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Everyone Is Guessing When It Comes To Oil Prices
Submitted by Nick Cunningham via OilPrice.com,
Predicting and diagnosing the trajectory of oil prices has become something of a cottage industry in the past year. But along with all of the excess crude flowing from the oil patch, there is also an abundance of market indicators that while important, tend to produce a lot of noise that makes any accurate estimate nearly impossible.
First there is the oil price itself. The crash began last summer, and accelerated in November. Since then, predictions for oil prices for 2015 have been all over the map – from Citigroup’s $20 per barrel, to T. Boone Pickens’ prediction of a return to $100 per barrel. OPEC’s Secretary-General even said prices could shoot up to $200 in the coming years as a result of overly drastic cutbacks and a failure to invest in new production. With those estimates at the extremes, most analysts think prices will continue to seesaw within a rough band of $40 to $70 for the rest of the year. Still that is quite a large range, highlighting the fact that everyone is merely guessing.
Aside from oil prices, the weekly measurement of the number of rigs still in operation has become one of the most watched indicators out there. Weekly rig counts from Baker Hughes have sparked the Twitter hashtag #Rigcountguesses, to which energy analysts post their predictions. For the week ending March 6, another 75 oil and gas rigs were pulled from operation, taking the total down to 1,192. That is the lowest level in years, and 43 percent lower than its 2014 peak. While the rig count metric has garnered a lot of attention as a leading indicator of a potential cut back in oil production, it has also been criticized for not being an entirely accurate portrayal of output. Drillers have become more efficient, able to use fewer rigs for the same amount of production. So the notion that a falling rig count will necessarily lead to a fall in production may be a bit more complicated than it seems.
A new metric that has popped up in recent weeks is the level of available storage. Excess oil has been stashed in storage tanks around the world, but government data suggests that storage space is starting to run low. The EIA says that about 60 percent of total U.S. storage is filled, a jump from 48 percent a year ago. Regional figures are higher, for say, the East Coast (85 percent). Oil storage is at its highest level in 80 years, and storage at the all-important hub in Cushing, Oklahoma could begin to run out of space this spring. Globally, the picture isn’t any better – Citigroup says Europe is at 90 percent, while South Korea, South Africa, and Japan may all be nearing 80 percent. The growing shortage of places to put oil has led to the creation of an oil-storage futures contract by CME Group. As storage begins to run out, the glut could worsen, sending prices way down.
Another key number to keep in mind is the number of drilled but uncompleted wells out there. There are an estimated 3,000 wells that have not been completed as producers wait for prices to rebound. Instead of storing oil in tanks, simply holding off on finishing a well can allow drillers to “store” oil in the ground. Once completed, however, the backlog of wells will push down prices.
The most important indicator for trying to figure out where prices are going is actual levels of oil production. In the face of spending cut backs, drops in rig counts, and ongoing price pressure, oil production continues to defy gravity. Output continues to climb. At the end of February, the U.S. was producing 9.3 million barrels per day, up 10 percent since prices began crashing in June 2014, and even up 2 percent since the beginning of 2015. Low prices have yet to cut into the trend line, but will have to at some point soon.

One of the big unknowns is how oil demand will respond to low prices. Lower prices should push up consumption, but how quickly and how fervently consumers respond will go a long way to determining when the glut will subside. Overall demand is also largely determined by broader economic growth. With so much unknown about the rate of economic expansion around the world, demand projections are understandably all over the place. The IEA, OPEC, and EIA – the three most-watched energy prognosticators – have tinkered with their oil demand scenarios, but they haven’t yet seen enough evidence to forecast a surge in demand.
