Oil price discussion and analysis

[rederob]

@rederob @Smurf1976
Would you guys concur with a macro analysis that I think we have largely seen the bottom of the poo?
Based on;
1. Production fall now seemingly leveling out (based on US production and rig counts)
2. Storages starting to get used
3. The worst of covid19 seemingly behind us (for now)
4. Economic activity increasing
5. Poo consolidation
6. Retailers discounting automotive lubricants

Interested on thoughts as I am looking to enter ooo when funds permit or cull some underperformers and rotate.
Cheers

US domestic production of crude is rising slightly from over a fortnight ago - some 500kbbl/day.
Net crude imports are down significantly over the month.
Remember that crude is principally a product feedstock, and that refiners try to balance each market sector in accordance with demand.
Presently all refiner products have more than adequate supplies.
The fundamentals for near term declines in WTI crude prices remain firm, so prices declines in excess of 10% would not surprise me atm.
Factoring in probable COV19 impacts on US demand gives me no confidence that present prices will hold.
On the potential plus side, LTO drillers never returned to the shale patches with prices averaging $38/bbl, so maybe tomorrow's rig count will keep speculators interested in POO at present levels.

 

[Smurf1976]

Factoring in probable COV19 impacts on US demand gives me no confidence that present prices will hold.

That's the elephant in the room in my view. What happens with the overall situation (pandemic, real economy) and demand.

That plus there's some degree of uncertainty about storage and by that I mean while the US does publish what should be accurate figures, it's far less certain how much oil is or isn't being stored in many other countries where there's either no data or it's merely a third party estimate based on tracking tankers etc.

Then there's the political situation which is anything but stable.

I'm presently not invested in oil unless an individual stock comes up on its own merits (as distinct from me seeing it as a play on the oil price).

 

[Dona Ferentes]

I usually read him and move on. This caught my eye with driving season upon the nth hemisphere

AAA expects we will take 700 million trips this summer. That’s about 120 million, or 15%, fewer outings than we embarked on last summer.
That sounds like good news for the economy until you realize that 683 million of those trips will be in a car. Airlines, cruise ships, rail, and other forms of mass transportation are missing out—with business expected to come in at 86% below last year’s levels

John Mauldin

 

[over9k]

Northern hemisphere is now heading into winter - heating energy use will be up but not a lot of caravans being driven around in snow. Very basic seasonality.

I've bought santos here in aus though.

 

[rederob]

LTO drillers never returned to the shale patches with prices averaging $38/bbl, so maybe tomorrow's rig count will keep speculators interested in POO at present levels.

And so it proved to be.
LTO rigs in the USA declined by 3 net, and increased in Canada by 2.
Gas rigs for North America increased by 4 net.
Last year the US rig count stood at 963, and today it's at 263.
From the chart below we can probably surmise that with WTI crude averaging a shade over $38/bbl over the past month that it's nowhere close to enticing US drillers back to shale:

Most surprising of all from the chart above is the incredibly low trading volumes which have persisted over the past fortnight. Anyone with an explanation?
The international rig count fell by 24 in the month to June so confidence is yet to return to conventional oil.
While the USA continues to be deeply mired in another round of COV19 shutdowns I reckon the WTI crude price is in for a lot more sideways action. A few weeks ago I would have suggested the "driving season" could have lifted prices, but now I am not sure that this season is going to see anywhere near the traditional traffic.

 

[ducati916]

So:



Possibly having found a bottom in production, combined with:

OPEC+ scheduled to ease production cuts. OPEC+ is scheduled to ease production cuts beginning in August, and sources told Reuters that the group will likely refrain from an extension. Saudi Arabia also reportedly put pressure on Nigeria to increase its compliance. On Thursday, Russian energy minister Alexander Novak reiterated that position. “At present, there are no decisions to prepare any changes…Next, under the current agreements we should have a partial restoration of the volume of reductions starting August 1,” he said, according to TASS.

