Oil price discussion and analysis

[Ann]

Jog on... over to the December competition leaderboard

(no, I'm not suggesting it actually means anything, but you seem to love reading stuff after my name, so you might enjoy the sight ).

Well Sdajii, I did a little jog over to the leaderboard and had a wee bit of a looksee. I looked and I saw. Get ready for this, little one!

 

[Smurf1976]

It is Christmas Eve, almost Christmas Day, so I don't wish to cause upset but I think it needs to be said.

It is not my role to police this forum, I am not the owner or a moderator, but the extent to which this thread has morphed into some sort of personal crusade to be "proven right" and reacting aggressively toward alternative views is annoying at best and that is putting it politely.

OPEC themselves are based in a modest, unimpressive looking building in Vienna. Not a bad approach really - it's always good to keep both feet firmly on the ground.

Photo = mine.

 

[ducati916]

POO



So it's Christmas and volumes are thin...

jog on
duc

 

[aus_trader]

Photo = mine.

Nice photo. Thanks for posting it, so that's what the OPEC building looks like

 

[Ann]

Photo = mine.

View attachment 90925

Love the reflection in your photo Smurf. The OPEC logo just rocks! I love those big doovie thingos. Full marks to the graphic designer. I did a pic in Ann's Gallery of big doovies. (I don't know what they are, they just appeal to me).

 

[Smurf1976]

Love the reflection in your photo Smurf.

Location is Vienna (Austria) for anyone who happens to be there.

Austria isn't an OPEC member by the way and never has been, the country producing only trivial amounts of oil (about 0.013% of world production so pretty much irrelevant).

Elsewhere, in Canada the suggestion seems to be that the 325,000 barrel per day production cut is likely to be in place for about the first 3 months of 2019. Exactly what happens after that, a gradual increase versus going flat out, doesn't seem clear.

As for the price, well we're at the $45 level that has seen a bit of discussion.

 

[Ann]

...and now a fairly boring chart of the POO clinging onto the Fibonacci 61.8% line.

 

[Ann]

Just for fun I have calculated a swing trade for the POO. If it succeeds in breaking above $51 and stays above it then the swing trade suggests a high of $61 which is interesting as that will take it right up to the level of the long term overhead rising resistance line (red line). I have drawn the swing trade in vertical orange lines just so you can see how I worked it out. Sometime these things can be quite magic they way they react so perfectly. Let's see if this is one of the good ones.

 

[Smurf1976]

Just for fun I have calculated a swing trade for the POO. If it succeeds in breaking above $51 and stays above it then the swing trade suggests a high of $61

As someone who tends to look at the fundamentals, particularly with oil, you're starting to convince me with this technical caper....

Now I haven't really got my mind around how you worked out the $51 up to $61 bit, I'll need to get my mind around that a bit more which I will but perhaps not right now at 3am, but presumably after the $61 is hit the price then goes down again by a significant amount? So down from $75 to $42, back up to $61, then down again?

Or I'm seriously over thinking this?

 

[Ann]

As someone who tends to look at the fundamentals, particularly with oil, you're starting to convince me with this technical caper....

Now I haven't really got my mind around how you worked out the $51 up to $61 bit, I'll need to get my mind around that a bit more which I will but perhaps not right now at 3am, but presumably after the $61 is hit the price then goes down again by a significant amount? So down from $75 to $42, back up to $61, then down again?

Or I'm seriously over thinking this?

G'day Smurf,

Careful, we may make a techi of you yet, relax and breath deeply, it will pass!

OK I have done a tight closeup of how I drew it. I didn't draw it as close as the current close up so I can see I did a really bad job of measurements. The first orange line from the low point should be to the purple line I then moved that first orange line up on top of the purple line around the general area I thought the price would travel, if it travels up....bit of a positon guestimate with that. Others call it a 'measured move' it is the same thing. On reflection it may not go as high as $61 but should be darn close. If it hits and falls back from the $61 red line then I think it may crash back down and even fall below the green line of $42. This will then become a line of resistance, a red line if you wish. This may be a barrier for a rise and then it will be likely headed down to $23 to $25 as a first floor. I may be entirely wrong about this, it may not evolve as I see it and I would ask people not to base any trades on this swing trade calculation as it may not evolve as I am expecting.

