Posted on 02/20/2015 4:33:23 AM PST by thackney
STAGE one of Saudi Arabia’s plan—or perhaps hope—to restructure the oil market is taking longer than expected. By refusing to rein in production while prices fell, the Saudis permitted a big surplus to grow and served notice on higher-cost rivals (Russia, Venezuela, American shale-oil producers) that they would not prop up other people’s profit margins at the expense of their own market share.
That signal has been weakened by the growing amount of oil in storage, which is absorbing most of the glut. World oil stocks rose about 265m barrels last year and Société Générale, a French bank, reckons they will increase by a further 1.6-1.8m barrels a day (b/d) in the first six months of this year, adding roughly 300m barrels to the total. At the moment, global oil output is exceeding demand by about 2m b/d, so the build-up of stocks is enough to take most of the glut off the market. Oil is being stored in the hope that demand and prices will pick up later. So stocks, plus renewed political worries (flows from Libya’s largest oilfield were disrupted again this week by apparent sabotage), have pushed the price of oil back over $60. After having fallen by more than 60% since June, the price of a barrel of Brent crude closed above $62 on February 17th.
The restocking cannot continue for long. Storage facilities in Europe and Asia are already 80-85% full. Much more and they will overflow. As it is, companies are renting tankers to keep oil in. If storage space runs out, prices could tumble again.
Whether that happens depends on how quickly phase two of the Saudi plan gets under way. This is to force high-cost producers out to increase the influence of Gulf countries. At the moment, this is happening only slowly. Oil types have recently become obsessed with the so-called “rig count”—the number of drilling rigs operating in America and elsewhere. Analysts think that as the rig count declines, shale-oil output will fall, hurting profits and investment. That seems dubious.
Figures from Baker Hughes, an oil-services company, showed that the rig count in America in mid-February fell to its lowest since 2011, and was 35% below its peak in October 2014. That is a big fall. But most of the idled rigs are in marginal areas; the fall has been only 9% in the main shale-oil areas, in North Dakota and Texas, which accounted for four-fifths of the increase in American oil output in the past two years. Moreover, productivity is rising in the remaining wells. Citibank reckons that even a 50% fall in the rig count would allow output to rise this year and turn the average shale firm’s cashflow positive, encouraging investment.
More broadly, says Antoine Halff of the International Energy Agency, an inter-governmental body, “The market sentiment may have changed but the fundamentals have not.” The Organisation of the Petroleum Exporting Countries (OPEC) says its members’ output will rise by 400,000 b/d this year; others think the increase will be greater. Non-OPEC supplies are likely to rise by twice that. Thanks partly to cheaper oil, world demand is rising, but not by much. The IEA reckons demand will be flat in the first half of 2015, before rising by 2m b/d in the second. By most estimates, the market will be oversupplied for a while.
In the long run, there are signs that a restructuring of the market is starting, which could eventually lead to high-cost producers going bust or marginal areas being abandoned. Large oil firms have announced cuts in capital spending of over 20% for this year. BP, for example, will spend $20 billion in capital projects in 2015, compared with $23 billion in 2014. New discoveries are down even more steeply. According to IHS, a research firm, new finds of oil and gas were the equivalent of 16 billion barrels last year, the lowest for 60 years. That will cheer the Saudis.
How about not using private industry to enforce a government desire?
Are you wanting to stop buying OPEC oil? If we imposed such a ban, our commercial oil stocks would be gone in less than 5 months.
Of course reality is, places like Mexico would import OPEC oil and sell us more of theirs for a greater profit and the US paying higher prices.
Conservatives shouldn’t be trying to use government to manipulate private industry.
Using the government to select winners and losers in private industry is always bad for the industry you think government is going to help.
A six month sanction on Saudi oil wouldn't run US oil stocks dry and it would create a big incentive to continue producing.
Of all the people that actually needed a good blowing up and "regime change" it was the soddies. Some "secular" dictator like Kadoffy or Soddom Whosane would have been ideal.
Maybe a good oil-crash like that would help pull one off.
I don't think it would hurt my feelings too much to see those arrogant murderers running around screaming, with their kaftans fully engulfed.
How exactly does a sanction on Saudi oil do that..and why would a sanction on Saudi oil be any different than the one on Iranian oil?
