Oil prices up and staying up – political disruptions and Chinese hoarding will keep them high for a generation
LeVine 6/12 (Steve LeVine, 6/12/14 Quartz's Washington correspondent, writes about the intersection of energy, technology and geopolitics, a juncture of some of the most important and quickly developing events and trends on the planet. , “Oil prices aren’t coming down any time soon, and Iraq is just the latest reason” http://qz.com/220082/oil-prices-arent-coming-down-any-time-soon-and-iraq-is-just-the-latest-reason/#/)
The upheaval in Iraq threatens to exacerbate a three-year-old trend in which unusual geopolitical disruptions have become the new normal. A key impact—high oil priceswhen analysts say bulging new supplies should be sending them far lower. + That is because much of the geopolitical turmoil has been in or involved oil-producing countries. “We are witnessing the failure of the petro-state,” Citigroup’s head of commodity research, Edward Morse, told Quartz. + Up until 2011, an average of 500,000 barrelsof oil a day was off the market at any one time for maintenance and other reasons, a volume that triggered no perceptible price volatility. Temporary aberrations like Hurricane Katrina took 1.5 million barrels off the market in 2005, and the 2003 attack on Iraq removed 2.3 million barrels a day. But starting in 2011, the disruptions often began to exceed 2 million barrels a day.Among the culprits were the Arab Spring and follow-on uprisings, the chaos in Nigeria, Iran sanctions and of course Russia president Vladimir Putin’s crypto-invasion of Ukraine. + Then last July, Libyan militants stormed oil export facilities and shut them down. As of now, the country pumps just one-eighth of the 1.6 million barrels of oil a day it produced before Muammar Qadhafi’s ouster in 2011. All in all, about 3.5 million barrels of oil a day have been off the market around the world since last fall. Those barrels have offset a 1.8 million-barrel-a-day surge of supply from the US. As a consequence, oil prices have continued to soar. And this increase has been exacerbated recently by China’s record-setting hoarding of oil. + If it wasn’t for the disruptions, many analysts say prices would decline well below $100 a barrel. + Morse said Citigroup bakes 3 million barrels a day of disrupted oil into its forecasts as a matter of course. It is hard “to predict the challenges making for state failure,” he said, but he expects the new state of play to last a generation. + Oil research firm IHS’s analyst Jamie Webster believes the level of oil disruption will gradually tail off over the coming decade or so, settling at a still-elevated norm of 1 million to 1.5 million barrels a day off the market.
Prices Up – Chinese Hoarding
Chinese hoarding keeps prices high
Bloomberg News, 6/11/14 “China’s Record Oil Hoarding Seen Keeping Crude Above $100”” http://www.bloomberg.com/news/2014-06-11/china-s-record-oil-hoarding-seen-keeping-crude-above-100.html?_ga=1.62686767.226861924.1405529405
China is hoarding crude at the fastest pace in at least a decade, shielding itself from supply disruptions and helping keep prices above $100 a barrel. The country imported a record volume in April as it emulates steps taken by the U.S. in the 1970s to create a strategic petroleum reserve, government data show. Chinese President Xi Jinpingis building stockpiles as his nation clashes with Vietnam over resources in the South China Sea and faces potential risks to oil sales from Russia, Africa and the Middle East because of sanctions and violence. The purchases are helping drive oil prices higher, according to Barclays Plc, Citigroup Inc. and Nomura Holdings Inc. As China’s thirst for crude grows with the expansion of its emergency stockpiles and refining, the International Energy Agency estimates that the Asian nation is poised to surpass the U.S. as the world’s largest oil consumer by 2030. “This panicked stockpiling is one of the ways that geopolitical tensions can actually tighten physical oil markets,” Seth Kleinman, a London-based analyst at Citigroup, said yesterday by e-mail. “This buying spree is partly driven by the infrastructure needs of China’s ongoing refinery expansion, but also reflects the rise in geopolitical tensions.” West Texas Intermediate crude, the U.S. benchmark, gained 9.5 percent over the past year to $104.40 a barrel on the New York Mercantile Exchange. Brent, the marker for more than half the world’s oil, climbed 6.9 percent on the London-based ICE Futures Europe exchange to $109.95.
