Oil price discussion and analysis

[Sdajii]

The speculation all seems to be focussed on how long it will take Saudi Arabia to get repairs finalised and get back to normal operations. This is obviously important, but less focus than I would have expected is being put on the likelihood of further attacks.

There's a lot of evidence now confirming Iran was behind the attack and that they did their best to cover their tracks but it wasn't sufficient. It seems Iran attacked Saudi Arabia out of desperation; Iran is hurting due to sanctions and likely wants to bring about a situation where the world is forced to accept their oil. Given that sanctions are now being increased and Iran is going to hurt even more, making it even more desperate, and given that they often boast that if things get too extreme they will bring the oil situation to a standstill, often talking about bringing transport through the strait of Hormuz to a halt, it's difficult to now see this escalation cooling down.

Can anyone see how Iran is going to calm down and do nothing when the situation is escalating in terms of how desperate they are becoming, giving them more motive, and having been caught out in the drone and missile attack, giving the US and her allies incentive to take military action? What realistic alternative outcomes are there to military action? I can't see Iran just rolling over and accepting defeat and sitting around in poverty. Iran also seems far too proud to simply accept US dominance and bark to Trump's tune, going along unconditionally with everything Trump dictates in exchange for being able to go about business freely. The only other option seems to lead to escalating military action.

Thoughts? Am I missing something? The market seems to be assuming there's a low chance of things escalating, but I see it as the clearly most likely scenario.

 

[jbocker]

Thoughts? Am I missing something? The market seems to be assuming there's a low chance of things escalating, but I see it as the clearly most likely scenario.

I think the market is on the money, otherwise if they saw it the same as your most likely scenario then I think we would already be in POO $100+ already. Not to say there is a lot of shouting and niggling going on and if it continues and someone pushes too hard the real fight might begin. I think all parties would be very cautious about making that big shove.
Lets hope it settles and everyone backs off. That may take some time … giving the weapons sellers time to cash in.

 

[Sdajii]

I think the market is on the money, otherwise if they saw it the same as your most likely scenario then I think we would already be in POO $100+ already. Not to say there is a lot of shouting and niggling going on and if it continues and someone pushes too hard the real fight might begin. I think all parties would be very cautious about making that big shove.
Lets hope it settles and everyone backs off. That may take some time … giving the weapons sellers time to cash in.

I'm not sure we're going to see $100 and if we do I'm almost certain we're going to see something well below $50 within a few months of it after the economy crashes, demand dwindles and supply increases. So, (keep in mind this is a hypothetical, not what I expect) if we assuming oil will be $120 in 2-6 months after USA and SA strike Iran, Iran fights back and it spreads somewhat in the middle east, and then in 4-10 months oil is $30, what price would it make sense for the market to set now? You can say that since we know (in this hypothetical) it's going to $110 within 6 months it makes sense to take a massive long position at anything more than about 10-20% below $110, and since it's currently trading at $58-60 the market is sure it won't go about $70-80, but we can see this doesn't make sense since if it does go to $110 (which is a real life possibility in the next few months), we also can be very confident it will crash the market and with it the oil price, presumably to around $40 or less, so surely the market would be so full of shorters that the price couldn't get above about $50-60 even in all out war. Clearly it doesn't work that way for several reasons.

But regardless of what the market thinks, I'd be interested to hear people's own thoughts here and why they expect it rather than just 'the market thinks x'. Will Iran just accept the increased sanctions and economic pain and do nothing? They were already willing to stage an attack and blame Yemen. Presumably that means they didn't want to take credit because fear a military response, and having been caught out they are very vulnerable to a counterstrike given how thin their ice now is, but the pressure is on more than ever. It has seemed to me for several months that Trump wants a war with Iran, he's just being absolutely sure to make it look to the majority of people that he really didn't want it, so he has to make the first move subtly to ensure it looks like they made the first move.

