Oil price discussion and analysis

[Smurf1976]

The Green Biden Bogeyman hasn't stomped on it yet.

I'll avoid political comment as such and simply note that any US President is far more likely to influence production than consumption in the short to medium term at least.

Short of grounding aircraft and stopping anyone driving, there's not much they can really do to influence the consumption end right now. Any impact there would be a very long term one - encouraging a shift to electric vehicles and things like that.

On the production side though, well they can certainly impose tighter regulations in the industry, not make Federal lands available and things like that. Doing so will push production down not up.

The previous US President was at an extreme in terms of being favourable to production. Anything this one does can't realistically exceed that, it can realistically only be somewhere between the same and less favourable to production in practice.

 

[over9k]

Most of this is states' rights stuff though. Think about the land rights texas has vs california. Texas has wells all over the place on all kinds of private property as in texas you actually own the stuff below the surface of your land down to a certain depth as well, hence the massive energy production.

In california meanwhile, producing energy is usually illegal.

 

[rederob]

Comfortably over support again:


Last week's Baker Hughes rig count added 10 more horizontal drillers, most in the Permian. The USA still has less than half the number of horizontal rigs drilling than a year ago, so it's going to be a t least a year before it gets back to 2019 production levels:

US Crude Oil Field Production (10.90M bbl/d for week of Jan 29 2021)​

The EIA expects crude oil production to decline again in 2021, averaging 11.1 million b/d before increasing to an annual average of 11.5 million b/d in 2022, as prices and drilling conditions become more favorable. I don't think the US oil market acts so evenly, and expect that once POO sits comfortably above $60/bbl the ramp up in drilling will easily add over 1Mbbl over the following 12 months. A possible fly in the ointment is that field decline rates have not been adequately factored in, meaning that it is possible that the full effect of fewer rigs plus field decline rates is yet to bite.

 

[jbocker]

@rederob I love your chart and I watch it with interest. I did borrow it and added some prices to a few ASX stocks at the times around the $52 WTI support line. Asking myself is there any 'correlation'. So firstly forgive me for borrowing your chart and secondly for any probable invalid attempt trying to correlate price to WTI, in this instance to look for any shortfall in stock pricing.
Anyway I thought WPL was interesting it may have some way to go, STO and BPT probably had many other things rattling their price at those times for any correlation to be valid.
I appreciate this is a crude match up attempt and that there would far better overlays of Company price data to WTI. (which I have not yet looked for.

 

[Smurf1976]

A possible fly in the ointment is that field decline rates have not been adequately factored in, meaning that it is possible that the full effect of fewer rigs plus field decline rates is yet to bite.

Without wanting to be political as such, the change of President may also have some implications.

The Trump administration substantially reduced environmental regulation to a point less stringent than that applied under any previous President, either Democrat or Republican, in many years.

My point there is not partisan politics but simply observing that for many oil projects the break even cost will have gone up. Arguments for or against such regulations aside, compliance doesn't add to profit, if it did then they'd do it anyway, and usually adds to costs in some way.

 

[over9k]

There's also the keystone pipeline getting KO'd. GUSH ran in response.

 

[over9k]

@rederob I love your chart and I watch it with interest. I did borrow it and added some prices to a few ASX stocks at the times around the $52 WTI support line. Asking myself is there any 'correlation'. So firstly forgive me for borrowing your chart and secondly for any probable invalid attempt trying to correlate price to WTI, in this instance to look for any shortfall in stock pricing.
Anyway I thought WPL was interesting it may have some way to go, STO and BPT probably had many other things rattling their price at those times for any correlation to be valid.
I appreciate this is a crude match up attempt and that there would far better overlays of Company price data to WTI. (which I have not yet looked for.
View attachment 119688

Just FYI on this one: I think you'll find that the points you've noted on this chart are at or are very close to the breakeven production price for a lot of shale wells. There was a big carryon not long ago about how oil had finally cracked the breakeven production price for shale wells/that this would mean a whole ton of wells could be brought back online, i.e that this was the beginning of the recovery for the oil sector.

