This is from Jack's Corner at http://www.americanoilman.com/
I post it here because I agree with it 100%. The oil market is in the initial stage of a significant "paradigm shift". We never had an oil "glut", but we are about to have a period of real supply shortage. - Dan
-----------------------------------------------
Written 10-31-2017
From 2011 to November 2014, the oil industry enjoyed the longest run of high oil prices …..ever.
And, we paid the price for that “higher forever” philosophy. We actually made it economical to
produce oil from source rocks, and we found better and better ways to produce that shale oil.
From November 2014 until now, October 31, 2017, the oil industry has undergone one of the most
severe downturns ……. ever. There is that word again – longest run of high oil prices ever, and
most severe downturn ever. What is going to happen next that will employ the use of the term
“ever” ?
I submit, that what the oil consuming world is set up for next, is the most severe price spike ever.
In late 2008, oil prices fell from $140 to $38 essentially over night, as a result of the Global Financial
Collapse. But, OPEC cut production by 4.2 million barrels per day and the oil price recovery came fast and resulted
in the longest run of high prices ever.
One of the things that kept prices high was the “fear premium” built into the oil price. Instability in the
Middle East and the Arab Spring turning into the Al Qaeda/ISIS spring caused the fear. But along comes US shale
oil production, and the “fear premium” subsided.
The instability in the Middle East that caused the fear premium did not go away, but the increased
US shale production acted as an insurance policy – that no matter how bad things got – there was
a new large supply of oil that could keep a cap on prices. The fear of what would happen in a supply cut-off was gone.
So, the fear premium goes away at the same time that OPEC, namely Saudi Arabia, decides to cut the oil price
to drive domestic shale companies out of business
Things change on a grand scale, and the change seems to just happen while we are
not paying attention. Some say, or hope, that the shift in the energy industry
will be a move toward electric cars and a drop in demand for oil. That will happen – when oil becomes really scarce
and really expensive. Probably some twenty years from now.
What has been happening recently in the oil patch, is that demand has been relentlessly going up. Increased demand to the
tune of 1.5 million barrels per day has happened each year of this downturn, and now the economy is heading back to full
strength. Three years of downturn, 1.5 MMBPD equals a demand increase of over 500 million barrels per year for
three years. Over 1.5 billion barrels of new oil that is needed to meet demand.
The 1.5 billion barrels of demand increase is conservative. The current estimate for increasing demand is 1.7 MMBPD.
Either way, demand is being met by production, and increasingly by storage drawdown.
The fear premium will rear its ugly head as soon as the global inventory gets close to what is considered normal.
When the oil storage glut is reduced. And … that is happening now.
The lack of long term investment in new projects throughout the worldwide oil industry will result in a supply squeeze at the
same time as the fear premium and storage drawdown occurs. That is the recipe for a price spike.
Maybe the biggest price spike ever.
Over
(Side note: As for natural gas - we are of the opinion that our winter weather will return to the cool side of normal, and that
means higher natural gas prices. In the near future, we will be talking about a shift in global temperatures to the cool side
and the effect that shift will have on commodity prices – especially natural gas. Say goodbye to El Niño and hello to colder winters).
Oil Price in a market that is under-supplied
Oil Price in a market that is under-supplied
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price in a market that is under-supplied
You should all read this: https://seekingalpha.com/article/412217 ... lock=false
There is a major flaw in how Wall Street was (still is to some extent) valuing upstream oil & gas companies. The "flaw" in thinking is that U.S. shale oil production could and would fill any gap in oil supply demand over production. As I have posted here many times, it is simply IMPOSSIBLE for tight oil production to go up by a million barrels per day year-after-year. Shale oil can't and won't fill the supply shortage that is now less than a year away. The math just does not work. BTW global demand is going up an estimated 1.5 million barrels per day and that estimate is likely to be revised upward.
For now, the supply gap is being filled by taking lots of oil from storage. However, that cannot go on much longer.
I get lots of Wall Street reports. Some firms are beginning to figure this out. Very soon the "herd" will begin to move in the right direction and the Wall Street Herd can take energy stocks a lot higher from where they are today.
There is a major flaw in how Wall Street was (still is to some extent) valuing upstream oil & gas companies. The "flaw" in thinking is that U.S. shale oil production could and would fill any gap in oil supply demand over production. As I have posted here many times, it is simply IMPOSSIBLE for tight oil production to go up by a million barrels per day year-after-year. Shale oil can't and won't fill the supply shortage that is now less than a year away. The math just does not work. BTW global demand is going up an estimated 1.5 million barrels per day and that estimate is likely to be revised upward.