Political disruptions and Chinese reserves keep prices high
Bloomberg News, 6/11/14 “China’s Record Oil Hoarding Seen Keeping Crude Above $100”” http://www.bloomberg.com/news/2014-06-11/china-s-record-oil-hoarding-seen-keeping-crude-above-100.html?_ga=1.62686767.226861924.1405529405
Potential Disruptions “We expect prices to strengthen slightly going forward due to continued supply shortfalls and geopolitical tensions, and continued Chinese buying would help tighten the market as well,” Sijin Cheng, a commodities analyst at Barclays in Singapore, said in an e-mail on May 30. Crude production from the Middle East and North Africa has been curtailed by a battle for political control in Libya, pipeline attacks in Iraq and prolonged sanctions against Iran. Russia’s conflict with Ukraine has also stoked fears of a disruption of supplies from the world’s largest energy exporter. China is building reserves while it hunts for future resources. Its claims in the South China Sea have put it at odds with neighboring Vietnam and the Philippines, which are also exploring for oil and gas in the disputed waters. “The escalating maritime tensions in offshore China also call for accelerated strategic oil reserves stockpiling,” Gordon Kwan, regional head of oil and gas research at Nomura, said in an e-mail May 23. The buying will sustain “high oil prices at least above $100 for the rest of the year,” he said.
Chinese reserve buying keeps prices high – puts both literal and psychological pressures on prices
Cunningham 6/12 (Nick Cunningham of Oilprice.com, “China’s Oil Hoarding Is Raising Prices” 6/12/14 http://oilprice.com/Energy/Crude-Oil/Chinas-Oil-Hoarding-Is-Raising-Prices.html)
China has been buying up oil at a record pace in order to stockpile reserves for a rainy day as part of its strategy to insulate the country from geopolitical conflict or supply disruptions. It’s modeled after the U.S. strategic petroleum reserve (SPR). However, the heightened rate at which China is purchasing oil is driving up global oil prices. Dating back to the oil embargo of 1973, the U.S. government has maintained an SPR to guard against future oil supply disruptions and/or price spikes. Located in salt caverns in Texas and Louisiana, the Department of Energy’s SPR has a capacity of 727 million barrels of storage. Similarly, the International Energy Agency (IEA) – whose 29 members include Western countries plus Australia, Korea, and Japan – are required to hold the equivalent of 90 days’ worth of oil supply in a reserve. China, who is not a member of the IEA, for years did not have significant volumes of oil set aside as in a reserve. But as the world’s second largest oil consumer of oil, and one highly dependent on imports, China recognized the threat its oil consumption presents to its economy. When China’s economy was undergoing explosive growth at the turn of the 21st century, it embarked upon a strategy to build up its strategic stockpiles as part of its 10th Five-Year Plan, beginning in 2000. A three-phase program was instituted that would eventually lead to the stockpiling of 100 days’ worth of imports. The first strategic reserve was completed in 2008, with a facility located on Aoshan Island, about 186 miles south of Shanghai. By 2009, when the first phase was completed, China had constructed four facilities capable of holding 103 million barrels. The second phase will consist of storage fit to handle 191 million barrels across seven sites, with several currently under construction. In all, China’s 100-day supply will hold an estimated 680 million barrels by 2020, based on today’s consumption levels. Although targets were broadly laid out, China does not publish data on what it is holding at any given time. But according to China National Petroleum Corp., China had 141 million barrels in storage at the end of 2013. And while market analysts understand that China needs to buy up oil in order to meet its storage targets, Bloomberg News found that China has been hoarding oil at an unprecedented clip since the beginning of the year, amassing over 600,000 barrels per day. On the one hand, this is enhancing China’s energy security; by building storage capacity, the government can be prepared in the event of a supply outage. It will shield the economy from shortages and provide the Chinese government with ammunition if prices spike too high. Additionally, the move is very timely. The first half of 2014 has been riddled with geopolitical conflict, which entered a new phase of instability this week with the chaos in Iraq. But the stockpiling – intended in part to guard against price spikes – is contributing to higher oil prices. By adding over a half million barrels per day to global demand, oil markets are feeling the squeeze. Moreover, there is a psychological impact – the appearance of China scrambling to hoard oil can bid up prices. “This panicked stockpiling is one of the ways that geopolitical tensions can actually tighten physical oil markets,” Seth Kleinman, a Citigroup analyst, told Bloomberg in an interview. And buying enormous volumes of oil when prices are high will cost China much more. Buying an additional 600,000 barrels per day over and above what is normally needed will cost China an additional $66 million per day, assuming Brent prices of $110 per barrel. For the world’s second largest economy, that is a small price to pay. China views geopolitical instability as a much greater threat to the economy than higher oil prices. But with world oil markets already growing tight because of unrest in several OPEC countries, China’s buying spree is only adding to market pressure.
