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CNPC Expects Robust Oil Demand Growth In China

Chinese state-owned oil and gas…

Is Oil About To Collapse?

Oil

When writing about markets, here and elsewhere, I usually try to avoid the temptation to write sensational things. Words like “collapse” and “crash”, or “surge” and “explode” attract clicks, which in turn often translates to cash for a writer, but major events like that are rare. That is all fine and logical, but…WTI really does look like it is about to collapse.

Let’s be clear, I am not necessarily talking about a return to the sub-$30 of the beginning of 2016 here, but a return to the more recent lows around $42 before too long is distinctly possible, and if that happens, who knows where we go from there? There are, as I have noted in the past, reasons to believe that the long-term path of oil is still upward, but more immediately there is one dominant factor that keeps adding downward pressure, large and still growing supply from North American shale producers.

Some say, as in this FT piece, that there are signs that U.S. shale production has peaked, but then that was also supposed to be the case in 2015 and 2016. I am sure that if I could bother to go back further I would find that the same thing was said in previous years too. The fact is though, that as the EIA chart below shows, after dropping off as price declined at earlier this year, U.S. crude production is growing again and will be higher this year than last and is expected to be higher again in 2018.

(Click to enlarge)

The second chart, directly above, indicates why American producers are pumping at a growing rate. WTI has been recovering ever since the low of $26.05, and is now at levels not seen since June of 2015. There are reasons for that recovery, most notably the production cuts agreed by OPEC countries and others including Russia and improving global growth, but those bullish factors are now fully priced in and the effect of that is to encourage U.S. E&P companies to, to borrow a phrase, drill, baby, drill!

Related: Oil Prices Slide On Major Gasoline Build

I have been waiting for the expansion in North American production to slow and for demand growth to dominate pricing, but it hasn’t happened. It seems there are only two thing that will potentially bring that about… a lack of available drill sites, or a big drop in price. Anybody who has witnessed the actions to date of the current U.S. Presidential Administration and Congress will know that the first is not about to happen soon, which leaves us with the second.

When OPEC and other signatories to the deal got together recently in Vienna they announced that there was almost total adherence to the scheduled cuts. That was greeted by most people, including, I will freely admit me, as a positive for oil prices. It is certainly rare based on the results of other agreements to cut and therefore impressive, but there is a basic problem. Now that the appropriate level of cuts has been achieved, production in the participating countries will at best remain at current levels. U.S. production, however, continues to increase exponentially.

There are, as I said, some bullish factors, and there is always the chance of a major unforeseen event disrupting supply, but all else being equal the next big move in oil will be caused by the most basic driver of price for any commodity; the balance between supply and demand. As it stands, every increase in demand and attempts at reduction in supply outside the U.S. is being more than compensated for by increases in domestic production, and eventually the price must reflect that, despite a continued positive outlook for economic growth.

Related: The Drastic Drop Off In U.S. Oil Imports

That is especially true if further cracks start to appear in the production cuts agreement. Russia already rumbled some dissatisfaction at the last meeting of the parties to the cuts, and if crude prices simply stall for a while and U.S. exports continue to increase it is unlikely that the Russians will continue with a policy whose net effect is to enrich U.S. oil companies. 

There is, then, a chance of an event that would cause a collapse in oil prices, but that may not even be needed. The simple mechanics of pricing, supply, and demand need only to do their thing and the result will be a drop in oil prices that justifies the use of words like “collapse”.

By Martin Tillier for Oilprice.com

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  • Neil Dusseault on December 10 2017 said:
    First of all: Thank you, thank you, thank you!
    Well done, Martin Tillier! Hat's off to you, Sir...

    See, in previous articles on Oilprice.com recently I have commented about articles being posted that were extremely bullish in sentiment--maybe because as WTI was nearing $60/bbl analysts were not speculating on what's next but instead jumped to talk of $75 - $100/bbl (or more) on WTI as a new norm, and I mentioned how analysts with bearish sentiments never, ever dare to speculate on similar downward price movements without fear of being labeled as greedy or just altogether crazy.

    But right away in this article Mr. Tillier said he tries to avoid such wild headlines and he even said oil could return to prices they have already seen in 2017 (not years ago): $42/bbl.

    This is important, folks...as Russia has stated numerous times that they can survive on $40/bbl oil forever; and last year, when WTI was in the $30s/bbl (after quickly escaping the mid-$20s), U.S. oil industry professionals said, "Just give us $40/bbl" and BOOM! It happened almost overnight, even without OPEC, NOPEC, and their jawboning meetings.

    In fact, in February of 2016 (when WTI hit multi-year lows of $26.05/bbl) it was the Saudis themselves that said that unlike any other producers, they can still turn a profit at $10/bbl. Many already know that they cannot break-even at this point, but let's be honest: Any price of WTI above $40/bbl has Brent (and OPEC's Basket) closer to $45/bbl and everyone is breaking even (except for Canada's oil sands and of course, Venezuela--they all demand $100-$140 WTI as a minimum).

