Manipulation can push the price up OR down (and speculators are indifferent as to which) for days, weeks and even a few months but not longer in a massive market such as oil.
The annual average price of oil reflects demand & supply realities. A fact that public & private policy and public opinion in the USA has not yet accepted.
De Beers can, and has, put almost a decade of excess diamond production in a large London bank vault (when too high diamond prices created an imbalance between diamond supply & diamond demand).
NO ONE can do that with oil.
Cheap gasoline and diesel are subsidized by $100+ billion in the US (we have teh cheapest fuel for any oil importing nation except for Egypt & Indonesia) BUT CNG pays no road taxes at all, as the truckers tear up the roads.
They have been doing that for decades. And rigs when not set up, but moving, are not counted as "active drilling rigs". Of course, a company may plan multiple holes from one pad, but if the first one or two are "disappointing", they will move on.
By today, the Bakken has been pretty well profiled. The oil companies know where the sweet spots are.
Just had along talk with a friend that also writes for a "noted investment/financial publication". We both agreed that the safest bet is natural gas up significantly in 3 to 5 years.
His short term outlooks are almost always better than mine. He think WTI is heading down towards $90 in the next few months.
He was intrigued by my argument that since drilling rigs in frac basins are down slightly in last 18 months, wellhead oil prices are up $15/$20 range, well productivity is up significantly and day rates for rigs are down (it is now cheaper to drill - and each completed well produces more oil, and that oil is worth more) - the only explanation is that the profitable areas to drill are limited.
Otherwise, with 3 economic factors improving (wellhead oil prices, oil/well & drilling costs), why fewer oil rigs ?
Yesterday, the EIA released an entirely new type of statistics, on drilling efficiency. (Important enough to produce despite the sequester & shut down).
Of the six frac basins, only the Permian did not show an increase in efficiency. The best was Eagle Ford, with 5% fewer rigs than last year, but the initial production per well up 28% over last year and the # of wells/rig comparable.
Personally, I wonder how much of this is not using chokes to restrain initial production.
Wellhead prices are about $15 to $20 per barrel better than a year ago (collapse of the WTI-Brent split). In addition day rates for drilling rigs has dropped as the # of rigs has dropped.
Higher prices, better well efficiency (ascribed to better tracing) and lower drilling costs will expand the area that can be drilled profitably. So the rig count has only dropped slightly.
All great in the short term, debateable in the medium term and a looming disaster in the long term.
US non-fraced oil production continues to decline, offset by wells with extraordinarily high depletion rates (half of Bakken wells drop to 50% of their initial production in 20 months).
The area that can be profitably drilled & fraced is limited (even with higher prices, greater efficiency & lower costs, active rigs declined slightly). And what happens when we come to depend on traced oil for our way of life - and then there is no more area to drill & frac even at twice the efficiency of today and $190 (2013 $) /barrel oil ?
IMHO, that day will not be before 2020 but will be before 2030.
Do you remember Jack 2 ? That MAJOR oil find that was going to make the USA oil independent ? That was tertiary and well before BP created a disaster through their negligence.
And there will be few comparables elsewhere in the world. Thick sediments in deep water are quite rare AND below 15,000' one usually finds gas, not oil. The reason is that it gets hot enough that deep to cook oil into gas & tar. For some reason, the Gulf of Mexico has stayed cooler and has not cooked the oil below 15k'
BTW, after 8 years of development, Jack 2 will produce 1% of US oil demand for @ 8 years (stretched out over a longer tail).
Americans, instead of actually DOING something meaningful, just keep hoping and dreaming for the proverbial gusher. There is no comprehension that that gusher will one day disappear even if we do luck out and find it.
After investing $49 billion, and 13+ years since discovery (13 years since agreement to produce), Phase I of Kashagan (in Kazakhstan) is starting. It will ramp up to 180,000 barrels/day by the end of 2014. With less than a dozen more billion dollars invested, production will increase further to 370,000 b/day of low quality (thick, high sulfur) oil in a remote location (landlocked Caspian Sea)
Phase II (or II + III + IV) could raise Kashagan oil production to 1.5 million barrels/day, but current low oil prices cannot justify such an investment.
For those that think oil is too expensive, just look at these #s
- $49 billion (in an area with political risk)
- 13 years
- 180,000 b/day (370,000 b/day with extra billions)
Calculate a ROI with low current oil prices.
The cheap to produce oil is a small, and rapidly shrinking percent of global oil production.
Oddly, investments to reduce oil consumption (such as doubling the Paris Metro with an extra 125 miles of subway by 2025 (Conservatives) or 2030 (Socialists)) appear to cheaper, faster, better and MUCH longer lasting, than oil from Kashagan.
I will also note that Brazil, despite it's large deep offshore oil fields, is still an oil importer (a small one though). Brazilian oil production is generally up, but so is Brazilian domestic oil consumption.
How many times did we hear how Brazil was going to flood the world with oil and drive high oil prices down ?
The prostitute provides better service.
I worked by way through school at UT as night auditor at the hotel closest to the Texas State Capital (then a "Downtowner" at 11th & San Jacinto). The Texas Good Roads lobbyist kept a "hospitality suite" there stocked with li
As an aside. I have learned other reasons that the # of rigs drilling in North Dakota (Bakken) have stabilized at 180-189 for almost a year now (Peak 220 rigs in May 2012).
The day rate for ND drilling rigs has dropped (added to higher wellhead prices for oil) and fracing has become more efficient (more oil) with experience. This has kept the drop in initial production from new wells from dropping a lot. New fraced Bakken wells are only a little bit less productive than those of a year or two years ago.
Earlier I knew that many early Bakken wells were drilled too far apart, and new profitable wells could be drilled between two once good, older Bakken wells. Many 2013 Bakken wells are in-fill drilling.