 

[rederob]

I'm not sure we're going to see $100 and if we do I'm almost certain we're going to see something well below $50 within a few months of it after the economy crashes, demand dwindles and supply increases. So, (keep in mind this is a hypothetical, not what I expect) if we assuming oil will be $120 in 2-6 months after USA and SA strike Iran, Iran fights back and it spreads somewhat in the middle east, and then in 4-10 months oil is $30, what price would it make sense for the market to set now? You can say that since we know (in this hypothetical) it's going to $110 within 6 months it makes sense to take a massive long position at anything more than about 10-20% below $110, and since it's currently trading at $58-60 the market is sure it won't go about $70-80, but we can see this doesn't make sense since if it does go to $110 (which is a real life possibility in the next few months), we also can be very confident it will crash the market and with it the oil price, presumably to around $40 or less, so surely the market would be so full of shorters that the price couldn't get above about $50-60 even in all out war. Clearly it doesn't work that way for several reasons.

But regardless of what the market thinks, I'd be interested to hear people's own thoughts here and why they expect it rather than just 'the market thinks x'. Will Iran just accept the increased sanctions and economic pain and do nothing? They were already willing to stage an attack and blame Yemen. Presumably that means they didn't want to take credit because fear a military response, and having been caught out they are very vulnerable to a counterstrike given how thin their ice now is, but the pressure is on more than ever. It has seemed to me for several months that Trump wants a war with Iran, he's just being absolutely sure to make it look to the majority of people that he really didn't want it, so he has to make the first move subtly to ensure it looks like they made the first move.

Cutting to the chase, Iran can choke off the the Strait of Hormuz, which is the world's single most important oil passageway, being the only route for over 15% of global oil and one-third of the world's LNG.
And Iran has VERY powerful allies who are also not overly fond of the USA.
So for the USA to think that attacking Iran will achieve what they want is exceptionally naive.
Oil under a scenario of Iran under attack would reach all time highs. And if the war was prolonged, oil prices would stay high for a longer time still as all the US's strategic reserves would be depleted and replenishment required.
And, that's assuming Iran had zero opportunity to damage Saudi or UAE production facilities.

The very separate business as usual scenario should still see oil hold at and above $50/bbl for some time as the USA's Permian producers are not profitable at lesser prices, and producer debt is leading to record bankruptcies because the costs of borrowings are crippling them. Any dips into the $40 will see Permain production decline and cause prices to again rise.

 

[Smurf1976]

I'm in the camp expecting that there's a price rise, although I won't try and predict when beyond saying that it'll be in the not to distant future.

My reasoning is firstly the political situation as has already been mentioned. It's not only the actual loss of production, and that is certainly not insignificant of itself, but that there's now an effectively permanent threat of similar attacks. Well, it's permanent until there's a radical change in the overall situation which probably won't happen quickly.

Second reason is that nobody would dispute that this current (USA) business cycle is getting rather old, indeed it's the longest on record, and if we look back over the entire period since the end of WW2 then there seems to be only one occasion when the oil price didn't increase toward the end of the business cycle, that being in 1960. The one thing missing that would signal the end of this business cycle has been a rise in the oil price.

Note that in saying this I'm not counting the brief period between the two early 1980's "double dip" recessions as a cycle given how short it was. That said, whilst it didn't increase the oil price was most certainly very high during that period.

Third reason is that I note that the US has been a major source of production growth in recent years but that a trend seems to be emerging of companies wanting greater returns to investors now, so that is to pay dividends, and a lesser focus on production growth. That factor ought to slow future gains in US production.

Putting all that together, well nothing is ever certain but there seems a lot more reasons why price would go up than reasons why it would go down.

If any major increase does occur though well it'll kill the economy no doubt. Things were looking a bit shaky economically even before the Saudi attacks.

 

[Sdajii]

Cutting to the chase, Iran can choke off the the Strait of Hormuz, which is the world's single most important oil passageway, being the only route for over 15% of global oil and one-third of the world's LNG.
And Iran has VERY powerful allies who are also not overly fond of the USA.
So for the USA to think that attacking Iran will achieve what they want is exceptionally naive.
Oil under a scenario of Iran under attack would reach all time highs. And if the war was prolonged, oil prices would stay high for a longer time still as all the US's strategic reserves would be depleted and replenishment required.
And, that's assuming Iran had zero opportunity to damage Saudi or UAE production facilities.

Yes, as I said, the strait of Hormuz is one of the big cards they hold and repeatedly flaunt.