Russia’s oil exports to Europe near two-decade low. Russia is set to cut oil exports to Europe to just 900,000 bpd in July, the lowest level since 1999, as supplies from elsewhere continue to gain market share. U.S. oil, in particular, has gained a foothold.

Libya restarts eastern oil field. Libya brought the Mesla field back online, adding a small amount of idled production.

Saudi Arabia and Kuwait restart Neutral Zone. Saudi Arabia and Kuwait have restarted production at the Al-Khafji oil field in the neutral zone between the two countries.

jog on
duc

 

[rederob]

Oil traders must be in lockdown, or their keyboards are broken:

All in all I see this as positive for prices going forward as we should continue to see US oil output declining in months to come irrespective if they returned to the shale patches in big numbers in the interim. The decline rate of unconventional oil wells is stellar:

 

[rederob]

More sideways price action in oil over the week:

 

[over9k]

Yeah there's seasonality to think about now too - northern hemisphere heading into winter and with coronavirus depressing movement so much about the only bounce I can see will be in heating oil.

 

[qldfrog]

Yeah there's seasonality to think about now too - northern hemisphere heading into winter and with coronavirus depressing movement so much about the only bounce I can see will be in heating oil.

Which is big and covid unaffected
Whereas driving is always reduced.
I see consumption in October onward remaining very similar to last winter in northern hemisphere.a return to pre covid numbers

 

[over9k]

Yep we're in agreeance on something again frog!

 

[qldfrog]

Yep we're in agreeance on something again frog!

Stop it , I don't like it
;-)
Nice to see some convergence on some subject, open minded on both sides

 

[rederob]

Yeah there's seasonality to think about now too - northern hemisphere heading into winter and with coronavirus depressing movement so much about the only bounce I can see will be in heating oil.

The "winter" effect in the northern hemisphere peaks late January - 6 months away.
In the USA most space heating is via propane/gas. Winter demand for gas usually doubles. Throughout an average year (not 2020) there is not a great deal of monthly change to petroleum product supply:


Overnight the rig count showed 18 consecutive weeks of oil well drilling decline: net loss of 5 to LTO. Canada added 8 gas rigs but none to oil.
That news lifted WTI crude prices by 2.5% to close out the week at $40.57.
It seems as close to certain as can be that LTO at around $40/bbl is not economic given that we have been hovering up to and over this figure for about 5 weeks.

 

[over9k]

There's also the breakeven price of the shale wells too - I'm not an oil specialist so I don't know them off the top of my head but I do know the small producers are all heading to the wall because they just don't have the sheer size to be able to weather an economic storm like this.

Same thing as all the mum & dad convenience stores getting swallowed up by bigger chains etc - the whole economy's laying waste to the little guys while the big companies raise capital etc and ride things out.

 

[rederob]

There's also the breakeven price of the shale wells too - I'm not an oil specialist so I don't know them off the top of my head but I do know the small producers are all heading to the wall because they just don't have the sheer size to be able to weather an economic storm like this.

Same thing as all the mum & dad convenience stores getting swallowed up by bigger chains etc - the whole economy's laying waste to the little guys while the big companies raise capital etc and ride things out.

Just an FYI: LTO is oil from shale, otherwise called Light Tight Oil (ie. needing fracking) or unconventional oil.

 

[over9k]

Gotcha. Though afaik, the big players can (and are) easily able to raise the capital necessary to ride out the storm and in doing so squeeze the little guys no? Just like in basically every other sector at the moment?

I seem to recall what I think was chesapeake going bust not long ago?

And that's before we even start on what the saudi's are up to.

 

[Smurf1976]

In the USA most space heating is via propane/gas. Winter demand for gas usually doubles. Throughout an average year (not 2020) there is not a great deal of monthly change to petroleum product supply:

Agreed although I'll add that there's some shift between refined products seasonally. That gasoline peaks when heating oil is at minimum masks that in terms of total product volume (though gasoline is by far the larger in absolute volume terms).

