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WTI Crude Plunges To 7-Month Low (But Don't Get Too Excited)

Tyler Durden's picture




 

At $91.70, front-month WTI crude prices have dropped to a fresh 7-month-low this morning. The mainstream media is already crowing of what this means for gas prices and how that will be an implicit "tax-cut" - even though gas prices remain at or near record-high levels for this time of year. The issue with this thinking, of course, is Brent crude (which more closely correlates to US gasoline prices) remains stubbornly high at around $107 as the spread between WTI and Brent surges over $15.

 

 

Chart: Bloomberg

 

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Thu, 01/09/2014 - 13:43 | 4315947 firstdivision
firstdivision's picture

BTMFD (WTI), STMFATH(SPX)

Thu, 01/09/2014 - 16:25 | 4316638 Bokkenrijder
Bokkenrijder's picture

"The issue with this thinking, of course, is Brent crude (which more closely correlates to US gasoline prices)..."

Huh? I always thought that WTI, traded in Cushing OK, was closere alligned with US demand?

Thu, 01/09/2014 - 16:36 | 4316713 Flakmeister
Flakmeister's picture

Hasn't been in years....

Thu, 01/09/2014 - 13:46 | 4315954 hugovanderbubble
hugovanderbubble's picture

I think Oil will hit 84 and SP 1680

Thu, 01/09/2014 - 14:01 | 4316017 firstdivision
firstdivision's picture

I'll take the under on both.

Thu, 01/09/2014 - 14:44 | 4316147 papaswamp
papaswamp's picture

Alot of shale fields will close at that price, and US trade deficit will rise again....as well as job losses for all the workers in the field and associated support.

Thu, 01/09/2014 - 13:47 | 4315962 101 years and c...
101 years and counting's picture

anyone willing to do the math will see the US just hit a new 24 year low in fuel/energy demand.  according to the EIA.  the US now has net exports of 2.2 million barrels/day of fuel products.  prior to the depression, we'd import 2.2 MBD of fuel products.

Thu, 01/09/2014 - 13:59 | 4316008 firstdivision
firstdivision's picture

That was a running theme here awhile ago as you could see total gas sold, miles driven, et all.  The industry responded by shutting refineries and creating faux supply constraints.  Demand has not, and will not recover to previous highs.  More people are still moving into the hearts of cities and walking to work instead of doing the commute. 

 

Thu, 01/09/2014 - 15:25 | 4316301 CrashisOptimistic
CrashisOptimistic's picture

Were that true, electoral votes would not be leaving the urbanized northeast for the more rural south and west. 

Demand is down because unemployment has eviscerated commutes.

Thu, 01/09/2014 - 16:46 | 4316771 firstdivision
firstdivision's picture

That's the other input that is diriving down demand as well as people moving to more fuel efficient vehicles.

Thu, 01/09/2014 - 16:39 | 4316734 negative rates
negative rates's picture

And that was my call some years ago, I don't travel enough now to see the difference on the street, but I am planning a trip.

Thu, 01/09/2014 - 14:09 | 4316041 Headbanger
Headbanger's picture

According to this EIA chart, it looks like a lot more than 24 years since the US had this low fuel demand.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=A103600001&f=M

I think the price of oil, like that of housing and stocks markets and bonds is being heavily propped up cause a collapse in oil prices to the present level of demand would mean implosive deflation cause oil affects prices of everything immediately.

Thu, 01/09/2014 - 14:24 | 4316092 101 years and c...
101 years and counting's picture

i think oil is just another way of forcing the peasants to fund the deficit.  pay $95 for oil, saudis use petrodollar to buy UST.  should oil drop below $80, any demand for UST from OPEC would be gone. 

Thu, 01/09/2014 - 14:34 | 4316117 Headbanger
Headbanger's picture

But we're buying less than half the fuel we did just a few years ago so the flow of petrodollars to buy UST is much less now anyway regardless of the price of oil.

