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Page added on November 11, 2015
Why the oil market is behaving normally
FROM John Rockefeller’s Standard Oil in the late 1800s, through the Railroad Commission of Texas in 1930, to OPEC since 1960, institutions have long tried to control and stabilise the oil market for their own benefit. Only rarely, says Jason Bordoff, director of Columbia University’s Centre on Global Energy Policy, has the oil market behaved like a normal market, more subject to the laws of supply and demand than to the whims of a cartel. Now is one of them.
Take supply. A year ago Saudi Arabia refused to allow OPEC to try to raise prices by pumping less crude, in the hope that a low price would drive competitors, especially America’s shale-oil producers, out of business. Since then, like any scrappy trader in a tough market, it has used its low cost of production to carve out a bigger slice of the pie. It has fought with Russia and fellow OPEC members to sell oil to China. Seth Kleinman of Citibank says that it has recently sought to displace Russian crude going into refineries in Sweden and Poland, and cut prices across Europe
Producers with higher costs, including big listed oil firms and many rival national oil companies, have also behaved rationally, albeit reluctantly, cancelling at least $150 billion of investments this year, with more cuts to come next year. It takes time for this retrenchment to feed into lower production, because oil projects have long lead times, and in the meantime, producers naturally seek to compensate for lower prices by pumping more from existing facilities. But eventually diminished investment will reduce output.
The geopolitical tensions that sometimes play havoc with the oil market are also relatively absent this year, in part because OPEC has more or less abandoned its quotas. That means disputes within the cartel that might once have led to the breaching of production caps, such as the proxy war in Yemen between Saudi Arabia and Iran, barely stir prices. Instead the factors that set traders’ pulses racing make crude oil sound about as thrilling as iron ore: an oil-workers’ strike in Brazil; cuts to Iraq’s investment budget; a Saudi bond issue that may enable it to withstand lower prices for longer.
Demand is also making its mark. As might be expected, the falling oil price is boosting consumption to a degree. Since last year, according to the International Energy Agency (IEA), a Paris-based forecaster representing oil-consuming nations, drivers have been opting more often for “larger, more fuel-guzzling vehicles” such as SUVs, especially in America and China. Overall the IEA expects demand to grow by 1.9% this year, well above the average for the past decade, of 0.9%.
Yet the nuances are as interesting as the overall direction. The IEA says that even in the developing world, the amount of oil consumed per unit of economic output is declining. China’s growth, in particular, is becoming less energy-intensive. Fuel-efficiency standards may not be tightly enforced but they nonetheless affect three-quarters of all vehicles sold worldwide. Industry analysts are beginning to invoke “peak demand”, as opposed to “peak supply”, as a factor that may determine the trajectory of prices in the long run.
In its annual “World Energy Outlook”, released on November 10th, the IEA predicted that a relatively sluggish recovery in demand and decline in supply would yield a price of $80 a barrel in 2020. But it also aired an alternative scenario in which oil stays in a range of $50-60 a barrel until well into the 2020s. One of the main reasons it hedged its bets is American shale oil, which has not been responding as promptly to changes in the price as analysts had assumed.
Even after oil prices fell last year, production continued to increase, a process that has only recently started to reverse (see chart). The IEA says this longer-than-expected adjustment was caused by a timelag of several months between drilling a well and fracking it, ie pumping in water and sand to split the shale rock, allowing oil to seep out. Cost-cutting and hedging also enabled the industry to maintain margins even as prices fell.
One big question is how quickly would the frackers ramp up production again if oil prices rise? The IEA is sceptical. It argues that banks may be reluctant to fund more of their wells, staff will take longer to mobilise after recent lay-offs, and other factors will make shale-oil production “stickier” than boosters assume. It believes that rapid depletion rates in shale-oil fields may raise costs faster than new technology can lower them, putting a cap on shale’s long-term potential. That would be music to Saudi Arabia’s ears. But the shale oilmen are a resourceful bunch, who understand markets at least as well as the Saudis. The battle is not yet won.
13 Comments on "Why the oil market is behaving normally"
shortonoil on Wed, 11th Nov 2015 7:18 pm
We don’t think this turning out normal:
http://www.thehillsgroup.org/depletion2_022.htm
http://www.thehillsgroup.org/
idontknowmyself on Wed, 11th Nov 2015 7:53 pm
Decantation is explain below.
https://www.youtube.com/watch?v=VIjyNF3s26M
The oil left is crap with the wrong chemical composition and not cannot be process by refineries. The oil glut is in fact some kind of oil mixture that is not that cannot be refined.