For now, the supply gap is being filled by taking lots of oil from storage. However, that cannot go on much longer.
I get lots of Wall Street reports. Some firms are beginning to figure this out. Very soon the "herd" will begin to move in the right direction and the Wall Street Herd can take energy stocks a lot higher from where they are today.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price in a market that is under-supplied
Wall Street is starting to get it.
Macquarie Energy Newsletter - November 8, 2017
The energy complex is taking a breather again this morning as yesterday’s API figures showed a smaller than expected draw in crude oil stocks and the market tries to figure out exactly what’s going on in Saudi Arabia as an anti-corruption drive there continues to snare more and more political & economic elites. Also weighing on the complex this morning are China’s October crude imports, which tumbled to a 13-month low. With the OPEC meeting bearing down upon us at the end of the month and Brent fully backwards with prompt prices > 60.00 speculation is starting to emerge whether OPEC may decide to end the program of cuts early. Early price action sees both of the big barrels trading slightly lower this morning (WTI -30c; Brent -40c) as Wall Street also opens with a softer tone (DJIA -45; S&P -5.50) as US 10-yr yields tighten to 2.25%.
Ebb & Flow – Crude Oil Rally: Let It Ride (Macquarie Research*)
Although WTI is now above our $54/bbl expectation when we turned bullish in July, we expect the current rally to continue toward $60. We have recently worried about the high absolute price and the near-record managed money (MM) length. Despite those risks, fundamentals remain bullish enough to support prices, in our view. Bad fundamentals broke the market in 2Q17, not the record net length. We expect net length to continue increasing as the OPEC meeting approaches.
Strong Demand = Strong Fundamentals, $60 resistance may be tested
As the OPEC meeting approaches, we expect refining demand to be supportive of the crude price through year-end, as 3-4 MM BPD of refining runs come back on line, post Fall turnarounds.
In our opinion, a fundamentally driven end to this rally will require (1) demand growth slowing back toward 1.3 to 1.4 MM BPD, and (2) rising US export volumes to soften physical Brent markets. A technical end to the rally will be tested at $60 WTI.
We view continued OPEC cut compliance, strong global product demand, inventory draws, and limited producer hedging as fundamentally supportive through YE17 and into 1Q18. Though we would not be surprised to see profit-taking shortly before or after the OPEC meeting, we expect sell-offs to be bought.
Macquarie Energy Newsletter - November 8, 2017
The energy complex is taking a breather again this morning as yesterday’s API figures showed a smaller than expected draw in crude oil stocks and the market tries to figure out exactly what’s going on in Saudi Arabia as an anti-corruption drive there continues to snare more and more political & economic elites. Also weighing on the complex this morning are China’s October crude imports, which tumbled to a 13-month low. With the OPEC meeting bearing down upon us at the end of the month and Brent fully backwards with prompt prices > 60.00 speculation is starting to emerge whether OPEC may decide to end the program of cuts early. Early price action sees both of the big barrels trading slightly lower this morning (WTI -30c; Brent -40c) as Wall Street also opens with a softer tone (DJIA -45; S&P -5.50) as US 10-yr yields tighten to 2.25%.
Ebb & Flow – Crude Oil Rally: Let It Ride (Macquarie Research*)
Although WTI is now above our $54/bbl expectation when we turned bullish in July, we expect the current rally to continue toward $60. We have recently worried about the high absolute price and the near-record managed money (MM) length. Despite those risks, fundamentals remain bullish enough to support prices, in our view. Bad fundamentals broke the market in 2Q17, not the record net length. We expect net length to continue increasing as the OPEC meeting approaches.
Strong Demand = Strong Fundamentals, $60 resistance may be tested
As the OPEC meeting approaches, we expect refining demand to be supportive of the crude price through year-end, as 3-4 MM BPD of refining runs come back on line, post Fall turnarounds.
In our opinion, a fundamentally driven end to this rally will require (1) demand growth slowing back toward 1.3 to 1.4 MM BPD, and (2) rising US export volumes to soften physical Brent markets. A technical end to the rally will be tested at $60 WTI.
We view continued OPEC cut compliance, strong global product demand, inventory draws, and limited producer hedging as fundamentally supportive through YE17 and into 1Q18. Though we would not be surprised to see profit-taking shortly before or after the OPEC meeting, we expect sell-offs to be bought.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group