A "Flood" of new oil..........

[santafe2]

Re: A "Flood" of new oil..........

If the Northsea is going belly up you think that "perhaps" lots of other fields are as well?

I know Alaskan production is about 1/4 its peak in the late 1980s. It only took about a decade for production to peak and begin a gradual slide.

[davidstvz]

Re: A "Flood" of new oil..........

PCO = Peak cheap oil

what is AFC ???

what is FA ???

UPDATED: AFC = American Financial Crisis

da!

Jeees I hate acronyms!!!

FA = Fortress America. As I understand it, in this case it refers to disallowing the selling of American oil outside the country even if we produce a glut. In a broader sense, it is a trend or future trend of America disassociating itself from global affairs to some extent as the cost of meddling starts to outweigh the benefit (due to increasing oil price/scarcity).

[GRG55]

Re: A "Flood" of new oil..........

Thanks GRG. Will you wait until mid 2015 to call a winner? You'll need to ensure if this happens that it's not recession induced. Even without a recession I suppose it would have to be a quick dip to $60 because my understanding is that most of this production isn't profitable at $60 a barrel. We'll see, you still have 9 months.

Mid-2015? Not likely. I grew up in a family with 6 boys, no sisters. We had to fight for food. Worse than a boarding school, and as bad as a military boot camp! We all get along great, but there's no mercy when it comes to settling debts. Whichever way it goes, the other will be on the phone like Repo Man looking for the payoff.

If oil cracks...yes, a big "if", I am counting on it falling like an elevator with no brakes...

[santafe2]

Re: A "Flood" of new oil..........

If oil cracks...yes, a big "if", I am counting on it falling like an elevator with no brakes...

I get that my knowledge in this area is no better than a spreadsheet version of reality but as I'm looking at this puzzle and the charts you and EJ have posted here I'm trying to understand how the price of oil could ever get close to $60 without a massive financial crisis. I've re-read your post so I understand you think enough capacity can be brought on line before the end of the year to overwhelm US demand in a predominately closed system. So bear with my spreadsheet logic for a minute and tell me where I'm incorrect.
I'll just use round numbers:
Seven years ago the US produced about 25% of it's oil requirements and today we produce about 40%, (~5MBD to ~7.5MBD)
At the same time our oil consumption fell about 12% from 21MBD to 18.5MBD. This decline pushed us from 35% to 40%.
The US gets about 15% of our oil from Canada, (thank you).
The US gets ~20% of our oil from Latin America.
The last 25% we get from Africa, the Persian Gulf and here and there.

So here's where the wheels are likely to come off but I'll continue anyway. The US still imports 60% of our oil requirements, how is it possible for US based production to overwhelm US consumption? Are you saying that with short notice, import contracts cannot be delayed? That oil is on the water, in the pipeline, etc. and a very small percentage production improvement that was not anticipated by most players will drop the value of near term contracts like a brick falling off a building?

[GRG55]

Re: A "Flood" of new oil..........

I get that my knowledge in this area is no better than a spreadsheet version of reality but as I'm looking at this puzzle and the charts you and EJ have posted here I'm trying to understand how the price of oil could ever get close to $60 without a massive financial crisis. I've re-read your post so I understand you think enough capacity can be brought on line before the end of the year to overwhelm US demand in a predominately closed system. So bear with my spreadsheet logic for a minute and tell me where I'm incorrect.
I'll just use round numbers:
Seven years ago the US produced about 25% of it's oil requirements and today we produce about 40%, (~5MBD to ~7.5MBD)
At the same time our oil consumption fell about 12% from 21MBD to 18.5MBD. This decline pushed us from 35% to 40%.
The US gets about 15% of our oil from Canada, (thank you).
The US gets ~20% of our oil from Latin America.
The last 25% we get from Africa, the Persian Gulf and here and there.

So here's where the wheels are likely to come off but I'll continue anyway. The US still imports 60% of our oil requirements, how is it possible for US based production to overwhelm US consumption? Are you saying that with short notice, import contracts cannot be delayed? That oil is on the water, in the pipeline, etc. and a very small percentage production improvement that was not anticipated by most players will drop the value of near term contracts like a brick falling off a building?

Commodity pricing behaviour is quite different from other price behaviour. In the case of oil the first barrel of perceived shortage drives up the price of all the barrels...and the first barrel of perceived surplus drives down the price of all the barrels.