Heating oil in the US and indeed most countries is effectively diesel by the way. It's either actual road diesel as such from the same tanks (typically in places with low sales volume) or it's diesel with some additives left out and/or dye added for tax identification purposes. In a few places it also has a higher sulfur limit but ultimately it's still diesel of a sort.

In the UK however, and Australia to the extent of the very limited use of it, heating oil is a different product. It's No.1 fuel oil that is supplied as "heating oil" in the UK and Australia and in Japan it's kerosene sold for that purpose.

#1 can be used in place of the diesel type oil without technical problems so any surplus of that is easily gotten rid of by the oil companies but going in the other direction ends in a world of hurt and isn't an option.

 

[rederob]

Heating oil in the US and indeed most countries is effectively diesel by the way. It's either actual road diesel as such from the same tanks (typically in places with low sales volume) or it's diesel with some additives left out and/or dye added for tax identification purposes. In a few places it also has a higher sulfur limit but ultimately it's still diesel of a sort.

US household fuel oil consumption is only 5% of energy use compared with about 45% for propane/natural gas.

 

[Smurf1976]

US household fuel oil consumption is only 5% of energy use compared with about 45% for propane/natural gas.

No argument there, fuel oil consumption is relatively minor compared to gas in the US and indeed most places.

Propane is of course petroleum and included in the petroleum volumes for statistical purposes by most countries. Likewise butane.

 

[ducati916]

News:

China’s oil imports surged. China’s crude imports surged to 11.93 mb/d in June, a record high, and up 25 percent from a year earlier. A separate estimate put imports at 12.9 mb/d for the month.

Explosions in Iran. Multiple explosions have hit Iranian nuclear facilities in the past few weeks, and at least one study suggests it could set the Iranian nuclear program back by two years. Analysts widely suspect either Israel or the U.S., or both working together. The clandestine confrontation with Iran raises new geopolitical risks to the region.

Kansas City Fed survey finds ongoing stress. Roughly 32 percent of oil executives responding to the Kansas City Fed survey said that they would be insolvent within one year if current crude prices remain steady.

Libya declares force majeure again. Just two days after it lifted the force majeure on all oil exports, Libya’s National Oil Corporation has declared force majeure again, citing a renewed blockade on its oil export terminals and blaming it on interference from the United Arab Emirates.

Drilling hits 20-year low. The number of oil and gas wells drilled globally is expected to hit 55,350 this year, the lowest level in two decades, according to Rystad Energy. That represents a 23 percent drop from 2019 levels. The number of wells drilled does not return to 2019 levels through at least 2025, as far out as the Rystad forecast goes.

OPEC+ leans towards easing cuts. OPEC+ is right now leaning towards allowing the production cuts to drop from 9.7 mb/d to 7.7 mb/d beginning in August. The group’s technical committee meets this week. The challenge for the group is that while they don’t want to cede market share to other producers bringing production back, if they ease the cuts they risk pushing oil prices down. Other analysts believe that because the market is technically seeing a supply deficit, there is room for the group to ease.

Oil write-downs on the rise. The oil majors have announced a slew of impairment charges as they revise down their long-term oil price assumptions, with an eye on energy transition. The companies are dealing with this challenge in different ways, but impairments may continue to rise for a while. On Tuesday, Woodside Petroleum (ASX: WPL) announced a US$4.37 billion write-down.

IMF: Middle East loses $270 billion on downturn. Oil-producing countries in the Middle East are set to earn $270 billion less in oil revenues this year compared to 2019, with losses led by Saudi Arabia, according to the International Monetary Fund. The region’s overall GDP could contract by 7.3 percent this year. Oil-importing countries in the Middle East, such as Egypt, will suffer less, with GDP expected to contract by just 1.1 percent.

Real mixed bag. Some positive for higher prices, some less so.

jog on
duc