$50 oil?

Energy prices present an perfect example of a Producer-Producer conflict.  While the people who produce energy naturally want prices (at least) high enough to cover the costs of production, the rest of a society's producers want energy costs to be as close to zero as possible.  Over the years, attempts to resolve this dilemma have been tried such as publicly-owned non-profit power generation and treating energy companies as natural monopolies subject to regulation.

Whatever the causes, the dramatic drop in oil prices is coming as an unexpected joy to the overwhelming majority.  It is hardly a stretch to assume that for quite a few, the choice every month is between energy and food.  And because energy is a significant fraction of food prices, lower energy prices will probably translate into lower food costs.  Merry Christmas!

Couple of things to keep in mind:

1. It is quite possible to lower prices below the costs of production.  Oil companies tend not to tolerate losses for long so low costs will translate into production cutbacks—and sooner rather than later.  
2. Energy companies still have pricing power—at least as much as anyone has pricing power.  I'll only believe that oil prices have really fallen when they don't go back up again next spring.

My best guess is that this fall in energy prices will be brief and any windfall would best be invested in energy efficiency because the long-term trend is definitely up.  See below.

Sub-$50 Oil Surfaces in North Dakota Amid Regional Discounts

By Dan Murtaugh Dec 4, 2014

Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there.

Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All American (PAA) Pipeline LP. That’s down 47 percent from this year’s peak in June, and 29 percent less than the $70.15 paid for Brent, the global benchmark.

The cheaper price for North Dakota crude underscores how geographic and logistical hurdles can amplify the stress that plunging futures prices have put on drillers in new shale plays that have helped push U.S. oil production to the highest level in 31 years. Other booming areas such as the Niobrara in Colorado and the Permian in Texas have also seen large discounts to Brent and U.S. benchmark West Texas Intermediate.

“You have gathering fees, trucking, terminaling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said Dec. 2. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.”

Discounted prices at the wellhead have been exacerbated by a 39 percent drop in Brent futures since June 19 to $69.92 a barrel yesterday. Prices have fallen as global demand growth fails to keep pace with surging oil production from the U.S. and Canada.

Much of that new output is coming from areas that are facing steep discounts. Bakken crude was posted at $50.44 a barrel Dec. 2. Crude from Colorado’s Niobrara shale was priced at $54.55, according to Plains. Eagle Ford crude cost $63.25, and oil from the Oklahoma panhandle was $58.25.

Location, Quality

Discounts for all crudes are based on two things, location and quality, according to John Auers, executive vice president at Dallas-based energy consulting firm Turner Mason & Co.

Most U.S. refiners are along the coasts, which gives them a choice between oil pumped from wells in the middle of the country or foreign crude that can be delivered to the plant on a tanker.

That means the producer has to charge less, to make up for whatever it costs to transport it to the plant. In the Eagle Ford, that just means a few dollars to get to a pipeline that can cheaply push it 100 miles or so to Corpus Christi, Texas.

It’s more complicated in places like North Dakota, Colorado or Wyoming, where there is limited pipeline capacity. Producers have to fill rail cars with crude and pay $10 to $15 a barrel for them to be pulled a thousand miles or more to the coasts.

Reallocating Capital

Brent fell 42 cents, or 0.6 percent, to $69.50 a barrel on the London-based ICE Futures Europe exchange at 110:25 a.m. New York time. WTI slipped 54 cents to $66.84.

“To a producer in Wyoming, if Brent’s $70 then I’m at $50, then I have to start asking does it economically make sense to keep drilling,” Auers said yesterday. “They might start reallocating capital, you might see projects slowed or shut down.”

Transportation discounts don’t last forever. WTI, priced at Cushing, Oklahoma, traded almost $28 a barrel below Brent in October 2011. Companies built new pipelines and reversed old ones to allow Cushing oil to cheaply get to the Texas coast, and now the discount is less than $3.

In West Texas’s Permian Basin, the nation’s largest oil field, prices at a hub in Midland dropped to as much as $21 a barrel less than WTI this year as production growth overwhelmed the pipeline system. It’s narrowed to less than $1 as new pipes recently came online.

North Dakota

The same thing is happening in North Dakota, where the Bakken shale produces 1.12 million barrels of oil a day. At the end of last year, there was only space for 583,000 barrels daily to leave the state on pipelines. That’s forecast to grow to 773,000 by the end of this year and to as much as 1.7 million barrels a day by the end of 2017, according to the state’s Pipeline Authority.

One possible effect of lower prices is that companies may focus their spending on places where the infrastructure already exists or is on the way, said Carl Larry, a Houston-based director of oil and gas atFrost & Sullivan.

“Places that are just starting to build up are going to be hit the worst,” Larry said by phone yesterday. “They’re going to get hit the hardest because it’s harder to get the oil out. Not out of ground, but out of the area.” more

Keep in mind that the overwhelming majority of fracking exploration is being financed by junk bonds.  So falling oil prices will threaten a lot of players in the big casino.

Low Oil Prices Won't Last Long

Cheap Saudi crude is targeting US oil production, not Russia
Liam Halligan (The Telegraph) OPINION Tue, Dec 2 | 2384

This article originally appeared in The Telegraph

Attempting to forecast the oil price is a mug’s game. But that hasn’t stopped me in the past (ahem!)

The reality is that crude is so important to modern life, and the path of the global economy, that for all the pitfalls of prediction, any serious economist needs to have a view on the future cost of the black stuff.

Pivotal not just in terms of energy and transport, but also the manufacture of vital inputs from polymers to fertilisers, the dollar oil price is perhaps the world’s single most important economic variable.

