Oil price discussion and analysis

[Smurf1976]

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

Agreed these low prices aren't sustainable.

Short term though, it seems that the OPEC deal with Russia has fallen apart and the price has plunged to $42 per barrel (WTI).

https://www.kitco.com/news/2020-03-...rt-as-Russia-resists-crude-prices-plunge.html

 

[tinhat]

You know what is unsustainable? Oil!

 

[ducati916]

Commercials have been all over this move lower.



It is 1 week out of date. I'll be looking at this week's when it comes out, they will probably catch (pretty close to) the lows.

Plenty of gas left in Oil over the next few years, possibly even decades.

Unsustainable or not, we will continue to use it.

jog on
duc

 

[qldfrog]

AMZA has been bashed last night..10pc in a session

 

[Smurf1976]

You know what is unsustainable? Oil!

Well ultimately it is yes as are rather a lot of things, the current level of food production being one of them.

I was however referring to the price being unsustainable in that it appears to be unprofitable to develop new supply at this price and, since oil wells deplete, ultimately that cannot continue indefinitely.

 

[Smurf1976]

Relating to the oil price are other energy sources.

Without getting into in depth engineering and so on, there's a not insignificant ability to substitute one fuel for another in the short term and a much greater ability in the longer term.

Industrial boilers fulled by gas not always but often have oil as a backup fuel. In the event that oil became cheaper than gas, they'd rationally switch to using it. LNG prices are commonly set relative to the oil price for that reason with a guarantee that gas is always cheaper.

Within the power industry, and that's the biggest single user of fuel, there are two ways of doing it:

1. In some cases there's the ability to switch fuels at the same plant. Firing some oil in a coal boiler for example or the ability to switch completely between gas and oil.

2. Changing the priority order of generation dispatch. Whilst it's well known that coal plant tends to run constantly and oil or gas are used for peaking, if the oil price drops low enough then it could certainly be run a lot more than it is now (globally).

So point is that as we see oil down to low prices, that puts a cap on the thermal coal and gas prices also. Something to bear in mind if you're investing in either industry and I'll note that we're seeing Australian east coast (all states except NT and WA) gas prices back down around $5 / GJ now so that's around half what they were not too long ago. Reason = the LNG exporters are losing enthusiasm to produce and export given international market factors.

 

[ducati916]

Latest COT



Commercials starting to buy. Supply will be starting to contract. After all, if you are a producer, would you sell at a loss? If the answer is yes...how long can you sell at a loss for? If you are a Sovereign (Russia etc) probably quite some time if all you care about is having some revenue irrespective of the longer term damage.

However, the US shale supply is now less debt and more private ownership (the majors) who will not indiscriminately sell at a loss. US shale is (possibly) along with the Arabs, the marginal producer.

COVID-19 isn't going anywhere fast, so lower prices are here for a while (weeks/months) but will rebound nicely once the all clear is given.

jog on
duc

 

[PZ99]

What in the name of utter fudge is this ?

 

[greggles]

What in the name of utter fudge is this ?

View attachment 101123

Down, down... oil prices are down!

 

[basilio]

The Saudis are opening the tap.
Smurf noted that the OPEC price arrangements had failed

Oil price to plunge as Saudis vow to step up production
Move follows Russian refusal to join Opec-led production cut aimed at keeping prices high
https://www.theguardian.com/busines...uch-as-20-as-saudis-vow-to-step-up-production

 

[MrChow]

Russians have to respect how cold blooded they are.

They didn't beat U.S shale 3 years ago but with Coronavirus led demand drop see another chance to take them out.

 

[moXJO]

Jesus that's lower then a snakes hard on.
That's insane.

How long will Russia hold out?
That price will send everyone to the wall it's just not sustainable.

WPL anyone know their cost of production?

 

[Smurf1976]

So far as production cost are concerned there’s threemeasures really.

Total cost to discover, develop and operate an oil field. This gives the highest number.

Cost to develop and operate an oil field that you’ve already found, considering the cost of exploration to be irrelevant given the money’s already spent and the question now is whether to develop what’s been found or not.

Cost to keep producing from an existing well that’s already been found, drilled, infrastructure put in place etc.