I'm sure you'll find it if you run a search of some of my previous posts.

 

[jbocker]

Just FYI on this one: I think you'll find that the points you've noted on this chart are at or are very close to the breakeven production price for a lot of shale wells. There was a big carryon not long ago about how oil had finally cracked the breakeven production price for shale wells/that this would mean a whole ton of wells could be brought back online, i.e that this was the beginning of the recovery for the oil sector.

I'm sure you'll find it if you run a search of some of my previous posts.

That's cool. I can understand the $52 support line now. I was just curious to know if some ASX 'hydrocarbon' stock prices were at a 'similar price' coincidently at those same times points 1 to 4 and therefore at what price were they at point 5. WPL interesting in it being short of the price, but it is a long bow to draw a conclusion from, that the price would repeat.

 

[rederob]

That's cool. I can understand the $52 support line now. I was just curious to know if some ASX 'hydrocarbon' stock prices were at a 'similar price' coincidently at those same times points 1 to 4 and therefore at what price were they at point 5. WPL interesting in it being short of the price, but it is a long bow to draw a conclusion from, that the price would repeat.

Here's what the Dallas Fed regularly produce:




The concept of "breakeven" is, however, a bit rubbery, as explained in the linked article. For example, it may not necessarily include all the costs of doing business, as shown below:




I don't believe the Dallas Fed use "full cycle costs" in their breakeven, as this chart shows from them shows costs over time:


A more complete picture of LTO economics is found here.

 

[over9k]

Mmm but if you're ever in doubt about the costs of production, I feel like a support price would be a very good thing to look for.

 

[Smurf1976]

A lot also depends on existing infrastructure.

Drilling a new well that's right next to existing oil and wet gas pipelines which have unused capacity is a very different proposition to drilling the same well but having no such infrastructure nearby. It substantially alters the economics.

Cost of capital is another factor. If investors start expecting higher returns and/or interest rates go up then so does the price required for it to be worthwhile. That may seem obvious but I'll note that there are certainly people in high places who've overlooked that one in the past.

 

[over9k]

I wouldn't expect that any time soon though smurf, the only conversation they're having at the moment is about how much more money they should print.

And no, this is not going to spike inflation & therefore interest rates. Things will deflate soon as production can actually come back online for, well, everything.

 

[over9k]

 

[over9k]

Peter Zeihan's latest newsletter:

If there is one thing most Americans agree on in this age of social media screaming, it is that they want the United States to get out of the Persian Gulf. The challenge is finding a way to do so that also avoids sucking America back in in a few years. There are two general approaches to consider: The first strategy is the one Biden's immediate predecessor, Donald Trump, attempted: appoint a strategic successor to manage the region. Trump decided the successor should be Israel. That…that was a poor choice. Is Israel very militarily competent and blam-heavy for its size? Undeniably. But it is neck deep in managing its own micro-neighborhood of the Palestinian Territories, Jordan, Lebanon, and Syria. It cannot execute an American-style policy in the Persian Gulf that keeps the oil flowing while preventing Iraq from collapsing while keeping Iran down. It is clear that at least to a degree TeamTrump grasped that Israel was not up to the task, so the administration worked to rig the game. Trump greatly intensified sanctions on Iran, largely preventing the Iranians from selling…anything internationally. An economic crash resulted. Trump also worked to build a coalition of Arab states to buttress the Israelis. That required Trump convincing the Arabs that they should recognize Israel as something other than the "Zionist entity" and treat it as an actual country that had an actual right to exist. Trump met with some success and deserves some serious diplomatic kudos, but let's not get crazy. Consider the countries Trump flipped: Morocco – a state that is literally over a continent away from the drama of the Persian Gulf. Bahrain – an island statelet that has run out of oil and has but 1.6 million people. The United Arab Emirates – a confederation of city states who collectively are Iran's largest (non-oil) trading partner. A coalition, yes, but not a strategically effective one. Strategically, Trump's achievements changed little. The second option for American extraction from the region is the one selected by Trump's predecessor, Barack Obama: establish a regional balance of power so the region's countries contain one another. Israel aside, consider the other major players: Saudi Arabia, as the world's largest oil exporter and the keeper of the holy cities of Mecca and Medina, asserts that it should lead the entire region. That's an assertion which aggravates everyone, but in particular aggrieves… Iran, the country with the largest population on the Persian Gulf, and whose dominant religion – Shia Islam – clashes with that of the Wahhabi Sunni Islam of the Saudis. Problematic for the Saudis, Shia Islam is practiced by the majority of people who live within 100 miles of the Persian Gulf's shores. Even Saudi Arabia itself has a large Shia minority. But neither of these countries are the region's most powerful. That title goes to Turkey, a country which doesn't even border the Gulf itself. Turkey has the broader region's largest and most sophisticated economy, largest and most capable military, and a population slightly larger than even Iran. The whole point of Obama's 2015 nuclear deal between the United States and Iran was to bring Iran in from the cold, enable it to economically develop, and re-establish Iran as a formal player in the Middle East space. Then, as the logic goes, Israel, Saudi Arabia, Turkey, and Iran would all counter one another, leaving the Americans to play an eclectic variety of Middle East-news-driven drinking games.