 

[Ann]

Now for all you FAers out there, check this out, I found it fascinating!

Mexico Finance Ministry Completes Oil Hedges at $55 a Barrel
By
Dale Quinn

January 11, 2019, 8:07 AM GMT+11



The Mexican government paid 23.5 billion pesos, or about $1.23 billion, for the hedges as part of its strategy to ensure oil revenue against falls in prices, the Finance Ministry said in a statement.

Mexico hedged at $55 a barrel, equivalent to the price approved by lawmakers for the 2019 budget, protecting the country’s revenue if oil falls below that level, the statement says.

https://www.bloomberg.com/news/arti...-ministry-completes-oil-hedges-at-55-a-barrel

.....and this is even more fascinating

Uncovering the Secret History of Wall Street’s Largest Oil Trade

Year after year, Mexico places a multi-billion-dollar bet in a deal that big banks lust after. This is the untold story of how the “Hacienda hedge” happens.

By
Javier Blas

April 4, 2017, 2:01 PM GMT+10

https://www.bloomberg.com/news/feat...et-history-of-wall-street-s-largest-oil-trade

 

[Ann]

This is a very interesting chart. As I am understanding it, when the oil rig count goes down it appears the price of oil also falls. This is a very interesting piece of information if it is so. Am I misreading/misinterpreting this?

The chart came from this article.
https://www.calculatedriskblog.com/...mpaign=Feed:+CalculatedRisk+(Calculated+Risk)

 

[Smurf1976]

This is a very interesting chart. As I am understanding it, when the oil rig count goes down it appears the price of oil also falls.

I interpret it as saying that there's a 9 week lag between a fall in the price and a subsequent fall in the rig count.

Whilst the two appear to line up on the chart, they're shifted the price by 9 weeks to show that.

That's how it looks to me at least.

 

[Ann]

I interpret it as saying that there's a 9 week lag between a fall in the price and a subsequent fall in the rig count.

Whilst the two appear to line up on the chart, they're shifted the price by 9 weeks to show that.

That's how it looks to me at least.

Yes there did appear to be a lag, it sounds in his comments the reduction in rigs are planned to be continued. It will be interesting to watch the price • "The model continues to predict big rig roll-offs in the next several weeks."

Although the big thing will be when the US government goes back to work and begins to release the COTs. I am wondering if it will all blast outward like a blocked drain. This stuff is so interesting!

 

[aus_trader]

Yes there did appear to be a lag, it sounds in his comments the reduction in rigs are planned to be continued. It will be interesting to watch the price • "The model continues to predict big rig roll-offs in the next several weeks."

Although the big thing will be when the US government goes back to work and begins to release the COTs. I am wondering if it will all blast outward like a blocked drain. This stuff is so interesting!

Certainly interesting stuff Ann, it also shows how the drillers are keeping costs down by keeping the rig count down when POO is down these days. In the good old days most rigs stayed on and any excess oil was kept as stockpile/inventory for times of higher oil prices.

I wonder if there is doubts about the future of oil with the rise of renewables and Electric Vehicles etc for such short term thinking. i.e. only spend on rigs if there is immediate profits to be made by selling at spot prices.

 

[Smurf1976]

I wonder if there is doubts about the future of oil with the rise of renewables and Electric Vehicles etc for such short term thinking.

An alternative explanation is that pretty much all business has a short term focus these days compared to what it used to be.

There aren't many CEO's around these days who will invest heavily in something that will reap bumper profits for their successor's successor.

The downside of that approach is best explained by saying that such long term strategic thinking is what made huge corporations so successful. The short term approach comes at a huge long term cost but that's another subject.

 

[Ann]

Certainly interesting stuff Ann, it also shows how the drillers are keeping costs down by keeping the rig count down when POO is down these days. In the good old days most rigs stayed on and any excess oil was kept as stockpile/inventory for times of higher oil prices.

I guess it would depend on the profit margin, if oil had a better return, I would imagine they would be able to absorb the costs. These days with squeezed margins they would need to control costs where they could. Plus stockpiling may not be of benefit if they can see a long term fall in the price of oil.

