Oil Prices Poised To Rise In Early 2018

Oil prices will be lower for longer—that is the conventional wisdom. Data suggests, however, that oil supplies are tightening and that higher prices are likely in the relatively near-future. Refined Product Demand and Crude Oil Exports U.S. crude oil plus products comparative inventories have fallen 120 mmb (million barrels) in 26 of the last 32 weeks (Figure 1). Strong domestic demand for refined products and increased crude oil exports are the main reasons. That translates into lower net imports of both crude oil and petroleum products…

Are Strong U.S. Crude Inventory Draws Sustainable?

The decline in U.S. comparative inventories since February is the most significant oil market development since prices collapsed three years ago. It means that U.S. demand has exceeded supply for most of the last 5 months. The main cause is lower net imports, not higher domestic consumption, and that is probably not sustainable. Comparative Inventories: The Key To Understanding Oil Prices Comparative inventory (C.I.) is the difference between current storage levels of crude oil plus a select group of refined products, and their 5-year average for…

Permian Oil Reserves Are Grossly Exaggerated

We are entering a new age of American energy dominance according to Energy Secretary Rick Perry. President Trump reflected that view in comments he made last week that “…we’ve got underneath us more oil than anybody, and nobody knew it until five years ago.” Trump was referring to tight oil production and today, that means the Permian basin. Global energy dominance by the United States is somewhere between aspirational and absurd. So far in 2017, the U.S. has imported more than 9 million barrels of…

The Shale Gas Revolution Is A Media Myth

Shale gas is not a revolution. It’s just another play with a somewhat higher cost structure but larger resource base than conventional gas. The marginal cost of shale gas production is $4/mmBtu despite popular but incorrect narratives that it is lower. The average spot price of gas has been $3.77 since shale gas became the sustaining factor in U.S. supply (2009-2017). Medium-term prices should logically average about $4/mmBtu. A crucial consideration going forward, however, will be the availability of capital. Credit markets have been willing…

What’s Wrong With The U.S. Oil Export Boom

The lead editorial in Friday’s Wall Street Journal was pure energy nonsense.’ “Lessons of the Energy Export Boom” proclaimed that the United States is becoming the oil and gas superpower of the world. This despite the uncomfortable fact that it is also the world’s biggest importer of crude oil. The Journal uses statistical sleight-of-hand to argue that the U.S. only imports 25% of its oil but the average is 47% for 2017. Saudi Arabia and Russia–the real oil superpowers–import no oil. The piece includes…

Are Oil Prices $7 Too High?

OPEC extended oil production cuts last week and oil prices plunged. OPEC’s goal was to keep a floor under current prices but the market expected the cartel to move prices higher through inventory reduction. OPEC was satisfied with greater revenues from higher prices compared to a year ago, but the market wanted deeper production cuts. OPEC takes the long view but the market is concerned with the near term. OPEC extended the cuts and the market reacted with lower prices. Analysts have created the unfounded but widely accepted belief that OPEC…

Tight Supply Boosts Natural Gas Prices In 2017

A year ago, most analysts were bearish about natural gas prices. I wrote that natural gas prices might double and they did. Today, most analysts are again bearish about gas prices and again, I think that they are probably wrong at least for 2017. The mainstream narrative is that new pipeline capacity—notably the Rover Pipeline—out of the Marcellus and Utica shale plays will unleash a torrent of pent-up supply. That is because over-production in these plays has saturated the northeastern U.S. markets and 2016 wellhead prices averaged…

Don’t Believe The Hype: Oil Markets Far From Recovery

Global oil inventories are falling because of OPEC and non-OPEC production cuts, but the road to market balance will be long. Production cuts have removed approximately 1.8 million barrels per day (mmb/d) of liquids from the world market since November 2016 (Figure 1). (Click to enlarge)Figure 1. OPEC-NOPEC Have Cut 1.8 mmb/d Liquids Since November 2016. Source: EIA April 2017 STEO, EIA International Data and Labyrinth Consulting Services, Inc. Saudi Arabia has cut 619 kb/d (35 percent of total) and the Gulf States Cooperation Council—including…