The first would be unprofitable for most at this price, only reason for anyone to keep going is with an eye to the future and if they want to retain expertise and so on.

Development of known resources wouldn’t stack up in a lot of cases at this price. Since it’s typically contractors doing it, there’ll be a bit of a battle between owners deciding to not develop versus contractors soashing prices to try and get work. Not a good time to be invested in an oil field service company.

Simply running what’s already there would still beat shutting it in in virtually all situations other than some stripper wells so we won’t see a sudden plunge in production unless it’s a conscious decision by someone to try and raise prices.

It’s a standoff basically. Flood the market, send price right down, and keep doing so until either the other side goes broke as such or comes back to the negotiating table and agrees to cut production and raise prices.

 

[MrChow]

Crude Oil is now $28 just off the 2016 low of $26.

Wasn't there a mass panic about that in 2016 and today it's only a minor story.

 

[Smurf1976]

A one third drop in price in a matter of hours - there's probably an example somewhere but I can't recall any prior examples of anything major (eg major indices, oil, gold etc) losing quite that much value in a matter of just hours.

Looking at some other impacts though (with the discussion here being both physics and finance - skip to the last paragraph if you just want the financial conclusion):

Energy content of a barrel of crude oil is about 6 GJ. It varies a few % either way, not all crude oil is exactly the same, but it's roughly 6 GJ per barrel. Some is 5.8, some is 6.2, etc but none of it's too far from that.

Oil is currently trading at $27.75 and the AUD is at about 65 cents which gives an AUD oil price of $42.50 per barrel or just over $7 per GJ.

Looking at the Australian domestic (excl WA and NT) market, natural gas has been mostly in the range of $5 - $6 in recent days. A year ago it was more like $10 - $12 but, and this is the point, you won't generally see gas prices exceeding oil prices at least not for long.

That's due to the reasons I've previously mentioned. LNG prices linked to oil prices under contract is a big one. Industrial users able to switch between fuels is the other.

Note in this context that there's more than one gas price globally and in this context I'm referring to seaborne LNG and the onshore domestic market in countries (including Australia excl WA and NT) where the LNG price sets the domestic price. From a trading perspective I'll draw attention there to the fact that the USA is not in this situation, the gas price there is driven by other factors primarily.

Gas costs more to transport, simply because it's a low density gas and to move it you either need pipelines and compression stations along the way (which are basically just pumps of a sort but they use quite a bit of energy to operate) or you can turn it into liquid at -161 degrees C. All that takes energy though and has other costs when compare to oil that can be stored in a simple low tech and low cost tank. Hence the general case of gas selling at a discount to oil.

Bottom line is that oil at ~USD 28 per barrel supplies energy at AUD 7 per GJ and that's not far from the AUD domestic market gas price of $5 - $6. It's going to put downward pressure on that gas price and thus on Australian gas producers.

For some users, those paying higher pipeline costs, gas would need to come down toward AUD 4 per GJ to match the current oil price whilst for most it is capped at no more than AUD 6 per GJ with oil at the present price.

This situation may also put some pressure on bulk pipeline owners. If they want to keep gas going through them then ultimately the price at the customers' end needs to be competitive. A contract that the customer pays $x per GJ transported only works if the customer still wants gas transported.

Looking at thermal coal, it has been trading at about USD 65 per tonne or AUD 100 per tonne recently. As with oil the energy content varies a bit, not all coal is chemically identical, but for thermal coal the official specification is 26.35 GJ / tonne.

So coal at USD 65 is equivalent in energy terms to oil at USD 14.77 per barrel. Or in AUD it's equivalent to oil at $22.70 or gas at $3.77 per GJ. That sounds good but I'll add some caution in that there's two issues which complicate it.

First, coal is more costly to handle. There's ash to dispose of, there's a greater need to control pollutants, operation requires more physical plant maintenance and staff, etc. Coal needs to trade at a discount to oil for that reason since low price relative to oil and gas is ultimately the only reason there's any serious market for thermal coal in the first place.

Second, in some uses there's a significant efficiency difference. Worst case using oil or gas in a boiler gets the same efficiency as using coal. Best case gas or oil gain a significant advantage and that's especially so in power generation in situations where it's a purpose built gas-fired power station competing in the same grid against a purpose built coal-fired one. Gas does have an efficiency advantage there such that it skews the break even fuel prices.

