$60 Oil Will Not Last Long

Authored by Peter Tertzakian via OilPrice.com,

U.S. oil prices are treading water above $US 60/B (WTI) again, the first time since 2015.

 

https://www.zerohedge.com/sites/default/files/inline-images/20180112_WTI.png

Crude oil has a northerly wind in its sails, though everybody on board this fickle ship is cautious about its compass bearing. Since 2013 we’ve seen the price of a barrel peak to $110, capsize to $26, and roll back to $60.

The gyrations make sense.

Here is what we’ve learned over the past decade:

Above $80 is too high. Cash flow is ample. Investors gladly fund more drilling rigs. Pump jacks work hard. Too much productive capacity is added. But costs inflate quickly too—competitiveness diminishes within the oil industry, and also encourages alternative energy systems. Consumers become more miserly and demand growth decelerates.

Under $40 is too low. Cash flows dry up and investors jump ship. Rigs head back to their yards with drooping masts. Costs deflate, rapidly decimating employees and equipment in the service industry. Production begins to decline in marginal regions. State-owned enterprises are unable to pay their ‘social dividends’. On the consumption side, conservation and efficiency lose meaning; consumers revert to guzzling oil like free refills of coffee.

So, simplistically a mid-range price of $US 60/B should represent what oil pundits call “market balance.” It’s the elusive price point where daily consumption is equal to production; inventory levels are neither too low nor too high; and economists’ cost curves intersect with demand.

Yet, if there is one thing 160 years of the oil age teaches us, there is no such thing as a mid-range balancing point in oil markets. Everyone either rushes to one side of the ship or the other, almost always at the wrong time.

As in any marketplace, oil producers and consumers respond to price signals. Those on the using end of petroleum products respond to the changing winds of price fairly quickly. On the other hand, much of the world’s big producers are not like nimble sailboats, rather they act like big supertankers that take time to change direction. In other words, the time between investing capital (or not) to realizing changes in production is slower.

Even in the last 10 years, the frequency of price data (WTI) shows clustering around either the $45 to $50/B grouping or the $95 to $100/B range (see Figure 1). Of course, costs have come down significantly, and the shale revolution has not only lowered the cost curve, but also shortened the cycle time of responding to price signals. So, in theory it’s easy to believe that the low end of the price spectrum may be the new norm.

(Click to enlarge)

But that’s theory. In the oilfields of the world, much of the changes in cost have been a result of taking margin out of the service industry, something that goes up and down with the same waves that bob price. Further, productivity gains seen in US and Canadian shale plays are not the norm in the world—most oil producing nations are rocking the boat by shutting off oil valves rather than innovating on their processes.

Today’s choppy world of lower extraction costs, process innovation, investor apathy, disruptive alternatives and environmental pressures, have made us skeptical in believing in the possibility of higher prices. And when prices are high our minds become landlocked into thinking about endless demand growth, geopolitics, cartel collusion, steep decline rates and the necessity of high levels of capital investment.

I’m only skeptical of one thing: That world oil markets will balance around $US 60/B. Historically, oil prices have not anchored in the calm of mid-ranges for long. So, today’s price is only a way point to either $US 45/B or much higher.

Comments

Dukes Jan 12, 2018 8:17 AM Permalink

Anything above breakeven for shale fucks OPEC.

Anything below breakeven for shale fucks OPEC.  

Let's see where this goes.  

Hubbs Jan 12, 2018 8:21 AM Permalink

What about the dollar index?

Faster than advertised shale oil well depletion rates?

 

Distortions in price due to need for shale oil drillers to drill solely to pay iff interest (not even principle) on their huge debts?

 

Banks requiring shale to drill like no tomorrow so that drillers can keep some sort of cash flow so their loans don't have to be written off as bad debt?

 

Way too many variables here.

 

 

 

 

 

 

deuce awesome Jan 12, 2018 8:25 AM Permalink

Noone can call oil. People can predict one way or the other and one of them will be proven right. 

I never saw the crash of 15 coming in a million years. 

I still say though all it will take is something to "happen" in the shithole middle east and speculators will hop back on the oil train. I guess they are all on the crypto train currently.

VangelV Jan 12, 2018 8:26 AM Permalink

Too many people are deluded by cash flowing into drilling.  The simple fact is that to be profitable, you need a formation that can yield oil at a decent return.  Such formations are scarce so we will need to look for other sources that make economic sense.  And alternatives do not fit the bill.  

LawsofPhysics Jan 12, 2018 8:54 AM Permalink

LOL!  Again, talking about the "price" of anything in the absence of a mechanism for true price discovery is a fool's errand. 

 

Ask yourself, can you do and make things of real value with oil (reduced hydrocarbons and consumable calories).