Finally, clouding the entire picture are fluctuations in currency markets. Fluctuations in currencies influence – and are also influenced by – fluctuations in oil prices. Most important is the U.S. dollar because oil prices are priced in dollars. Just to take a recent example, the U.S. posted very positive employment numbers on March 6. While that should theoretically put upward pressure on oil prices because a stronger economy should lead to more oil consumption, oil prices actually fell. Why? A stronger economic outlook also raised speculation that the Federal Reserve may increase interest rates, which would strengthen the dollar. Since oil is priced in dollars, a stronger dollar tends to push down oil prices.
The set of indicators above is just a small selection of what energy prognosticators have to take into account when trying to predict oil prices. When you throw in geopolitics, technological advances, and changes in tax policy, for example, one quickly realizes that nobody knows which way oil prices are heading.
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going to $30 folks
Maybe, $40 for sure. At some point Wall St won't be able to levitate the market. The real number to watch though is Brent, that's the one OPEC plays by.....
i'm not guessing. i look at the weekly and monthly charts and see oil in the low 30's.
...Obama, "as only a few oil, train & truck tankers blow up, to me, thats a sign it's safe".
Yeah, not like those super dangerous pipelines that keep crashing and catching fire. Oh wait......
Topping it all off and getting ready for war. God Help Us!
One of the big unknowns is how oil demand will respond to low prices.
Uh, really, I don't think that's exactly an unknown. For the same reason companies are buying shares with excess profits and not spending on capex, I think we can safely say demand won't change much in a dead economy. Look out below.
ZH always points out the rig counts. if they keep going down, wont that inevitably bring supply down with it and raise prices? unless of course there are a shitload of aquisitions and supply stays where it is. oil market is like the gold market on steroids. just like japan QE is usa QE on roids. the oil market SHOULD be a good indicator of how the GOLD miners will play out..,
Who gives a fuck, they'll just keep gasoline prices higher
yeah no shit man
tell me how the fuck WTI at 100 = 5.00 per gallon, and when WTI is at 40 bucks, i was paying 3 bucks per gallon. oh yeah and fuck california. i was in denver awhile ago and i saw 87 octane at 1.95!! as if trucking tankers of fuel up through the rocky mountains creates some sort of discount?
When oil was $10/barrel, gasoline was $0.75/gallon. Ergo, when WTI was $100/barrel, why wasn't gasoline $7.50/gallon?
Duplicate.
Let's see.
We need gas to get to work. Labor participation rate at all time low. Check.
We need gas to go buy stuff. Retail spending at lows. Check.
We need gas to go on vacation. Part time jobs that don't pay vacation time at all time highs while jobs that pay benefits like vacation at all time lows. Check.
We need a car to put gas in. Registration fees, license fees, excise taxes, insurance costs, tolls, maintenance costs, tire, battery, and oil disposal fees at all time highs. Check.
I think the price of crude just like APPL doesn't have a top.
Why is oil special? Why does anyone think they can predict the future with any degree of precision on anything close to a consistent basis?
It's a complex system. Made up of simple-minded people.
It's an overly complex system designed to confuse simple minded people. If you plug your ears and close your eyes, it will make a lot more sense.
This is the most intelligent conclusion ZH has reached about oil prices. You expose your ridiculous emotional bias when you conclude that the increase is always without merit, and it's certain to go lower. Maybe it will, maybe it won't, but you try to interject free market principles into something not governed by the market.
Most ZH articles usually run counter to Consensus/Biz-News/Dealer views which are usually allways bullish. As a result, ZH, especially since 2008, has tended to be bearish. If you focus on fundamentals, the underlying economic trends have been pretty crappy after the temporary boost of QE1, notwithstanding the artificial goose to equity markets.
As for Oil prices, the best investment theme I've gotten from ZH is that since the producers have sunk costs their only option is to 1) cut CAPEX / New Wells and 2) Pump even more out of existing wells. So Price will fall until producers start to go bankrupt.
When the bankruptcies start, that should be close to bottom (subject to some Saudi announcement).
