Oil Prices

[yewkim]

I think it is perilous to argue how low oil will go or whether it is manipulated. In reality, no one know. But what we can do on our part is to take care of our vestment. We must make a decision for the just in case, just be prepare is our only protection.


We cannot do anything about the price of oil, but we can do a lot more for our investment. Don't delay.


Copper too are down 6% today. Many commodities are been sold down. I certainly do not think it is the work of speculator.

[greengiraffe]

Back to the future? Oil replays the 1980s bust
RUSSELL GOLD THE WALL STREET JOURNAL JANUARY 15, 2015 12:00AM


A SURGE of oil from outside of the Middle East flooded global energy markets. The worldwide thirst for crude didn’t keep up. The Organisation of the Petroleum Exporting Countries stood by and watched as oil prices fell and then fell more.

Welcome to the world of oil in 2015 — a repeat in surprising ways of the story 30 years ago. Between November 1985 and March 1986, the price of crude plunged by 67 per cent. Between June 2014 and today, crude prices have fallen by 57 per cent and could well head lower.

After the mid-1980s bust, it took nearly two decades for oil prices to rebound to pre-bust levels and remain there. Energy executives are now haunted by the question: Will it take as long this time?

The answer may lie in one enormous difference between today and 30 years ago: the speed of shale.

Before US energy companies figured out how to pull oil from shale formations, petroleum projects often took years to execute. Two decades passed between a fisherman spotting a colourful slick floating off the coast of Mexico and oil flowing from the giant Cantarell project off the Yucatan Peninsula. It took nine years and billions of dollars to get crude moving from the North Slope of Alaska to markets.

Today, the discovery and development of oil from shale rocks means that oil output is faster paced and near at hand — in Texas and North Dakota, Colorado, Oklahoma, Wyoming, even Ohio. Drilling and hydraulically fracturing a well takes weeks, not years. An expensive well costs $10 million, compared with the billions needed to drill offshore wells and build associated infrastructure. Moreover, expenditure of both time and money are falling fast.

The oilfield investment cycle has shortened. Wildcatters in Texas discovered the Eagle Ford Shale in 2008. Within five years, it was pumping a million barrels a day — thanks to an influx of capital that paid for drilling thousands of new wells. Each well roars into life and then drops off fast. Without constantly drilling new wells, these oilfields will peter out.

Faster-reacting shale production could help cut supply more quickly than in the past, restoring market balance without a decades-long wait. The availability of so much new oil, housed in easy-to-tap shale formations, could also make price spikes less frequent.

But that doesn’t mean prices will rebound soon, or return to the triple-digit levels seen just months ago. Price pressure may need to remain on the US oil industry and its lenders for months to rein in supply.

Goldman Sachs said this week it saw a “U-shaped” recovery with depressed prices until the market rebalances and prices rise in 2016. The firm said it expected US crude to average $US47.15 a barrel this year, down from a previous prediction of $US73.75.

A year of low prices beats a decade, as far as the energy industry is concerned. But it is unclear exactly what will happen: shale-oil output has boomed only in the past five years — and faces its first downturn. “No one has so far experienced what the actual consequences of a ‘stress test’ on US production could be,” says Leonardo Maugeri, a scholar at Harvard University’s John F. Kennedy School of Government and a former top executive with the Italian oil giant Eni SpA.

Even veteran oil traders are uncertain. “Sustained low prices will ultimately bring the market into balance,” Andrew Hall, who runs a $3 billion energy derivatives hedge fund, Astenbeck Capital Management, wrote in a private letter to investors earlier this month which was reviewed by The Wall Street Journal. “But it is unclear how long that will take and what the new price equilibrium will be.”

Many economists and energy analysts believe prices will probably rebound somewhat by the end of the year. The global benchmark for oil, currently $US46.59, will “head back toward the $US70 range and I suspect that will be sustainable for quite some time”, says Stephen P.A. Brown, an energy economist at the University of Nevada, Las Vegas and former economist with the Dallas Federal Reserve Bank.

The US dollar increased in value in the early 1980s as the Federal Reserve wrung inflation out of the US economy, but the Reagan administration engineered a large devaluation in 1985 in agreement with other major economic powers. Between March 1985 and December 1987, the dollar lost 40 per cent of its value against a basket of other major currencies. That stands in contrast to the current episode: The dollar rose more than 12 per cent in 2014, compared with a basket of widely-traded securities.

During the last big supply-driven oil bust, demand had been muted for several years, in part because of conservation measures Americans embraced after the Arab oil embargo in the 1970s. The country adopted energy-efficiency standards for cars, while using oil to generate electricity fell out of favour.

