Peak Oil

[semiopen]

Oil is getting hammered today.

Oil hits nearly 6-1/2 year low after stockpile build

CNN suggests $15/barrel is possible

That $40 Wizard enforced Stop Sign looks more and more shaky.

YOU SHALL NOT PASS

Technically speaking, I'm not sure whether Gandalf was able to stop that thing... of course everything worked out in the end.

In the present case, at least Derek's bet is still alive although living in more shit than he expected.

 

[Derec]

Oil is getting hammered today.

One month later, not so much. Oil prices back at ~$46.

CNN suggests $15/barrel is possible

That would put it below production cost of even Saudi Arabia. Like that old joke: "we lose money on every sale, but we make it up in volume".

That $40 Wizard enforced Stop Sign looks more and more shaky.

Well, $40 price lever was broken for a short while, but not enough for you to win.

In the present case, at least Derek's bet is still alive although living in more shit than he expected.

I expected Saudis/OPEC to cave by now. Saudis are having to cut spending lest they deplete their dollar reserves.
Saudi Arabia to cut spending after oil price decline
But it all may be over before long.
Crude at $50 threatens $1.5 trillion in oil and gas projects
Projects like these are necessary to offset declines in existing production. Therefore, global production is likely to sink in the coming months and years.

 

[Derec]

What a bunch of rationalizations. So your explanation for increasing levels of production with decreasing levels of drilling at recession prices are that its just a negative bubble?

My explanation is that marginal drilling gets stopped first so that average productivity increases.

Care to bet on $35 dollar price yet?

Sure. What are you wagering?

 

[Derec]

Derek, my buddy Ruy Lopez also called me a short term trader.

For a reason. You seem obsessed about short term movement and how much other people would gain or lose on imaginary margin calls.

Since you have selective amnesia about him, he recommended gold at $1800 (give or take) in 2012-13 and now is in danger of seeing a 50% loss. Don't worry, you can still pretend to be perfect, even though basically the same kind of guy bets on both.

I remember old Ruy. I wonder what he is up to these days.
And there are big differences between oil and gold - particularly that oil gets burned and is thus lost. Most gold ever mined however, is still around.

FWIW, usually an oil price forecast is given as an average price for the year. ABN AMRO lowered their Brent forecast to $65/barrel for 2016. I just bring this up because you made a rather odd comment about nobody forecasting $35/barrel. Our bet didn't involve an average price, just one barrel of West Texas Intermediate crude changing hands for $35 or lower on the spot market.

I do not recall specifying a "one barrel rule" back then. I assumed we would use regular websites reporting price like CNN Money, which I assume have a resolution well above 1 bbl. Otoh, if I go and pay somebody $100 for a bbl of oil, does that mean I win automatically. We should have bet much more money ...

- - - Updated - - -

This is interesting because it takes Derec's mythical, absolute, no questions asked stop sign at $40 and changes it to a caution sign.

I never said anything about absolute stop signs. I merely said that I do not think oil will go down to $35. As I recall you thought oil would breeze by $35 mark, which obviously didn't happen.

 

[semiopen]

I guess Santa gives and takes away.

For making a winning bet, I can't imagine how much I've been wrong.

In typical right wing fashion, all the flaws of Derec's reasoning are applied to me.

Well today, the bet is over. Oil is breaking below $35. I'm sure there is some way this makes me the loser.

It did take a little less than a year, and there was that glorious moment it made the dead cat bounce to $62.

 

[Derec]

I guess Santa gives and takes away.

For making a winning bet, I can't imagine how much I've been wrong.

In typical right wing fashion, all the flaws of Derec's reasoning are applied to me.

Well today, the bet is over. Oil is breaking below $35. I'm sure there is some way this makes me the loser.

It did take a little less than a year, and there was that glorious moment it made the dead cat bounce to $62.

I guess congratulations are in order. Sort of, since you weren't confident enough to actually do a real bet, so ...

We didn't even specify if we were going to use WTI or Brent, which is still above $36.

I must also say that this has nothing to do with chart-technical "resistances" or such but with KSA being too stubborn to reverse their policy. And as far as peak oil (original topic of this thread), this high production/low price regime is hastening it. KSA for example is burning through their reserves at a very high rate and are sacrificing future production for making less money on each barrel now.

By the way, do you still think oil will zoom past the $35 "resistance" and move toward $25 now?

 

[Derec]

Also, are you sure WTI ever dipped below $35? I had taken your word for it, but now I see that it doesn't seem to have quite dipped below $35. Also, I think daily close prices, and not dips that perhaps last a few milliseconds should be relevant here. That is, if we ever had made an actual bet.

 

[semiopen]

Also, are you sure WTI ever dipped below $35? I had taken your word for it, but now I see that it doesn't seem to have quite dipped below $35. Also, I think daily close prices, and not dips that perhaps last a few milliseconds should be relevant here. That is, if we ever had made an actual bet.

That's an interesting question. Earlier today the front month WTI Futures contract was as low as $34.51

Obviously if you want to buy some spot WTIC you don't go to the local Walmart.