Again, the price of fuel, like everything else, is being propped up only to avert severe deflation which would bankrupt what's left of the global economy.

How much longer can this charade last?

Thu, 01/09/2014 - 14:46 | 4316160 papaswamp
papaswamp's picture

Not necesarily... shale is much more expensive to extract. Price is already into the upper end of extraction cost zone for shale.

Thu, 01/09/2014 - 15:31 | 4316328 CrashisOptimistic
CrashisOptimistic's picture

The whole "petroleum products" narrative is silly.

The US imports about 7 million barrels per day of crude.  A small but significant part of that is exported as a petroleum product because the import source doesn't have refineries capable of refining their particular crude type (e.g. Venezuela's heavy oil). 

It's not like US domestic oil production is so vibrant that we are shipping the refinery results outward.  Were that true, we wouldn't have to import 7 mbpd.

The price of oil of WTI is falling because it's not very valuable compared to Brent.  Remember, Bakken crude ships via truck to rails.  There are transport costs.  This makes it less valuable than even WTI.  As that price falls, drilling stops.  If drilling stops, the hyper steep decline rates eats the production increases to oblivion.

This is what scarcity looks like.

Thu, 01/09/2014 - 21:13 | 4317713 DaveyJones
DaveyJones's picture

It's funny how finance folks treat this "commodity" like every other when our military clearly doesn't

Thu, 01/09/2014 - 17:00 | 4316862 Flakmeister
Flakmeister's picture

You really did think this through very far did you?

For example, just how much oil does the US import from the ME and how does that compare to the deficits....

BTW, have you been napping during all the lessons on QE?

Thu, 01/09/2014 - 15:36 | 4316368 Hohum
Hohum's picture

101 years,

Why don't you provide a link?  Because the Wednesday EIA report doesn't seem to say that:

http://ir.eia.gov/wpsr/wpsrsummary.pdf

Thu, 01/09/2014 - 13:49 | 4315968 ChrisDG74
ChrisDG74's picture

Meh. Retail just went up 25 cents/gallon today. Thanks Speedway!!

Thu, 01/09/2014 - 13:52 | 4315979 101 years and c...
101 years and counting's picture

deflation.  "it cant be allowed to happen here".  courtesy of Ben.  not Speedway.

Thu, 01/09/2014 - 14:46 | 4316163 ChrisDG74
ChrisDG74's picture

In that case, it;s couresty of Greenthumb as well. Speedway's been doing it since at least the mid 90's.

Thu, 01/09/2014 - 14:46 | 4316164 ChrisDG74
ChrisDG74's picture

In that case, it;s couresty of Greenthumb as well. Speedway's been doing it since at least the mid 90's.

Thu, 01/09/2014 - 13:54 | 4315983 Winston Churchill
Winston Churchill's picture

Doctor Copper is giving a similar diagnosis on the world economy.

BTFD if you dare.

FX is much safer right now.

Thu, 01/09/2014 - 14:00 | 4316013 firstdivision
firstdivision's picture

AUD has been telegraphing that signal for a few months now.

Thu, 01/09/2014 - 13:59 | 4316005 Quinvarius
Quinvarius's picture

Can't go too low or all the shale operations will become unprofitable.  But when has the ESF ever been concerned about the profitability of an actual business when a temporary print can bee seen on the tape?

That being said, there is no demand and the price was probably artifically high just so the shale would be profitable.

Thu, 01/09/2014 - 14:11 | 4316044 Coast Watcher
Coast Watcher's picture

Fracked oil needs $75-$95 oil to show the kind of profit investors want. If WTI remains low, the high-cost wells will be capped and new drilling will drop off a cliff, and without new drilling the Red Queen wins the race. Which will push prices up again, eventually, of course.

Thu, 01/09/2014 - 14:24 | 4316090 Flakmeister
Flakmeister's picture

The wells won't be capped, the E&P guys need the cashflow to service all the debt they took on..