There was nothing wrong with the idea, but there was plenty wrong with the execution. The nuclear deal was (in)famously light on details of anything beyond the nuclear program itself. It didn't address Iran's paramilitary and assassination activities throughout the region, the status of Israel, or the religious splits among the region's populations the Iranians exploited as a matter of course. Obama (in)famously found speaking with people – any people – tedious, and so tended to toss out grand ideas and then walk away forever. Establishing a regional balance of power in which you do not plan to actively participate requires a lot of upfront work and a lot of lengthy conversations. Under Obama that just didn't happen. Far from generating a balance of power, the Obama plan was little more than an unstable deal which made an unstable region even more unstable. My goal here isn't to condemn the strategies of both Trump and Obama (that's more of a side bonus), but instead to highlight that the Middle East is difficult. My point is that for the approaches the pair of American presidents chose, they simply did things wrong. For the successor strategy to work, Trump should have picked a different country. Israel lacks the military capacity to control its own neighborhood, much less the distant Persian Gulf where the populations are four times as large. Saudi Arabia might look good on paper, but it is broadly militarily incompetent. The only regional power that could even theoretically fill the role would have been Turkey, and America's relationship with the Turks under Trump (and under Obama) descended into such a deep freeze to the point that the two are no longer even functional allies. For a balance of power strategy to work in the Persian Gulf, it must be like all the other successful balances of power throughout human history. It cannot be purely military. There must be excessive entanglement on multiple fronts. There must be an economic angle. A political angle. A diplomatic angle. For Obama's strategy to work, any Iran "deal" was really only the first baby step. He would then have had to build relationships among the regional players. That'd require some seriously uncomfortable diplomacy not simply with Iran and Turkey, but also Saudi Arabia and Israel. That would require a lot of political capital and even more face time. Considering how much Obama loathed speaking to people, especially about uncomfortable issues, it’s a minor miracle he made it as far as he did in the region. So now we get to try this again with a new president: Joe Biden. Believe it or not, there may be some room for progress – in part because of the efforts of Biden's predecessors. As part of Trump's "maximum pressure" campaign to crush Iran, the Iranian economy has been absolutely devastated. The Iranians cannot even sell pistachios any longer, to say nothing of large-scale oil sales. With Iran proving to be an unreliable oil supplier, traditional customers like Italy, Greece, India, China, Korea, and Japan have all turned elsewhere for crude. Then COVID reduced global oil demand, crushing Iranian finances. No oil income means the Europeans have zero interest in participating in a revised nuclear deal because there is literally nothing in it for them. No oil income also means Iran has proven unable to sustain many of its paramilitary efforts in Lebanon, Syria, and Iraq. Iran hasn't been this weak since the rise of the ayatollahs in 1979. America has changed as well. Politically, there is no longer an American faction pushing for deep regional involvement. While the shale revolution was little more than a glimmer in some oilmen's eyes when Obama stepped into the White House the first time, twelve years later the United States is functionally energy independent. The energy cord has been cut. The Forever Wars are…over. Both America and Americans can tolerate a far higher degree of chaos in the Persian Gulf than they previously could. Which means TeamBiden might actually have a third option that hasn't existed since the early days of American involvement in the region in the 1950s. To simply leave. America will still play at the margins. Just because the United States doesn't need a stable global oil market doesn't mean having a knife to the region's pulse isn't useful. So, Biden has already announced it is maintaining every speck of the sanctions Trump enacted. If there is to be a new deal, TeamBiden has made it clear they won't be following the Obama script because Biden's negotiating power is already far superior to that of any of his predecessors. Nor is Biden playing favorites like Trump did; the new president has already cancelled advanced weapons sales to both Saudi Arabia and the United Arab Emirates (two states that were supposed to be at the core of Trump's Israel-coalition). Consider what this means: The Israelis are appalled Biden is even talking about talking to the Iranians. The Iranians are appalled that Trump's exit hasn't ushered them back into the world. The Saudis are appalled they can't purchase weapons. Just a couple weeks on the job Biden has done something none of his predecessors would have dared: pissed off everyone in the entire region. It’s unclear if this general pissing-off effort is part of a broader plan, or nothing more than a series of tactical decisions TeamBiden believes are unrelated. It is also unclear whether it matters. And if it does matter, it’s unclear if the administration even cares. Will that have consequences down the road? Certainly. But not for the United States, or at least not for the United States on anything less than a decade time scale. The global superpower has barely been able to keep the region's many fires on smolder. No one else has within an order of magnitude the necessary power or reach to step in, suggesting flare ups will be the new norm. Fires in the part of the world responsible for the majority of globally traded crude oil will absolutely reverberate.