EuroInvestor WTIC

This link gives $34.51 as the low price for spot WTIC. I've seen other pages that start from 9 or 9:30 ET and show a higher low.

I think the end of day chart from Stockcharts can be regarded as accurate as that will include a high/low. But you do have a reasonable case for bitching, at least compared to your previous comments.

Obviously, I think a more convincing low is almost infinitely more likely than seeing crude run to 100, but I was hoping this would be over.

 

[semiopen]

Here is a chart from Stockcharts.com that shows WTIC. It is updated end of day and shows a low of $34.53.

I think this is correct and have asked customer support to explain how they get this. There was significant early morning volume in the front month futures contract below $35 and, of course, that brightened my day - almost as much as the Pack beating the Cowboys yesterday.

 

[semiopen]

I don't think the money was the issue, it was more the technical aspects of putting the money in escrow for some indeterminate period.

Stockcharts told me they have a formula tied to the volume of various futures contracts. I think the low for the front month CL (WTIC) was 34.51 on the front month but they came up with 34.53.

Crude Falls Below $35 per Barrel in New York for First Time Since 2009

Technical analysis of Nymex crude chart shows oil prices haven't bottomed

The author is a well known technician, but, of course, we're not dealing with hard science here.

The first step to determine the downside target for oil is to apply the same trading band analysis methods that successfully set the downside targets when oil fell below $98. A $28 target is calculated by taking the width of the trading band and projecting it downwards below support near $38.

That's probably reasonable.

Personally, I'd take the reaction high of $62.58 the week of May 4 and subtract the low of $37.75 from the week of August 24. This equals 24.83. The next high was 50.92 from the week of October 5, subtracting 24.83 = a target of 26.09.

It is reasonable to do it this way: 37.75 / 62.58 = .603; .603 x 50.92 = 30.71.

Might or might not happen, but it is at least a semi-intelligent way to forecast.

 

[Derec]

That's an interesting question. Earlier today the front month WTI Futures contract was as low as $34.51

Doesn't matter. The WTI closed for the week at $34.55. Crazy, it's as if those people don't want to be making any money on oil!
So you could have won some money had you not chickened out.
Still, the price didn't breeze past the $35 "resistance" on it's way to the next "resistance" at $25 either.

Obviously if you want to buy some spot WTIC you don't go to the local Walmart.

Obviously.

Obviously, I think a more convincing low is almost infinitely more likely than seeing crude run to 100, but I was hoping this would be over.

What do you consider "a more convincing low"?

And I still consider $100/bbl inevitable in the next couple of years. Oil projects are getting delayed all over the world, which together with natural declines of existing developments spells less oil drilled down the line.
For example the Khurais (in KSA) expansion has been delayed:
Saudi Arabia Khurais oil project delayed past 2017

At the same time relatively low gas prices at the pump encourage drivers to drive more and also buy more gas guzzling vehicles.

 

[semiopen]

This was an ugly week all around.



Note the down waves from October.

50.92 to 42.58
48.36 to 40.06
43.46 to 34.53
38.39 to 32.10

I discussed possible forecasts above that expect a move to $29 or so. Call me sentimental, but I have to back myself here. My guess is that a well defined bottom will eventually be made before we see a big up move.

It's been interesting to watch.

 

[RVonse]

The OP mentions peak oil, but I believe there is a lot more going on with this than just supply and demand of oil. Oil is tied to the dollar and everything in the world is priced in dollars. Right now Europe is experiencing negative interest which is causing the carrying trade to blow apart and that is causing the dollar to become worth more in a big way.

The real question is how come all the commodities are too low right now? If you answer this question honestly, you will quickly realize this is a monetary problem which began in Europe and has nothing to with how much oil is in the ground. It is unfortunate that the dollar is connected to this as it is IMO causing the price of a very scarce resource to be artificially priced too low.

So to Derec I will say this. Peak oil is still out there. We just don't see it right now because it is tied to our dollar.

 

[semiopen]

There is a lot of sense in looking at the strong dollar.



This is a fund that invests in short currency positions versus the dollar.

The rough patch for the dollar was a big talking point for the right wing and I remember several FRDB discussions about it. Of course, like all right wing talking points, that has all turned into over simplified bullshit. With any serious economic credibility gone, we see the right moving toward fascism and racism.

Another part of the oil price question is that it hasn't been reacting in the same way it used to to middle east unrest.

Anyway, i was spending a little time looking at the markets on account of the new year, and watched a John Person presentation on his forecasts. This was from Tuesday afternoon and he made the outrageous statement (I think he was trying to be bold) that oil would go to $45 before it hit $30. Three days later, I'm sure he is wishing he hadn't said that, but at this point, that bet would be almost as silly as Derec's - since $30 is a butterfly in China's fart away from happening randomly.

Personally, I'm not expecting anything really nasty.

Using VTI as an example -



There is a decent chance it will test the October 2014 and August 2015 lows. My guess is that it won't go much below them and maybe resolve into a trading range. Hopefully, the February 2014 low of 87 doesn't become a bigger part of the conversation.

