Oil price discussion and analysis

[rederob]

Biggest problem with peak oil is that the concept is almost universally misunderstood. (Not having a go at you or anyone there, just noting it).

Common perception is that it means we're running out of oil or that prices are going to the moon. In reality the actual basis behind it is far simpler.

Pick any resource from land to timber to dam sites to oil and humans pick the low hanging fruit first.

Go to pretty much any city in the world and you'll find that the oldest part is that closest to the center. If you're looking for the oldest building then it generally won't be 50km away in the outer suburbs and if by sheer chance it is, then that building won't have been part of the city at the time but was a farmhouse etc which only became part of the urban area a long time after it was built.

Now find the oldest dams built for water supply. They'll be the sites closest to the city center almost always. Nobody builds a dam 200km away if they can build one in the hills next to the city.

And so on. Pick any resource and it's what humans do.

Same with oil.

The first wells were shallow, onshore and not far from existing cities and towns. In other words, the simplest, easiest, cheapest options available. Then as those run out, progressively further away, deeper or more technically difficult sources were developed.

That being so, with any resource that's working down the list of available options the cost inevitably rises. More materials, more labour, greater technical challenges and it's further away. The fundamental costs of developing each new source are higher than the best, now already used, one that came before it.

Same goes for things like environmental conservation or war zones and so on. Nobody's going to come up with a plan to drill in a National Park or set up operations in a war zone if there's a far less contentious and safer option sitting right in front of them that's dead easy. Such ideas only make business sense if there's no better option.

The "peak oil" theory is simply that as cost rises over time, a point would logically come where consumers can no longer afford increasing consumption and sometime after that, as cost continues to rise even further, consumption rolls over. That maybe either because the higher price prompts the development of alternatives or simply because it's unaffordable as such - if it cost $1000 per barrel then I think we all agree there'd be a drop in use.

So where are we then?

Looking at inflation-adjusted oil prices in USD, to the extent there's a "normal" price for oil it's between $20 and $30 per barrel. Excluding wars, sanctions, embargos and so on then prior to the year 2000 the industry was consistently able to operate profitably with prices in that range. Highly profitably in fact.

If we're not seeing companies excited at the prospect of $30 oil well that says all you need to know really. It says that the options available today aren't as good as the ones available previously. In truth well even at double that, $60, there was no great rush of drilling.

I'm no doomer and there's still plenty of oil on the planet but the evidence does point to it being past its economic best. The price required to make drilling viable has increased on a per barrel extracted basis despite improvements in technology. Prices that would have seen a flurry of drilling in the past don't prompt that response these days, the available options just aren't so good.

As you note, the low hanging fruit has been picked.
The other aspect affecting exploration is the willingness of financiers to risk lending to drillers when success rates decrease and new finds don't have the volumes to be profitable given the volatility of oil prices in the market.
Another way of putting it is that there are much safer bets for financiers nowadays.
That also has a flow-on effect to investors who are less willing to pour into oil companies, thereby deflating stock prices.
And all this in an environment where FF industries are increasingly problematic due to climate change concerns.

 

[Smurf1976]

Whilst the thread subject is oil and this chart's about coal, it's a pretty good illustration of the underlying concept of resource constraints.

I'm posting it since it's one of the few examples from a developed country with accurate data where a resource has been almost completely exploited. It's a good illustration of the concept.

Now there's still plenty of coal as such in the UK today. It's just that what's left is of poor quality and/or costs a fortune to mine due to depth and so on. With minor exception there's nothing left of any real value.

Note also that Margaret Thatcher, popularly associated with the demise of the industry during the 1980's, wasn't even born until 12 years after production peaked in 1913 with production having already declined 58% from the peak by the time she became Prime Minister (1979). She may have slightly accelerated the inevitable but ultimately it was resource constraints that killed the British coal industry, it was already doomed - she was just the one who decided to pull the pin on its life support.



Ultimately oil ends the same way. Not now but ultimately it has the same fundamental limit that "production" is really just extraction of a constantly diminishing natural resource. At some point it rolls over the peak, it will happen with the only question being when and under what circumstances - UK coal peaked just before WW1 and may have gone marginally higher if not for the war but ultimately resource limits are just that.

 

[Garpal Gumnut]

Without getting on to the EV vs ICE debate, I believe Oil is going to be around for longer than many anticipated.

Globalisation and progress is fine, until you get a loon like Putin unleash a European war and a mob of old men in Beijing unable to remove themselves from the dream of hegemony.

Then there is the USA which seems more intent on a race to the bottom both in terms of IQ and picking the least suitable person to be President. Not to mention the Saudi cousins who do not need to hark back to the good old days, they are living it, and still control a goodly percentage of the black stuff.

All in all the POI will remain high, $90-$120 with occasional fitful falls and rises above those two levels imo.

gg

 

[Tyre Kicker]

Totally agree with you gg.

Oil will be around much longer than many have foolishly begun to think in recent times.

 

[qldfrog]

Whilst the thread subject is oil and this chart's about coal, it's a pretty good illustration of the underlying concept of resource constraints.

I'm posting it since it's one of the few examples from a developed country with accurate data where a resource has been almost completely exploited. It's a good illustration of the concept.

Now there's still plenty of coal as such in the UK today. It's just that what's left is of poor quality and/or costs a fortune to mine due to depth and so on. With minor exception there's nothing left of any real value.

Note also that Margaret Thatcher, popularly associated with the demise of the industry during the 1980's, wasn't even born until 12 years after production peaked in 1913 with production having already declined 58% from the peak by the time she became Prime Minister (1979). She may have slightly accelerated the inevitable but ultimately it was resource constraints that killed the British coal industry, it was already doomed - she was just the one who decided to pull the pin on its life support.

View attachment 139133

Ultimately oil ends the same way. Not now but ultimately it has the same fundamental limit that "production" is really just extraction of a constantly diminishing natural resource. At some point it rolls over the peak, it will happen with the only question being when and under what circumstances - UK coal peaked just before WW1 and may have gone marginally higher if not for the war but ultimately resource limits are just that.

I agree with the overall idea but just believe due to the unique richness of oil in carbon chain varieties, we will have ongoing use longuer than expected by most ...
Even at 1000$ a barrel..not for burning in ICE or home furnace but for chemical feedstock.
So a greater emphasis on the type of oil bituminous,light etc with specific purposes will determine the future of explorers/oilers.

 

[Smurf1976]

I agree with the overall idea but just believe due to the unique richness of oil in carbon chain varieties, we will have ongoing use longuer than expected by most ...
Even at 1000$ a barrel..not for burning in ICE or home furnace but for chemical feedstock.
So a greater emphasis on the type of oil bituminous,light etc with specific purposes will determine the future of explorers/oilers.

Oil use as such is not going away agreed.

Case in point, a couple of days ago I did some brazing at home and that's using propylene gas, a manufactured (that is, not naturally occurring) petroleum gas. Decades from now, someone may well be brazing something and using propylene gas to do it and same goes for lots of other uses.

For relatively low value things though it's days are numbered in my view. The ultimate example:



Location: Cooper Basin (South Australia). Image: Santos

Even if you're literally producing your own oil, and that is a real working oil field, it's still cheaper to power the pump by some other means rather than burning some of your oil as used to be done.

Short term though, well the ACCC's LNG netback pricing for the next year was updated today.

Those figures are in AUD and are the value of natural gas "as gas" before it's turned into LNG. Multiply by 6.1 to get an equivalent oil price in AUD.

There's plenty of reports emerging regarding fuel switching from gas to oil in some countries due to the situation with natural gas and that's going to put upward pressure on oil consumption so long as it remains the cheaper option for firing boilers and so on.

How long it persists is anyone's guess really - the ACCC figures are just market data (see link below for the methodology etc). Throughout 2022 price is seriously high and at present oil's the cheaper fuel of the two.

April 2022		44.55
May 2022		41.59
June 2022		40.19
July 2022		39.32
August 2022		38.84
September 2022		38.66
October 2022		37.37
November 2022		37.51
December 2022		36.57
January 2023		33.29
February 2023		31.38
March 2023		26.25
April 2023		23.47
May 2023		21.89
June 2023		22.46
July 2023		21.89
August 2023		22.14
September 2023		22.67
October 2023		22.14
November 2023		22.33
December 2023		22.37
January 2024		21.03
February 2024		21.29
March 2024		20.75

Data from https://www.accc.gov.au/regulated-i...as-inquiry-2017-2025/lng-netback-price-series

 

[rederob]

Overnight we saw WTI rise about 10% from yesterday's low of $94, so expect our oilers to have a bumper day.
As you can see from the chart below, which shows the price trend for 2022, WTI is presently trading on the low side.
I still think it's far too early to draw any meaningful conclusions about POO's fundamentals while the Ukranian conflict remains in play, but clearly the market believes we are going to see further upside ahead.



With 5% - 10% price movements over 24 hours becoming frequent in recent weeks we could easily end up over $130/bbl next week. That's not a prediction, merely an observation of volatility.
On the flipside, I can't see support being challenged near term.

 

[over9k]

 

[over9k]

"Think the Europeans will need to get by without Russian crude? You are 100% correct. But you are not thinking anywhere near big enough.

Most of Russia’s oil fields are both old and extraordinarily remote from Russia’s customers. Fields in the North Caucasus are either tapped out or were never refurbished in the aftermath of the Chechen Wars, those of Russia’s Tatarstan and Bashkortostan provinces are well past their peak, and even western Siberian fields have been showing diminishing returns since the 2000s. With few exceptions, Russia’s oil discoveries of the last decade or three are deeper, smaller, more technically challenging, and even farther from population centers than the older fields they would be expected to replace. Russian output isn’t in danger of collapsing, but maintaining output will require more infrastructure, far higher up-front costs, and ongoing technical love and care to prevent steady output declines from becoming something far worse.

While the Russians are no slouches when it comes to oil field knowledge, they were out of circulation from roughly 1940 through 2000. Oil technology came a long way in those sixty years. Foreign firms—most notably supermajors BP and Shell, and services firms Halliburton and Schlumberger—have collectively done work that is probably responsible for half of Russia’s contemporary output.

The Western supermajors have left. All of them. Just as the Ukraine War began, Exxon and BP and Shell have walked away from projects they’ve sunk tens of billions of dollars into, knowing full well they won’t get a cent of compensation. Halliburton and Schlumberger’s operations today are a shadow of what they were before Russia’s previous invasion of Ukraine in 2014. Between future sanctions or the inability of the Russians to pay them with hard currency, those operations now risk winding down to zero. The result is as inevitable as it is damning: at least a 50% reduction in the ability of Russia to produce crude. (No. Chinese oilmen cannot hope to keep things flowing. The Chinese are worse in this space than the Russians.) The outstanding question is how soon?

Sooner than you think. It’s an issue of infrastructure and climate.

First, infrastructure. All of Russia’s oil flows first travel by pipe—in some cases for literally thousands of miles—before they reach either a customer or a discharge port. Pipes can’t . . . dodge. Anything that impedes a single inch of a pipe shuts the whole thing down. In the post-Cold War globalized Order when we all got along, this was something we could sing-song-skip right by. But with the Russians dropping cluster bombs on civilian targets - as they started doing on Feb 28 - not so much. Whether the Russians destroy the pipes with their indiscriminate use of ordinance (like they damaged a radiation containment vessel at Chernobyl!!!) or Ukrainian partisans target anything that brings the Russians income, much of this system is doomed.
Second, climate. Siberia, despite getting cold enough to literally freeze your nose off in October, doesn’t get cold enough. Most Russian oil production is in the permafrost, and for most of the summer the permafrost is inaccessible because its top layer melts into a messy, horizon-spanning swamp. What the Russians do is wait for the land to freeze, and then build dike-roads and drill for crude in the long dark of the Siberian winter. Should something happen to consumption of Russian crude oil or any of the millions of feet of pipe that take that crude from wellhead to port or consumer, flows would back up through the literally thousands of miles of pipes right up to the drill site. There is no place to store the stuff. Russia would just need to shut everything down. Turning it back on would require manually checking everything, all the way from well to border.

The last time this happened was the Soviet collapse in 1989. It took millions of manhours of help from the likes of BP and Halliburton – and thirty-two years – for Russia to get back to its Cold War production levels. And now, with war on in Ukraine, insurance companies are cancelling policies for tankers carrying anything Russian on Seas Black and Baltic while the French seize Russian vessels, and the Russian Central Bank under the strictest financial sanctions ever, it is all falling apart. Again.

Even in the sunshine and unicorn scenario that Putin duct tapes himself to a lawn chair and throws himself into a pool, and a random band of kindly kindergarten teachers take over the Russian government, we should not expect the energy supply situation in Russia to begin to stabilize before 2028, and for us to return to what we think of as the status quo before 2045.

In the meantime, the debate of the moment is expanded energy sanctions. Once everyone concludes that Russian crude is going away regardless, there’s something to be said about pre-emptively sanctioning Russian energy before reality forces the same end result. Moral high road and all that. Bottom line: Uuuuugh! The disappearance of some four to five million Russian barrels of daily crude production will all by itself kick energy prices up to at least $170 a barrel. A global energy-induced depression is in the wind.

But probably not an American one. In the bad ol’ days before World War II there wasn’t a “global” oil price. Each major country or empire controlled its own production and maintained its own - sequestered - market. Courtesy of the American shale revolution and preexisting legislation, the U.S. president has the authority to end American oil exports on a whim and return us to that world. An American export ban would flood U.S. refiners with relatively cheap shale oil. Those refiners will certainly bitch - their facilities have a taste for crude grades different from what comes out of Texas and North Dakota - but having a functional price ceiling within the United States of roughly $70 a barrel will achieve precisely what Joe Biden is after: cheaper gasoline prices.

The rest of the world? They’ll have to grapple with losing Russian and American crude at the same time. If the “global” price stays below $200, I’d be shocked".

- Peter Zeihan

 

[rederob]

This article gives a good overview of the North American drilling situation, including crude oil projections for the next 2 years.
Here's the Baker Hughes rig count for last week, showing yet another decline despite POO over $100/bbl:

I could not find an explanation for the huge drop in Canada's numbers, so if anyone knows, please post.

Meanwhile there are workarounds - known as "carve outs" - to SWIFT sanctions on Russia that allows many economies to continue buying their oil and gas. How much in total and at what price remains unknown.

 

[rederob]

Steady continuation of an upward trend can be seen in this short term chart for POO:

Nothing on the horizon to indicate it will fall off a cliff.
Also, the world's 3 largest oil services companies are now pulling out of Russia. That's not a skill gap easily backfilled, so producers are going to have to push their luck to maintain output.

 

[rederob]

If patterns repeat then POO has a bit more upside before tailing off and going sideways for a short while.
Below I have shaded in white the TSI trends that show how this could play out:

 

[qldfrog]

‘Wakey, wakey. We are not going back to normal business in a few months’: A top hedge-fund manager says crude oil prices could hit $250 this year

Top commodities experts met at the Commodities Global Summit in Lausanne, Switzerland this week and many predicted oil's price will top $200 this year.

finance.yahoo.com

Interesting as on mainstream financial site.

 

[wayneL]

‘Wakey, wakey. We are not going back to normal business in a few months’: A top hedge-fund manager says crude oil prices could hit $250 this year

Top commodities experts met at the Commodities Global Summit in Lausanne, Switzerland this week and many predicted oil's price will top $200 this year.

finance.yahoo.com

Interesting as on mainstream financial site.

I remember they were predicting 200$ oil back in 2008 (the last time I was looking around for a good second hand buggy and a pair of Clydies)... got to around 150ish IIRC.

This time probably has a lot more potential to actually get there and even more.

The big question is will it be really temporary like last time or will there be a permanently high Plateau of prices (like they predicted for the Dow in 1929).

I'm leaning towards believing there is something more sinister behind it all this time.

 

[Smurf1976]

I'm leaning towards believing there is something more sinister behind it all this time.

Never attribute to malice what can be explained by incompetence.

Not always true but usually is.

 

[Smurf1976]

I know the thread's about oil but I'll mention gas too since it's related.

International LNG prices have gone crazy as per my previous post and the ACCC data.

Now it looks like the Australian east coast domestic market is just starting to move.

A year or two ago prices were in the $6 - $8 range per GJ and have generally risen slowly to around $10 since then. Until a few days ago.....

Current price in Victoria is $10.99 and projected at $12.49 on Tuesday this week. Much the same for other states. That's only a small movement but if it were on a chart (which I don't have...) then it would be a breakout.

My personal view there is prices are headed a lot higher and will get there quickly once some cold weather arrives and pushes demand up (Melbourne being the most critical location in that regard). Reason being physical supply capacity just isn't there without diverting gas away from the export market that values it over $40 per GJ.

 

[divs4ever]

don't forget the dollar ( US and Aus ) are plummeting in spending power especially compared to 2008

 

[qldfrog]

Could be in that thread, or in the "russian invasion" one.
As we are talking facts and not Ukrainian PR, i prefer that place.
Mirroring my thinking,

The PetroYuan and the Rise of a New Economic Order - PanamaTimes

We are witnessing incredible developments in the global economy, driven by geopolitics. The sanctions that have been heaped on Russia for their invasion of Ukraine seem to be quite ineffective (at least for now), and this has been shown up much sooner than expected.

panatimes.com

 

[frugal.rock]

It would seem the US and Iran are both rather keen to conclude nuke talks so Iran can get on with oil exports to other than the back hand China deals and whoever else buys off them, despite sanctions (N Korea etc)....

Saudi's not keen for it, but having trouble with Houthi rebels running amok at the behest of... ? so don't see Iran as a threat to POO, just a general threat...
(you would need a degree to study/ understand all the historical tribal stuff going on over there & secret US business )
The US has released reserves recently, and may do again.
Not really an emergency, unless you consider Biden's political grip is urgent. Befuddling old fool...
The Whiteho's are starting to disown him.... ??

China Sinopec looking at spending a record amount in investment for down the line.
Most spare Russian oil is going to find a new home fairly easily, mostly India/ China,although China will be slowing down again.

POO? Expecting to see it head lower for a little while, before it resumes an uptrend again.

 

[bluekelah]

I remember they were predicting 200$ oil back in 2008 (the last time I was looking around for a good second hand buggy and a pair of Clydies)... got to around 150ish IIRC.

This time probably has a lot more potential to actually get there and even more.

The big question is will it be really temporary like last time or will there be a permanently high Plateau of prices (like they predicted for the Dow in 1929).

I'm leaning towards believing there is something more sinister behind it all this time.

I like to look for simpler explanations. For oil it will be the lack of investment and CAPEX past 2 years, remember when oil dropped to zero during covid? so for 2020 u could say no spending at all, and probably some extra investment only starting to flow in during 2H2021 as oil prices slowly recovered past 40USD mark and up to 70-80 by end of the year.

Shale needs more than 40USD to be profitable. Likely higher at $45USD now considering cost of labour and inflation on goods used. But the supply doesnt just kick in, it will take time to permit new wells and get the funding and staff to restart old ones.

I monitor some oil rig makers as well, and only toward 2H2021 have they started getting some interest and smallish orders for new rigs.

So with underinvestment for 2020 and most of 2021, i reckon we are going to see a continued climb in oil prices for at least next 1-2years. Russia problems, Saudi problems will compound the problem but unless there is a sudden recession happening, imho POO will slowly trend up this year due to supply limits from prior underinvestment into the sector, just like it had in 2021 on the back of covid recovery.

I believe a repeat of history where oil prices went up to $180 before the GFC hit will happen again, only this time likely to breach $200 from inflation and just the amount of printed money sloshing around.