Look at it like water decantation. The top water is clean and at bottom of have crap.
idontknowmyself on Wed, 11th Nov 2015 7:55 pm
https://www.youtube.com/watch?v=oXXDHJ1lpsI
BobInget on Wed, 11th Nov 2015 9:02 pm
http://www.huffingtonpost.com/entry/fossil-fuel-subsidies_5643dd87e4b045bf3dedc2d9
The G20 countries spend almost four times as much to prop up fossil fuel production as they do to subsidize renewable energy, calling into question their commitment to halting climate change, a think tank said on Thursday
The G20 spent an average $78 billion on national subsidies delivered through direct spending and tax breaks in 2013 and 2014, according to a report from the Overseas Development Institute (ODI) on Thursday.
A further $286 billion was invested in fossil fuel production by G20 state-owned enterprises. Related public finance was estimated to average a further $88 billion a year.
Meanwhile, renewable energy subsidies in 2013 were estimated at $121 billion by the International Energy Agency (IEA).
dave thompson on Wed, 11th Nov 2015 9:36 pm
Preaching to the choir. http://prosperouswaydown.com/
makati1 on Wed, 11th Nov 2015 9:40 pm
“…The battle is not yet won.”
The battle is over. Only the ‘economists’ don’t seem to realize it. The world is in a recession bordering on a depression. There will be no consumers at higher prices. Or not for long. Another dream piece…
idontknowmyself on Wed, 11th Nov 2015 10:49 pm
Why Toronto-Dominion Bank could soon overtake Royal Bank of Canada
http://business.financialpost.com/news/fp-street/why-toronto-dominion-bank-could-soon-overtake-royal-bank-of-canada
Canadian banks are starting to feel the negative impact of low oil price on their oil investment and mortgage portfolio.
Plantagenet on Thu, 12th Nov 2015 12:37 am
I wonder how much longer KSA can keep pumping full out?
The moment KSA cuts its oil production back to pre-2015 levels, the oil glut is over.
Dredd on Thu, 12th Nov 2015 5:00 am
“… the [Oil-Qaeda] market is behaving normally”
Mass murder is not normal (The Harm Oil-Qaeda Has Done).
rockman on Thu, 12th Nov 2015 6:40 am
“One big question is how quickly would the frackers ramp up production again if oil prices rise? The IEA is skeptical. It argues that banks may be reluctant to fund more of their wells, staff will take longer to mobilize after recent lay-offs, and other factors will make shale-oil production “stickier” than boosters assume”.
And all this ignoring the fact that the shale boom grew out of an oil patch that suffered for years with the inflation adjusted oil price much lower than the prices we have TODAY. The banks will loan money on the potential return they perceive: the banks/investors were slaughtered in previous oil patch bust and yet did not hesitate to throw mucho $BILLIONS at the shale plays. They’ll do it again if a similar opportunity presents itself…it always has be it .coms, .auto or .oil. Everybody remember Petrohawk Energy…the company that put a lot of EFS acreage together, drilled a few wells and then sold their position for $15 BILLION? The company was founded in 2003 when the price of oil was 25% LOWER THEN IT IS TODAY. If you bait a big hook you’ll catch a big fish. LOL
Mobilizing staff problems? The many thousands of hands used to drill the shales weren’t in the oil patch before the boom began. Bodies will always be available when you offering them a 3X or better salary. Boosters? The Rockman is hardly a booster since the shale boom (just like the Canadian oil sands) has cost his company $millions in lower revenue. Yet he also knows the potential for the shales to rebound. Still has the t-shirt: “Been there…done that”. LOL
BTW: the Texas Rail Road Commission didn’t just impact global oil prices “in 1930”. The TRRC had set the % of oil produced in Texas through its allowable rules until the early 70’s. Since then the TRRC has consistently set the allowable at 100% at every monthly meeting. Not very likely to happen but next month the TRRC could force Texas producers to reduce our oil output by 50%. Hmm…maybe the TRRC commissioners are conspiring with the Saudis to hurt the shale players? Yeah, yeah, that’s the ticket. LOL.
Dredd on Thu, 12th Nov 2015 6:37 pm
“Why the oil market is behaving …”
Psychopaths gotta do what psychopaths gotta do (Extinction: Sydney, Shanghai, Rio, NYC, Mumbai, London, & Durban).
peakyeast on Fri, 13th Nov 2015 9:35 am
I could imageine something exist caparable to the Plunge Protection Team stabilizing oil prices or perhaps even outright controlling them to ensure a slightly prolonged BAU.
Davy on Fri, 13th Nov 2015 9:58 am
Peaky, we can call that martial law maybe.