Future oil prices will remain high — buyers are leaving the market
Ausick 2/17 — Paul Ausick, Energy Editor at 24/7 Wall Street, 2-17-2014, “The Oil Futures Market: Prices Are High Because Nobody Wants to Play,” 24/7 Wall Street, http://247wallst.com/energy-business/2014/02/17/the-oil-futures-market-prices-are-high-because-nobody-wants-to-play/
Gasoline prices in the United States have risen nearly six cents a gallon in the past month, and the spot price for a barrel of West Texas Intermediate (WTI) crude oil has risen from $97.63 at the end of December to $99.47 now, after a brief sojourn last week above $100 a barrel. We noted Monday morning that gasoline prices remain above $3 a gallon in every state, with a national average of $3.34 a gallon, and we note some of the temporal reasons for the higher prices.¶ Pump prices are not likely to fall much in the next few months as refineries enter the turnaround period when they stop producing cheaper winter gasoline and begin making more expensive summer fuel.¶ There may be a more fundamental change also keeping crude oil prices high at a time when U.S. production is at its highest level in more than a dozen years: the futures market is being abandoned by non-commercial (i.e., speculative) participants. Even commercial participants are looking to get out of the trading business. Occidental Petroleum Corp. (NYSE: OXY) has said that it will “reduce” its proprietary trading business and Hess Corp. (NYSE: HES) is trying to sell its Hetco trading operation.¶ As these market participants leave the market, fewer buyers remain, which lowers the futures price that producers can get as a hedge for future production. The result is an increase in price spreads between current cash spot prices and futures prices — cash prices rise and futures prices fall. That leads to a market condition called backwardation.¶ The following chart shows the difference between the current WTI price per barrel and the price 12 months out.¶ As more players exit the futures market, there are fewer buyers willing to take the long side of the bet on future crude prices. The result could well be lower inventories, a result already noted by the International Energy Agency (IEA) in its most recent report:¶ At the end of December [global] commercial inventories stood at 2,559 million barrels, their lowest absolute level since 2008. Moreover, the stock deficit to five-year average levels widened slightly to 103 million barrels, the first time the 100 million barrel level has been exceeded since mid-2004.¶ There is evidence that as backwardation increases, stockpiles decrease. Crude prices remain high and so do refined product prices. Energy economist Philip Verleger notes in his latest weekly newsletter:¶ Looking to the future, we see no reason for commercial inventories to increase. The market offers no incentive at the moment to build stocks. To the contrary, it is imposing growing punishments on those who hold oil. For this reason, we agree with the IEA that the glut will be more and more elusive.¶ In other words, prices will remain high and probably rise even higher as commercial inventories are drawn down. It looks like summer driving is going to be expensive.¶
Oil Prices are high and stable
Al-Katteeb 3/19 — Luay Al-Khatteeb, Brookings Institutions Fellow, executive director of Iraq Energy Institute (nonprofit), 3-19-2014, “Why the World Oil Prices Should be High and Stable,” Brookings Institution, http://www.brookings.edu/research/opinions/2014/03/19-world-oil-price-alkhatteeb.