Prices Up – Demand Growth
Long term demand growth and tightening supplies make long term price trend upward
StreetAuthority 14 High Oil Prices Are Here To Stay -- Here's How To Profit By StreetAuthority, June 09, 2014, 09:30:00 AM EDT The future dammed of oil will keep the prices high
American oil production is surging. Yet oil prices remain near $100 a barrel. You may be wondering: When will all of this additional production finally overtake demand and push the price of oil down? You can find one answer in the price of oil futures -- which say we can expect oil to fall to closer to $80 in the coming few years and stay there. Is the market correct? Are oil prices heading south? I think that the answer is no, for several reasons -- especially after I listened to a recent presentation by Bill Thomas , the CEO and chairman of EOG Resources (NYSE: EOG ) . EOG is, by a considerable margin, the largest horizontal oil producer in the world. That means the company has access to the best data available on horizontal oil production and resources. Put simply, EOG and Thomas believe that the futures market is all wrong about oil prices. The company is bullish on oil and focused on producing more of it. What EOG sees -- and the market doesn't seem to grasp -- is that for all intents and purposes, the horizontal oil boom is coming from only two plays: the Bakken Formation in the upper Midwest and the Eagle Ford Shale in South Texas. A slide from EOG's most recent investor presentation illustrates this clearly: Fully three-quarters of the horizontal oil being produced in the United States comes from the Bakken and Eagle Ford. Without these plays, the horizontal boom would be barely noticeable. Equally important to note is that production growth in both the Bakken and the Eagle Ford is slowing significantly. The growth of production both by rate and absolute amount in both of these plays appears to have peaked. During his recent presentation, EOG's Thomas was asked what the next big horizontal oil play in the United States would be. His answer? There isn't going to be one. EOG has scoured the United States and hasn't found a new play with anything close to the productive capability of the Bakken and Eagle Ford. What makes the Bakken and Eagle Ford unique is that they are crude oil plays. Most of the other large horizontal plays are "combo" plays that have large hydrocarbon accumulations, but much of those hydrocarbons are in the form of natural gas and natural gas liquids. For example, in his presentation, Thomas referred to the Permian Basin in West Texas as having lots of barrels of oil equivalent (BOEs) -- but heavy on the "equivalent" and light on the oil. There is going to be a lot of production from the Permian in the coming years, but a great deal of it won't be oil. Large, profitable oil plays are few and far between, and they are getting harder and harder to find. The Bakken and the Eagle Ford are #1 and #1a, and there is no #2. So what does this mean for investors? In my view, it means that while oil production in the United States will keep growing for the next several years, the pace of that growth is going to be greatly reduced. With annual global oil demand growing at roughly 1 million barrels a day and oil production outside of North America not growing at all, oil prices are going to remain high and perhaps even go higher. The companies in the sweet spot are the ones that have locked up large land positions in the top horizontal oil plays. EOG is one of those; Continental Resources (NYSE: CLR ) is another. EOG's Eagle Ford stake contains an astounding amount of oil. EOG has 564,000 acres in the Eagle Ford oil window, the largest position in the industry. EOG estimates it will eventually recover 3.2 billion barrels of oil from that land -- and over time, with improving techniques and technology, the company may well do better than that. Continental Resources is primarily focused on the Bakken, where it produces nearly 100,000 barrels a day. Like EOG in the Eagle Ford, Continental is the largest leaseholder in the Bakken, with 1.2 million acres. (EOG also has a sizable position.) Since 2008, Continental has increased its proved and probable oil reserves from 159 million barrels to over 1 billion barrels. That is a compound annual growth rate of 47% -- and there is likely more still to come. These land positions should allow EOG and Continental to continue to increase reserves and production as oil prices rise in the coming decades. As an investor, I'm most excited by what the future might hold in these premier oil plays. Secondary recovery methods such as water flooding ( which I discussed last week ) or natural gas injection could significantly increase the amount of oil that these plays can produce. The key is owning the land. Risks to Consider: The greatest risk is a potential "cure" for oil as our primary transportation fuel. For example, the advent of affordable and high-performance electric cars could put a significant dent in global oil demand. Action to Take --> It's looking like we're in for a future of high oil prices -- and the companies best positioned to thrive are oil producers like EOG and Continental that control the largest and best land positions in the Bakken and Eagle Ford.
