Oil price discussion and analysis

ducati916 · 22 November 2019

The oil market (NYSEARCA:USO) is far tighter than many observers assume, and oil prices and energy companies could be set for a bounce, Spencer Jakab writes at WSJ's Heard On The Street.

The number of oil-specific drilling rigs just hit the lowest level since March 2017, but more than 7K drilled but uncompleted wells remain available to pump crude fairly quickly, which tells most analysts that U.S. producers could respond rapidly to an unexpected surge in oil prices.

"Many people look at that and see that huge backlog that's going to flood us [but] the scale is just much lower," says Marshall Adkins, head of energy investment banking at Raymond James.

Adkins thinks the changes in drilling methods that have made the industry more efficient also mean that many DUCs should not be counted; a more accurate barometer would be months of supply, on which basis the number of DUCs is slightly lower than average.

If he is correct, then the market is drawing false solace from DUCs and, unless something happens to dent demand, the oil market is far tighter than many observers assume.

Adkins sees the trend as bullish for crude prices and especially for shares of oilfield service providers such as Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BKR), and for sand mining firms directly tied to shale fracking activity such as U.S. Silica (NYSE:SLCA) and Hi-Crush (NYSE:HCR).

jog on
duc

ducati916 · 26 November 2019

A bit of selling from the Commercials.

Probably not enough to create a major price retracement, but certainly enough to slow down any further rises.

So possibly a week of (even further) contracted volatility.

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duc

ducati916 · 18 December 2019

So through $60, which was my target. Reduce position size.

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duc

Smurf1976 · 9 January 2020

ducati916 said:
So through $60, which was my target. Reduce position size.

Price went up to around $63 but has fallen sharply in the past few hours and is now back under $60.

With the tensions between the USA and Iran as they are, politics outweighs anything else at the moment in my view and things could escalate at any time. Well it does unless someone actually blows up oil pipes etc.

ducati916 · 9 January 2020

Smurf1976 said:
Price went up to around $63 but has fallen sharply in the past few hours and is now back under $60.

With the tensions between the USA and Iran as they are, politics outweighs anything else at the moment in my view and things could escalate at any time. Well it does unless someone actually blows up oil pipes etc.

Longer term, I see POO in a range of $60 - $80 with occasional forays higher/lower. Which (excepting the extremes driven by geopolitical issues) makes trading in oil much harder.

The correct play now...are the majors (XOM etc via XLE/XRX) which can make improvements in margins and earnings from POO in a range.

The reason: financing for the shale explosion is over. Volumes pumped/produced will fall, thus stabilising the price as a range.

jog on
duc

Smurf1976 · 17 January 2020

It seems that the new shipping fuel regulations are having some impact and sending different fuel grades to very different pricing levels.

On one hand we've got WTI around $58 per barrel but then some low sulfur grades, including that from Australia, have shot up to over $90 per barrel since they're usable as a direct part of the heavy fuel oil pool (that is, without needing to refine the oil). ASX listed Santos is one producer of such oil.

https://www.spglobal.com/platts/en/events/emea/middle-east-bunker-fuel

On the other hand high sulfur fuel oil is trading at a ~$30 discount to the crude from which it came. One consequence of that is Saudi Arabia importing more high sulfur fuel oil for power generation, replacing the use of unrefined crude oil for that purpose given that the crude's now worth far more than fuel oil. So import more fuel oil > burn less crude > export more crude = effectively halved their cost of fuel going into power stations.

Smurf1976 · 23 January 2020

The heading of this article says it all:

OPEC, IEA or EIA Completely Wrong in 2020 Oil Market Analysis

Click to expand...

https://www.rigzone.com/news/wire/o...l_market_analysis-20-jan-2020-160838-article/

They can't all be right so someone's in for a big surprise, the question being who?

ducati916 · 23 January 2020

Smurf1976 said:
The heading of this article says it all:

https://www.rigzone.com/news/wire/o...l_market_analysis-20-jan-2020-160838-article/

They can't all be right so someone's in for a big surprise, the question being who?

Inventories will rise and fall.

Longer term, I think supply will reduce because the financing for shale is drying up. The Shale patch will consolidate with the Majors buying up distressed supply. Thus supply, will over the next year or so reduce, before coming back somewhat.

Demand will (I think) continue to grow. The question is whether the alternatives grow faster than this demand growth.

jog on
duc

Smurf1976 · 26 January 2020

It seems that concern over the virus situation in China (and increasingly elsewhere) is adding to downward pressure on the oil price:

https://www.rigzone.com/news/wire/alarm_over_virus_pushing_down_oil-23-jan-2020-160868-article/

I do think there will be a buying opportunity at some point in the not too distant future though. Oil's still being used, it still has value, the shale producers seem to be having issues with cash drying up and so on.

ducati916 · 26 January 2020

Smurf1976 said:
It seems that concern over the virus situation in China (and increasingly elsewhere) is adding to downward pressure on the oil price:

https://www.rigzone.com/news/wire/alarm_over_virus_pushing_down_oil-23-jan-2020-160868-article/

I do think there will be a buying opportunity at some point in the not too distant future though. Oil's still being used, it still has value, the shale producers seem to be having issues with cash drying up and so on.

Oil is not going to lose all of its demand overnight. Possibly oil demand will wane over time. Until then I would expect a range between $50 odd and $70 odd. There will be spikes higher and lower based on geopolitical events I'm sure.