Why Breakeven Prices Are Plunging Across The Oil Industry

Shale companies have pushed breakeven oil prices below $40 per barrel—but so have major oil companies. Analysts commonly portray cost reduction as something unique to the tight oil companies. Data from annual reports filed with the U.S. SEC (Securities and Exchange Commission) suggests otherwise. (Click to enlarge)Along with tight oil companies, ExxonMobil, Royal Dutch Shell, ConocoPhillips and ChevronTexaco all had 2016 breakeven prices below $40 per barrel (Figure 1). Figure 1. Breakeven Prices for Majors and Tight Oil Companies Were All…

Tech Miracle In U.S. Shale Is A Media Myth

I am tired of hearing about the unbelievable impact of technology on collapsing U.S. shale production costs. The truth is that these claims are unbelievable. The savings are real but only about 10 percent is from advances in technology. About 90 percent is because the oil industry is in a depression and oil field service companies have slashed prices to survive. Zero Hedge posted an article yesterday called How OPEC Lost The War Against Shale, In One Chart that featured the chart shown below from a Goldman Sachs note. (Click to enlarge)Figure 1.…

Is The Oil Price Plunge A Turning Point? 

WTI futures fell $2.86 from $53.14 to $50.28 per barrel, and Brent futures dropped $3.81 from $55.92 to $52.11 per barrel. WTI is trading below $49 and Brent below $52 per barrel at the time of writing. The apparent cause was a larger-than-expected 8.2 million-barrel (mmb) addition to U.S. crude oil inventories. Over-Reaction Based on history, we can see that this was an over-reaction. WTI has fallen below the $50 to $55 per barrel range in which oil futures have traded for the last 3 months (Figure 1). (Click to enlarge)Figure 1. Oil prices have…

Why Investors Should Beware Of The Bakken

It’s the beginning of the end for the Bakken Shale play. The decline in Bakken oil production that started in January 2015 is probably not reversible. New well performance has deteriorated, gas-oil ratios have increased and water cuts are rising. Much of the reservoir energy from gas expansion is depleted and decline rates should accelerate. More drilling may increase daily output for awhile but won’t resolve the underlying problem of poorer well performance and declining per-well reserves. December 2016 production fell 92,000 barrels…

Why Sub $50 Oil Is More Likely Than $70 Oil

It is more likely that oil prices will fall below $50 per barrel than that they will continue to rise toward $70. Prices have increased beyond supply and demand fundamentals because of premature expectations about the effects of an OPEC production cut on oil inventories. Last week’s 13.8 million barrel addition to U.S. storage was the second largest in history. It moved U.S. crude oil inventories to new record high levels. Meanwhile, 130 horizontal rigs have been added to tight oil drilling since the OPEC cut was first announced in September.…

Keystone XL Needs Much Higher Oil Prices To Be Viable

The Keystone XL Pipeline (KXL) is a bet on much higher oil prices several years from now. It will take at least $85 oil prices to develop the new oil sand projects needed to fill the pipeline. It is also a bet that U.S. tight oil output will continue to grow and will need heavy oil to blend for refining. Both bets are risky. A Bet On Higher Oil Prices KXL would add about 830,000 barrels per day (b/d) to the 1.3 million b/d already moving through the base Keystone Pipeline system completed in 3 phases between 2010 and 2014 (Figure 1) when oil prices…

Why Cheap Natural Gas Is History

Natural gas prices averaged a little more than $2.50 per mmBtu (million British Thermal Units) in 2016. Those days are over. Prices will average at least $3.50 to $4.00 in 2017. Prices have more than doubled since March 2016 but gas is still under-valued. Supply is tight because demand and exports have grown and shale gas production has declined. In April of last year, I wrote that natural gas prices should double and they did. Henry Hub spot prices increased 2 1/2 times from $1.49 to $3.70 per mmBtu and NYMEX futures prices doubled from $1.64…

Low Oil Prices Could Last As OPEC Cuts Won’t Suffice

An OPEC production cut offers oil producers hope for higher prices in 2017. But there is a dark cloud hanging over that expectation. Global storage inventories must be substantially reduced before higher oil prices can be sustained. Some of U.S. tight oil has nowhere to go but into storage because it can neither be refined nor exported. If all OPEC cuts take place as announced, it will be at least a year before sufficient inventory reductions allow prices to move much higher than current levels. If not, lower oil prices will last even longer. The…