You say it's naive to think attacking Iran will achieve their goals, but do you think that's what they think? I don't think they're stupid... well, sort of... maybe... but either way, I don't think anyone especially wants to go to war, but it seems to be a situation which is escalating and I find it difficult to see a likely scenario where it settles down. The USA can't at this point just say 'Hey, actually, don't worry, let's just bury the hatchet and forget that surveillance drone you shot down and the drones and cruise missiles you attacked our ally with and tried to use a scapegoat and you know what, don't worry about those sanctions, just sell what you like, we don't care now'. Similarly, Iran (which jokes aside is more controlled by pride and arrogance even than the USA) can't exactly say 'Hey, look, we're really sorry about everything, can we just put it all behind us, be friends, and have a deal that allows us to operate our economy freely? No more silly business, pinky promise!'

Unless Trump has some clever plan up his sleeve to diffuse the situation and play peacekeeper to look amazingly wonderful on the global stage (and I can't even imagine how he'd do that now), I don't see it calming down.

The very separate business as usual scenario should still see oil hold at and above $50/bbl for some time as the USA's Permian producers are not profitable at lesser prices, and producer debt is leading to record bankruptcies because the costs of borrowings are crippling them. Any dips into the $40 will see Permain production decline and cause prices to again rise.

Agreed.

 

[Sdajii]

I'm in the camp expecting that there's a price rise, although I won't try and predict when beyond saying that it'll be in the not to distant future.

My reasoning is firstly the political situation as has already been mentioned. It's not only the actual loss of production, and that is certainly not insignificant of itself, but that there's now an effectively permanent threat of similar attacks. Well, it's permanent until there's a radical change in the overall situation which probably won't happen quickly.

I'm not sure the market will care too much about the little scuffle unless there are further attacks. It will probably put a small risk premium on the price for a while but the market is pretty fickle. If there are further attacks at this point I think the market response will be significant. At this point it can be seen (well, not reasonably, but it is being seen) as a one off/isolated incident. Another attack now would really put a piece into the picture and make it look like a bigger issue. Currently a direct attack with drone bombers and cruise missiles on the world's largest oil refinery is being taken surprisingly mildly.

Second reason is that nobody would dispute that this current (USA) business cycle is getting rather old, indeed it's the longest on record, and if we look back over the entire period since the end of WW2 then there seems to be only one occasion when the oil price didn't increase toward the end of the business cycle, that being in 1960. The one thing missing that would signal the end of this business cycle has been a rise in the oil price.

We certainly live in strange times. We're well overdue for a crash, and I was expecting one 4, 3, 2 years ago, but the rules seem to have changed and we've deviated from the usual pattern. Trump is certainly a big part of the unorthodox situation, and part of that is because he is so desperate to be seen as the best president in the history of his country that he'll do whatever it takes to make it happen, and like him or not, he's a pretty good business man with a good grasp of economics and management. A crash in the near future wouldn't surprise me, neither would 5 more years of Trump and economic growth.

If any major increase does occur though well it'll kill the economy no doubt. Things were looking a bit shaky economically even before the Saudi attacks.

I totally agree with this, and I think it's a likely scenario. As you say we're overdue for a crash, we have events which are likely to push the price of oil up, that as a rule signals a crash, and I have no doubt that's what would happen if oil spiked now.

Thanks for sharing your thoughts, I appreciate your post.

I still see no ideas about a scenario where the situation in the middle east is diffused though.

 

[Smurf1976]

We certainly live in strange times

I think that's the one thing that can be said with certainty.

I'll steer clear of politics itself and simply note that we're in an era with a US President who could be fairly described as extremely unconventional when compared to predecessors and where Britain has become effectively irrelevant in world affairs to the point that it doesn't really even rate a mention.

It's an era where all manner of "unthinkable" things, and knocking out much of Saudi Arabia's oil production is one of many such examples, now happen fairly routinely and life just carries on regardless.

We're on the same page I think yes. Various risks seem very obvious but there's no certainty what actually happens next.

 

[Smurf1976]

Something else I'll throw into the mix is the upcoming change to regulations regarding fuel used on ships which greatly reduces the allowable sulfur content.

In theory it's just a matter of removing the sulfur from #6 fuel oil and that's the logical approach. There is however a lot of uncertainty as to the capacity of refineries to do so, given that historically (and at present) there has been no such requirement. Industry doesn't generally spend $ billions on equipment that isn't needed and it's apparent that a lot of refineries haven't done upgrades for this recently.