 

[Derec]

The OP mentions peak oil, but I believe there is a lot more going on with this than just supply and demand of oil. Oil is tied to the dollar and everything in the world is priced in dollars. Right now Europe is experiencing negative interest which is causing the carrying trade to blow apart and that is causing the dollar to become worth more in a big way.

While the strong dollar (relative to other currencies) certainly plays a role, it's a relatively minor one.

So to Derec I will say this. Peak oil is still out there.

In one sense it has to be - oil is still a finite commodity and we are pumping about 30 billion barrels of oil out of the ground every single year.

However, the events of the last 10 years perhaps showed that we are on a permanent bumpy plateau and that we may never reach "peak oil" in the sense M. King Hubbard and others envisioned it.
Since mid-2000s to 2014 we had very high oil prices. That led to investments being made in new technologies and difficult/expensive sources of oil on the supply side as well as developments of technologies that reduced demand like hybrid and electric vehicles. Increased interest in diesel is part of that trend too.
That led to the decline in prices we see now. What enhanced it is the unwillingness of OPEC (i.e. KSA) to reduce demand to moderate the decline in prices. This will only make the plateau more bumpy.
This period of low oil prices will lead to lack of investment in new oil projects (many are already delayed/cancelled) which will lead to lack of supply down the road. At the same time consumers are less interested in fuel efficient vehicles. So cue price increase in the coming years which will lead to increased investment. Rinse, repeat.

But this idea that we will reach a cliff where the oil supply will fall precipitously with disastrous effects no matter how high the oil price rises has been proven wrong I'm afraid. To increase proven reserves you do not really need to find new oil deposits. With an increase in price and improvements in technology more of the known oil in place can be considered "proven".

 

[bilby]

I saw the following exchange today on Facebook, between an English friend currently working in Qatar, and another friend still in England:

Shock! Horror! Filled the car with petrol and it cost over 50 riyals! Previously its been around 35 riyals. Qatar has raised the price of petrol by 30% overnight with no warning. It's almost a pound a gallon now! #LifesHardOutEast

Why are they putting up prices when everywhere else are lowering them?
Have they run out of money to subsidise it?

Well Stuart, yes they have.

The State of Qatar's GDP is 80% sourced from petrochemicals.

With the price of oil dropping from over 110 USD per barrel to less than 40 USD per barrel over the last several months GDP has, roughly, halved.

Qatar is looking at a pretty major budget deficit all of a sudden when they have never had a budget deficit ever before. I don't think that "panic" is too strong a word to describe the reaction of many who are in authority.

Where I work we were informed last year that we were to have a 35% reduction in budget but "no job losses". I work in a school. Like almost all schools over 80% of the budget is salary and benefits. Obviously someone did not do the maths.

We lost quite a few staff, several vacant slots are now not to be filled and there was some major belt tightening.

We had it easy compared to a lot of companies over here. There have been massive job losses locally in the oil industry coupled with, apparently, a 20% salary reduction worldwide in several global oil companies.

There are an awful lot of "farewell" events going on around here.

Interesting times in the Middle East.

 

[Derec]

Interesting times in the Middle East.

Indeed. KSA also had to reduce subsidies to the tune that a gallon of gasoline is now somewhere around 90 cents which is close to the wholesale price (in the US) of $1.10/gal. Oil prices are also sharply up on Friday, from $28 to $32. We shall see on Monday if this was a blip or start of a longer trend.

And I found this article interesting as well.
Royal Pains: Two Princes Vie for Power in Saudi Arabia, Make a Mess

 

[semiopen]

Over a year after this thread was started, oil is starting to look interesting as a buy.



The chart shows a low of $27.56 a few days ago, which is sort of in line with the projections I mentioned above.

We would want to see a move above 38.39, if it penetrates the $27.56 low before this, "that would be bad" to quote Dr. Spengler in Ghostbusters.

USO is the main etf for crude oil, but that has issues with moving to appropriate futures contracts, that's an example of  Contango. XLE is the main energy sector stock etf. An interesting stock mentioned on Briefing.com is CFR - Cullen Frost Bankers, which has been moving with oil. It's up 10% or so in the last few days so I wouldn't jump in immediately. That advice applies to any of these.

As oil and the stock market are sort of moving together, it might pay to wait to see how that shakes out.

The Saudi/Mid East situation is interesting but it is difficult to come up with actual trading ideas from looking at that.

 

[dismal]

The real question is how come all the commodities are too low right now?

The price is going down because at the old price the incentive to produce was too high and the supply exceeded the demand.

At the current price hundreds of rigs have been laid down, and maybe with some increase in global demand due to lower price eventually things will come into balance. In reality, it will probably just swing past the balance point into a price that induces more rigs to start drilling again because there is inertia and lag that must be overcome both on the way up and on the way down. This is the nature of cyclical businesses. As they say in the oil business, the cure for low prices is low prices. And vice versa.

Of course, oil is also influenced by the fact that the majority of the world's reserves are in basket case national oil companies in basket case countries that, at least in the past, have colluded to keep prices high. Geopolitics can trump micro economics in the short run.

 

[Derec]

Oil surging. Back to $38 from a low of $27 (WTI). Brent is at $41.
This is what I expected would happen months ago. I guess it took oil producers longer to get their shit together.