I wonder if there is doubts about the future of oil with the rise of renewables and Electric Vehicles etc for such short term thinking. i.e. only spend on rigs if there is immediate profits to be made by selling at spot prices.

That is my thinking aus_trader, not so much the renewables but certainly the rapid proliferation of EVs. These guys are the people who sell the stuff, they would know what orders are coming through and would have weeks of prior knowledge of peak and reduced demand simply from their order book. It could be a nine week turn around for orders, so people who follow the switching on and off of the rigs would likely be able to time the market. I have heard about the switching on and off of rigs for a long time now but I haven't put in an effort to find a regular site where it is reported. If I was a commodity trader of oil, it would certainly be a key indicator for me with my trades. I guess that is why the price leads the shutting and opening of rigs. They know what is going on simply watching rig action and timing the market.

.....long term strategic thinking is what made huge corporations so successful. The short term approach comes at a huge long term cost but that's another subject.

I am sure the oilers have a long term strategic plan Smurf, they would certainly not have the delusion oil is going to be a meaningful commodity in the long term. It will be very interesting to see where big oil money lands next. I guess their short term approach is still producing sufficient quantities to supply a diminishing market without it costing them too much. I imagine the modern oil rigs can be switched on and off easier than older equipment.

What are your thoughts on the short term approach and its consequences?

 

[Smurf1976]

What are your thoughts on the short term approach and its consequences?

More volatility basically. Good for traders but not so good for those who just want to buy the stuff.

Price goes down a bit > drilling activity is slashed rather heavily > creates a supply squeeze > price goes up > drilling activity goes up but not enough > price goes up even more > boom in drilling > price goes down a bit > rinse and repeat.

Noting in there that the price of drilling itself is a market and follows the same cycle. The higher the level of drilling activity, the higher the cost to drill - supply and demand as with anything else.

So the average oil company is drilling most of its wells when the cost of drilling is highest and stops drilling when the cost of drilling is lowest.

If management of any once company took a longer term view and had sufficient cash backing to stand the short term pain then they'd get their drilling done when oil and drilling prices were down and save rather significant $ on the cost of doing it.

In the longer term, as someone who has followed the whole energy story for over three decades now my view is really quite simple. Yes there's going to be a revolution with electric road vehicles. It won't kill oil demand anytime soon though and there's a few reasons for that:

*EV's do nothing at all to reduce oil consumption by ships, aircraft, petrochemicals, plastics, road construction and so on.

*The notion that people buy a new car every few years is something that relatively well off people in wealthy countries do. In reality most stuff that gets built is in use for 20+ years (cars, planes) and for anything heavy industrial we're looking at double that.

The latter is a point worth stressing. When it comes to heavy stuff, and by that I mean locomotives, large ships, heavy industry and so on things last decades not a few years. The life cycle there is a lot longer than the "throw away" consumer products life cycle among the wealthy.

For that matter, go to the poorer suburbs of any Australian city and take a good walk around of an evening. You'll find no shortage of 1990's cars parked and yes they're still in daily use. Likewise there's still buses from last century in daily service in Australia, depending on the state they're kept for ~25 years and then sold off overseas where they'll still be running many years later.

Overall I don't doubt that we're going to move away from oil but I also don't doubt that it will take quite some time to happen since we're still building new stuff that relies on it and which has a lone lifespan.

 

[aus_trader]

Good analysis Smurf, so looks like oil demand is not going away anytime soon... but I also haven't seen those crisis reports about oil running out on Earth and "Peak Oil" and stuff like that that used to plague us a few years back. Just to refresh the memories, below are a few of those pics:








Please note: The above images are out of date, so don't panic. I posted just for fun

 

[Ann]

Good analysis Smurf, so looks like oil demand is not going away anytime soon... but I also haven't seen those crisis reports about oil running out on Earth and "Peak Oil" and stuff like that that used to plague us a few years back.

I am seeing another term being used now, "peak use" suggesting we are at the peak period of oil use and it will gradually fall away but as Smurf says there are going to be heavy users around for a long time as in boats, planes, etc. These won't be running on a battery any time soon I shouldn't think.