseudo-science of Econ 101 with the systematic reality of global BAU. You fail to see outside the box of limited linear analysis of a nonlinear system. Once oil production and consumption become unbalanced from unfavorable economic supply and demand relationships the entire system deteriorates and collapses. This is what we are likely seeing now very slightly but noticeable. You cannot get your narrow brainy brain around change. You are living in the past and soon your thinking will be completely discredited in a paradigm shift of growth to descent.
shortonoil on Sat, 4th Apr 2015 10:15 am
You probably won’t believe me, but the price system is broken since the crash 07/08.
The shale industry was never an oil play, it was a financial play. The composition of the production from shale lacks the molecular structure to make it a sustainable process. 37% of it has an API that is greater than 50. Physics informs us that it just doesn’t have what it takes to power our modern civilization. It is a primary example of the cannibalization that will occur as petroleum losses its ability to function as one of the world’s primary energy sources.
The cannibalization of existing infrastructure is appearing in the form of massive debt creation. If shale was adding to the world’s economic portfolio it would be showing profits, not an ever increasing pile of debt that it can never repay. Shale production has been possible through the consumption of assets in one part of the economy, to power the production of a less than profitable asset in another. It is the quintessential example of robbing Peter to pay Paul. In this example Paul consumes more than he can steal from Peter!
Through the miracle of new “financial instruments” (a euphemism for monetary mechanisms that are so complex that no one can understand them) the shale industry has been able to extract enough value from other peoples wealth to power itself. It is another example of impoverishing many to enrich a few. From this perspective the traditional supply/ demand system has broken down. When the supply side has been tricked into supplying more than it ever intended to provide, the mechanism collapses. We can expect the end of the oil age to be resounding in such occurrences. As the ability to create real wealth diminishes with petroleum’s ability to power its creation, the coach roaches will continue to stream out of the places were they have been hiding.
http://www.thehillsgroup.org
steve on Sat, 4th Apr 2015 10:55 am
I remember in 08 that when the price of oil was high there was rice shortages and you could only buy so much at a time…this has all been papered over since then…Get ready Amerikans if you can’t take care of yourself a FEMA camp will be provided for you.
steve on Sat, 4th Apr 2015 11:01 am
@ Davy what do you think the PTB will do economically? I picture a throw everything at the fire in the form of just giving money to people and then wiping out debts all to no avail..or just a slow deflationary collapse…
Davy on Sat, 4th Apr 2015 12:01 pm
Steve, whatever TPTB do it will likely be the wrong thing. They will start doing somethings right when forced into by crisis. I say crisis and I mean something that has not been experienced in any of our lifetimes. This will be serious situations that will require emergency services which generally the government can do.
I say this in comparison to the rest of what they do which is more harm then good. Now that the government and the business sector are corrupted the lead up to a crisis will be doing anything to maintain their wealth and power at the expense of the public.
I personally think this may continue for a few years if no other black swans crash the system. The ultimate brick wall is peak oil dynamics restricting our foundational commodity enough that BAU dies.