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The World has Too Much Oil?
Oil prices have plunged nearly 20% this month
The world still has too much oil.
China's crashing stock market and the meltdown in the metals market may be getting all the attention lately, but crude oil is quietly crumbling once again. Oil has plunged nearly 20% this month alone and it briefly dipped below $47 a barrel on Tuesday. That leaves it flirting with the March lows, which was the weakest price since 2009.
The latest selling has been fueled by the same dynamics that caused oil to tumble from $100 last summer. The American energy revolution has created a massive supply glut and the tepid global economy is depressing demand growth.
The good news for American drivers is industry insiders expect these dynamics to persist, keeping energy prices cheap for some time. Thousands of U.S. gas stations will have sub-$2 gasoline prices by December, according to Tom Kloza, chief oil analyst at the Oil Price Information Service.
Supply glut persists: Oil prices have been on a rollercoaster as the U.S. and Saudi Arabia battle for market share of the global energy industry.
Crude plunged from $107 a barrel in June 2014 to as low as $43.46 in March. Then they rebounded above $61 a barrel on hopes the supply/demand imbalance had been fixed as U.S. producers dialed back drilling. That turned out not to be the case as American production ramped back up.
"U.S. output has been remarkably resilient. Any kind of price rise will be met with a wall of output that will restrain any further price rise," said Vincent Piazza, a senior analyst at Bloomberg Intelligence.
The U.S. is currently pumping 9.5 million barrels of oil per day -- up by a million from a year ago.
"The recovery only emboldened the shale crude oil producers. So you saw another surge of production," said Walter Zimmerman, chief technical analyst at United-ICAP.
Production may also be on the rise in Iran at just the wrong time. If sanctions are lifted, Iran's nuclear deal with the West could add hundreds of thousands of barrels of oil to the global market -- each day.
Turmoil in China keeps lid on demand: The demand picture doesn't look much better. Not only did the U.S. economy actually shrink during the first quarter, but estimates for global growth continue to be whittled lower.
China is at the heart of these concerns. Its growth rate has gone from explosive to just good -- and many fear it's only going lower. That slowdown means China can't be relied upon to gobble up the excess oil created by shale. The crash in China's stock market -- which resumed this week after a brief respite -- is only increasing concerns about the country's underlying economic health.
"China is the Michael Jordan of emerging market growth. If Michael Jordan gets a fractured foot, it really damages the case for growth in consumption," said Kloza.
Energy stocks renew tumble: Just like gold and copper, oil continues to be dinged by the rise of the U.S. dollar. A stronger greenback makes commodities that are priced in dollars more expensive for overseas buyers.
All of this is taking a toll on pockets of the U.S. stock market. Oil jumped 1.5% on Tuesday, sending the S&P 500 energy sector sharply higher. However, despite those gains the group is still down 6% so far in July and 12% on the year. Some of the biggest losers in the broader S&P 500 this month include energy stocks like Chesapeake Energy, (CHK) Ensco (ESV), Marathon Oil (MRO) and Apache (APA). All of those names are down about 20%.
Related: Mining stocks are getting killed as gold, metals plunge
So where are oil prices going next? It's pretty difficult to find a catalyst for a strong rebound in prices over the next nine months, said Kloza.
Zimmerman believes oil could soon retest the March low of $43.46 a barrel. If it breaks below that, the next logical level is $32.40 -- the basement put in during the 2008-2009 Great Recession.
"It could be a lot worse than that because there's a lot more shale oil production now than there was in 2008," said Zimmerman.
His most bearish case calls for panic selling to briefly send crude spiking down to $25 a barrel.
We live in a time in which decent and otherwise sensible people are surrendering too easily to the hectoring of morons or extremists.
- TheLagerLad
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Re: The World has Too Much Oil?
Funny you would post this article.I came across this quarterly investment newsletter last night and pages 8-23 is some of the most depressing writing I've read in recent memeory. Particularly the parts about climate change and potential disruption to the food supply.
But there was this part about oil and how we seem to have so much more in our supply today when in reality we've been using more oil than we've been pulling out of the ground since 1982.
If we keep on pumping more than we find, we will certainly run out of cheap oil. Eventually. But this data is also unsatisfactory. Given this exhibit, how
is it possible that since 1982 (the first year we pumped more than we found) global reserve life has
risen by 60%, despite oil demand growing by 1.5% a year? (Which dichotomy has led the bulls to
ignore all negative data and assume that somehow we will always have enough oil.) Well, this is why.
