Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

Update on oversupply of oil – 12/16

[youtube:https://www.youtube.com/watch?v=6JJDXcu9KNM%5D

Lots of news lately on what is going on with crude oil. Here are a few articles of particular value for me: zombies appearing in the oil patch, low prices are due to worldwide oversupply and thus will likely continue a while, increased production and thus competition by producers will likely keep prices low.

12/10 – Reuters – Zombies appear in US oil fields as crude plums new lows – Here is a phrase that will make OPEC happy: zombies, in the context of the energy industry. That refers to a drilling company with such poor income that it is using all its cash to cover interest payments. That leaves no cash for drilling new wells.

Article says there is an increasing number of zombies in the US shale field. I previously mentioned the weakest companies are entering bankruptcy. The next round of companies, which are still weak, are barely covering debt payments. One mentioned company has enough cash plus new cash flow to cover current expenses and debt payments for three years. That doesn’t some of such a bad deal, but is still a bad place to be.

Those companies who are zombies won’t be seeing their existing wells vaporize, their leases evaporate, or the vast amount of oil that is under their leases dissipate. The oil, the leases, and the pumpjacks can be bought by stronger players, who will make a fortune when prices eventually go back up to something approaching equilibrium, wherever that may be.

Wrong forecasts on oil prices

12/10 – Wall Street Journal – What Went Wrong in Oil-Price Forecasts? Actual oil prices have proved forecasts wrong. A graph in the article shows a curve of futures prices at the end of 2013, 2014, and 2015. That price information reflects the markets best estimate of future oil prices. Neither the 2013 nor 2014 pricing curves even came close to prices that are in play today.

Article suggests the reason for this is a supply driven price drop. It isn’t just Saudi Arabia production that is at a record high and pushing higher. Other members of OPEC are increasing production. In the US, production is the highest level of several decades and has barely declined off the peak. Article points out that Canada, Russia, Norway, and China are going to have increased production this year.

Looks like production is increasing almost everywhere. Article points out that a supply driven imbalance in the market usually lasts a very long time, perhaps years. The contrast is a demand driven drop, such as the 2008/2009 recession, from which the market recovered quickly.

If that analysis is correct, crude oil prices will continue lower than everyone expects for a longer period of time that everyone expects.

Expect supply to remain high and prices low

12/15 – Daniel Yergin at Wall Street Journal – The Global Battle for Oil Market Share – It is looking very likely that the US will end the foolish ban on exporting crude oil. That will increase competition for crude on the international market.

Iran will be gearing up its exports as soon as it checks off the few remaining requirements which will then allow removal of all sanctions on a major financier of terrorism.

Other articles I’ve read suggest they want 1 million bopd but observers think they will more likely only produce half a million. Still, that would be a lot of oil coming on the market.

Expectations are lifting the US export ban would reduce the discount on crude in the US but won’t affect consumer prices at the gasoline pump. In addition to increasing income for US producers, that would also likely lead to an increase in production from the US shale fields.

I chuckled at the comment from the chair of the Senate Energy Committee:

Why remove sanctions on Iranian oil as part of the nuclear deal, but leave “sanctions” on U.S. oil exports?

Great question. Hopefully the last half of that oddity will soon be fixed.

Combine all those factors with OPEC, I mean Saudi Arabia, opening the production tap as wide as they can, means that overall there will be a lot more oil on the market next year which in turn means prices will stay low for a long time.

Recap of US production

Here’s a recap of past production in the US and guesses for the future. Of course keep in mind that while guesses from Mr. Yergin are still guesses, his are probably the best guesses you will find.

Mr. Yergin points out production in the US increased 4.6M bopd from 2008 until April 2015. Production is down about 0.4M bopd between April and now. He estimates production will drop from 9.3M bopd in 2015 to about 8.8M bopd in 2016.

Here’s a recap of those numbers.

Production:

  • 4.7M  – approximate production in 2008 (calc’ed as 9.3M – 4.6M = 4.7M)
  • 9.3M – average in 2015
  • 8.8M – average in 2016

Changes:

  • +4,700K bopd – increase from 2008 to 4/15
  •     (400K bopd) – decline from 4/15 to 12/15
  •     (500K bopd) – decline from 2015 to 2016

 

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