There's also a third level impact. In short cheaper oil and cheaper gas, and pressure on the coal price, is likely to push wholesale electricity prices down in many countries including Australia. That then has impacts for power producers using other resources, eg wind, hydro, solar, brown coal (which is not a traded market) or nuclear. They get zero reduction in costs but the value of their production drops unless they're very well hedged.

Long story short = oil at USD 27.75 is going to put pressure on the price of gas at current levels and it wouldn't need to fall too much further to squeeze the thermal coal price too. Oil at this price is going to put the entire energy sector, gas, coal and electricity as well as oil, under price pressure.

 

[Smurf1976]

Do those of you who look only at the charts, so not the fundamentals of the industry etc, see anything of note?

I had been thinking that circa $30 would be the bottom but the I sure wasn't expecting to see a one third drop in price in a matter of hours, I'd been thinking it would be far more gradual than that.

On one hand it seems like a plausible value for a bottom. Low enough to cause pain, it's near some previous low points, it's a 50% drop since start of the year, etc. On the other hand it seems far too fast.....

 

[rederob]

Do those of you who look only at the charts, so not the fundamentals of the industry etc, see anything of note?

I had been thinking that circa $30 would be the bottom but the I sure wasn't expecting to see a one third drop in price in a matter of hours, I'd been thinking it would be far more gradual than that.

On one hand it seems like a plausible value for a bottom. Low enough to cause pain, it's near some previous low points, it's a 50% drop since start of the year, etc. On the other hand it seems far too fast.....

The USA recently became the swing producer as OPEC had reduced output to keep prices in the $50-$65 range. They achieved this through LTO which is relies on +$50/bbl to be profitable. And the USA is awash with LTO so anyone thinking POO can climb to high sustainable levels in the next few years has rocks in their head imho.
However, with prices at $30 as I post, USA's LTO producers will, overall, be producing at massive losses.
Conventional oil does not have high ongoing lifting costs, so the selldown in most Australian equities seems extremely overdone. For example field operating costs/boe for Beach (BPT) are expected to be around $9/boe in FY 2020.
I expect POO to return to the low $40s in a few months and anticipate a trading rang to settle later in a $45-$55 range.

 

[rederob]

Overnight WTI dipped as low as $27.34 before bouncing.
It sits around $31 as I post so has recovered a tad.

An open secret in the USA's oil industry resurgence has been the amount of debt financing the fracking of shale formations to squeeze out light tight oil (LTO) embedded within its formations and make it flow to the surface. It's a very expensive process. Many smaller LTO outfits have never been able to get adequate returns on their outlays have gone belly up in the relatively short period fracking has boomed.
With WTI at around $30/bbl only the biggest producers with the best fields will be able to survive as most industry observers regard that price as a production cost that fails to cover debt obligations. Producers either try to maintain a cash flow through production until prices recover, or file for bankruptcy. Those that choose the option of shutting up shop instead, and waiting for a price recovery, face the whammy of an increasing debt burden and essentially just delay the inevitable.
USA's LTO producers were already getting nervous as WTO steadily dipped from over $60 at the beginning of the year to $45 by end February. Marginal producers will have already worked out their game plan if prices dropped further, and they clearly now have.
What now remains to be seen is how long they can keep producing before they go belly up and the POO bounces decisively.

 

[basilio]

I think the real looming disaster is the huge debt overhang particularly in the fracking industry. It was already precarious. It is now totally untenable.

On top of that if/when the companies fall over there will be huge clean up liability left for... yep the taxpayer. This story is 3 months old when POO was still $60 per B

As Fracking Companies Face Bankruptcy, US Regulators Enable Firms to Duck Cleanup Costs
Read time: 9 mins
By Justin Mikulka • Friday, December 20, 2019 - 08:45
https://www.desmogblog.com/2019/12/20/fracking-oil-gas-bankruptcies-cleanup-costs-regulators

 

[qldfrog]

With the aud low, i bough ooo osh and beach petroleum today..my only buy foray.
Amza got slammed 40pc last night in the us market and i had a decent exposure so it hurts
50pc down in 2 sessions
Duc must not be happy