When the original giant Saudi fields were being discovered, the first oil volunteered to bubble to the
surface virtually free of cost. Why bother to expensively tease out more with so many new fields being
discovered? The ultimately cheap recovery rate was only about 15% of the oil that was there, but who
cared? By 1982, U.S. production, for a while the largest in the world, had famously peaked out (in
1970) so there was a modestly growing interest globally in capturing more, and recovery rates had
risen to around 20% (all numbers here are rounded). And what are the recovery rates today? Now, in
comparison, we torture oil fields with expensive and energy-intensive secondary and tertiary recovery
tricks: compressed CO2, water under pressure, high-pressure steam, and, I suppose the ultimate torture,
fracking – shocking and fracturing the rock with the encouragement of water, sand, ceramic beads, and
an often secret mix of toxic and non-toxic chemicals, a process that is considerably more expensive
than actually drilling the original well. With these efforts (and excluding fracking) we now aim for 60%
recovery, with a new outlier from Statoil in the North Sea aspiring to 70%. What this means is that all
of the oil fields ever discovered could now yield three times the oil originally counted on, as recovery
has risen from 20 to 60%. To keep the math simple, this is about equal to a 3.5% a year compounded
increase in reserves since 1982. With demand only growing at 1.5% a year, rising recovery rates have
increased recoverable reserves to 50 times current global production, up from 32 times in 1982. Not
bad. In fact, reserve life would have slightly increased with no new finds at all since 1982.
But, here is the problem. The cost rises exponentially as one moves up the recovery curve, and
somewhere between 75 and 85% recovery we are unlikely to be able to afford the cost. In fact, the
energy required to recapture more starts to overtake the energy produced. Checkmate. A move from
60% recovery to 80% (to be friendly) in the next 35 years would represent a 33% increase, or about
0.9% a year. This is obviously a big step down from the previous 3.5% a year, but it is still good news
and bad news. The bad news for oil bulls is that this recovery game, which we might call the second
derivative negative to production, is playing itself out quite fast. The good news is that with slower
global growth and more emphasis on energy efficiency and a probability of some carbon tax increases,
global oil demand may settle down to around 1% a year for the next 10 to 15 years. At that level of
increase in demand, even modest continued increases in recovery rates will keep us in oil even if
no new oil is found for the next 15 years. However, here’s the snag: Increased recovery rates will
take steadily increasing prices, which we may or may not be able to afford. And if these price rises
occur, they will act as a continuous drag on global growth rates. Beyond 15 years, the resource and
environmental news gets better because cheaper electric vehicles and changes in environmental policy
will enable steady decreases in oil demand, and the remarkable insight of Sheik Yamani, Saudi Arabia’s
oil minister, three decades ago will prove to be right: We will not run out of oil any more than the
Stone Age ran out of stone – we will simply find better fuels.
I think you're going to see a lot of different United States of America over the next three, four, or eight years. - President Donald J. Trump
- Rongone
- Sentient Being
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Re: The World has Too Much Oil?
Two factors influence the worldwide price of oil: speculators and production manipulation. Despite the recent "boom" in U.S. Fracking, due to the expense of the extraction process causing the shutting down of drilling operations in the U.S., and the Saudis increasing production to keep the price low, things are going to change. Here are a couple of articles that provide a perspective on what the future may hold:
By John Kemp
Jan 7 (Reuters) - Unless prices recover, U.S. oil production will start falling before the end of 2015 as new drilling is insufficient to replace declining output from wells completed in 2013 and 2014.
Future production depends on the rate of decline from existing wells (known as the decline curve) and the average age of old oil wells as well as the number of new ones drilled and their productivity.
Decline curves for typical shale wells in the Bakken, the Permian Basin and the Eagle Ford are all widely available on the internet, as are basic data on the number of wells in each play and their approximate age.
In the short term, U.S. oil production is set to continue rising because there is still a backlog of wells waiting for fracturing crews and completion after the record drilling during the first ten months of 2014.
In North Dakota, for example, there were around 650 wells waiting on completion services at the end of October 2014 because drillers had outpaced completion crews, according to the state's Department of Mineral Resources.
As these wells are completed, there will be a significant increase in reported output because newly completed wells yield extremely high rates of production in the first few days and months after starting to flow.
But as the backlog is cleared, production will plateau and then start to fall, as new drilling and completions fails to keep up with the declining output from older wells.
RECENTLY DRILLED WELLS
Daily production from a typical Bakken well falls by around 65 percent by the end of the first year, then another 35 percent by the end of the second, 15 percent by the end of the third, and around 10 percent per year thereafter, according to state regulators (link.reuters.com/kup73w).
There are currently around 8,600 wells producing from the Bakken shale, of which more than 2,000 were drilled and completed in 2014, with another 1700 dating from 2013 and 1700 dating from 2012.