After a decade of volatile prices, the past three years saw an unusual period of stability in the oil market, with a barrel of crude oil averaging $110 each year. However, forecasts for 2014 predict a decline to an average of $105, on the basis of expanding supply and a weaker-than-expected demand. A combination of geopolitical events in Syria, Libya and Nigeria have prevented oversupply despite the expanding entry of US shale oil into the market. The price has remained high thus far, but how long can prices stay above $100?¶ This coming price drop arrives at a time when the world’s largest consumer is nearing its long-held goal of energy self-sufficiency. The United States embarked on this quest in the aftermath of the 1973 oil crisis, and in recent years has seen the country develop a comprehensive nuclear program, develop biofuels and seek oil from ever-more-expensive sources: the tar sands of Canada, the depths of the Gulf of Mexico and even the wilds of Alaska. Further afield, it drew on oil from Brazil’s deep-water wells and West Africa’s low-sulfur oil deposits, all of which contributes to a reduced dependency on oil from the Middle East.¶ More recently, the development of unconventional sources of oil and gas back in the United States has led to a revolution in energy flows and policies, as the country stands on the verge of becoming a gas exporter. The rapid development of shale oil and gas fields has seemed miraculous at times, but like many of the conventional sources the US relies upon the production is more expensive (costing $60-80 per barrel) and more risky, as output and depletion rates seem less predictable than conventional sources. As a result US domestic and regional supply is quite vulnerable to price fluctuations, as witnessed when work at the tar sands of Canada came to a standstill in 2008 following a price drop.¶ Analysts have claimed that the age of “easy oil” is over, and we are entering a period of expensive extraction and capital-intensive processing. With the shale oil and gas sector currently requiring $1.5 in capital investment for $1 of revenue, several major oil companies have turned their backs on shale in favor of expanding their operations in the “easy” oil fields of the Middle East. Despite the risks involved, Iraqi oil pumped up at $20 a barrel seems like an attractive prospect, as do sources in Libya and Iran when politics and security permit. Still, will dumping more “easy” oil on the market lower prices to the point where shale oil production grinds to a halt?¶
Oil prices will continue to spiral upward in the years ahead
Block 6/25 — Ben Block, staff writer at Worldwatch Institute, 6-25-2014, “Energy Agency Predicts High Prices in Future,” Worldwatch Institute, http://www.worldwatch.org/node/5936.
The world can expect energy prices to continue their generally upward spiral in the years ahead if global energy policies remain the same, the International Energy Agency (IEA) reported this week.¶ Rapid economic development in China and India, coupled with relatively consistent energy use in industrialized nations, will likely strain the world's ability to meet a projected rise in energy demand of some 1.6 percent a year until 2030, the agency predicted Wednesday in its annual World Energy Outlook report [PDF].¶ The IEA significantly increased its projections of future oil costs in this year's report due to the changing outlook for demand and production costs. It now expects crude oil to average $100 per barrel over the next two decades and more than $200 per barrel in 2030, in nominal terms. Last year's forecast estimated that a 2030 barrel would amount to only $108.¶ "One thing is certain," said Nobuo Tanaka, the IEA's executive director, in a prepared statement. "While market imbalances will feed volatility, the era of cheap oil is over."¶ Oil and natural gas resources are expected to supply the world for more than 40 years at current consumption rates. But the report expressed concern that rising world energy demands will outpace production.¶ "There remains a real risk that under-investment will cause an oil-supply crunch in that timeframe," the report said. "The gap now evident between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010."¶ The price of meeting the world's energy demands is estimated at $26.3 trillion through 2030-an average of more than $1 trillion a year, the IEA said.¶ In addition to higher prices, most new oil fields are offshore or smaller than in years past, making oil extraction more difficult than ever. "Oil resources might be plentiful, but there can be no guarantee that they will be exploited quickly enough to meet the level of demand," the report said.¶ Demand for oil is predicted to rise from the current 85 million barrels per day to 106 million barrels per day in 2030, the report said. Due to this year's high oil prices, the predictions are 10 million barrels per day less than what was projected last year. Still, this represents an increase of 1 percent per year.¶
OPEC Oil prices will continue to rise — low supply from Iraq turmoil
McGovern 6/14 — Bob McGovern, staff writer at Boston Herald, 6-14-14, “Experts: Gas prices will rise,” Boston Herald,http://bostonherald.com/business/business_markets/2014/06/experts_gas_prices_will_rise.
Gas prices in the United States will continue to rise as OPEC’s second-largest oil producer fends off total collapse at the hands of extremists, experts say.¶ The price of oil rose to $107 yesterday as the crisis in Iraq reached a fever pitch. Oil prices rose more than 4 percent this week alone, and experts are worried the continued violence could have an ongoing effect on prices at the pump.¶ “The violence and turmoil in Iraq is already affecting oil prices and have boosted the price to a 10-month high,” said Mary McGuire, director of public and legislative affairs at AAA Southern New England. “It’s likely that we’ll see an increase this week or the week after at the pump as the result of our new oil prices.”¶ Fear in oil-producing countries can have a drastic effect on the bottom dollar.
AT: Shale Boom Lowers Prices
Low prices from shale oil boom is only temporary. Long-term prices are still on the upside.
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.