However, at current oil prices, drilling prices and technology, the area of the Bakken that can be profitably drilled has been defined and that limited area is being rapidly "drilled up".
The hype has been around Bakken and Eagleford for oil and "other oil" production. Both have limited long term potential. Bakken should peak @ 2015 and Eagleford a year of two later.
However, the more slowly developing Permian fraced wells may be the one US play that may not peak until the 2020's, and peak at well over 1 million, perhaps 2 million b/day. It is still too early in the game, and the hypesters are not yet fully involved, but the Permian looks promising to me (as long as your world ends before 2030).
However, structural energy demand in the USA is still *FAR* too high, and it will be easier and cheaper to just reduce our "elevated: oil demand - investments that will last beyond 2030.
BTW, Paris will double their subway system by 2030 with 2 million more daily riders and pick up close to 1 million more with new tram and commuter rail lines. French oil consumption is already down from 2 million b/day to 1.7 and they are clearly heading towards 1 million b/day. The USA should be following this lead.
Meanwhile, UK oil production may drop -22% in 2013.
New car sales in China during the first 8 months of 2013 were 11.3 million cars (up +13% yoy) vs. US new car sales of 10.6 million (up +17% yoy) in the USA.
In the USA, new car sales are mostly replacements (one new car, one scrapped car). In China some new cars replace cars lost in accidents and a few worn out cars, but most new Chinese cars create new oil demand. Car sales a decade and more ago in China (long enough to wear a car out) were a small fraction of current sales.
Iahphx cherry picks data to support his POV (oil prices should be $20/barrel, or no more than $60) while I try to take a more holistic view pf world supply & demand.
I went to the EIA website for Texas, got the data for all oil product sales (gasoline to residual fuel oil), summed it up and converted to millions of barrels/day. In July 2013, Texas burned 2.532 million barrels/day. This is WAY above the US average per capita.
Texas could double production again (they will not, even at $200/barrel) and Texas (unlike Saudi Arabia) would still be an oil importer (just like the rest of the USA).
Reduced oil consumption (have gas taxes pay for roads & highways instead of stealing from "rainy day" fund) is the way to go. Fraced wells deplete quickly.
BTW, much/most of the oil production increase in Texas is in "other oil" that cannot be used for jet fuel or diesel. Stuff like propane, butane and pentane.
France will be using 30% less oil, natural gas and coal (just 4% -5% of French energy) by 2030. This is *NOT* just the electrical sector, but total national consumption (all imported).
Unlike Germany, this drop will NOT come renewables (just a little) but from transportation, space heating and agriculture - and other sectors.
After WW II, the French developed just like Americans with two differences. Less population growth and they did not bulldoze freeways through the center of their cities. As result of our "freeways" bulldozed through cities In the USA, "central city" is a code word for slums. In France, it is a code word for high priced real estate.
30% of Americans, and 60% of Gen Y, want to live in walkable communities with good rail transit. We have spent $5 trillion building roads to subsidize, and saturate the market for Suburban McMansions. Why not build what the market wants ?
And France has average wind speeds 4.5 m/s along most of it's Atlantic and Mediterranean coasts, and well inland. Already over 7,000 MW of wind installed. And lots of solar potential as well.
So France will be burning about 30% less oil and 30% less natural gas in 17 years, and doing so in ways that benefit the economy.
This is on top of the -14.8% per capita reduction 2007 to 2012.
In 2012, only 9.5% of French electricity was from fossil fuels, 75.2% nuke, 11.5% hydro and 3.6% other renewables. So more renewables will be just a small part of this reduction.
They are going to double the Paris Metro (+2 million daily riders) and add trams (Light Rail) on the surface and improve commuter rail (an 8 km tunnel) for almost an additional 1 million riders.
They are going to almost double high speed rail (2,048 km in 2007, planned 4,000 km) and halve domestic air travel.
Almost every town of 100,000+ is building a couple of tram lines (2.2 million daily riders so far), railroads are being electrified more and freight shifted from roads to electrified rail. And much, much more. National urban growth boundaries to stop sprawl.
The French claim the savings on imported oil & gas (coal is just 4% to 5% of French energy) will pay for these investments. If I am right about future oil prices, the French will be in much better shape (less obese too) than the USA in 2030. And there will be a bit less CO2 in the atmosphere.
Absent "something happening", I can see Brent between $100 & $125/$130 for a year or two, perhaps even three years.
Then why are North Dakota drilling rigs (almost all fracing Bakken) down to 182 rigs today (all time high May 2012 @ 220 active drilling rigs) ?
Unless, of course, we have the inevitable Arab Spring in Saudi Arabia. A revolt there is inevitable (see demographics, 12,000 princes & climbing, employment, etc.), the question is how long can it be postponed. My GUESS is about 2020 or so - but who knows ?
Meanwhile. oil men GWB and Cheney drove US oil production down to the lowest it has been since 1948 !
Actually Obama has opened up the last of four Naval Petroleum Reserves set aside for the US Navy in the 1920s and he also opened up vast areas of offshore leases just before BP proved that these could not be drilled safely. After some delay caused by BP's criminal negligence (yes they are felons in their corporate capacity - along with Mafia controlled hazardous waste disposal firms), those leases are going out for bid.
More to encourage domestic drilling than GWB & Cheney did. They just looked for oil in Iraq.
Isaac did little long term damage, but all rigs near the path are routinely shut down when a major hurricane nears and they take weeks to get them all back on-line.
More important than increased US oil production is reduced US oil demand. I love even more seeing US oil consumption down almost 3 million b/day from it's peak (and Hummers out of production :-) than US oil production up from it's lowest point since 1948 (2008 almost = 1948 crude oil production).
Structural reductions in oil demand are basically permanent, while fraced oil production is "here today, gone tomorrow".