My view is that the current price dip is temporary, partly illusory and that oil is now heavily over-sold, having fallen way below its fundamental value. As such, I’d venture that, in the absence of a 2008-style systemic meltdown on global markets, $100-a-barrel (£64) oil will return by the middle of 2015.

I’d also say – and I know this won’t be popular but here goes – that against the temporary boost which cheaper oil provides crude importers such as America and the UK, must be set a significant future cost.

While cheaper oil feels good, acting like a tax cut for producers (and consumers if lower costs are passed on), it seriously curtails investment in future crude production.

In other words, a period of low oil prices can create the conditions for a pretty sharp upswing. That’s especially true today, given that a relatively high share of the recent increase in global oil supply has come from relatively expensive “non-conventional” sources such as tar sands, ultra-deep water and tight “shale” oil.

From late 2010 until August this year, Brent crude traded within a relatively narrow range, averaging close to $110 per barrel. In each of the three years from 2011 to 2013 inclusive, the average crude price has been in triple-digit dollars. It won’t be far short in 2014 either, seeing as oil stayed well above $100 during the first eight months of this year and was just shy on average during September.

Over the last couple of months, though, crude prices have fallen by well over 30pc. From a high of $115, oil dipped below $72 last week, a four-year low, after the Opec exporters’ cartel – in particular Saudi Arabia – decided not to bolster prices by cutting their production quota from 30m barrels daily. Prices fell 5pc on Thursday alone, the day Opec announced that decision at the end of its annual Vienna summit.

Some commentators of a conspiratorial disposition suggest that the Saudis are colluding with America, keeping oil prices low in a joint bid to damage their respective enemies, Russia and Iran.

I would politely suggest that this is hokum.

Yes, cheaper oil suits America because, despite all the hype surrounding increased domestic production, the US remains the world’s biggest energy importer by far, still reliant on other countries for a net 9m barrels a day – amounting to over 10pc of total global production. And there’s certainly no love lost these days between the US and Russia.

It should be remembered, though, that the relations between Riyadh and Washington are also extremely strained. This is not least due to American overtures to cooperate with Iran in the battle against Islamic State and US support for Qatar – a key backer of the Muslim Brotherhood, whom the Saudis detest. Once a key feature of post-War geopolitics, the US-Saudi axis is now seriously bent out of shape.

Remember, too, that while the Saudis are powerful within Opec, the likes of Venezuela and Iran are also influential. Clearly, the Saudis have managed to convince recalcitrant members to bite their tongues and accept that the 30m quota remains in tact. But it’s absurd to think that Riyadh could persuade other, far poorer members to keep prices low in order to please America, even if the Saudis wanted to, which they don’t.

Opec agreed what it agreed in Vienna for one reason only; to suppress prices in order to squeeze US shale producers, many of whom have high production costs and are shouldering lots of debt.

The Saudis won the argument that the US shale boom must be countered by undermining the profitability of North American producers, curtailing current US production and future investment. At $70 for a barrel of oil, an awful lot of shale producers – particularly relatively small outfits that have driven much of the increase in US production from 7.5m barrels daily to 10m over the past four years – won’t be able to operate.

Many of them will default on their borrowings, potentially dealing a serious blow to America’s “shale revolution”.

Opec Secretary General Abdullah al-Badri basically admitted in Vienna that his members were now engaged in a battle to defend their current one-third share of global oil markets. Asked at a press conference how Opec would respond to rising US oil output, he said: “We answered. We kept the same level of production. That is our answer”.

The main reason that the dollar price of oil has fallen so sharply in recent months has nothing to do with US-Saudi conspiring and an awful lot to do with Janet Yellen. At the end of October, the chairman of the Federal Reserve announced that the US is to end its latest bond-buying programme, otherwise known as quantitative easing.

Since then the dollar has rallied on the strength of less virtual money-printing.

The passing of the QE baton back to Japan, with the eurozone soon to follow, has also helped drive the greenback to a near seven-year high against the yen and the single currency to an 18-month dollar low.

Oil is priced in dollars. All the major Opec producers peg their currencies to the dollar. Given that, when the dollar rises, all other things being equal, the price of oil falls. This is an axiomatic truth.

Having said that, I accept that we’ve recently seen higher Libyan production and also rising oil output from Iraq – both of which have contributed to lower prices. Also important is the fact that, earlier this autumn, the International Energy Agency cut its oil demand forecast for 2015.

Why, then, do I think that oil prices will bounce back next year and remain relatively elevated in the medium-to-long term? One reason is that more than two thirds of the 12m-barrel rise in daily global oil production over the past decade has come from “unconventional” sources.

While conventional crude costs up to $60 per barrel to produce, unconventional production generally absorbs $80-$100. So lower prices make some current production uneconomic and deter investment in future capacity, sowing the seeds of an forthcoming price rise.

At the same time, the fundamental trends still point to expensive energy. The big populous emerging markets, while they’ve slowed down in recent months, are still consuming more than half of total crude output. They’re the reason why oil consumption has outstripped production for years; by more than 4m barrels a day last year, and 3.7m the year before, with the shortfall coming from reserves.

Note, also, that the IEA didn’t “cut” its demand forecast for next year, as many newspaper headlines suggested. It actually said oil demand would merely rise more slowly in 2015 than previously forecast, with total consumption growing by 1.1m to 92.4m barrels daily next year, rather than to 92.7m. That still amounts to a 20pc increase in oil demand in not much more than a decade. The global crude industry meanwhile struggles to keep up, as it’s increasingly forced to tap more and more expensive unconventional oil.

The recent fall in the oil price is spectacular and, if we’re lucky, motorists may even see a decent drop in petrol prices. But, unfortunately, it’s likely to be short-lived. more