Where that ends is with the idea that considerable volumes of #2 fuel oil, aka diesel or light fuel oil, which is normally much lower in sulfur will be blended in so as to meet the specifications. Technically that's a workable solution but it has the effect of significantly increasing demand for diesel and leaving a surplus of heavy fuel oil.

One possible outcome, especially if we see ongoing reductions in crude production, is that Saudi Arabia ends up importing heavy fuel oil at a price lower than the crude oil from which it came and using that to run power generation. Saudi is the biggest potential market for doing that, odd though the concept of them importing oil may seem.

What effect all that has on price is a good question but it's another disturbance to the market most certainly given that fuel use by ships is not insignificant.

 

[Smurf1976]

So the oil price is back roughly where it started.

I'll avoid making political comments as such but just noting the situation:

*Drone, missle or whatever you want to call it attack on the oil facilities in Saudi.

*Drums of war being given a bash with various countries blaming Iran.

*Attempts to impeach the President of the USA.

Things that in any previous time would have been in the news for months but in 2019 everyone just shrugs their shoulders, the markets move 1% or so, the Federal Reserve throws around a few $ billion and life carries on.

We're living in a very strange times and in the context of the price of oil I can't avoid thinking that the price is being "managed". OK, so we all know OPEC is a cartel but I mean beyond that. It's just seems too stable at present really - world goes mad and the oil price is as consistent as the sun rising each morning. That just doesn't seem right.

 

[Smurf1976]

https://finance.yahoo.com/news/ships-set-burn-raw-crude-230100180.html

 

[rederob]

So the oil price is back roughly where it started.

I'll avoid making political comments as such but just noting the situation:

*Drone, missle or whatever you want to call it attack on the oil facilities in Saudi.

*Drums of war being given a bash with various countries blaming Iran.

*Attempts to impeach the President of the USA.

Things that in any previous time would have been in the news for months but in 2019 everyone just shrugs their shoulders, the markets move 1% or so, the Federal Reserve throws around a few $ billion and life carries on.

We're living in a very strange times and in the context of the price of oil I can't avoid thinking that the price is being "managed". OK, so we all know OPEC is a cartel but I mean beyond that. It's just seems too stable at present really - world goes mad and the oil price is as consistent as the sun rising each morning. That just doesn't seem right.

"Managed" to the degree that oil under $50/bbl becomes to marginal for lots of North American production (eg Permian Basin and Canada's oil sands), but still profitable for most of OPEC, especially in the Middle East.
Separately there is the issue of energy substitution between oil and gas. I have not yet worked it out, so won't speculate on what it means - I know it's happening, but have no idea how it moves their respective prices.
Maybe the other issue that is seldom covered is that it's US money that significantly dabbles in the oil markets. And if you live in the USA you will know that oil and gas production are not just at record highs, but able to swing higher if the market were to tighten.
What is certainly true is that OPEC's dominant role in price setting has gone, and they are now reacting to US production/capacity.
That said, it's such a different world out there, as you say.
All because of who holds the Trump card .

 

[Smurf1976]

Maybe the other issue that is seldom covered is that it's US money that significantly dabbles in the oil markets. And if you live in the USA you will know that oil and gas production are not just at record highs, but able to swing higher if the market were to tighten.

I heard a commentator a few months ago nothing that the US shale industry has effectively done what was always thought to be impossible.

He was nothing that the business model gives rise to a situation where, in practice, the US can turn money into oil.

There’s plenty of shale oil just waiting for someone to throw money at it. Add the Federal Reserve into the equation and follow the argument - production can be ramped up so long as money itself is cheap enough.

Now add in all the international political stuff and it gets rather complex with actual production costs being almost a side issue.

Meanwhile the Saudi’s are talking about prices going to huge but unspecified levels but the actual spot price is down over the past day.

My basic conclusion is that this is not a normal market being driven by supply and demand and that the level of “other” factors at work today seems to far exceed OPEC’s quotas which were at least a straightforward concept.