Reality is we would not raise production fast enough, import from others at a greater volume and higher cost, making them middlemen for greater profit outside the US.
At the same time you would make it cheaper to import gasoline, diesel, jet fuel from outside the US than refine it in the US. You would shut down US refineries and petrochemical plants.
Stop trying to use the federal government to manipulate private industry. The US oil industry will survive this down turn just like it has all the others.
And I say this as one already directly impacted by the falling oil/natgas/ngls prices.
Give the government more powers is not a help to private industry. Take Reagan's view point on help from the Feds.
Does leveling the playing field against OPEC and encouraging domestic production really count as "manipulation"?
That's news to me...
That is sad that someone claiming to be a conservative wants the feds to tell private industry who they can buy and sell from.
They playing field is just fine. That is why the US production is growing faster than OPEC's.
"Encouraging" domestic production at the expense of domestic refineries and petrochemical industry is not help to the american consumer.
Besides what's the worst they can do in retaliation...fund an international terror organization?
They already do that!
Their manipulation....
Tell me what you think “they” did.
Reality is prices have dropped because OPEC has failed to act together as an effective cartel. You want them to manipulate the volumes of oil to raise prices?
Whats “sad”, is it sounds like you have some vested interest in keeping Saudi oil flowing to the United States at the expense of the domestic oil industry.
I’m a conservative working in the domestic oil/gas/petrochem industries and have for decades. My hours are now cut and my commute has doubled to over 100 miles a day with the closing of one of our offices.
What I know is more federal government involvement always raises prices and costs us jobs.
We don’t want government help.
The most terrifying words in the English language are ‘I’m from the government and I’m here to help.’
- Ronald Reagan
Here you go genius...from the first paragraph of the article.
By refusing to rein in production while prices fell, the Saudis permitted a big surplus to grow and served notice on higher-cost rivals (Russia, Venezuela, American shale-oil producers) that they would not prop up other people’s profit margins at the expense of their own market share.
So they did not take action. They did not act as a cartel to manipulate volumes to raise prices. And you think that is a bad thing?
In other words, a sanction on Saudi oil would actually help you personally.
There are none so blind as those who will not see.
-btw there are lots of examples of RR using government to assist domestic industry during his Presidency.
China has had a major effect on all commodities in the last ten+ years. In 2004-2005 Portland cement availability was effected because of demand from just the construction of the Three Gorges dam in China. Next is was steel and hence iron ore and everything that goes into its production. After that is was copper.
Lumber(my commodity)has been greatly effected by Chinese demand in the last ten years. They do not build with western framing rules like we do. Most construction is masonry. However, between what they consume to make pallets, crates, concrete forming and furniture it has had a huge effect on the world lumber market. This is especially true for the western Canadian manufactures that are close the port of Vancouver(less freight). However, now Chinese demand is falling. The US dollar has gone up against the Loonie and the result is an oversupply of lumber to the US market. Hence prices are falling, even though US housing starts a slowly increasing and projected to be back in the 1.1- 1.2 million by the end of this year.
The strength of the US dollar has made it more difficult for US sawmills to compete against foreign manufactures. Lumber from Brazil, Chile, New Zealand, Europe and Canada is all less expensive delivered to China than US wood.
Lastly, the west coast port strike has made it virtually impossible to ship wood anywhere right now. I have mills in OR & WA that are shipping lumber up to Vancouver(more trucking freight) to fulfill contracts they have to Asia.
Nope. I do work for refineries and the petrochem industry as well.
I want less involvement by the federal government in private industry. You want more. Past examples of this mistake are not reasons to repeat it.
“Is the market returning to normal?”
I hope so, it’s the only way they will ever drill the Spearfish in eastern Bottineau County.
The formation has had success north of the border for some time.
More than 1600 horizontal wells have been drilled in the Spearfish trend in the last 5 years!
http://www.ndoil.org/image/cache/Mark_Birchard.pdf
Exactly!
The Saudis reacted, in the only way they could, to the new market reality. With the rise in North American shale, extraction wasn't static, it was rising, so a decision to cut production would lose them a great deal of market share. They would have sold far less product, for a lower, or slightly higher price.
Rock. Hard place.
For many years now, the Saudis (and OPEC) have been ascribed far more power than they have actually had, to affect the market, IMHO.
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