• 30 mins Bidding Action Heats Up In UK’s Continental Shelf
  • 6 hours Keystone Pipeline Restart Still Unknown
  • 10 hours UK Offers North Sea Oil Producers Tax Relief To Boost Investment
  • 12 hours Iraq Wants To Build Gas Pipeline To Kuwait In Blow To Shell
  • 14 hours Trader Trafigura Raises Share Of Oil Purchases From State Firms
  • 15 hours German Energy Group Uniper Rejects $9B Finnish Takeover Bid
  • 17 hours Total Could Lose Big If It Pulls Out Of South Pars Deal
  • 18 hours Dakota Watchdog Warns It Could Revoke Keystone XL Approval
  • 1 day Oil Prices Rise After API Reports Major Crude Draw
  • 2 days Citgo President And 5 VPs Arrested On Embezzlement Charges
  • 2 days Gazprom Speaks Out Against OPEC Production Cut Extension
  • 2 days Statoil Looks To Lighter Oil To Boost Profitability
  • 2 days Oil Billionaire Becomes Wind Energy’s Top Influencer
  • 2 days Transneft Warns Urals Oil Quality Reaching Critical Levels
  • 2 days Whitefish Energy Suspends Work In Puerto Rico
  • 2 days U.S. Authorities Arrest Two On Major Energy Corruption Scheme
  • 2 days Thanksgiving Gas Prices At 3-Year High
  • 2 days Iraq’s Giant Majnoon Oilfield Attracts Attention Of Supermajors
  • 2 days South Iraq Oil Exports Close To Record High To Offset Kirkuk Drop
  • 3 days Iraqi Forces Find Mass Graves In Oil Wells Near Kirkuk
  • 3 days Chevron Joint Venture Signs $1.7B Oil, Gas Deal In Nigeria
  • 3 days Iraq Steps In To Offset Falling Venezuela Oil Production
  • 3 days ConocoPhillips Sets Price Ceiling For New Projects
  • 5 days Shell Oil Trading Head Steps Down After 29 Years
  • 5 days Higher Oil Prices Reduce North American Oil Bankruptcies
  • 5 days Statoil To Boost Exploration Drilling Offshore Norway In 2018
  • 6 days $1.6 Billion Canadian-US Hydropower Project Approved
  • 6 days Venezuela Officially In Default
  • 6 days Iran Prepares To Export LNG To Boost Trade Relations
  • 6 days Keystone Pipeline Leaks 5,000 Barrels Into Farmland
  • 6 days Saudi Oil Minister: Markets Will Not Rebalance By March
  • 6 days Obscure Dutch Firm Wins Venezuelan Oil Block As Debt Tensions Mount
  • 6 days Rosneft Announces Completion Of World’s Longest Well
  • 7 days Ecuador Won’t Ask Exemption From OPEC Oil Production Cuts
  • 7 days Norway’s $1 Trillion Wealth Fund Proposes To Ditch Oil Stocks
  • 7 days Ecuador Seeks To Clear Schlumberger Debt By End-November
  • 7 days Santos Admits It Rejected $7.2B Takeover Bid
  • 7 days U.S. Senate Panel Votes To Open Alaskan Refuge To Drilling
  • 7 days Africa’s Richest Woman Fired From Sonangol
  • 7 days Oil And Gas M&A Deal Appetite Highest Since 2013
Alt Text

Has The Big Oil Fire Sale Started?

The world’s largest sovereign wealth…

Kent Moors

Kent Moors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment. His…

More Info

Why Oil Prices Will Keep Moving Up

Oil

Crude oil prices were have hit a two-year highs. Despite the misgivings of some pundits who view oil simply as a means for making money from short plays, the global market has finally stabilized.

That means we’re now in the perfect environment to make some nice money with the presence of two crucial ingredients: a degree of predictability and low volatility.

WTI posted a price above $57 on Tuesday morning, with the consensus now forming that the next resistance level may be around $59.

Meanwhile, Brent (set daily in London and the more globally used of the two primary oil benchmarks) is trading above $63, higher than my predicted range for December 31 of $58-$60 a barrel.

This means that my next estimates – for what the market will look like at the end of the first quarter of 2018 – will forecast a higher price.

I expect the movement to continue incrementally. Each new ceiling provides its own resistance, especially when improving profitability entices additional production from significant surplus reserves.