What will happen is that new drilling will wind down until the decline curves kick in curtailing supply...

Thu, 01/09/2014 - 21:10 | 4317727 DaveyJones
DaveyJones's picture

agree.  pretty sure the oil guys know how the ever rising dips will play out

Thu, 01/09/2014 - 14:21 | 4316080 cougar_w
cougar_w's picture

Death spiral. But every drop of crude will be extracted nevertheless. The shale fields will have to be nationalized in the cause of national defense, and developed at a loss paid by taxpayers. The oil extracted will either be given to oil companies at a subsidized price "to boost the economy", or will be refined by USG-owned refineries for the MiC to use keeping the armed forces rolling.

Watch for it.

Thu, 01/09/2014 - 15:34 | 4316349 CrashisOptimistic
CrashisOptimistic's picture

Credible scenario.

The fly in the scenario's ointment is the costs start getting measured in joules rather than dollars.  Remember, trucks haul Bakken oil.  The drilling is so frantic and rapid there is no way to slow down for pipelines.

So how much diesel do those trucks burn?

Thu, 01/09/2014 - 21:12 | 4317737 DaveyJones
DaveyJones's picture

nationalization is my vote too. A when not an if. If we false flag and war for it, we damn well sure can nationalize it 

Thu, 01/09/2014 - 14:21 | 4316081 orangegeek
orangegeek's picture

WTI topped in December and was showing pending downside

 

http://bullandbearmash.com/chart/wti-oil-daily-continues-falling-hard-fo...

 

And here we are.  Support near 91.

 

PMs have rolled, oil is rolling - again.  Market indexes aren't sure, but they are reading to roll over too

Thu, 01/09/2014 - 15:39 | 4316383 Hohum
Hohum's picture

Now this is a macro perspective, but this table suggests marginal costs are high, high, high.  The Bakken may be the highest cost oil in the world, but that is where it's at--the marginal barrel.

https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf

Thu, 01/09/2014 - 15:55 | 4316487 Notarocketscientist
Notarocketscientist's picture

Scientists Wary of Shale Oil and Gas as U.S. Energy Salvation

Hughes sums up: "Tight oil is an important contributor to the U.S. energy supply, but its long-term sustainability is questionable. It should be not be viewed as a panacea for business as usual in future U.S. energy security planning."

http://www.sciencedaily.com/releases/2013/10/131028141516.htm

 

U.S. Shale-Oil Boom May Not Last as Fracking Wells Lack Staying Power

“I look at shale as more of a retirement party than a revolution,” says Art Berman, a petroleum geologist who spent 20 years with what was then Amoco and now runs his own firm, Labyrinth Consulting Services, in Sugar Land, Tex. “It’s the last gasp.”

http://www.businessweek.com/articles/2013-10-10/u-dot-s-dot-shale-oil-boom-may-not-last-as-fracking-wells-lack-staying-power

 

THE FRACKING PONZI SCHEME

Robert Ayres, a scientist and professor at the Paris-based INSEAD business school, wrote recently that a "mini-bubble" is being inflated by shale gas enthusiasts. “Drilling for oil in the U.S. in 2012 was at the rate of 25,000 new wells per year, just to keep output at the same level as it was in the year 2000, when only 5,000 wells were drilled."  http://www.forbes.com/sites/insead/2013/05/08/shale-oil-and-gas-the-contrarian-view/

 

Why America's Shale Oil Boom Could End Sooner Than You Think

http://www.forbes.com/sites/christopherhelman/2013/06/13/why-americas-shale-oil-boom-could-end-sooner-than-you-think/

 

FRACKING WILL CREATE AN ECONOMIC CRISIS

Overinflated industry claims could pull the rug out from optimistic growth forecasts within just five years.  A report released in March by the Berlin-based Energy Watch Group (EWG) concluded that: "... world oil production has not increased anymore but has entered a plateau since about 2005."  Crude oil production was "already in slight decline since about 2008."   

