Oil/Gold Prices Will Go Up This Week!

[markrmau]

Re: Oil....Gold prices Will Go Up This Week!

GM thing could be interesting. I understand they are being interviewed over accounting practices. If anything is uncovered, it could cause turmoil in the bond market as I understand there is 100's billions$ of GM debt (currently classed as junk anyway though) on the market.

Should be good for gold.

 

[TjamesX]

Re: Oil....Gold prices Will Go Up This Week!

Just came across this thread and thought it would be worth continuing the discussion (on the Oil side of things)

I have gone Long AWE and ARQ today, I think the oil price will rebound.... long term. Unfortunatly I got out of HDR too early today for a 6% loss after being spooked by WPL 10% sale (the price has held up well considering) - one of those unfortunate things of investing - buy in, a few days later someone wants to sell 10% of the company....

I have recently moved into the energy industry (commercial analyst by title). Two things I have realised in that short time;

1) we live in a very lucky country as far as energy goes (I'm talking Coal & Gas here)
2) people don't realise how lucky we are and how much we rely on it.
3) I believe petrol prices will rise because transition technologoies are not developed enough and will take time to materialise.

Oil is the most condensed form of energy (hang on, I just thought of Uranium hmmmm), OK Oil is the most condensed for of energy available that can be easily converted . A transition from this form of energy to coal, gas or uranium for transport (ie electric or gas powered transport) will cost more money than high oil prices and they haven't worked out electric/gas powered plane transport as yet! Then we move onto oil refined products. Do we have a transisiton technology for plastics yet???

In the end we have to come to grips with the fact its a limited resource. There can and will be alternatives, but any transition will cost money - money that the consumer will have to pay. The only way to get cheaper energy is if someone seriously cracks the renewable game.... but its proving to be quite hard. You don't want to know how much more expensive wind and solar power are compared to fossil fuels.

And the price of making solar cells in the US has bottomed and is rising (due to commosity price rises).........

 

[michael_selway]

Re: Oil....Gold prices Will Go Up This Week!

atm theres alot of oil and OPEC can increase production quite a bit

so Oil shouldnt rise between 3-5 yrs at least (most likely fall), however every now and then spikes occur liek hurricanes etc

 

[doctorj]

Re: Oil....Gold prices Will Go Up This Week!

atm theres alot of oil and OPEC can increase production quite a bit

so Oil shouldnt rise between 3-5 yrs at least

That's a big, big call.

Like it or not oil is finite and each day we use more of it, not less. All doesn't actually have to run out, the supply just has to slip beneath demand and prices will rise.

I don't think we're going to see US$100+ oil in the next 3 years, but if anything, the average price paid for Oil is going to increase not decrease in the long term.

 

[Smurf1976]

Re: Oil....Gold prices Will Go Up This Week!

atm theres alot of oil and OPEC can increase production quite a bit

so Oil shouldnt rise between 3-5 yrs at least (most likely fall), however every now and then spikes occur liek hurricanes etc

I strongly disagree with you there.

I run my own world oil production model, admittedly not updated this year but still reasonably accurate, and to the best of my understanding there is no significant unused capacity to produce any grade of oil which sufficient numbers of existing refineries can process anywhere in the world including Saudi Arabia.

Except for the Saudis this is backed up by recent US Government stats which show OPEC except Saudi Arabia to be at 100% capacity. It's well accepted that nobody outside of OPEC is sitting on surplus capacity and indeed most of the major non-OPEC producers are post peak anyway.

As for Saudi, they have been consistently unable to produce above the capacity used in my model despite overwhelming incentive in the form of price and all manner of promises to stabilise the market and so on. Once again they ran up production until they hit what I believe to be their maximum (9.6 mmbpd versus historically claimed capacity 10.0 - 10.5 mmbpd which has recently been raised to 10.5 - 11.0 whilst actual production has fallen from 9.6 to 9.5). The last time they were producing significantly above present levels was 25 years ago and even then they only sustained the lower limit of the capacity range they have claimed for decades.

Much of the additional oil relesed to the market in recent years by Saudi is sour, heavy crude for which the world lacks sufficient refineries to process and accordingly it sells at a significant discount. This strongly suggests that they don't have surplus capacity to produce light or medium grades and it is generally accepted by both sides of the debate that nobody outside of Saudi has surplus.

This is not to say that oil is a one way bet. It is not. But I disagree with the notion that there is significant unused production capacity.

 

[doctorj]

Re: Oil....Gold prices Will Go Up This Week!

I run my own world oil production model

Surely this is worth a topic on its own. I'm sure many would benefit from discussions about how to go about building these models and what kind of inputs you use.