Almost a quarter of Bakken wells are under a year old and their output is set to decline by as much as two-thirds in the year ahead.
In total, more than half the wells in the Bakken are less than three years old, and these rapidly declining wells account for the vast majority of oil output (link.reuters.com/nup73w).
To replace the declining production from this large inventory of recent wells, companies would need to drill more than 2,000 new wells in 2015.
But drilling rates have already started to fall sharply and the number of new wells will fall far short of the replacement rate unless oil prices improve.
The number of rigs active in the state has fallen to just 169, down from 191 in October, according to the Department of Mineral Resources.
Further declines in drilling are virtually certain in the months ahead as rig crews come to the end of their existing contracts.
CASH CONSERVATION
Sweet crude from the Bakken fetched less than $32 per barrel on Jan 6, and sour crudes were worth less than $23, according to posted prices from Plains Marketing.
At these price levels, there are no parts of the Bakken, whether in the core areas of the play or on the periphery, where drilling new wells makes financial sense.
Most of the small and medium-sized independent oil producing firms which dominate shale plays rely on borrowing to fund new wells and already carry a high debt burden.
The imperative in the current environment will be to conserve as much cash as possible by limiting the cost of new drilling and abandoning plans to drill wells which are not profitable (which is most of them at current prices).
The same pattern is repeated with only minor differences in the Permian Basin and Eagle Ford in Texas, the two other major shale plays.
In both, there are large stocks of relatively young and rapidly declining oil wells drilled in 2013 and 2014. Meanwhile rigs are being idled as small debt-laden exploration and production companies try to conserve cash.
Across the United States, oil production has surged by more than 3 million barrels per day in the last four years and by more than 2 million in the last two years alone.
But almost all of that production increase has come from recently fractured shale wells which are now declining rapidly and must be replaced to sustain let alone grow output.
However, drilling rates are plummeting. The industry has idled almost 130 oil-directed rigs (8 percent of the total) since Oct 10, according to oilfield services company Baker Hughes.
Oil-directed rigs are being idled at the fastest rate since the financial crisis in 2009 and before than 1991 and 1988, and hundreds more will be taken out of service in the next few months.
The net result is that production will be declining month on month by the end of the year, though in the next few months it might continue increasing.
PRODUCTIVITY AND COSTS
Some analysts have questioned whether U.S. oil output will indeed fall, arguing improvements in drilling and well productivity will offset the smaller number of rigs operating and wells drilled.
That seems implausible. Given the large stock of comparatively new wells, rapid decline rates, and sharp drop in rigs operating, a truly enormous improvement in productivity would be needed to keep production flat let alone on a rising trend.
Costs will come down as the price of everything from rig hire to fracking sand and contractor rates are renegotiated. But it would need an epic reduction in costs to make shale oil profitable at less than $45 per barrel in Texas and Oklahoma and $35 per barrel in North Dakota.
Analysts with an optimistic view about production (and a bearish view on prices) can point to two important examples where output was flat or continued to increase despite steep price falls.
In 2009, oil output in North Dakota and the United States flattened though it did not fall much in response to plummeting prices amid the financial crisis and recession and a slowdown in new drilling.
And U.S. natural gas production has continued to rise each year since 2008 despite the depressed level of gas prices and the number of gas-directed rigs falling by more than three-quarters.
Neither of these cases should provide much comfort, however. In 2009, the inventory of recently drilled shale wells was small, less than a thousand, accounting for just a fraction of national oil output, and prices rebounded very quickly.
U.S. gas production has been sustained despite low prices and a fall in the number of gas-directed rigs because of the huge increase in associated gas output from oil wells.
U.S. gas production been sustained by the oil boom. Shale oil producers have no such support. On balance, it is more likely than not that U.S. oil output will be declining by the end of the year unless prices rise from current levels. (Editing by William Hardy)
Saudi Arabia to Cut Oil Production Levels at the End of Summer
The world's number one oil exporter, Saudi Arabia, is planning to scale back oil production at the end of the summer. The latest reports suggest that Saudi Arabia will reduce its crude output to 10.3 million barrels a day, cutting around 300,000 barrels per day. According to reports, the country will slow its record-breaking output in response to domestic demands, as the need for air conditioning subsides in September. The Street's Jim Cramer said that Saudi Arabia's reductions will have a dramatic impact on the price of oil, despite the potential Iran deal on the horizon. Cramer said the cutback will make it 'unlikely we will visit the $43 level again. We all know that our production has already peaked and I expect it to decline pretty precipitously.' He added that the latest developments provide 'the missing piece of the puzzle, that should cause oil to trade at these levels and not go much lower.' Saudi Arabia currently produces around 10 percent of the world's crude oil.