http://www.guardian.co.uk/environment/earth-insight/2013/jun/21/shale-gas-peak-oil-economic-crisis 

 

 

FRACKING OUR WAY TO A TOXIC PLANET

Elevated levels of methane, ethane and propane gases were found in drinking water wells in Pennsylvania, close to operations that shake natural gas loose from underground shale formations in a process known as fracking, scientists reported on Monday.  Mr. Johnson and his colleagues found 82 per cent of drinking water samples contained methane, with concentrations six times higher for homes within 1 kilometre of natural gas wells than for homes farther away. Ethane concentrations were 23 times higher for homes close to natural gas wells; propane was detected in 10 drinking water wells, also within 1 km of a natural gas well.

 

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/methane-found-in-drinking-water-near-natural-gas-wells-study/article12783760/

 

 

POISONING OUR LAND
Over the past several decades, U.S. industries have injected more than 30 trillion gallons of toxic liquid deep into the earth, using broad expanses of the nation's geology as an invisible dumping ground.  No company would be allowed to pour such dangerous chemicals into the rivers or onto the soil. But until recently, scientists and environmental officials have assumed that deep layers of rock beneath the earth would safely entomb the waste for millennia.
There are growing signs they were mistaken (or lying of course)

http://www.scientificamerican.com/article.cfm?id=are-fracking-wastewater-wells-poisoning-ground-beneath-our-feeth

 

 

Former BP geologist: peak oil is here and it will 'break economies'
http://www.theguardian.com/environment/earth-insight/2013/dec/23/british-petroleum-geologist-peak-oil-break-economy-recession

 

The decline of the world's major oil fields
Aging giant fields produce more than half of global oil supply and are already declining as group, Cobb writes. Research suggests that their annual production decline rates are likely to accelerate.
http://www.csmonitor.com/Environment/Energy-Voices/2013/0412/The-decline-of-the-world-s-major-oil-fields

Thu, 01/09/2014 - 15:58 | 4316506 Notarocketscientist
Notarocketscientist's picture

Toil for oil means industry sums do not add up (FT.com)

 

Rising costs are being met only by ever smaller increases in supply The most interesting message in this year’s World Energy Outlook from the International Energy Agency is also its most disturbing. Over the past decade, the oil and gas industry’s upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply. Even these have only been made possible by record high oil prices. This should be a reality check for those now hyping a new age of global oil abundance.

According to the 2013 WEO, the total world oil supply in 2012 was 87.1m barrels a day, an increase of 11.9mbd over the 75.2mbd produced in 2000. However, less than one-third of this increase was in the form of conventional crude oil, and more than two-thirds was therefore either what the IEA calls unconventional crude (light-tight oil, oil sands, and deep/ultra-deepwater oil) or natural-gas liquids (NGLs). This distinction matters because unconventional crude has a higher cost than conventional crude, while NGLs have a lower energy density. The IEA’s long-run cost curve has conventional crude in a range of $10-$70 a barrel, whereas for unconventional crude the ranges are higher: $50-$90 a barrel for oil sands, $50-$100 for light-tight oil, and $70-$90 for ultra-deep water. Meanwhile, in terms of energy content, a barrel of crude oil is worth 1.4 barrels of NGLs.

 

Threefold rise The much higher cost of developing unconventional crude resources and the lower energy density of NGLs explain why, as these sources have increased their share of supply, the industry’s upstream capex has increased. But the sheer scale of the increase is staggering: upstream outlays have risen more than threefold in real terms over the past 12 years, reaching nearly $700bn in 2012 compared with only $250bn in 2000 (both figures in constant 2012 dollars).