Meanwhile, oil output outside OPEC grew rapidly. Production in the North Sea surged, as did output from China and Oman. Mexico began shipping more than one million barrels a day in 1981 from its Cantarell complex. Even the American oil industry had started pumping more oil from its high-cost oilfields.

And so a glut developed. At first, as oil prices began retreating, Saudi Arabia tried to bolster prices by cutting its production, which fell from 10 million barrels a day in the early years of the decade to 2.3 million in August 1985, according to the US Energy Information Administration.

Late that year, tired of losing market share to rising oil exporters, the Saudis threw in the towel and began pumping again — and so did the rest of OPEC.

Global oil prices went into free fall, declining from over $US30 a barrel in November 1985 to nearly $US10 by July 1986. The US oil industry basically shut down. In late 1985, there were nearly 2300 rigs drilling wells; a year later, there were barely 1000.

Prices spiked upward a few years later, prompted by Iraq’s invasion of Kuwait in 1990. But that didn’t last long, ending in 1991 once Operation Desert Storm pushed Iraq out of Kuwait and the fires set by retreating forces were put out. Afterwards, prices remained low, bouncing between $US15 and $US25 until the end of the decade.

It wasn’t until about 2000 that supply began to struggle to keep up with rising demand. Global economic growth, especially in Asia, pushed demand for crude as the Chinese middle class began driving cars. Chinese oil imports, virtually non-existent in 1985, have risen steadily ever since. On Tuesday, Chinese data hit a record of about seven million barrels a day.

Prices spiked in the northern summer of 2008, then plunged when the economy crashed and went into recession. But the price drop was brief and prices rebounded quickly. Today, demand for crude is growing, albeit slowly, around the world. The health of the global economy and Chinese appetite for fuel will have a significant impact on global and US crude prices. An outside event — warfare or civil strife in a major crude-producing country — could raise prices again.

As in the past, Saudi Arabia is betting that low prices will force other producers to cut back. Falling prices will hurt US output, but perhaps less than OPEC expected. The cost of producing oil from shale — especially in the new US oilfields responsible for a huge upsurge in output — has been falling.

ConocoPhillips says it can make a profit on its US shale wells as long as oil trades for more than $US40 a barrel. A Conoco spokesman said improved efficiency, better technology and a better understanding of the rocks helped the company reduce costs.

And it is not alone. The expense of getting oil from the Eagle Ford Shale fell by about 15 per cent, or $US7.50 a barrel, last year, despite intense competition for rigs, truck drivers and oilfield services, says Pers Magnus Nysveen, head of analytics for Rystad Energy, a Norway-based global oil consultant. Costs could fall another 10 per cent to 15 per cent this year as some financially weak companies pull back and competition for services lessens. “The key driver here is improved efficiency,” Mr Nysveen says.

Companies like EOG Resources are drilling better wells faster. EOG said it takes 4.3 days to drill its average well in the Eagle Ford Shale in South Texas, down from 14.2 days in 2012. What’s more, as it drills more of them, it has figured out how to locate wells to get the highest oil output.

Combining lowering costs and increasing output means that EOG says it can drill wells at $US40 per barrel while still earning a 10 per cent return. We “pride ourselves on being a very efficient operator”, says Billy Helms, EOG’s head of exploration.

Since oil prices began to fall, many companies have cut their capital spending plan for 2015 and the number of drilling rigs in the US has fallen. But output has continued to increase.

Mike Rothman, president of Cornerstone Analytics, says that given the decreasing costs of drilling, it is not clear when shale output in the US will fall.

“How quick will the response in shale oil be to this drop in prices? That is a big open question,” he says. “With shale, you are dealing with something very different.”

The Wall Street Journal

[CityFarmer]

Major traders are betting on recovery within 12 months...

Exclusive: Oil glut spurs top traders to book supertankers for storage at sea

(Reuters) - Some of the world's largest oil traders have this week hired supertankers to store crude at sea, marking a milestone in the build-up of the global glut.

Trading firms including Vitol [VITOLV.UL], Trafigura [TRAFGF.UL] and energy major Shell (RDSa.L) have all booked crude tankers for up to 12 months, freight brokers and shipping sources told Reuters.

They said the flurry of long-term bookings was unusual and suggested traders could use the vessels to store excess crude at sea until prices rebound, repeating a popular 2009 trading gambit when prices last crashed.

The more than 50 percent fall in spot prices now allows traders to make money by storing the crude for delivery months down the line, when prices are expected to recover.

The price of Brent crude is now around $8 a barrel higher for delivery at the end of 2015, with its premium rising sharply over spot prices this week due to forecasts for a large surplus in the first half of this year, in a market structure known as contango.
...
http://www.reuters.com/article/2015/01/0...M520150108

[opmi]

Major traders are betting on recovery within 12 months...