 

[Milk Man]

Re: Oil....Gold prices Will Go Up This Week!

Don't the Saudi's pump water into their oil fields to make the oil come out faster too? This would mean that supply in these fields wil not slowly dry up but come to an abrupt halt when water comes out the rigs (because oil floats on water). Is this correct? I dont know about the ramifications are for damage but if you pump too much out of a bore then the bedrock wears away around the casing, and if too much wear occurs then the water will escape out the top of the bedrock and the bore is FUBAR. Im pretty sure thats how it works, bottom line: pump to much then bore is FUBAR.

Saudi's = FUBAR

 

[Smurf1976]

Re: Oil....Gold prices Will Go Up This Week!

Don't the Saudi's pump water into their oil fields to make the oil come out faster too? This would mean that supply in these fields wil not slowly dry up but come to an abrupt halt when water comes out the rigs (because oil floats on water). Is this correct? I dont know about the ramifications are for damage but if you pump too much out of a bore then the bedrock wears away around the casing, and if too much wear occurs then the water will escape out the top of the bedrock and the bore is FUBAR. Im pretty sure thats how it works, bottom line: pump to much then bore is FUBAR.

Saudi's = FUBAR

This is a very complex topic but in short, yes the Saudis do pump very large volumes of sea water into their oil fields, particularly at the Ghawar field (the world's largest).

In simple terms an oil field without enhanced recovery techniques in use will experience a gradual decline in output over a long period of time. A bit like how a torch battery runs down only it's over a much longer time period. In parts of the USA there are "idle" oil field pumps all over the place. Actually they're not "idle" at all but are simply switched off until the oil fills the bore up again and then the pumps are switched on to pump it out and then switched off again. The reason being that the fields are so heavily depleted that the oil just doesn't flow at all rapidly these days.

The reasons are geologically quite complex (and I'm not a geologist) but suffice to say that it's wrong to think of an oil well as being like a straw into a glass of water. Think of it more in terms of a straw stuck in a sponge soaked with thick honey and you'll understand what the problem is with getting it out quickly.

And the thicker (heavier) the oil, the bigger the problem with production rates such that some heavy oil fields are still pumping over a century after they started. They never did flow quickly, they still don't and probably never will. They will ultimately produce a lot of oil, but over a long period of time and that is what the issue with oil is. It's not about "running out" of oil but rather a question of the rate at which it can be produced.

This situation creates the misleading impression, especially to tourists, that the USA has numerous oil wells simply sitting idle when in fact the reverse is true. They're running flat out but that doesn't result in a lot oil being produced these days.

To maintain production rates as the field ages (depletes) a number of techniques are used with water flooding being the most well known and amongst the simplest and oldest. Pumping steam, natural gas, carbon dioxide etc. in is also used as are detergents in some situations. And of course there's also the drilling of production wells into small surrounding fields (usually falsely announced as a recent discovery) etc.

With water flooding what basically happens is that huge volumes of water are injected to both maintain reservoir pressures (which drop naturally as the oil is extracted) and also to "sweep" oil across the field towards production wells.

Another, far more modern, technique is horizontal drilling. In very simplified terms think of a well drilled in a curved manner so it runs horizontally through the oil with several "legs" coming off it reaching to the sides. This can produce a lot more oil on a daily basis than a conventional vertical well. Such wells sit above the water below and below the natural gas above the oil. It's literally a case of extracting an ever thinning layer of oil from between water and gas. Production stays very high until suddenly all you have is gas (which is either used, flared or reinjected) and water with a bit of oil.

According to Saudi Aramco (the Saudi national oil company) both water flooding and horizontal drilling are extensively used by them. Two very significant points arise from this:

1. The fact that they are injecting such huge water volumes and spending a fortune on horizontal drilling very strongly suggests that they would otherwise be unable to meet production targets. This in turn implies that the Ghawar field in particular has passed its natural peak production and is only being propped up by the use of such technologies. If this is correct then it would also strongly suggest that Ghawar is more than 50% depleted. It is known publicly that the reason for starting the water injection in the first place was alarm at the rapidly falling reservoir pressure levels in the 1960's. Ghawar was only discovered in 1948 and commenced production in 1951.

2. The use of horizontal maximum contact drilling combined with water injection has the potential to lead to a rapid fall in production once water reaches the producing wells. Rather than declining slowly, they would simply die, one at a time, almost literally overnight.