The demand for oil will increase while oil supply is falling
Moukwa, 7-7-14 [Vice President of Global Technology-Coatings Products at Reichhold Inc Moukwa, Mosongo. "Unsolved Global Oil Supply and Demand Equation Poses Risks: Dr Mosongo Moukwa." Www.business-standard.com. N.p., 7 July 2014. Web. 08 July 2014. Soon, the world will not be able to produce all the oil it needs as demand is continually rising while supply is falling. According toInternational Energy Agency (IEA), oil consumption will rise by 56% between now and 2040, with China and India, both responsible for half of this increase in consumption. A study by Pickering, Holt &Co, an investment bank focusing on energy, estimates that more than 50 billion barrels of oiland gashave been consumed in 2013 against only 20 billion barrels of conventionaloil discovered. The study has examined 400 exploration wells and has concluded that companies have found less oil than anticipated, despite heavy investments in capital and technology. Deep-sea exploration, where more hydrocarbons are being discovered at about 1500 meters, is becoming ever more important. None of the discoveries made in 2013 exceeded one billion barrels of oil equivalent. The largest one was made by the Italian ENI off the coast of Mozambique, with two deposits of 700 million barrels, followed by the Lontra (Angola) by the American Cobalt (900 million) and that of a field in Malaysia by Newfield Exploration (850 million). Others have been unsuccessful, such as in Ethiopia and Cote d’Ivoire by British Tullow Oil. Oil explorations by Shell and Total off the coast of French Guyana has produced very little. According to the French Institute of Petroleum (IFPEN), reserves discoveries between 2008 and 2012, including deposits in hard places to operate, cover only 40% of global consumption of conventional oil. This is far from offsetting the decline of mature fields. According to the IEA, who studied the profile of 1600 fields having passed their peak production, production has fallen to an average rate of 6% per annum. Richard Miller, a former BP geologist, and Steve R Sorrels, a co director of the Sussex Energy Group at the University of Sussex (UK), have stated that squeezing more oil out of older reserves and exploring new ones in the deep seas will not be sufficient to meet the production levels required to address the demand. They have estimated that we would need to bring on stream new productions equivalent to a minimum of 3 millionbarrels per day to compensate for declining crude oil production. This is equivalent to a New Saudi Arabia every 3 to 4 years in order to meet the demand. The oil peak is the result of declining production rates, not declining reserves. Professor David J Murphy of Northern Illinois University, an expert in the role of energy in economic growth, has stated that the Energy Return on Investment (EROI) for global oil and gas production is about 15 and declining. EROI is the amount of energy produced compared to the amount of energy invested to get and use it. EROI of oil and gas production is 11 for the US and is also declining. It is generally less than 10 for unconventional oil and biofuels. As the EROI decreases, energy prices increase. The dependence on shale could worsen the decline rates in the long run, since these wells decline extremely fast. The current rise in oil production in North America, one million barrel a day, has helped offset any outages coming from other oil producer countries and has helped the market remain in balance. Looking out a few years, global demand for oil will continue to increase because of rising prosperity in emerging economies. Supply, however, will still remain constrained. Last year, IEA predicted that over the 2012-18 period, the largest contributors of new supplies to world markets, after the US and Canada, would be Iraq and Brazil. Iraq is expected to contribute to 45% of global oil growth between now and the end of the decade. Technical challengesseem insurmountable in Brazil, and Iraq has exploded to chaos again, implying that geopolitical factors are the wild cards in the oil equation and they can outdistance the “market only” factors. The price of oil has continuously risen since 2004, where it was at $30. Then, it spiked to $150 to come down to a floor of $100 per barrel in 2008. Today the oil price is at about $110 per barrel and the markets have been relatively calm, as investors have assumed that Baghdad will not fall. But, the risk is to the upside. While the price of oil has been high, exploration costs have also taken the same trajectory. According to Goldman Sachs, oil companies would need the price of oil to be at $120 per barrel in order for them to balance their own budgets. The relationship between economic growth and energy consumption is straightforward: the former is a function of the latter. With national economies around the world forced to pay more than $120 for every barrel of oil consumed, a critical question must be asked: what happens when the world’s most important source of energy becomes unaffordable?