    So, with prices still far from $42/bbl on WTI, let's just call it what it really is: Greed on behalf of OPEC's & NOPEC's part, and an addiction to petro-dollars from Canada & especially Venezuela...I still have the utmost respect for U.S. oil workers, but they too don't need $60/bbl on WTI to pay off last year's debt AND still have plenty left over for capex on new explorations.
  • Al on December 11 2017 said:
    In an alternate reality - maybe....here on planet Earth, oil will be somewhere over $100 in 2018, even if it is only a temporary shock, due to geopolitical mayhem, natural disasters or both.
  • Neil Dusseault on December 11 2017 said:
    In response to AI's comment "...oil will be somewhere over $100 in 2018,"

    This is exactly my point: It comes off sounding extremely bullish to the point of absolute desperation on the part of folks like yourself when as I first commented on this article (last night, 12/10) and as of right now (12/11 at 9:30 Central), WTI is trading between $57 and $58/bbl.

    2018 is less than 1 month away, so just a few weeks...but still, give it a whole year from now and you're suggesting a $42+/bbl gain (interesting amount, considering this article's author, Martin Tillier, predicts prices could return to that number). You're wish/hope/pipe dream fantasy represents an approx. 75% gain from where we are now.

    So, what if someone with a bearish outlook did the same thing? A $42 drop (also roughly 75% decline) would bring oil prices to between $16 and $17/bbl. Can you imagine the mockery and uproar these sorts of estimates would create?

    Once and for all, the oil markets are a double-standard, currently still in favor of the oil bulls. But once more, thanks again to Martin Tillier for providing very useful insight.
  • Craig Woerpel on December 11 2017 said:
    There is so much talk about "break even price" for WTI, but so little recognition that break even price changes with production level and vice versa. If only the very best shale wells were drilled, break even might indeed be $40, but then US production would be only 9.0 mbd. If you added thousands of crappy wells you could get to 10.0 mbd, but then break even would be $90. The sweet spot (it's called supply-demand balance) is somewhere in between. Investors are finally demanding that shale drillers find this point, and they will.
  • Will Fine on December 11 2017 said:
    President Trump’s energy domination continues in the booming U.S. shale Basins - America first self sufficiency in energy is here and now- watch here as Energy expert Dr. Daniel Fine discusses prospects for U.S. energy dominance in this outstanding lecture-> https://youtu.be/yAe5ll5fFyg
  • JustMeNS on December 11 2017 said:
    The price of oil collapsed several years ago because of high prices and the FED's easy money at low interest rate policy. The high prices incentivised more exploration of oil in higher priced shale basins and the easy money provided the means. Shale companies have burned through billions of dollars and are still cash deficient. Art Berman is one of the best at examining these companies and produces charts from SEC data showing the sorry state of these companies.

    What people need to realize is the cheap oil is gone. We are now into more expensive shale oil. Technology has its limits and we are reaching them. Shale oil is also a lower quality oil being an API of 45 or higher. 2018 will be the year people and MSM realize the reality of the oil supply situation.

    In about 7 months in 2h 2014 oil dropped from $105 to $48. Not many believed that could happen. Just as now not many believe it can go to $80-$90 in a year. Believe it. We are drawing down reserves. A minor disruption will cause an instant spike. I am more concerned about a mid east war than I am about shale being the miracle provider. We are in for higher prices; get used to it and conserve energy wherever you can.
  • ilPaco on December 11 2017 said:
    The desperation lies in the oil traders and their need to minimize America’s contribution of petroleum volumes in the market in a vain attempt at controlling it. Good luck.
  • brett Ingham on December 11 2017 said:
    The articles leaves the 1.5M bpd elephant out of the room. The world needs 1.5M barrels of new oil each and every year. 0.2% EV usage ain't gonna cut more than a long weekend per year out of that need! Sorry, Elon. Plus, there is also about a 5% production depletion rate on all current oil wells with each and every year that goes by. US shale has just created the eclipse of the 9.6M bpd, produced by the US 2.5 years ago, only recently. What is never, never, never mentioned in these articles is that demand has increase by 4M bpd since then!!!! And an additional 300K bpd of US production over the next year is going to collapse the current price? What a joke! OPEC and Russia has topped out, too! They can't produce much more "cheap" oil than they are currently producing...that's why they want prices to continue to go up...so THEY can sell their more expensive oil too! My analysis - hedge funds want to control the price through information manipulation, not facts.
  • Pj on December 12 2017 said:
    Wait a minute here. I thought conventional oil was in permanent decline at a rate of about 3 million barrels a year and demand was increasing at about 1.2 million barrels a year. With 4.2 million barrels needing to b offset just to stay flat each year ow does shale adding a couple more rigs offset all this and send prices spiraling down???
  • Robert Craig on December 14 2017 said:
    You forgot the Red Queen. Any article on the oil price that fails to deal with world depletion which is minimum 3% per year and maybe as high as 6% per year (10-12% for new drills) is worthless. The majority of the avalanche of new drilling that took place when the oil price was over $100 has been used up (hence the market is now "in balance") and we are soon going to feel the effects of sharp global reduction in investment over the last 4 years. Articles that assume constant production in OPEC or non-OPEC and then net off predicted global growth against projected shale growth are missing 3-5m/day of the actual story...
  • Karl Milhon on December 18 2017 said:
    If you look at the overall trajectory of oil prices, at best, you can maintain a price in the fifty dollar "range" over time. I'd say that time frame will be in the 10 year range? We have moved from a "false" Peak Oil international economy to a Peak Demand economy. I also remember traveling and seeing those oil shale pilot plants in the west Rifle CO. for example that could never be cost effective... And my dad saying if only they could get it out.