Let's look at some history:

Thursday, January 10, 1986 the spot price of WTI FOB Cushing, OK was $26.03 per barrel.
Monday, March 31, 1986 the spot price of WTI FOB Cushing, OK was $10.25 per barrel...a decline of 61 percent in about 11 weeks.

Did actual USA (or global) oil consumption decline by a comparable amount in those 80 days?
Was there an economic calamity in the USA or globally during that short period of time?

Wouldn't appear so:
On January 10, 1986 the DJIA closed at 1513.53. On March 31, 1986 the DJIA closed at 1818.61

Monday, May 2, 2011 the spot price of WTI FOB Cushing, OK was $113.03 per barrel.
Monday, September 26, 2011 the spot price of WTO FOB Cushing, OK was $79.97 per barrel, a decline of 29 percent in 21 weeks.
The DJIA declined from 12,807.36 to 11,043.86 (about 14%) during that time.

Monday, March 26, 2012 through Monday, June 25, 2012 the spot WTI price declined from $107.07 to $78.76 (26%) while the DJIA declined 5.6%.

Even during the financial crisis the oil price declined 74.7% peak to trough while the DJIA declined 28.8% in the same period.

Let's suppose we have a 20% correction in the DJIA sometime during 2014. What is likely to happen with oil prices?

[santafe2]

Re: A "Flood" of new oil..........

Let's suppose we have a 20% correction in the DJIA sometime during 2014. What is likely to happen with oil prices?

Thanks for all the detail GRG, it made me wonder how one could profit after it was clear that that first barrel of surplus had been produced in the US. After the financial crisis all of us on iTulip know what to do if oil prices spike. We may not know when the system will break but we do know it will eventually break. I reviewed the last 25 years of market/oil prices and I don't see a correlation. Maybe I'm missing something or possibly I've gone back so far before PCO that I've completely muddied my chart with irrelevant data points. In any event, this is an interesting investigation.

[GRG55]

Re: A "Flood" of new oil..........

Thanks for all the detail GRG, it made me wonder how one could profit after it was clear that that first barrel of surplus had been produced in the US. After the financial crisis all of us on iTulip know what to do if oil prices spike. We may not know when the system will break but we do know it will eventually break. I reviewed the last 25 years of market/oil prices and I don't see a correlation. Maybe I'm missing something or possibly I've gone back so far before PCO that I've completely muddied my chart with irrelevant data points. In any event, this is an interesting investigation.

The US$ is on an oil standard now...falling oil prices, which used to be considered an economic boost, now strike fear into the hearts of bankers everywhere. Brings out the "D" word at the Fed...

[ST]

Re: A "Flood" of new oil..........

WSJ Video:

$50 Billion Kashagan Oil Development Isn't Working
Kashagan is one of the world's most ambitious oil developments and the biggest new field in decades. But despite $50 billion in investment by some of the world's largest oil companies and the Kazakhstan government, the Caspian Sea-based project isn't working.

Video Link

wsj.JPG

[jpatter666]

Re: A "Flood" of new oil..........

WSJ Video:

$50 Billion Kashagan Oil Development Isn't Working
Kashagan is one of the world's most ambitious oil developments and the biggest new field in decades. But despite $50 billion in investment by some of the world's largest oil companies and the Kazakhstan government, the Caspian Sea-based project isn't working.

Video Link

[ATTACH=CONFIG]5308[/ATTACH]

Yeah I was wondering if GRG55 knew about that one -- weren't you [GRG55] traveling to that region? (not that it necessarily was for this, but likely you've heard tales)

[gwynedd1]

Re: A "Flood" of new oil..........

Good eveing Gents
I like to point out that not very long ago the Northsea produced just under 3 million BPD, now "they" admit to 850 thousand....there is good "intel" that its less then 675 thousand...."Brent" no longer produces any oil.

If the Northsea is going belly up you think that "perhaps" lots of other fields are as well?

Mike

Yes, but why not applaud the new source of Helium?

[EJ]

Re: A "Flood" of new oil..........

I think my thesis is consistent with PCO. I made a wager that WTI would touch $60 some time during 2014 (and in behind the paywall posted a similar outlook some months ago). I have no idea if I will be proven correct, as I have also posted many, many times that forecasting oil prices over short time intervals is a mugs game.

However, here's my thinking...and why I do not think it inconsistent with PCO.

First I was specific about WTI. The differential between WTI and the most popular global index, Brent, is being influenced by factors that have nothing to do with global supply, demand or GDP, and everything to do with USA domestic pipeline, truck, rail, barge and refining capacity...all of which are presently overtaxed while the upstream industry does what it always does...drill baby, drill. I just got back from a short trip to Dallas and Midland, TX. I made a 2 hour drive northwest of Dallas to meet a biz associate. I had the rental car on cruise control at 75 mph in the right lane. Once I got out of Fort Worth I was being passed by an almost continuous line of trucks hauling drill pipe...I gave up counting them.

Then I flew from DFW to Midland. What I saw there and out in Pecos County confirmed what I expected. The big boys, Apache, Anadarko, and others similar are drilling up a storm. They won't stop until they, and industry as a whole, create a price drop...that is the usual scenario in pretty well every drilling boom. If Brent price cracks, WTI will probably be more volatile this time.

Second, I wagered "touch $60". If the oil price declines, but does it by way of a gentle drift down to perhaps $80ish, I'll lose the bet with my brother. Possible, but not a typical commodity (oil) price decline. Usually once the oil price cracks the speculators exit their long dated futures en masse creating a selling avalanche and oil overshoots to the downside. All that is needed is a single intraday trade settled at $60. If that happens I would expect a pretty healthy bounce in the oil price immediately after...but I will nevertheless be placing an order with my brother for an expensive bottle of Margaux.

No question the boys are drilling up a storm here in the U.S. Nonetheless oil is still a finite resource, cheap oil is more rare than expensive oil, and mining it faster only accelerates the long-run PCO process.

If the U.S. were playing the PCO long game shouldn't the U.S. be digging it up slowly not hell-for-leather and using up the other guys' oil first?

I think the answer to that question is that the U.S. has since the early 2000s pursued a strategy of energy isolationism under the banner of energy security, as a major element of Fortress America policy. This classic Joint Operating Environment report published around this time of year four years ago isn't a Fortress America manual it's close. One of it's warnings is indicative of the level of insight that the report offers generally: "One of the potential Russias that could emerge in coming decades could be one that focuses on regaining its former provinces in the name of “freeing” the Russian minorities in those border states from the ill-treatment they are supposedly receiving. The United States and its NATO allies would then confront the challenge of summoning up sufficient resolve and deterrence to warn off such a Russia."

The goal is not to reduce the price of oil by increasing the domestic supply or to reduce the oil trade deficit. These are secondary effects of the policy.

To your point about falling oil prices, of course the oil investment/production cycle didn't end with PCO:

A: Higher oil prices drive E&P project investment
B: Over-investment produces an oil glut
C: An oil glut drives down prices
D: Lower prices slow oil E&P project investment while also driving demand up
E: Rising demand meets falling or stagnant supply
F: Goto A

I think however that the cycle operates differently in the PCO era than in the era of The Great Disinflation when most of the oil geologists who are my contemporaries entered the industry and received their formative experience. In particular the era shown in green is one of repeated oil price boom-bust cycles albeit within a relatively narrow price band on a dollar basis but a still sizable range on a percentage basis. In the PCO era the oil investment/production cycle is "damped" by the over-all trend of rising E&P costs that is the primary feature of PCO. As I noted in 2009 when oil prices fell only to $40 vs $20 during a far less dramatic recession and demand collapse, PCO means Step C above, the glut caused by over-investment, has a far less dramatic impact on prices than during The Great Disinflation era because since 1998 E&P technology has perpetually played catch-up with declining reserves quality (accessibility and usability).

In the short run the gold price is helping your case. We haven't seen a gold/oil price spread like this since the late 1970s and under entirely different circumstances. One of three events is virtually certain to happen over the next several years: 1) the oil price is going to fall toward the $80 level without a significant demand decline (recession) or 2) gold prices will rise toward the $1,500 level, or 3) a bit of both, with oil falling into the 90s and gold rising into the 1400s.

One mystery in the chart above is the very tight price band for oil for 20 years from the mid-1940s until 1973, between $16 and $24 in 2013 dollars. Note that the boom-bust feature of the oil investment/production cycle that is evident in the 1980s and 1990s appears to be non-existent from the end of WWII until the end of gold convertibility of the dollar in 1973. That steady-state system blew up in the early 1970s and was in run-away crisis mode by the late 1970s. I don't have a theory of the era when oil was pegged to gold via the USD but suspect that high and rising interest rates muted the E&P investment cycle, and the rate of discovery of conventional oil fields and the technology to produce them was also not as fast-changing as today; there was plenty of cheap and accessible oil in the world waiting to be found. Today E&P is juiced up with cheap credit. A combination of high interest rates and high oil prices will in a decade make the world a very different place than it is today.