Prices Up – Supply Tightening
Oil found off the Gulf Coast and Gulf Coast states in steady decline- makes up almost a quarter of all fossil fuel production on federal land
Larino, 7-8-14 [Managing Editor at New Orleans CityBusiness, Reporter at New Orleans CityBusiness, Editorial Intern at Naples Daily News, , Jennifer. "Oil, Gas Production Declining in Gulf of Mexico Federal Waters, Report Says." NOLA.com. The Times- Picayune, 08 July 2014. Web. 08 July 2014. Oil and gas found off the coast of Louisiana and other Gulf Coast states made up almost one quarter of all fossil fuel production on federal lands in 2013, reinforcing the region's role as a driving force in the U.S. energy industry, according to updated government data. But a closer look at the numbers shows the region's oil and gas production has been in steady decline for much of the past decade. A new U.S. Energy Information Administration report shows federal waters in the Gulf of Mexico in 2013 accounted for 23 percent of the 16.85 trillion British thermal units (Btu) of fossil fuels produced on land and water owned by the federal government. That was more than any other state or region aside from Wyoming, which has seen strong natural gas production in recent years. The report did not include data on oil and gas production on private lands, which makes up most production in many onshore oil and gas fields, including the Haynesville Shale in northwest Louisiana. But production in the offshore gulf has also fallen every year since 2003. According to the report, total fossil fuel production in the region is less than half of what it was a decade ago, down 49 percent from 7.57 trillion Btu in 2003 to 3.86 trillion in 2013. The report notes that the region has seen a sharp decline in natural gas production as older offshore fields dry out and more companies invest in newer gas finds onshore, where hydraulic fracturing has led to a boom production. Natural gas production in the offshore gulf was down 74 percent from 2003 to 2013. The region'soil production has declined, though less drastically. The offshore gulf produced about 447 million barrels of oil in 2013, down from a high of 584 million barrels in 2010. Still, the region accounted for 69 percent of all the crude oil produced on all federal lands and waters last year. Crude oil production in the Gulf of Mexico could to start to recover in coming years, as companies restart major projects delayed after the 2010 Deepwater Horizon rig explosion. The disaster killed 11 men, unleashed the worst oil disaster in U.S. history and prompted a federal ban on deepwater drilling. The ban lasted several months. The most recent federal lease sale held in New Orleans, in March, drew more than $872.1 million in high bids on more than 1.7 million offshore acres in the central and eastern Gulf of Mexico. Previous sales under President Barack Obama administration's 2012-17 leasing program have opened 60 million acres offshore and drawn $1.4 billion in bid revenues.
Prices Up - AT: Shale/Fracking
New US supplies only offer short term relief from price gains – decreased capital expenditures and increased demand will cause long term upward pressures
Beschloss 6/17 (Morris Beschloss, economist at the Desert Sun, 6-17-14, “US Shale Oil Boom Calms Global Oil Prices, Retains Availability,” The Desert Sun, http://www.desertsun.com/story/money/industries/morrisbeschlosseconomics/2014/06/17/us-shale-oil-boom-calms-global-oil-prices-retains-availability/10694881/.)
What the Obama Administration either fails to understand, or is oblivious to, is that the world is increasingly dependent on America’s three year-old “fracking” boom that has lifted U.S. oil production by about three million barrels per day to more than eight million barrels currently. Simultaneously, Canada has added another one million BPD, almost exclusively from the “tar sands” of Alberta Province’s Athabasca region. Building the Trans-Canada XL oil pipeline would obviously accelerate Canadian crude shipments to U.S. Gulf Coast refineries, building America’s daily crude oil availability to over 10 million barrels per day, likely topping today’s leaders, Russia and Saudi Arabia.