    My dad was recruited to run the American education system within ARAMCO back in the mid-sixties. I was a kid, but remember the oil guy and my dad sitting on the back porch drinking beer. Evan as a kid, listening intently to their conversation I remember the oil guy saying quite distinctly there we would never run out of oil that there was so much oil and he rattled off areas of the world and he said the only thing keeping us from getting to it was technology but he felt that would take care of itself. He specifically mentioned the Tar Sands in Canada as having more oil than Saudi Arabia.

    Think about it. That was the mid sixties. I actually questioned what he said for 20 or thirty years but in retrospect now realize that "Peak Oil." was a false narrative all along. And so here we are today.

    We have an energy picture that is no longer completely dependent upon oil. The move to a multi-polar world vs the old bi-polar deal was the start. The old oil "cartel" comprised of "third world countries (And I include Russia there) controlling the spigots is over. Now that the U.S. is back in play with shale oil and Canada in play, we become the swing players and have "pivotal power." And thus the approximate $50 ceiling on pricing. Our shale oil can make money at that. And now over the last few years, we see that as soon as the prices move "toward" fifty, our swing internation production kicks in and balances pricing.

    This is the new reality and further, new solar and electric/battery technologies also reduce the overall market for oil thereby, long term, depressing the overall market. And eventually, they will likely solve the fusion problems. The only way oil prices will go up is when we fully transition to to other energy sources and the economies of scale of the oil/gas industry begin to deteriorate and potentially fall below market needs during the deterioration period. Eventually hydrocarbon Tech will be a supportive tech not the key energy source for a world.

    So, talk and argue all you want. The best thing, for all of us is to look long term, "strategically" as a company and figure out how to ride the beast to the ground making as much money as you can along the way and figuring out how to become one of the remaining hydrocarbon based corporations on the planet... We are close to the peak on a bell curve over time, but we have passed the cusp and inexhorably, the direction will be down over time, assuming we don't destroy ourselves in some fashion.
  • Mark Urbanski on December 31 2017 said:
    So with every Year oil consumption still increasing... Depletion... Less investment over the last few Years... A deficit of 3-5 million barrels a day per Year and Canada now been able within the next X number of Years to get oil out of the centre of their Country for various reasons, mostly political... Renewable energy and batteries not even close to making a dent in the World's energy demands... Asian economies growing fast... How is oil staying in the 50's again... My economics degree may be a tad long in the tooth now and maybe simple math is more complexed these days, but if I have missed something by all means show me where I am wrong... Don't put fluffy stuff out there noting this is the way the World should be and hey the bell curve... I had a great laugh... I wish too that oil and other carbon intensive energy applications would cease to exist first thing in 2018 for the sake of our existence, but that is not going to happen... Oil is going up and the demand is huge!!!! This is our stupidity human nature... I can not afford a EV yet, so I am guilty as well, but I am sure you must own a EV since you are most certainly lie in the sky...
  • Robert P. Balan on January 06 2018 said:
    The relationships between Capital Expenditures, crude oil production and global oil prices are counter-intuitive, but easy to prove.


    http://bit.ly/2EFIkTY

    1. Causality flows from price to production, and from price to CapEx. Price changes leads production changes by 3 month. And Price changes lead CapEx changes by 21 - 22 months. Generally, CapEx is a function of oil price.

    2. The correlation between production and CapEx has been severed since 2014, when production rose even as the lagged CapEx declined.

    3. CapEx will rise in 2018, as the effect of the delayed reaction from the recent rise in oil prices from the June 2017 low kicks in.

    4. October 2017 global production will fall (year on year), but global output will rise (year on year) from November until at least March 2018, based on the impetus provided by the recent run/up in oil prices. Global output responds positively to a rise in oil prices with a delay of 3 to 4 months.

    The relationships shown here work with aggregate global Capex, and not exclusively with new projects (which could take up to 5 years before becoming productive).

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