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Top Factors Undermining Any Oil Price Recovery
Submitted by Alexis Arthur via OilPrice.com,
Global oil prices have returned to a state of flux. This is hardly news to any who follow the oil markets closely and yet prices continue to drive international headlines.
While oil prices are notoriously difficult to predict, it has failed to deter the speculators. There are those warning that the latest dip is a precursor for $40 a barrel, a catastrophe for oil markets in some minds. On the other end of the spectrum are the optimists betting on a return to $100 by 2020. The World Bank has taken a typically middle-of-the-road approach, with forecasts of $57 a barrel in 2015.
That said, given Iran’s potential revitalization, Russia’s murky outlook, and U.S. shale supply limits uncertain, prices will be responsive to supply and demand trends; at least in the short to medium term.
The Iran deal could be a game changer for global oil supply. Lifting oil sanctions could pave the way for foreign capital to return to the country, contributing to a resurgent Iranian oil industry.
The Iranian oil ministry is optimistic about the nation’s recovery, predicting 400,000 barrels per day of exports almost immediately and an additional 600,000 barrels per day over six months.
Such a swift return is unlikely.
Iran was once the second largest oil producer in OPEC before Europe banned purchases of its crude in 2012. Since then, oil production has declined from around 3.6 million barrels per day in 2011to just 2.85 million barrels today.
The nation is still OPEC’s fourth largest producer but its output is far closer to Mexico’s than Saudi Arabia’s. Oil exports have declined by 1 million barrels per day during this time.
Iran has significant onshore and offshore reserves but has lacked the technical capacity and capital to develop them in line with its ambitions.
Executives from Shell have reportedly met with Iranian officials to express their interest in re-entering Iran. U.S. companies, meanwhile, risk losing out unless Congress decides to lift its own decades-old restrictions on dealing with Tehran.
In an era of low oil prices, Iran has among the cheapest oil to produce at an estimated cost of $5 - $10 per barrel. The nation’s strategic geographic position between European and Asian markets is also attractive. European and Asian companies - unfettered by the limits on their U.S. competitors - will no doubt take advantage of this high-risk but high-reward opportunity.
Still, a return to 2011 production levels will take time, as will its impact on global oil supply and prices.
That Russia’s economy is struggling is no secret. But in spite of severe economic and political crises, Russia’s crude output has continued to grow. Earlier this year, Lukoil Vice President Leonid Fedun warned that Russia’s output could fall by 800,000 barrels per day. A lack of investment may indeed eventually catch up with Russian production but in the meantime, like the U.S., oil supplies will continue to rise.
U.S. oil producers have also defied expectations as shale oil production continues apace. Efficiency gains and cost savings have allowed innovative producers to elude assumptions about the price floor for shale, for the moment at least.
Of course, all is not rosy for shale producers. Tens of thousands of oil workers have lost their jobs, companies have lost value, and some have gone bust. And the question remains how low they can really go and how long they can last – particularly those already incurring losses but holding out in the hope of a price recovery.
Still one would be foolish to dismiss shale producers’ resilience and without a doubt the U.S. will remain a key player in the global oil supply outlook.
In the longer term, another factor too often left out of the debate is the knock-on effect of slashed exploration budgets across the oil majors and national oil companies. Projects have been suspended, and companies are demonstrating increased caution in frontier – high risk – areas. This is a trend already apparent in the Western Hemisphere as Brazil, Mexico, Argentina, and others jockey for a smaller pool of exploration funds.
But this is just the supply-side of the equation. On the demand side, the International Energy Agency’s latest oil market report shows demand slowing in 2016. This would indicate a continued resistance to oil prices returning to anything resembling the pre-2014 fall.
Overall, the trends may be clear but the prices are not. For planning purposes alone, the only thing worse than low oil prices is market volatility and uncertainty will continue to rule in the short to medium term. In the meantime, oil price speculation – while entertaining – is a poor reflection of market reality.
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My guess is a bad economy and too much oil production. An ugly picture.
Two factors; two words: NO JOBS
WTF - Will anybody ever recognize the basis of the economic slowdown and resource comsumption downturns is all to do with slowing population growth alongside the well known debt created in place of the missing population growth.
http://econimica.blogspot.com/2015/07/global-us-population-growth-and.html
&
http://econimica.blogspot.com/2015/07/federal-reserves-therapy-has-nothing-to.html
.
Funny that, I thought they were just pissing away OPM since they could still borrow ...
Regards,
Cooter
prices responsive to supply and demand trends?? oh good, i thought there were no markets left yet to be corrupted
Gasoline production here in the US is up 6.2% over last year and gasoline reserves are still drawing down. I would say that is robust demand.
http://www.eia.gov/petroleum/weekly/
Our traffic is as thick as ever, including tractor trailers. So, at least for my area, any lack of demand must be driven by improved fuel efficiency.
Thinking back to the credit seizure of '08/'09, the rest stops and truck stops were virtual ghost towns compared with the traffic I see today.
Supply and demand, more supply and less demand should be awesome. A lot of tankers are basically floating oil storage now, hoping for better prices. The problem is Cushing can build more storage quickly, but building a ship, not so much and with the way world trade is going I wouldn't be surprised to see a lot of dry cargo ships converted to oil storage.....
Can't be insured,ata reasonable cost, so I doubt that conversions will happen.
On the demand side, the International Energy Agency’s latest oil market report shows demand slowing in 2016
For fuck's sake, give us some numbers. Not some hand waving arguments. How much will production increase and what will happen to demand?
Another worthless article from Oilprice.com. Just when you think it cannot possibly get worse, it gets worse.
Thank you for exceeding my expectations.
OP is the Barron's of energy investing. Just have to know how to read through what they publish ... has value, just not face value. :-)
And sometimes they have guest content that is pretty good.
Regards,
Cooter
The oil "price" is manipulated to fuck squared and back via futures contracts (I just deleted the term "market") exactly like the precious metals. How else could it occur in August 2008 and August 2014 that "supply" suddenly exceeded the "demand"?
The oil "price" is what the manipulators decide it will be and nothing else.
Duplicate. The postman always rings twice - especially after a glass of wine.
Sounds like someone was caught short WTI, LOL
My solar panels, for which I paid nothing, are a net supplier of power to the grid. Just saying.
And we're listening. If you have a source of free solar panels, for which as you said you paid nothing, please say that also. I'm thinking of forming a new buisness model based on the information.
The data is fraudulent, but that never concerned that cunt yellen, nor her alliance of banks bidding oil up.
So then you don't believe the storage reports at all? There could be no oil in the tanks and they are reporting large reserves or they could be overflowing and reporting less oil in the tanks? Either way, you have no idea of what the price of oil should be based on storage because you just don't believe the reports at any time.
THE END OF CHEAP OIL Global production of conventional oil will begin to decline sooner than most people think, probably within 10 years Feb 14, 1998 |By Colin J. Campbell and Jean H. Laherrre http://www.scientificamerican.com/article/the-end-of-cheap-oil/
HOW HIGH OIL PRICES WILL PERMANENTLY CAP ECONOMIC GROWTH For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil production has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies. http://www.bloomberg.com/news/articles/2012-09-23/how-high-oil-prices-will-permanently-cap-economic-growth
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
BUT WE NEED HIGH OIL PRICES: Marginal oil production costs are heading towards $100/barrel http://ftalphaville.ft.com/2012/05/02/983171/marginal-oil-production-costs-are-heading-towards-100barrel/
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/
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
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
THE PERFECT STORM (see p. 59 onwards)
The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel. http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf