Oil Prices Lower Forever? Hard Times In A Failing Global Economy

Guest Post by Art Berman

Two years into the global oil-price collapse, it seems unlikely that prices will return to sustained levels above $70 per barrel any time soon or perhaps, ever. That is because the global economy is exhausted.

The current oil-price rally is over as I predicted several months ago and prices are heading toward $40 per barrel.

Oil has been re-valued to affordable levels based on the real value of money. The market now accepts the erroneous producer claims of profitability below the cost of production and has adjusted expectations accordingly. Be careful of what you ask for.

Meanwhile, a global uprising is unfolding.

The U.K. vote to exit the European Union is part of it.  So is the Trump presidential candidacy in the U.S. and the re-run of the presidential election in Austria. Radical Islam and the Arab Spring were precursors. People want to throw out the elites who led the world into such a mess while assuring them that everything was fine.

The uprising seems to be about immigration and borders but it’s really about hard times in a failing global economy. Debt and the cost of energy are the pillars that underlie that failure and the resulting discontent. Immigrants and infidels are scapegoats invented by demagogues.

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Returning To Market Balance: How High Must Prices Be To Save The Oil Industry?

Guest Post by Art Berman

The global oil market is returning to balance based on the latest data from the EIA. That should mean higher oil prices but how high must prices be to save the industry?

Data suggests that oil producers need prices in the $70-80 range to survive. That is unlikely in the next year or so. Without more timely price relief, the future looks grim for an industry on life support.

EIA Revises Consumption Upward

Major EIA revisions to world oil consumption* data provide a new perspective on oil-market balance.

The world was over-supplied by only 570 kbpd of liquids in April compared to EIA’s earlier estimate for March of 1,450 kbpd; that March estimate has now been revised downward to 970 kbpd (Figure 1). February’s over-supply has been revised downward from 1,180 to 240 kbpd.

These revisions indicate that oil markets are much closer to balance than previously thought.

World Market Balance MAY STEO

Figure 1. EIA world liquids market balance (supply minus consumption). Source: EIA and Labyrinth Consulting Services, Inc.

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Natural Gas Prices Should Double

Gasoline prices are already up 30% from their lows in a matter of weeks. That’s how fast things can change in the real world. As more and more oil companies tied to oil and natural gas fracking declare bankruptcy in 2016/2017, the over supply will disappear and prices will rise. Art uses facts to predict natural gas prices will double in the next twelve months.

Luckily, none of us use gasoline for our cars or natural gas for heat and cooking. So, the 30% to 100% increase in these costs won’t effect that CPI number that Yellen keeps telling us is too low. As even the fake BLS inflation numbers jump above 3%, old lady Yellen will say it’s temporary and not raise rates again. So it goes.

 

Guest Post by Art Berman

Natural gas prices should double over the next year.

Over-supply plus a warm 2015-2016 winter have resulted in low gas prices. That is about to change because supply is decreasing (Figure 1).

Supply Balance_STEO_JAN 2016 Natural Gas 24 Jan 2016

Figure 1. EIA U.S. natural gas supply balance and forecast. Production, consumption and supply balance values are 12-month moving averages. Source: EIA and Labyrinth Consulting Services, Inc.

Total supply–dry gas production plus net imports–has been declining since October 2015* because gas production is flat, imports are decreasing and exports are increasing. Shale gas production has stopped growing and conventional gas has been declining for the past 15 years. As a result, the supply surplus that has existed since December 2014 is disappearing and will move into deficit by November 2016 according to data in the EIA March STEO (Short Term Energy Outlook) .

During the last supply deficit from December 2012 to November 2014, Henry Hub spot prices averaged $4.05 per mmBtu. Prices averaged $1.99 per mmBtu in the first quarter of 2016 so it is reasonable that prices may double during the next period of deficit.

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Another False Oil Price Rally: Crossing A Boundary

Guest Post by Art Berman

The oil-price rally that began in mid-February will almost certainly collapse.

It is similar to the false March-June 2015 rally. In both cases, prices increased largely because of sentiment. As in the earlier rally, current storage volumes are too large and demand is too weak to sustain higher prices for long.

WTI prices have increased 47%  over the past 20 days from $26.21 in mid-February to $38.50 last week (Figure 1).

NYMEX Futures 2015 Rallies & Declines 17 Jan 2016

Figure 1. NYMEX WTI futures prices & OVX oil-price volatility, 2015-2016. Source: EIA, CBOE, Bloomberg and Labyrinth Consulting Services, Inc. (click image to enlarge).

A year ago, WTI rose 41% in 35 days from $43 to almost $61 per barrel. Like today, analysts then believed that a bottom had been reached. Prices stayed around $60 for 37 days before falling to a new bottom of $38 per barrel in late August. Much lower bottoms would be found after that all the way down to almost $26 per barrel at the beginning of the present rally.

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Less Than 2 Percent of Permian Basin Is Commercial at $30 Oil

About that American oil independence narrative. Dead shale walking. The debt saturated shale oil companies are filing bankruptcy on a weekly basis and the trend will only accelerate from here as their hedges expire and oil prices continue to fall. You can stick a fork into the shale oil/gas miracle. I can’t remember who predicted this over a year ago.

Guest Post by Art Berman

Less than 2 percent of Permian basin tight oil wells are commercial at $30 per barrel oil prices.

Sorry about that. I know that many believe that U.S. shale and tight oil plays are commercial even at current low oil prices but data on the Permian basin and Bakken plays simply does not support that belief.

To make matters worse, Pioneer and EOG have made outrageous claims about Permian basin reserves in their 3rd quarter 2015 earnings reports that no sensible person should believe. Statements like these simply add to the mistaken idea that tight oil plays get a pass on the laws of physics and economics and that somehow the USA is going to beat Saudi Arabia as the low-cost “swing producer” of the world. I wish that were true but trust me–based on data, that’s not going to happen.

The Permian basin is one of the oldest producing areas in the United States. It has been thoroughly drilled and is in a hyper-mature phase of development. The Spraberry, Wolfcamp and Bone Springs plays that Pioneer and EOG are pursuing (Figure 1) are really secondary recovery projects in which horizontal drilling and hydraulic fracturing have replaced water and CO2 injection methods used in the past. Few new reserves should be expected. Most of the claims that these companies make are really about higher recovery efficiency of existing reserves.

None of these plays are remotely commercial at present oil prices. In the most-likely per-well reserve case, these plays require break-even oil prices in the range of at least $50-$75 per barrel, and current wellhead prices in the basin are less than $30 per barrel.

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When Will Oil Prices Turn Around?

Look for some good news about oil prices this week…maybe.

EIA releases its Short-Term Energy Outlook (STEO) on Tuesday (August 11) and IEA publishes its August Oil Market Report (OMR) on Wednesday (August 12). I hope to see a small increase in world demand and relatively flat supply.  That will bring the market somewhat closer to balance and prices may increase or, at least, stop falling.

Meanwhile, the view among most analysts is grim. On Monday, The Wall Street Journal’s Money & Investing headline read “No Relief in Sight for Crude: Oil’s Malaise could last for years.”  In late September, Bloomberg wrote, “Oil Warning: The Crash Could Be the Worst in More Than 45 Years.” As recently as mid-June, analysts were confident that oil prices were rebounding toward “normal” because both Brent and WTI had risen from low $40- to low-$60 levels.

When many were celebrating a return to higher prices, I warned that prices would fall. Now, when most are proclaiming lower oil prices ahead, I am looking for a bottom to the price slump.

Don’t get me wrong: this is not going to be anything dramatic but, if I’m right, it will add another month of data that suggests flattening production and increasing demand.

I have not changed my view that we have crossed a boundary and things are fundamentally different than before. My colleague Rune Likvern published a post today that details the key reasons why this substantive market shift has occurred.

As I wrote in late June, the world is a fundamentally different place post-the 2008 Financial Collapse and some markets, including oil, no longer respond as they did before. This is a function of even more massive debt than prior to the Collapse and monetary policies that have sustained artificially low interest rates for 6 years. Cheap money has fostered the expansion of oil and other commodity supplies beyond the weakened global economy’s capacity to absorb them. Also, the anticipated de-leveraging of debt has not occurred.

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Hope Fades: U.S. Storage Withdrawals About Price, Not Supply & Rig Count Drop Stalls

Guest Post by Art Berman

Storage withdrawals and falling rig count have been the main sources of hope that U.S. tight oil production will fall and that oil prices will rebound. That hope is fading as it is now clear that recent withdrawals from U.S. crude oil storage are because of price, not falling supply, and that the drop in rig count has stalled.

Figure 1 below shows the relationship between U.S. crude oil storage inventory and WTI price. The thinking around recent withdrawals from storage is that this reflects depleting supply. The data, however, reflects that traders were storing crude oil during the price collapse in order to realize higher prices later. With rising prices over the last month, traders are selling their stored volumes. The recent inventory build correlates almost perfectly with the fall in oil prices and the withdrawals from storage over that last 3 weeks correlate with the 35% increase in oil prices since late March.

http://www.artberman.com/wp-content/uploads/US-Crude-Oil-Inventory-WTI-23-May-2015.jpg
Figure 1. Monthly change in U.S. crude oil inventory and WTI oil price (3-month moving average of inventory volumes). Source: EIA and Labyrinth Consulting Services, Inc.
(click to enlarge image)

Previous builds and withdrawals from inventory also correlate with price but generally price followed changes in inventory. In the recent case, price lead inventory changes.

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Oil Prices Will Fall: A Lesson in Gravity

Guest Post by Art Berman

The oil price collapse is not over yet.  It is more likely that Brent price could fall back into the mid-$50 range than that it will continue to rise toward $70 per barrel.

That is because oil prices have risen based on sentiment alone. The fundamentals of supply and demand indicate a dismal reality: oil prices will fall and may fall hard in the near term.

Our present situation is like that of the cartoon character Wile E. Coyote.  He routinely ran off of a cliff and as long as he didn’t look down, everything was fine.  But as soon as he looked down and saw that there was no ground beneath him, he fell.  Hope and momentum cannot overcome gravity.

WILE E COYOTE SERIES 17 MAY 2015
Figure 1. Wile E. Coyote cartoons.  Sources:  The Braiser, Dubsisms and Forbes.

Neither can ignoring the data.

When I look down from $60 WTI and almost $68 Brent, I see no support except sentiment. Like Wile E. Coyote, we need a gravity lesson about oil prices.  What goes up for no reason, will come down sooner than later and it may fall hard.

Let’s examine the facts.

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Saudi Arabia’s Oil-Price War Is With Stupid Money

Hat tip Indentured Servant

Guest Post by Art Berman

Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible.

Saudi Arabia intends to keep oil prices low for as long as possible. Its oil production increased to 10.3 million barrels per day in March 2015. That is 700,000 barrels per day more than in December 2014 and the highest level since the Joint Organizations Data Initiative began compiling production data in 2002 (Figure 1 below). And Saudi Arabia’s rig count has never been higher.

Chart_Saudi Prod & Brent Ap 2015

Figure 1. Saudi Arabian crude oil production and Brent crude oil price in 2015 U.S. dollars. Source: U.S. Bureau of Labor Statistics, EIA and Labyrinth Consulting Services, Inc.

Market share is an important part of the motive but Saudi Minister of Petroleum and Mineral Resources Ali al-Naimi recently emphasized that “The challenge is to restore the supply-demand balance and reach price stability.” Saudi Arabia’s need for market share and long-term demand is best met with a growing global economy and lower oil prices.

That means ending the over-production from tight oil and other expensive plays (oil sands and ultra-deep water) and reviving global demand by keeping oil prices low for some extended period of time. Demand has been weak since the run-up in debt and oil prices that culminated in the Financial Collapse of 2008 (Figure 2 below).

Chart_Cons PCT_Demand PCT of Supply WTI CPI 3 April 2015
Figure 2. World liquids demand (consumption) as a percent of supply (production) and WTI crude oil price adjusted using the consumer price index (CPI) to real February 2015 U.S. dollars, 2003-2015. Source: EIA, U.S. Bureau of Labor Statistics, and Labyrinth Consulting Services, Inc.
(click to enlarge image)

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