February 23, 2015

How long before oil supply hits equilibrium?

That is, of course, a major question right now.

Besides particular wells in various "tight" oil formations, like the Eagle Ford in South Texas, the Wolfberry in the Permian Basin and the Bakken in North Dakota, that will continue to produce because they've already been drilled, the other big controlling factor is a place called Cushing, Oklahoma.

That's where a nexus of North American oil pipelines meet and empty their content, if it doesn't have a different immediate final destination, into a complex of storage facilities.

Storage facilities that are filling up rapidly because those already-developed oil wells continue to produce, and at a high initial rate, like most shale oil wells.
"With total crude stocks now about 425 million barrels and Cushing north of 46 million barrels, WTI is looking increasingly mispriced high above $52 per the April contract," said Jeffries Futures analysts in a note to traders.
Indeed, the note says that some commodities futures traders will probably bet on oil going higher with another drop in the rig count.

Folks, that means nothing, for the reasons just noted; we still have excess supply in current production, and that's probably not going to change for a few months. Meanwhile, producers in the US are scrambling for other storage facilities as Cushing nears being filled to the brim, currently at about 80 percent.

Unfortunately, people who write for websites like Slate, which should be hiring or retaining people that know better, someone like Daniel Gross, who puts himself out as a brainy business and investment consultant, is clueless about oil production, as shown here in Slate, believing (I guess, it's hard to tell for sure), that you just shut off a well, like a light switch, after it starts producing, ignoring the problems with capping and respudding, especially in shale oil, and also ignoring the problem with "lease-to-drill" issues. Admittedly, those are more punitive, or have been, with gas rather than oil, but can't be ignored in either sector.

The fact is that oil and gas, as vital commodities, are non-solids. One can stop digging at a coal mine (or an iron ore mine for steel) quite easily. One does not just "shut off" an oil or gas well.

Of course, many speculators are betting they can sit on this crude long enough to wait out the continued surplus, and then sell at higher prices.

Probably not. West Texas Intermediate, currently in the low $50s, won't rise more than $10/bbl for six months, maybe longer. And other storage facilities may also be full by then.

Gross then shows even less understanding of the oil patch with this:
What we’re seeing, I’d argue, is an example of yet another type of American business exceptionalism.
No, it’s nothing of the sort. That said, some oil companies are gambling that they can use this to force new market efficiencies in their production of tight oil, and thereby stay even with the Saudis.

I’d bet, just as much as futures speculators are betting on being able to round up adequate storage at Cushing or elsewhere, that both Daniel Gross and said oil companies would be wrong. As rain.

That said, I have little sympathy for oil futures speculators who may well be betting wrong, unless they get a very favorable, and long, lease contract.

I discussed some of this (with less detail, and with skepticism about President Obama's backbone) two months ago.

That said, per the graphic at left, right now, it's definitely unprofitable to mine for tar sands. And, contra former Texas Speaker of the House Tom Craddick, and perhaps contra claims that $45 is the break-even point here in Texas, as I previously blogged, right now, it's borderline unprofitable to be producing oil here in Texas, unless it's what's left in conventional plays.

That graphic comes from "the letter O" in an A-to-Z encyclopedia of the current oil situation from Canada's newsmagazine, Maclean's. The whole encyclopedia is well worth a read.

So, Daniel Gross? Even if US producers squeeze a full $10/bbl of "efficiencies" out of shale oil production, it will still cost them more than Mexican oil production. They could squeeze out $15/bbl and it would cost as much as Libyan oil production.

They could squeeze out $20/bbl in "efficiencies" (which no way is happening) and still cost more than the OPEC average, and still cost more than $10 a barrel more than the Saudis' average cost.

So, Daniel Gross, and others who think like him? Buy.A.Clue.

Meanwhile, the International Energy Agency expects crude prices to average $55/bbl for this year, and not to get above $70 for some time. Oh, and $100 oil? Not even on its current horizon.

The IEA story is worth a read right there. Going by Brent prices, which it expects to only get to the low-mid $70s by 2020 (yes!), this is not a one-year slump, it's potentially a multi-year readjustment.

And, the IEA is right to be concerned. Its U.S. counterpart, the Energy Information Agency, says current stockpiles are at an 80-year high for this time of year.

So, major new shale field work is likely just going to have to wait until current shale wells play out. That said, given predictions that both the Eagle Ford and Bakken might peak by the end of 2016 (which the current supply glut has probably pushed back a year or two) by 2020, things may pick up more and more. In the meanwhile, the US could be facing the biggest slump since the 1990s era after the end of the Iraq War.

Cheaper fracking sites may be profitable if $45 is indeed a break-even point, but newer exploration isn't going to happen in any great amount, if the IEA is right — because there will be no demand for it. US EPA gas mileage requirements will continue to rise. Older cars will come off the road in Europe and the US. Driving miles will remain flat in both countries. To the degree emerging economies buy cars, it will be inexpensive, economy ones with better fuel mileage than ever.

As for geopolitics? Russia as we know it can't live in $70 oil. Yes, it is still technically profitable at that point, but with the national budget highly dependent on oil revenues, that's not high enough, not if it's lasting 5 years. Either Putin finishes the move to full dictatorship, or he's thrown out of office well before 2020. More thoughts on this in a future post.

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