Aff Uniqueness — Price Shocks Coming Now
Rising volatility inevitable — Iraq production disruptions cause price shocks
Bawden 6/16 — Tom Bawden, Environmental Editor for The Independent (London), 6/16/2014, “Long years of oil price stability are at risk, BP’s top economist warns,” The Independent, http://www.independent.co.uk/news/business/news/long-years-of-oil-price-stability-are-at-risk-bps-top-economist-warns-9540548.html
Escalating violence in Iraq threatens to unleash an oil price spike that would put an end to the greatest period of price stability for nearly half a century, BP’s chief economist has warned.
The unusually high level of disruption to global oil production since the Arab Spring began in 2011 has been matched by a sharp rise in US oil output as a result of its fracking boom. This has kept supplies constant and prices stable, according to BP’s Christof Rühl.
US oil production soared by 1.1 billion barrels last year – the biggest rise in the country’s history – as the fracking companies increasingly turned their technology from gas to oil. This balanced out the disruption to supplies in the past three years in Africa and the Middle East, where outages have been running at 3 million barrels a day, compared with just 100,000 a day in the previous decade, BP figures show.
Without the disruptions, the oil prices would have tumbled, while without the surge in US production they would have soared, says Mr Rühl.
“This is the three-year period which has seen the least price volatility since oil prices were no longer regulated in 1970. If the world had only had these disruptions which we have seen in the last three years since the beginning of the Arab Spring you would have seen oil prices spiking and a discussion about strategic reserve release and damage to the economy and all the rest of it.
“And at the other extreme, if we had only seen these massive US oil production increases you would have seen prices coming under pressure and talk of Opec cuts,” Mr Rühl added.
But he warned that, sooner or later, the period of price stability would come to an end – with the problems in Iraq looking like a key contender to upset the status quo.
Oil prices increasing, multiple reasons
LeVine 6/12 — Steve LeVine, Washington Correspondent for Quartz, 6-12-14, “Oil prices aren’t coming down any time soon, and Iraq is just the latest reason,” Quartz, 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 prices when 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 barrels of 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.
Aff Uniqueness — Oil Prices High and Bad
Oil prices may rise to as much as $120 per barrel — Iraq
Kumar and Verma 6/18 — Manoj Kumar, staff writer, and Nidhi Verma, staff correspondent, 6-18-14, “Iraq-driven oil spike threatens to blow hole in budget – sources,” Reuters, http://in.reuters.com/article/2014/06/18/india-budget-iraq-idINKBN0ET0IY20140618.
The government expects oil prices to rise as high as $120 per barrel for several months because of fighting in Iraq, potentially driving a hole of at least 200 billion rupees ($3.3 billion) in the budget, two government sources told Reuters.¶ Prime Minister Narendra Modi won last month's general election by a landslide with promises of faster economic growth and new jobs, tapping into voter anger over India's longest slowdown in a quarter of a century.¶ Ahead of his maiden budget next month, Finance Minister Arun Jaitley is grappling with a food inflation scare, and now faces the risk that higher oil prices could swell the government's subsidy bill.¶ "If oil prices remain high even for three to four months around $120 a barrel, it could have a significant impact on the fiscal deficit and economic growth," a senior Finance Ministry official told Reuters on condition of anonymity.¶ The official added that this could increase subsidy costs by 200-225 billion rupees in the fiscal year to March 31, 2015.¶ That would threaten the deficit target of 4.1 percent of gross domestic product inherited from the last government.¶ "If oil prices remain high, it would not be easy to meet the fiscal deficit target," the source added.¶ India, the world's fourth-largest oil consumer, imports around 4 million barrels a day of crude oil - costing $165 billion a year at current prices, or more than a third of its total import bill.¶ The last government based its interim budget in February on an assumption that India's basket of oil imports would cost around $105 per barrel on average in the current fiscal year.¶ Prices for Brent crude, an international oil benchmark, have risen by $3 to $113 over the past week, during which Islamic militants have taken control over tracts of northern Iraq and threatened the authority of the Baghdad government.¶ For every dollar that oil prices rise, the government incurs annual costs of 70-75 billion rupees (around $1.2 billion) to compensate state oil firms for selling diesel, kerosene and other fuels at below cost.¶ Subsidies are assessed quarterly, based on the average oil price in the preceding quarter. That means that the higher expected oil price would feed through into subsidy costs in the second half of the fiscal year.¶