Exclusive: Oil glut spurs top traders to book supertankers for storage at sea

(Reuters) - Some of the world's largest oil traders have this week hired supertankers to store crude at sea, marking a milestone in the build-up of the global glut.

Trading firms including Vitol [VITOLV.UL], Trafigura [TRAFGF.UL] and energy major Shell (RDSa.L) have all booked crude tankers for up to 12 months, freight brokers and shipping sources told Reuters.

They said the flurry of long-term bookings was unusual and suggested traders could use the vessels to store excess crude at sea until prices rebound, repeating a popular 2009 trading gambit when prices last crashed.

The more than 50 percent fall in spot prices now allows traders to make money by storing the crude for delivery months down the line, when prices are expected to recover.

The price of Brent crude is now around $8 a barrel higher for delivery at the end of 2015, with its premium rising sharply over spot prices this week due to forecasts for a large surplus in the first half of this year, in a market structure known as contango.
...
http://www.reuters.com/article/2015/01/0...M520150108

more like doing arbitrage to capture contango. rather than a straight Long oil.

[lilvestor]

A New Ceiling for Oil Prices

LONDON – If one number determines the fate of the world economy, it is the price of a barrel of oil. Every global recession since 1970 has been preceded by at least a doubling of the oil price, and every time the oil price has fallen by half and stayed down for six months or so, a major acceleration of global growth has followed.

Having fallen from $100 to $50, the oil price is now hovering at exactly this critical level. So should we expect $50 to be the floor or the ceiling of the new trading range for oil?

Most analysts still see $50 as a floor – or even a springboard, because positioning in the futures market suggests expectations of a fairly quick rebound to $70 or $80. But economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20.

To see why, first consider the ideological irony at the heart of today’s energy economics. The oil market has always been marked by a struggle between monopoly and competition. But what most Western commentators refuse to acknowledge is that the champion of competition nowadays is Saudi Arabia, while the freedom-loving oilmen of Texas are praying for OPEC to reassert its monopoly power.

Now let’s turn to history – specifically, the history of inflation-adjusted oil prices since 1974, when OPEC first emerged. That history reveals two distinct pricing regimes. From 1974 to 1985, the US benchmark oil price fluctuated between $50 and $120 in today’s money. From 1986 to 2004, it ranged from $20 to $50 (apart from two brief aberrations after the 1990 invasion of Kuwait and the 1998 Russian devaluation). Finally, from 2005 until 2014, oil again traded in the 1974-1985 range of roughly $50 to $120, apart from two very brief spikes during the 2008-09 financial crisis.

In other words, the trading range of the past ten years was similar to that of OPEC’s first decade, whereas the 19 years from 1986 to 2004 represented a totally different regime. It seems plausible that the difference between these two regimes can be explained by the breakdown of OPEC power in 1985, owing to North Sea and Alaskan oil development, causing a shift from monopolistic to competitive pricing. This period ended in 2005, when surging Chinese demand temporarily created a global oil shortage, allowing OPEC’s price “discipline” to be restored.

This record points to $50 as a possible demarcation line between the monopolistic and competitive regimes. And the economics of competitive markets versus monopoly pricing suggests why $50 will be a ceiling, not a floor.

In a competitive market, prices should equal marginal costs. Simply put, the price will reflect the costs that an efficient supplier must recoup in producing the last barrel of oil required to meet global demand. In a monopoly price regime, by contrast, the monopolist can choose a price well above marginal costs and then restrict production to ensure that supply does not exceed demand (which it otherwise would because of the artificially high price).

Until last summer, oil operated under a monopoly price regime, because Saudi Arabia became a “swing producer,” restricting supply whenever it exceeded demand. But this regime created powerful incentives for other oil producers, especially in the US and Canada, to expand output sharply. Despite facing much higher production costs, North American producers of shale oil and gas could make big profits, thanks to the Saudi price guarantee.

The Saudis, however, could maintain high prices only by reducing their own output to make room in the global market for ever-increasing US production. By last autumn, Saudi leaders apparently decided that this was a losing strategy – and they were right. Its logical conclusion would have been America’s emergence as the world’s top oil producer, while Saudi Arabia faded into insignificance, not only as an oil exporter but also perhaps as a country that the US felt obliged to defend.
The Middle East’s oil potentates are now determined to reverse this loss of status, as their recent behavior in OPEC makes clear. But the only way for OPEC to restore, or even preserve, its market share is by pushing prices down to the point that US producers drastically reduce their output to balance global supply and demand. In short, the Saudis must stop being a “swing producer” and instead force US frackers into this role.