I'm a buyer at $50 and below and a selling at $60+. Not selling short...just selling longs.

jog on
duc

ducati916 · 1 February 2020

Just saw this:

https://oilprice.com/Energy/Energy-General/The-Oil-Industrys-Radioactive-Secret.html#

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duc

ducati916 · 1 February 2020

Refiners cut back on insurance. Refiners and petrochemical facilities have cut back on insurance because it has become too costly, which is the result of a string of explosions and accidents in recent years. Running without insurance puts them at risk of tens of millions of dollars of liabilities. In some cases, insurance rates have increased 100 percent, according to Reuters.

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duc

ducati916 · 4 February 2020

POO taken a bit of a hammering. I'm now interested. Could well fall further on negative sentiment and falling demand from China, but probably nearer a bottom now.

I'll add back to my position here.

jog on
duc

Smurf1976 · 4 February 2020

If this is even half right then it's a rather substantial shock to the oil market:

https://www.bloomberg.com/news/arti...-is-said-to-have-plunged-20-on-virus-lockdown

Chinese oil demand has dropped by about 3 million barrels a day, or 20% of total consumption

So about 20% of China's consumption or 3% of world consumption. That's about as big as it gets in terms of sudden drops in consumption. Now just have to see how OPEC responds.

ducati916 · 5 February 2020

Smurf1976 said:
If this is even half right then it's a rather substantial shock to the oil market:

https://www.bloomberg.com/news/arti...-is-said-to-have-plunged-20-on-virus-lockdown

So about 20% of China's consumption or 3% of world consumption. That's about as big as it gets in terms of sudden drops in consumption. Now just have to see how OPEC responds.

Assuming it is correct:

The bounce (or return to the upper end of the range) once the virus loses ground should be worthwhile.

jog on
duc

Smurf1976 · 10 February 2020

A rather dramatic view on the situation sees oil at $30 per barrel.

Given the reasoning relates partly to the virus situation in China, I really don't have anything to add to what the article says since I'm no expert on that but they're saying that China's consumption could drop 18% to 25% which is significant given that China represents about 14% of global oil consumption and has been a major source of rising demand.

Related to that would be possible falls elsewhere. Eg fewer planes and ships leaving other countries bound for China so they won't need fuel. Possibly a broader economic slowdown and so on.

In practice I think what OPEC does will have a fairly major bearing, the risk being that they're not sufficiently organised (willing) to make major production cuts in the event that demand really does fall in a heap. OPEC has historically been pretty good when it comes to minor adjustment but has tended to struggle with anything major.

https://www.ameinfo.com/industry/en...-notice-for-gcc-countries-to-heed-imf-warning

ducati916 · 10 February 2020

Smurf1976 said:
A rather dramatic view on the situation sees oil at $30 per barrel.

Given the reasoning relates partly to the virus situation in China, I really don't have anything to add to what the article says since I'm no expert on that but they're saying that China's consumption could drop 18% to 25% which is significant given that China represents about 14% of global oil consumption and has been a major source of rising demand.

Related to that would be possible falls elsewhere. Eg fewer planes and ships leaving other countries bound for China so they won't need fuel. Possibly a broader economic slowdown and so on.

In practice I think what OPEC does will have a fairly major bearing, the risk being that they're not sufficiently organised (willing) to make major production cuts in the event that demand really does fall in a heap. OPEC has historically been pretty good when it comes to minor adjustment but has tended to struggle with anything major.

https://www.ameinfo.com/industry/en...-notice-for-gcc-countries-to-heed-imf-warning

Definitely possible. Markets overshoot higher/lower regularly.

If it drops to $30, will it bounce back? I would say yes.
What is the chance that any government hits their 2% global warming target? Zero.

jog on
duc

Smurf1976 · 29 February 2020

Down to $44 per barrel now (WTI).

At this rate there's going to be at least a few companies that are unprofitable once all their costs (eg drilling wells in the first place) are included.

So I can't see that being a sustainable price, it's not a price where adding more supply is attractive for most, but given the overall market sentiment at the moment we could well see even lower.

ducati916 · 29 February 2020

Buyer (averaging down) all the way down. Showing (obviously) losses currently, but, once the dust settles, POO will return to range. There will (no doubt) be upside shocks at some point also.

jog on
duc

ducati916 · 29 February 2020

Lots of supply issues moving forwards:

Oil reserves now at lower end. Petrol moving lower from oversupply.

Apache quits Alpine High. Apache (NYSE: APA) is pulling the plug on a highly-publicized oil discovery in the Permian basin. In 2016, the company announced a 2-billion-barrel discovery, the largest in a decade. At the time, Apache said Alpine High could be worth $8 billion, by conservative estimates. Three and a half years later, the company took a $3 billion writedown on the project and said it has “no current plans for future drilling at Alpine High.”

OPEC talking further cuts. Russia (stopout) could well be forced to join due to lower prices.

BofA: Oil demand and supply to slow through 2025. A report from Bank of America Merrill Lynch sees oil demand slowing in the years ahead as EVs take hold. But it also sees supply growth slowing as U.S. shale slams on the brakes. The bank sees oil bouncing around between $50 and $70 through 2025.

Possible further supply drop:

Trump admin could end Chevron waiver in Venezuela. The Trump administration has repeatedly extended a waiver for Chevron (NYSE: CVX) to operate in Venezuela despite U.S. sanctions, but that could soon come to an end. Bloomberg reports that the administration could let the waiver expire in April as a way of increasing pressure on the government of Venezuela.

Price will return to that $50/$60 range in time.

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duc

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