Now, there are a lot of wells drilled into Ghawar but if they start just dropping off one at a time then that leads to a production decline which in due course becomes a major problem. This situation is exactly what happened at the Yibal field in Oman. Production was at 250,000 barrels per day a few years (1997) after the introduction of maximum contact horizontal wells and Shell convinced the government there that a 30% production increase over the next 10 years was the thing to do. Just months later the collapse began and now, depending on which reports you read, production is between 40,000 and 80,000 barrels per day. A rather spectactular collapse in production which was totally unexpected judging by Shell's actions. Oh, and it flows about 900,000 barrels of water per day in addition to that little bit of oil that comes up with it.

It is not my intention to be overly pessimistic about oil and suggest the end of the world etc. But it is anything but easy to maintain production going forward with meaningful increases being highly unlikely in my opinion. The new development that would be needed to facilitate sustained production increases just doesn't seem to be happening and there aren't the known undeveloped reserves for that development to occur. The underlying reason for this is that exploration has been increasingly unsuccessful over the past four decades with a sharply falling discovery trend. What was considered too small for a major oil company to bother with in the 1970's is now announced as a major discovery. A major discovery which over the next decade will produce enough oil to run the world for 5 days. That last sentence says it all in my opinion.

 

[Dan_]

Re: Oil....Gold prices Will Go Up This Week!

Smurf,

A big thanks for the detailed and informative posts you provide for us readers here as ASF.

I find your detailed explanations most valuable and educational

 

[Milk Man]

Re: Oil....Gold prices Will Go Up This Week!

Excellent explaination Smurf. You should do geology- sounds like you really have a good base in it already.

:bier:

 

[michael_selway]

Re: Oil....Gold prices Will Go Up This Week!

I strongly disagree with you there.

I run my own world oil production model, admittedly not updated this year but still reasonably accurate, and to the best of my understanding there is no significant unused capacity to produce any grade of oil which sufficient numbers of existing refineries can process anywhere in the world including Saudi Arabia.

Except for the Saudis this is backed up by recent US Government stats which show OPEC except Saudi Arabia to be at 100% capacity. It's well accepted that nobody outside of OPEC is sitting on surplus capacity and indeed most of the major non-OPEC producers are post peak anyway.

As for Saudi, they have been consistently unable to produce above the capacity used in my model despite overwhelming incentive in the form of price and all manner of promises to stabilise the market and so on. Once again they ran up production until they hit what I believe to be their maximum (9.6 mmbpd versus historically claimed capacity 10.0 - 10.5 mmbpd which has recently been raised to 10.5 - 11.0 whilst actual production has fallen from 9.6 to 9.5). The last time they were producing significantly above present levels was 25 years ago and even then they only sustained the lower limit of the capacity range they have claimed for decades.

Much of the additional oil relesed to the market in recent years by Saudi is sour, heavy crude for which the world lacks sufficient refineries to process and accordingly it sells at a significant discount. This strongly suggests that they don't have surplus capacity to produce light or medium grades and it is generally accepted by both sides of the debate that nobody outside of Saudi has surplus.

This is not to say that oil is a one way bet. It is not. But I disagree with the notion that there is significant unused production capacity.

Hi thx for the info!

http://www.smh.com.au/news/business...wn-petrol-price/2005/11/18/1132016987201.html

Btw do you agree or disagree with this article then?

 

[Smurf1976]

Re: Oil....Gold prices Will Go Up This Week!

Hi thx for the info!

http://www.smh.com.au/news/business...wn-petrol-price/2005/11/18/1132016987201.html

Btw do you agree or disagree with this article then?

The short answer is that numerous countries, more than half of all significant oil producing countries in fact, have experienced a rise, peak and then fall in production volumes. This is fact, not theory as the article asserts.

The response to high prices on North Sea production has been for an acceleration of the rate of decline. Likewise US production slumped through the oil price spikes of the 1970's and has trended down ever since. It is still trending down today and despite the huge rise in prices since 1998 production is lower now than it was then.

It is possible that the article is correct in a sense. Some production growth is likely in the near future and the markets could use that as a basis for sending the price down. Likewise changes in the geopolitical situation, weather, the economy and so on will also influence the price so $35 is certainly possible. If the economy ended up in a depression we could end up with $5 oil pretty easily.

As for the longer term, economists didn't see the North Sea oil peak coming whereas many thinking people did. Likewise the UK gas crisis happening right now, the USA gas crisis, the NZ gas situation, the famous peaking of US oil production in 1970, production collapse at Yibal oil field and the fact that oil prices ever went over $40 a barrel. Economists were consistently wrong and those sounding the alarm bells, whilst not particularly good with timing, have in due course been proven correct.

Those same people disagree with the notion of abundant oil and, unlike the economists, have a track record and relevant training (geology) as a basis for their claims. In the absence of proof that this time really is different, I will side with those with the track record. That said, given the seriousness of the issue I do hope to be proven wrong.