Any economics textbook would recommend exactly this outcome. Shale oil is expensive to extract and should therefore remain in the ground until all of the world’s low-cost conventional oilfields are pumping at maximum output. Moreover, shale production can be cheaply turned on and off.

Competitive market conditions would therefore dictate that Saudi Arabia and other low-cost producers always operate at full capacity, while US frackers would experience the boom-bust cycles typical of commodity markets, shutting down when global demand is weak or new low-cost supplies come onstream from Iraq, Libya, Iran, or Russia, and ramping up production only during global booms when oil demand is at a peak.

Under this competitive logic, the marginal cost of US shale oil would become a ceiling for global oil prices, whereas the costs of relatively remote and marginal conventional oilfields in OPEC and Russia would set a floor. As it happens, estimates of shale-oil production costs are mostly around $50, while marginal conventional oilfields generally break even at around $20. Thus, the trading range in the brave new world of competitive oil should be roughly $20 to $50.

Read more at http://www.project-syndicate.org/comment...UX7aa4d.99

We might not see high oil prices ever again unless demand accelerates from here.

[CityFarmer]

Asian oil market contango boosts demand for crude, gasoline storage

SINGAPORE (Jan 15): The persistent glut that has knocked more than 50 percent off oil prices since June has cheered tank farm companies and ship owners operating in Singapore, who are fielding increased enquiries for crude and gasoline storage space.

While the oil stocks build-up has pushed Asia's entire oil complex into contango - meaning near deliveries are cheaper than future months - the case for storage has yet to spread beyond crude and gasoline as the prompt-future price difference for other oil products cannot cover leasing costs.

"When it comes to a contango, storage guys are definitely happy," said a Singapore-based representative for an oil storage company.

"But most traders are cautious and not taking huge positions. A lot of enquiries are for spot storage."

A few terminal operators in Singapore and nearby Malaysia said deals have been reached in recent days, but declined to specify the lessees as the information is confidential.

"We've got a few (gasoline) deals done for the short-term, three-month period. The market is generally more upbeat," said a Singapore-based commercial director with a terminal operator.

The contango between the first two contract months for gasoline has widened to about US$1.20 cents a barrel, from around five cents since December, data from pricing agency Platts showed.

Converted to a cubic meter (cm) basis, the US$7.50 per cm contango is comparable to leasing costs of US$6.50 to US$8 a month per cm.

That means the profit on a cargo bought now, held in storage for a month and sold could cover tank rentals.

Enquiries for gasoil storage have also picked up slightly as traders expect a flush of supply to widen its contango further, but deals have yet to materialise, industry sources said.

Landed storage for gasoil or middle distillates requires a contango of at least 80 cents a barrel to profit, but the price difference between the two near-month contracts is only about 10 cents a barrel.

Naphtha and fuel oil storage would make sense only at contango spreads of US$10 and US$6 a tonne, respectively, traders said, but they are currently running at about US$4 and 25 cents a tonne.

The case for Brent crude storage is stronger, with forward prices consistently higher than prompt contracts.

March Brent crude, for instance, is around US$10 a barrel cheaper than contracts a year out.

As commercial land storage for crude is limited in the region, traders have hired super tankers as floating storage,
mostly over a 12-month period, and this could mean a further downward spiral for crude.

Once crude starts going into storage, consultancy Energy Aspects said in a note, the first-second-month contango for Brent could widen to US$3, especially after peak winter crude demand tapers off and charter rates for very large crude carriers ease.
http://www.theedgemarkets.com/sg/article...ne-storage

[greentea]

How the latest oil rout compares to previous oil price slumps: http://businesstimes.com.sg/infographics...ops-of-oil [Infographic]

Before the current fall, there were 13 troughs over the last 26 years when the price of oil was lower than its value six months earlier and later...

[specuvestor]

WTI back to parity with Brent from discount in past 5 years. Mr Market is talking if anyone is keen to listen

[orangetea]

WTI back to parity with Brent from discount in past 5 years. Mr Market is talking if anyone is keen to listen

I am noob in this statement. Please if you would explain the significance of the parity of crude and brent pricing? i don't quite get it.
Cheers!

[specuvestor]

WTI has been trading at premium prior to 09 as US is the largest importer of oil ie natural demand and quality is better than Brent.

However since the rise of shale oil, it has been starting to tradie at discount. Some say it is due to logistics and infrastructure constraints in Cushing Oklahama due to sharp rise in shale oil. But the inventory at Cushing has gone down since 2013 but discount persisted.

I leave it to you to figure out in this thread why it is back to parity and possibly normalise back to a premium to Brent soon.

"Monitoring and might be vested"