Yes, the drilling rig count is an important number . However, when you want to know the maximum pain point has arrived watch the service rig count. That is much more difficult to come by; Baker Hughes doesn't track it and it is a number dominated by small companies. That said, for example, Key Energy Services (I have no position) has 28 service rigs in the Bakken; as of Friday they had 26 on site doing well repair work. When these service rig numbers start to drop you will then know, almost immediately, that the welll owners have crossed the "variable cost/variable revenue" point. They will have decided that it isn't worth it to dump $100k, $300k or whatever in repairs to a well if they aren't going to get that cash back in the next 3,6, 12 months.
Watch the service rig count....that's when the fecal matter hits the rotating device.
Wow a good and thoughtful post. Thanks Herman they seem to be getting more rare by the day around here.
My son is a petroleum engineer out here in the Bakken; I'm just the dull old man. He ran through some numbers with me over the weekend showing the repair costs of a particular well at over $300k and the company, a larger operator here, simply texted him the following message: leave esp insitu, recal bop, sdfn.
Translated that means: don't pull the broken electric submersible pump-just leave it in the bore, recalibrate and test the blow out preventer valve and then shut down well site until further notice.
And so it goes.........
doesnt their insurance requirements force them to service the rigs regardless of profit? i am just speculating here
Good point.. Much of the new generation of oil being produced is a light-sweet crude, which is a type many U.S. refineries are not designed to process. Oil companies can't send it overseas, because crude exports are restricted by federal law. President Obama has not been supportive of lifting this 40 year old ban on crude exports. So, we have foreign oil flowing into the U.S. to source refineries designed to process heavy sour crude.
http://downholetrader.us4.list-manage.com/track/click?u=a93a60c1f99d08bc...
hermann55,
I saw that you were enquiring about workover rig count awhile back. I am in the Bakken for a brief trip and have been asking everyone, no one knows the exact count but keep getting the same answer... plenty. I've seen quite a few myself in McKenzie county (dead center of proven oil stores). So.. for what it's worth.
What will it occur if Iran and the USA get along? Will the price implode, not?
actually everything I've ever read is that Iran needs oil to be much pricier to just allow them to stay afloat.
they don't have much refining capacity and their economy is in tatters. the mullah's are getting rich and the vast population is doing the muppet bendover.
I hear you well, but if Iran returns on the markets with its 6 million barrels per days. We will drown in oil…
Is wti really at 47?
yup. And even Costco gas at ~frn3.25 per gal just like when wti was more than twice as much.
As long as gdub's saud buds and obama's homage bowing recipent's own the Houston refineries, they could care less what the "incoming" price is, they still get the overall spread. Barrel price is as relevent as the face value stamped on current .999Ag / Au US "collector" coinage.
you see how it got ramped right back to pre-inventory price as futures market closed? if wtic is going to $20 then it will likely go to $65 first.
As long as the inventories rise, the price won't go anywhere but down. When the inventories fall, it will be a contest between decreasing supply and decreasing demand.
Rock and hard place --- high priced oil kills growth --- low priced oil kills extraction …
For a long time, there has been a belief that the decline in oil supply will come by way of high oil prices. Demand will exceed supply. It seems to me that this view is backward–the decline in supply will come through low oil prices.
The oil glut we are experiencing now reflects a worldwide affordability crisis. Because of a lack of affordability, demand is depressed. This lack of demand keeps prices low–below the cost of production for many producers. If the affordability issue cannot be fixed, it threatens to bring down the system by discouraging investment in oil production.
When we graph of the cost of production of resources subject to diminishing reserves, the result is similar to that shown in Figure 1.
What happens with diminishing returns is that cost increases tend to be quite small for a very long time, but then suddenly “turn a corner.” With oil, the shift to higher costs comes as we move from “conventional” oil to “unconventional” oil. With metals, the shift comes as high quality ores become depleted, and we need to move to mines that require moving a great deal more dirt to extract the same quantity of a given metal. With water, such a steep rise in diminishing returns comes when wells no longer provide a sufficient quantity of water, and we must go to extraordinary measures, such as desalination, to obtain water.