 

[over9k]

NYMEX now over 60:

 

[rederob]

With WTI now well above breakeven in the fracking patches you would think rigs would be mobilised in greater number.
Instead, North American numbers actually declined last week:

 

[over9k]

Energy/oil companies>crude oil etf's directly. I bought all three a couple of months ago so I'm currently wearing my smug face. We'll see how long they last though.

3x oil etf's were delisted a while back. They still haven't announced their return anywhere other than the ftse as far as I know.

Also:



No idea how much the snowstorm has played merry hell with (caused) all of this, but we'll see soon enough. I'm in it for the long term so continuing to hold.

 

[BlindSquirrel]

If Texas is frozen, WTI supply is offline, that should help lift price (all else being equal).

 

[over9k]

Mmm it dumps demand significantly as well though.

Energy et al were on a solid uptrend beforehand so I'm not selling.

 

[Smurf1976]

If Texas is frozen, WTI supply is offline, that should help lift price (all else being equal).

Regarding the overall energy production situation in Texas:

A nuclear plant tripped offline.

Widespread reduction in wind and solar power generation due to the weather.

Some coal-fired power stations ceased operating due to coal stockpiles freezing up and becoming a solid mass. There are ways to stop that happening but wasn't done.

Power production from natural gas fell in a heap and that was the largest cause of the widely reported electricity outages. In short, there simply wasn't enough natural gas available to fully operate Texas' gas-fired power generation facilities. Hence their output progressively rose as the weather cooled and then rapidly collapsed - that's what happens when you run out of gas. Gas production is reported to have dropped circa 40% meanwhile consumption increased dramatically = ran out of gas in the pipes basically.

Oil - every report I can find puts it in the 0.5 to 1.2 million barrels per day range for lost crude oil production. For refining there's a much tighter range of estimates around 3 million barrels per day for refinery throughput lost.