Nonetheless, there are two essential reasons why the price improvement is taking place, both of which we’ve discussed on numerous occasions here, and both boding quite well for investment returns in the sector.

Oil Supply Surpluses Can Be a Good Thing

First, the elusive, long-awaited balance in the market is here.

As I have previously remarked, such an equivalence between supply and demand does not mean the oil market is moving into a “just-in-time” situation.

This has been a recurring and popular strategy to minimize costs in a range of manufacturing and delivery venues. The idea is that you only make and ship what’s needed when it’s needed, to avoid having to pay for large warehouses and manage inventory.

It’s a great idea if you’re making widgets.

But it’s not possible when it comes to a major raw material like oil. People do not use crude oil – they use refined oil products. And without oil supply in storage to allow for at-will refining, even tiny swings in the availability of oil would result in huge swings in the price of crude oil (and refined oil products) …

Related: Russia Aims To Dominate Middle East Energy

That could wreak havoc on whole economies. So, this balance requires a surplus in the market.

The key is to restrain the excess flow from available extractable volume from driving down prices. This is especially the case in the U.S., where the presence of huge shale and tight oil reserves has prevented an appreciable rise in price and, until recently, had fueled a decline.

However, at current levels, much of American production is entering profitability.

Now, not all companies will benefit. The cycle of mergers and acquisitions will continue, as will bankruptcies.

But companies with developed operations, with producing wells in low-cost development basins, and with manageable debt will be able to time production, thereby improving price per barrel at the wellhead (where the producer is paid) while stabilizing the broader market.

The days are gone when producers were forced to flood the market in a desperate attempt to stay in business. Prices at current levels allow surviving companies to plan production. That sustains a higher pricing range.

All of this has the net effect of raising prices.

But that’s not all…

Venezuela is on the Brink of Collapse

Remember, the oil price is set globally these days, not in the developed economies of North America and Western Europe. And demand is increasing faster outside the U.S. and EU than inside.

U.S. crude exports to higher priced foreign end users are now at 2 million barrels a day. American refiners already lead the world in the export of processed oil products.

Second, events elsewhere in the world are contributing to lowered supply expectations. The OPEC-Russia agreement to cut/cap production is working and will now be extended into next year.

In addition, as I foretold some time ago, it now appears Venezuela and its state oil company PDVSA will not be meeting debt interest obligations.

This will further fuel the financial crisis in the country, constrict access to working capital, and exacerbate a PDVSA production decline.

This will lead to increasing flexibility among other OPEC members to increase production without impacting the overall price. Related: What A U.S. Electric Grid Attack Looks Like

A few years ago, I never could have imagined that U.S. oil exports would surpass those of Venezuela. Yet that is what is taking place.

Geopolitical tension elsewhere is also increasing uncertainty. In cases such as the Persian Gulf and the South China Sea, this translates into concern over whether oil transit routes will be affected.

And that raises prices.

In the absence of actual events, traders peg prices on the expected costs of available barrels. In the current environment, they need to hedge at the higher level, effectively pegging contract prices to the anticipated costs of the most expensive next available barrel.

They then use an array of options and other derivatives to provide insurance.

Both of these main factors are causing a gradual rise in the floor of pricing ranges. It is the floor, not the ceiling, of those ranges that genuinely tells us the attitude of market players.

The floor tells us the price will keep moving slightly up.

That’s all we need to make money with targeted moves.

By Dr. Kent Moors

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • Jeffrey J. Brown on November 07 2017 said:
    Of course, the US is still a net oil importer, and Venezuela is a net oil exporter.
  • mothman777 on November 08 2017 said:
    Oil should, in reality, be worth almost nothing today, with the already-existing water-powered engine technology, fully developed in the USA and Japan, yet unused for no good reason.

    The water-powered car engine would do away with high incidence of asthma, dementia from particulates from petrol and diesel engines, and add two years to the lives of city dwellers, also vastly improving their quality of life long-term. How much is money worth, when the quality of life for thousands of millions is ruined by petroleum products?

    Nuclear-powered power stations would not be needed to produce electric to power electric cars either, nor would Saudi Arabia be wealthy anymore, so they would not be able to fund ISIS any longer, but of course, TPTB have no intention of altering the current balance.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News