 

Coinciding with the rise in US tight-oil production, most of this increase in upstream capex has occurred since 2005, as investments have effectively doubled from $350bn in that year to nearly $700bn in 2012 (again in 2012 dollars). All of which means the 2013 WEO has the oil industry’s upstream capex rising by nearly 180 per cent since 2000, but the global oil supply (adjusted for energy content) by only 14 per cent. The most straightforward interpretation of this data is that the economics of oil have become completely dislocated from historic norms since 2000 (and especially since 2005), with the industry investing at exponentially higher rates for increasingly small incremental yields of energy. The industry has been able and willing to finance such a dramatic increase in its capital investment since 2000 owing to the similarly dramatic increase in prices.

 

BP data show that the average price of Brent crude in real terms increased from $38 a barrel in 2000 to $112 in 2012 (in constant 2011 dollars), which represents a 195 per cent increase, slightly greater in fact than the increase in industry capex over the same period. However, looking only at the period since 2005, capital outlays have risen faster than prices (90 per cent and 75 per cent respectively), while in the past two years capex has risen by a further 20 per cent (the IEA estimates 2013 upstream capex at $710bn versus $590bn in 2011), while Brent prices have actually averaged about $5 a barrel less this year than in 2011. Iran not a game changer That prices have fallen slightly since 2011 while capex has risen by a further 20 per cent is a flashing light on the industry’s dashboard indicating that its upstream growth engine may finally be overheating. Without a significant technological breakthrough reversing the geological forces that have driven the unprecedented increase in upstream investment over the past decade, prices will have to rise further in real terms from here or else capex – and with it future oil production – will fall. It should also be emphasised that this vast increase in capex has occurred during a prolonged period of record-low interest rates. Once interest rates start rising again, this will put further pressure on the industry’s ability to make the massive capital outlays required to keep supply growing.

 

Of course, the diplomatic breakthrough achieved with Iran over the weekend could provide some much needed short-term relief to the market, as Iran’s exports could ultimately increase by up to 1.5m barrels a day if and when western sanctions were to be fully lifted. But this would not change the dynamics of the industry’s capex treadmill in any fundamental sense. Even if global oil demand only grows at 1 per cent a cent a year, those extra barrels would be would be fully absorbed by the market within about 18 months.

And that is probably how long it would take for Iran’s production and exports to return to pre-sanctions levels in any case. Alternatively, if we take the IEA’s estimate that global production of conventional crude oil from all currently producing fields will decline by 41m barrels a day by 2035 (that is, by an average of 1.9m barrels a day per year), then Iran’s potential increase of 1.5m barrels a day would compensate for just 10 months of natural decline in global conventional-crude output. In short, behind the hubbub of market hype about a new age of oil abundance, the toil for oil is in fact now more arduous and back-breaking than ever.

This should worry everybody, because with the evidence suggesting that consumers are reluctant to pay much above $110 a barrel, it is an open question what happens next to the industry’s investment plans and hence, over time, to the supply of oil. Mark Lewis is an independent energy analyst and former head of energy research in commodities at Deutsche Bank; Daniel L Davis, a lieutenant colonel in the US Army, is co-author

Thu, 01/09/2014 - 16:54 | 4316829 Flakmeister
Flakmeister's picture

Good post:

The reason is that not all liquids are oil, though TPTB like to call it so...

Crude + lease condensate production is about 74 mmbpd, the rest is a combination of smoke and mirrors (refinery gains), lower BTU liquids (NGL) and BTU arbitraged stuff like ethanol....

Thu, 01/09/2014 - 21:17 | 4317749 DaveyJones
DaveyJones's picture

funny, in any subject, I've noticed TBTB are into labels that don't fit

"Over the past decade, the oil and gas industry’s upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply"

that quote sums it up

Thu, 01/09/2014 - 16:24 | 4316633 magne13
magne13's picture

Has any one asked these oil companies what the EARTH actually uses the oil for? I think pumping out oil and pumping in GAS to fill the void is not a stable practice...after 100 years you would think we would have something other than fossil fuel burning combustible engines...

Thu, 01/09/2014 - 16:44 | 4316762 Cornholiovanderbilt
Cornholiovanderbilt's picture

Good time to sell some CLK4 Putz ;-)

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