This is of particular importance, as the Middle East and North African oil fields have retracted by an estimated 3.5 million BPD, due to civil wars in Libya, disturbances in Iraq, civil war in Syria, ideological tribal strife in Nigeria, and sanctions imposed against Iran. Also, with Europe depending on Russia’s oil and natural gas pipelines relying on 30% of their crude oil, sanctions or other economic punitive actions against Russia, would wreak turmoil on the European economy, already teetering on the edge of a new recession.
According to reliable energy experts, the breakdown in oil supplies previously indicated would rise from the current $106 per barrel for West Texas Intermediate, and approximately $115 for Brent crude to an estimated $150 to accommodate universal crude oil needs, were it not for America’s “fracking surge.”
While China continues to represent the pivot point for the up/down direction of oil pricing, as the world’s largest user, Beijing’s economic direction will magnify the price movements forthcoming in this year’s second half. U.S. demand, which is hanging in at around 19 million barrels per day has already closed the import gap to 25% of its total consumption from 60% as late as 2005. Although there are divergent schools of thought regarding the direction of oil pricing in the next few years, there is unanimity that the balance of pricing power has shifted from the turbulent Middle East, North Africa and Russia to how quickly and voluminously the U.S. oil production capability and refining potential can be brought to market.
With U.S. stockpiles mounting in the intermediate timeframe, a near-term price drop, especially in light of a Southeast Asian demand cut, could find U.S. central inventories in a temporary overstock mode. This could even become more severe if Iran and Iraq, containing the second and third largest global oil reserves resolve the geopolitical pressures that have reduced their exports.
However, a realistic longer term outlook, which envisions a worldwide demand growing from current 90 million barrels per day now, to 120 million BPD within the next decade, would indicate global prices sharply on the upside, with the U.S. and Canada’s maximum output becoming the global center of gravity in the oil world.
A faint thunderclap, already being heard is the cutback in capital expenditures by oil giants Exxon Mobil, Chevron, and Royal Dutch Shell, as exploration costs soar, awaiting the opportunities by these lead corporations to be assured of expanding economic demand and the acceptance of higher prices with it.
Oil prices will stay high, shale oil boom will not change prices
Badiali 3/31 (Matt Badiali, editor of S&A Resource Report, 3-31-2014, “Why gasoline prices are so high in spite of the shale boom...,” The Crux, http://thecrux.com/shale-oil-is-booming-but-youre-still-paying-50-to-fill-up-your-gas-tank-this-is-why/)
I had just wrapped up my talk to a small group of private-equity folks when a hand went up in the back of the room…¶ “Will the shale oil boom drive the price of gasoline down?”¶ I get this question all the time… It’s the first thing people ask after I tell them how great and prolific shale oil is.¶ But the answer is no. And the reason is simple – exports.¶ We export a lot of petroleum out of the U.S., which takes the extra supply out of our market and keeps the price of the stuff we want – gasoline and diesel – high.¶ In December 2013, the U.S. exported the most petroleum products in the 31 years that the U.S. government tracked the data.¶ I know, I know, you may have heard that it’s illegal to export crude oil. While that’s technically true… we still exported 137.8 million barrels of “Not Oil” in December. Not Oil is crude oil that was refined into gasoline, jet fuel, or diesel. Some of the exports aren’t even useful products… just partially refined oil.¶ That’s how refineries get around the export ban. In 2013, we sent 1.3 billion barrels of Not Oil abroad. That’s a 12% increase from 2012. The question that I had was… where did it all go?¶ The answer to that question is in the table below. I cobbled this together from data published by the U.S. Energy Information Administration (EIA). I broke down the values to show the percent of U.S. exports to various countries and regions. As you can see, it goes all over the world…¶ ¶ ¶ So if you are looking for the reason it costs you $50 to fill up the gas tank in your Camry… blame those guys. They keep buying, so the refiners keep selling. And with the latest developments in Russia, U.S. refiners may find new markets in Europe too. You can read more about that here.