[photon555]

Re: A "Flood" of new oil..........

The US$ is on an oil standard now...falling oil prices, which used to be considered an economic boost, now strike fear into the hearts of bankers everywhere. Brings out the "D" word at the Fed...

Should we expect a re-expansion of QE when the oil price drops? Will the Gov and/or Fed see a falling oil price as an opportunity to inflate while hiding the results for a while?

[GRG55]

Re: A "Flood" of new oil..........

Yeah I was wondering if GRG55 knew about that one -- weren't you [GRG55] traveling to that region? (not that it necessarily was for this, but likely you've heard tales)

Yes, I am quite familiar with this project and its troubled history. Quite a few hurdles to overcome. In the technical category the field is overpressured carbonate and overlain by a shale and salt layer cap, which makes the drilling extremely tricky. The completions are even trickier...the field is predominantly tight limestone, instead of the preferred dolomite with its higher permeability.

The field is in shallow water so the construction of artificial islands made the most sense, especially since the field has two main, but pressure connected pods (east and west). With directional drilling methods most of the reservoir can be reached from only a few man-made "platforms". Saudi used the same method to develop the offshore portion of the giant Manifa field. Land rigs can be used at much lower cost than offshore jack-ups, and future access for production operations and well servicing is easier.

Much is being made of the high H2S concentration in the oil, but that is not a big deal...we have numerous fields in Canada with concentrations well over that. One possibility about the associated (solution) gas pipeline failures is the metallurgy of the pipe is wrong...and it could be that they awarded the bid to a Chinese pipe manufacturer that faked the mill certs.

Kazakhstan is an extremely difficult place to do business, with very prescriptive regulations and rampant corruption that is insurmountable even by the cash rich, lawyer heavy IOCs. Part of the problem the consortium(s) faced is the changing ownership and widely differing agendas between the IOCs, the Kazakh and Chinese NOCs and the Kazakh Ministry officials (some no doubt looking for their personal share of the take).

And the saga continues (is it any wonder that ConocoPhillips sold its share and brought the money home to invest in Fortress America's shale plays):

Fri Mar 7, 2014 12:17pm EST

ASTANA, March 7 (Reuters) - Kazakhstan is suing foreign oil majors developing its huge Kashagan oilfield in the Caspian Sea, a tactic similar to those that secured the government large stakes in two of the three multinational energy projects on its territory.

Repeated delays at the 13-year-old project, targeted to produce as much oil as OPEC member Angola from a reserve almost as big as Brazil's, have infuriated the Kazakh government.

The consortium, led by Exxon, Royal Dutch Shell , Total and Eni as well as Kazakh state oil firm KazMunaiGas, may face Kazakhstan seizing a bigger stake in Kashagan or refusing to reimburse a big chunk of the $50 billion spent on bringing it onstream.

[GRG55]

Re: A "Flood" of new oil..........

Jeees I hate acronyms!!!

What you really meant is that you hate TLAs
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(Three Letter Acronyms)...

[GRG55]

Re: A "Flood" of new oil..........

...One mystery in the chart above is the very tight price band for oil for 20 years from the mid-1940s until 1973, between $16 and $24 in 2013 dollars. Note that the boom-bust feature of the oil investment/production cycle that is evident in the 1980s and 1990s appears to be non-existent from the end of WWII until the end of gold convertibility of the dollar in 1973. That steady-state system blew up in the early 1970s and was in run-away crisis mode by the late 1970s. I don't have a theory of the era when oil was pegged to gold via the USD but suspect that high and rising interest rates muted the E&P investment cycle, and the rate of discovery of conventional oil fields and the technology to produce them was also not as fast-changing as today; there was plenty of cheap and accessible oil in the world waiting to be found. Today E&P is juiced up with cheap credit. A combination of high interest rates and high oil prices will in a decade make the world a very different place than it is today.

Probably two main factors might explain this:

1. Global discoveries far outpaced global demand. Demand increases from population growth and post-WWII re-industrialising could be met largely from scheduled development of known reserves already discovered and standing (sometimes for decades) combined with new refinery construction that experienced relatively low cost inflation in the decades before the 1970s.

2. The 1970s all commodity inflation was followed by the financialization of the oil industry...like so much of the rest of the western economies. The break-up of the vertically integrated oil majors, the introduction of oil trading markets and contracts (in what used to be the exclusive preserve of the Seven Sisters), culminating in the 1990s with the rise of the purely financial merchant energy traders like Enron.