During the time when cost increases from diminishing returns were quite minor, it generally was possible to compensate for the small cost increases with technological improvements and efficiency gains elsewhere in the system. Thus, even though there was a small amount of diminishing returns going on, they could be hidden within the overall system.
Once the effect of diminishing returns becomes greater (as it has since about 2000), it becomes much harder to hide cost increases. The cost of finished products of many kinds (for example, food, gasoline, houses, and automobiles) starts rising, relative to the income of workers. Workers find that they must cut back on discretionary expenditures in order to have enough money to cover all of their expenses.
More http://ourfiniteworld.com/2015/03/09/the-oil-glut-and-low-prices-reflect-an-affordability-problem/
HIGH PRICED OIL DESTROYS GROWTH
According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf
$ 25 - 35? WTF?
Hmmm,
I have suggested most commodities will go down for several years now as well as a strong dollar. No surprise here.
And I will restate a prediction. While others are bitching about high beef prices, I suggest they will also decline. Sounds good? It isn't. Most of us won't be able to afford gas, PMs or beef at lower prices. The Great Greater Depression ahead.
You got it.
An uncontrolled deflationary spiral is an assured fiasco
for everyone... including Uncle Sam's balance sheet.
Note: I said "uncontrolled". A mild deflationary trend
is no worse than a mild inflstionary trend. When it gets more
than "mild" watch out for the "delta-V"... Kills everytime!
Yes, the actual world wide oil production number is significant.
And the world wide consumption number is also significant.
Funny no one mentioned that consumption number.
Guessing about oil? Try guessing about gold, silver and everything else!
we really should start guessing the oil price in Chinese yuans, since $$ are going to undergo hyperinflation soon
Demand destruction should lead to lower prices, but with the Fed involved, only Goldman insiders know what will happen next.
all commodities go down headed into a depression. Now that we give unlimited money to the tichest to build and buy things with no thought to profit....I see oil at $10!
Watch the Dollar. If the Dollar rise, oil falls. If the Dollar falls, oil rises.
To me this is a no-brainer... Let's say it takes (to be safe) three years at best for the price to return to "normal" at $80bbl. Is 100% growth in three years not enough for you? Seriously? Can you imagine a scenario where oil stays at this price for even a couple years? If yes, you break even at worst. If not you get huge returns in minimal time (100% in three years is absurd growth... unless you're enron)
Counter arguments please.
Topping off for the Iran vs House of Saud war, is a very probable
When the tanks are full, company's, governments, could purchase oil and store it in Saudi Arabia for latter delivery. thus feeding HOS money while cutting out all other undesirable countries.
In effect continuing to squeezing Iran, Iraq, Yemen, Libya, Venezuela, Syria, Isis.
As the squeeze progresses Saudi oil pipeline will explode, oil goes to #200 US/EUR and economy's fall.
And in the background we hear Hillary, Obama and the democRATic party yell, Allah Akbar!
In the US, the largest amount of oil is used for transportation. If the Trannies are not making money, then they are not haulining, and thus not using oil, regardless of price.
Add FrackLog to the indicators - not kept offishully by anyone yet, but is completed wells that have not been Fracked.
BTW - two observations about oil. It is not very price elastic. We need to be filling up the SPR. And call in the Plunge Protection group.
The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. http://ftalphaville.ft.com/2012/05/02/983171/marginal-oil-production-costs-are-heading-towards-100barrel/
Sanford C. Bernstein, the Wall Street research company, calls the rapid increase in production costs “the dark side of the golden age of shale”. In a recent analysis, it estimates that non-Opec marginal cost of production rose last year to $104.5 a barrel, up more than 13 per cent from $92.3 a barrel in 2011. http://www.ft.com/intl/cms/s/0/ec3bb622-c794-11e2-9c52-00144feab7de.html#axzz3T4sTXDB5
Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html