 

Davidduke2000 Jan 12, 2018 8:57 AM Permalink

there is no reason why oil is not $80 especially the us has no oil and the fracking bullshit is not viable.

the us must fill its reserves as it is facing 2 major wars and would like to fill them on the cheap, however the world too know the story and want to fill up too, I expect the oil will move fast toward the $80 mark.

I am a Russian spy and I know the real story.

Cloud9.5 Jan 12, 2018 9:11 AM Permalink

Oil is the linchpin that holds everything together.  Without it, the transportation sector collapses taking down everything else with it.  This fact is not lost on the banking cartel and the governments they have captured.  The decline in legacy fields is well documented.  In a real market, prices should rise exponentially as the result of increasing scarcity and rising extraction costs.  What we are witnessing is something altogether different.  We are seeing the necessity of more and more oil rigs to continue production.  This simple fact reveals that extraction costs are rising.  At the moment, the market is awash in product.  This is a direct result of low interest unlimited credit.  Debt is covering operating costs.

Arthur Anderson bookkeeping has made its way into the oil patch.  Unlimited debt has increased production at a moment in history when production should be declining as a result of rising production costs.  In a real market these rising production costs would bring about higher prices resulting in demand destruction. 

The limits on this artificial reality do not arise from profit margins or rising debt.  The limits arise from the ever increasing extraction rates of a finite resource.

Imagery Jan 12, 2018 9:42 AM Permalink

why would any self-respecting anal-ist use only the past 10 Yr period for projecting oil prices; or much of anything for that matter given this period is the most egregiously fraudulent and manipulated by USG and FedRes-TBTF WS in teh recorded history of man.

Oil is easily manipulated.  By the OPEC Cartel and Russia-Venezuela as by TBTF WS and their wholly-owned private FedRes; inspite of its' name.

Oil will be range-bound in teh mid-term to $40 - $65 inspite of every interested party's efforts at theft of every kind in this lawless world.

kavabanga Jan 12, 2018 10:10 AM Permalink

WTI crude breaks major resistance and hits 3Y highs, bulls on verge of retracing 50% Fibos, minor trend forms whipsaws – Uphold long hedges: 

Chart pattern formed- Breach of rising wedge resistance on daily plotting, Symmetric triangle resistance break-out and extension of consolidation phase by retracing more than 38.2% Fibonacci retracements, the uptrend is now on the verge of retracing upto 50% on monthly terms. 

In this process of the bull run, WTI crude prices have hit 3 years highs, Doji has occurred exactly at wedge resistance of $61.88 levels to counter these rallies. But bulls have shrugged off these bearish indications and managed break-out decisively with the stern bull candle with the big real body. 

For today, the rallies are dragging further to new the highs of $64.05 levels, both leading as well as lagging indicators are substantiating these buying indications. 

But on the contrary, let’s have a glance through the major trend that was bearish now has gone into consolidation phase that was jerky way back in mid-2015.  From massive slumps from the peaks of $114 levels shouldn’t be disregarded and jumping to conclude this as a robust uptrend would be unwise, it is just 38.2% retracements. 

Having mentioned that, we aren’t a pessimist, for now, more rallies on cards upto another major resistance at $70.18upon bullish EMA crossover. 

Major supports are observed at $62.54 levels. 

While both leading oscillators have been converging upwards but indecisive currently. 

The sustenance above DMAs with bullish MACD crossover indicate more rallies that head for next resistance. 

Trade tips: We’ve already advocated adding longs using futures contracts of near-month tenors with a view to arresting upside risks, we reiterate that it is wise to use dips to deploy long hedges using these WTI derivative contracts.

adr kavabanga Jan 12, 2018 10:53 AM Permalink

None of that matters or is even applicable to the real world and that is the problem, The market is 100% synthetic and trades based on total horseshit divined from a plot of points on a fucking chart.

Traders had to figure out how to make money off manipulating something that should be priced on pure fundamentals, so they added a million instruments of fraud and deception to force commodities into behaving like the other synthetic paper of Wall St.

In reply to by kavabanga

whatisthat Jan 12, 2018 10:29 AM Permalink

i would observe crude oil is barely worth $15.00-20.00 per barrel today (i.e., or for the next 10 years).  It has been reported, crude oil has been/is significantly manipulated higher through speculation markets (and collusion by corrupt entities??). These for profit speculators likely have a direct impact to increased pricing at the gas pump and for heating oil which has had a negative impact on American taxpayers for over 40 years...

SelfGov Jan 12, 2018 11:25 AM Permalink

Since December of 2014 oil companies have fracked more than 2,206 new wells in North Dakota's Bakken region but are producing 1,366,260 fewer barrels of oil per month.

snblitz Jan 12, 2018 1:20 PM Permalink

I like the strategy:

The author's prediction is that the price may go up or it may go down.

But the one certainty is that the price will not stay the same.

Very insightful /s