 

[ducati916]

Falling hotel rates in Midland a sign of the times. Liam Denning of Bloomberg Opinion wrote about the double-digit decline in hotel rates in West Texas. That magnitude of a percentage decline is “very, very rare,” said Jan Freitag, a senior VP at STR. “Normally, you get that when something like a hurricane hits; like a natural disaster.” The negative trend for hotel rates coincides with the contraction in drilling activity.

jog on
duc

 

[ducati916]

U.S. SPR more limited than expected. The U.S. strategic petroleum reserve is thought to be a massive trove of oil that can be readily deployed. For instance, in a hypothetical outage in the Strait of Hormuz, the U.S. should be expected to withdraw 3.5 mb/d of oil from the SPR. But the reserve might not be able to pull that off. Changes in pipeline flows, and huge increases in upstream production mean that only about 1.5 mb/d can be drawn down at a time, according to Platts.

OPEC production fell most in 16 years in September. Largely due to the Abqaiq attack, OPEC’s oil production fell sharply in September. It was the single-largest disruption in history when it occurred, although its short duration meant that the outage fell short of the PDVSA strike in 2002 in terms of total volumes lost. Still, oil prices languish as demand continues to weaken. “Oil-demand growth is hitting the skids as macroeconomic, trade, and political risk drivers continue to intensify, from Brexit to impeachment through Persian Gulf conflict risk and the U.S.-China trade war,” Bob McNally, president of Rapidan Energy Group, told Bloomberg.

jog on
duc

 

[ducati916]

So the latest COT data:



Would suggest that while not a clear buying opportunity, on balance, it would seem to be preferable to be long than short.

jog on
duc

 

[ducati916]

EP Energy Corp. files for bankruptcy. EP Energy Corp. (OTCMKTS: EPEG) filed for bankruptcy protection, and with debt at $4.6 billion, it is the largest bankruptcy filing in more than three years.

Credit redetermination could hurt U.S. shale. For the first time since 2016, lenders could cut the credit available to shale drillers, which could tighten the noose on the shale boom. According to a survey from Haynes and Boone, a majority of respondents – including both oil and financial executives – expect tighter credit conditions in the latest redetermination period.

Oil shipping costs soar. The cost of chartering a very large crude carrier (VLCC) from the U.S. Gulf Coast to Asia has spiked by $10 million, or $5 per barrel, in the wake of American sanctions on a Chinese shipping giant. The move comes at a time when another portion of tankers are sidelined as they are undergoing maintenance ahead of IMO regulations on maritime fuels. The soaring cost of shipping could curtail U.S. oil exports, which may depress WTI relative to other benchmarks. “Asia has been pulling barrels from everywhere,” Michael Tran, an analyst with RBC Capital Markets, told the WSJ. “If it becomes uneconomical to ship U.S. barrels to Asia, that essentially leaves barrels stranded in the U.S.”

So while POO could fall as easily as rise, the greater volatility move (potential) would seem to be higher, even though that may take a little time to manifest.

jog on
duc

 

[notting]

What is clear is that the US has achieved independence from the mad Arabs oil.
The fact that the bombing of the Saudis did nothing for the oil price proved the point.
Thus it makes perfect sense the Trump can just leave the region and tell them all to get F&*)ed.
We no longer need you lunatics and you can go on killing each other as much as you like.
Renewable energies and fracking are now taking over so stay in your Muhammad arse licking terrorist hell without us providing security and we'll carry on civilizing the civilized.

 

[Smurf1976]

We no longer need you lunatics and you can go on killing each other as much as you like.
Renewable energies and fracking are now taking over so stay in your Muhammad arse licking terrorist hell without us providing security and we'll carry on civilizing the civilized.

An issue there is the divergence between what's good for the USA versus what's good for anyone else.

Australia for example has never imported more oil in absolute volume terms than it does now and as a net % of consumption you'd have to go back to the 1960's to find a time when we were more reliant on imports than we are today.

So heading in opposite directions there.

 

[qldfrog]

An issue there is the divergence between what's good for the USA versus what's good for anyone else.

Australia for example has never imported more oil in absolute volume terms than it does now and as a net % of consumption you'd have to go back to the 1960's to find a time when we were more reliant on imports than we are today.

So heading in opposite directions there.

could the Australian position be a reflection of policy trends..no fracking, bad Australia stealing Timor resources, fossil fuel is bad, big us corporation taking over or have we really exhausted all our resources?