Do you think the U.S. will drill itself into an oil glut?

[JAllen]

Do you think the U.S. will drill itself into an oil glut? With prices < $60 for a multi-year period?

[Guest longinvestor]

Make that the US, Canada and Russia drilling away both oil and gas to a glut.

[yadayada]

No, not possible. Much below todays prices and a lot of supply comes of the market. And prices to get the stuff out of the ground are going up, not down.

[jouni1]

No, not possible.

thank god, i was getting a bit worried!

[yadayada]

well i phrased that badly, I should say unlikely :). I mean just look at the cost curve. Costs have been going up and not down. And they will only go up in the future. A lot of production will start losing money below 60-70$.

[Liberty]

well i phrased that badly, I should say unlikely :). I mean just look at the cost curve. Costs have been going up and not down. And they will only go up in the future. A lot of production will start losing money below 60-70$.

 

Didn't they say the same thing about gold?

[rkbabang]

well i phrased that badly, I should say unlikely :). I mean just look at the cost curve. Costs have been going up and not down. And they will only go up in the future. A lot of production will start losing money below 60-70$.

 

Didn't they say the same thing about gold?

 

Gold is an entirely different animal.  Just about all the gold that has ever been mined is still around and relatively little of it is mined every year.  The only thing that has a large effect on its price is the demand (do people want to hold it or sell it off).  Oil on the other hand is quickly burned and then it is gone. Therefore the cost of production quickly effects how much is available on the market and therefor on its price.

 

[CorpRaider]

I really do think there's a good chance.  I wasn't around pre 1970's but isn't there a rich history of booms and busts in the oil patch in america?  I think alot of these leveraged guys COULD keep drilling even when it is uneconomic, just to keep the cash flow coming in and the lights on, hoping to make it through to a rebound in price. 

[frommi]

I really do think there's a good chance.  I wasn't around pre 1970's but isn't there a rich history of booms and busts in the oil patch in america?  I think alot of these leveraged guys COULD keep drilling even when it is uneconomic, just to keep the cash flow coming in and the lights on, hoping to make it through to a rebound in price.

 

And not only the leveraged players, whole countries like russia, nigeria etc. have no choice but to drill more to compensate the lower price. And the cheap money helps to keep the leveraged players alive. I see this as a side effect of all this money printing.

[yadayada]

well i phrased that badly, I should say unlikely :). I mean just look at the cost curve. Costs have been going up and not down. And they will only go up in the future. A lot of production will start losing money below 60-70$.

 

Didn't they say the same thing about gold?

 

Gold is an entirely different animal.  Just about all the gold that has ever been mined is still around and relatively little of it is mined every year.  The only thing that has a large effect on its price is the demand (do people want to hold it or sell it off).  Oil on the other hand is quickly burned and then it is gone. Therefore the cost of production quickly effects how much is available on the market and therefor on its price.

 

That, and the highest cost producers set the price basicly. So all you have to look at is daily demand (i think about 90-100m barrels of oil?) and look at the costs of all the players. Let's say it is 90m barrels. If oil will be below 60$, then you need the highest cost player to still have costs below 60$, or probably around 40-50$. And that is not the case. If even a few million barrels cannot be filled at low prices, then the price spikes up.  The Saudi's have costs that low (around 35$ I think). Us fracking BE costs are between 55-100$. With the majority at 70$. It could be that oil will be around 80$ for a sustained period, but not much below that. Unless there is some break through in bringing costs down of drilling, or they find some massive low cost oil field somewhere.

 

And every year a little bit of those low cost guys run out of oil. So that can then be more and more filled up by higher cost production. That is also the aim of OPEC , to keep production at a level where at least some high cost oil is required to be online to full fill demand. The Saudi's flood the market if others do not get in line.  Some say that Saudi arabia is some sort of puppet master in the middle east, making sure there is a lot of unrest to keep their own extremist part of the population distracted and to bring competing low cost oil production offline.

 

And capex have increased 200% or so in the last decade, and production only 10-15% or so .

 

This is cost curve currently:

http://www.rystadenergy.com/Images/News/BreakevenPrices_Image1.JPG

 

Not sure how accurate. I think costs for oil sands are actually lower. But if you track this over the years, you see that OPEC is getting smaller, and that costs for everyone go up, while demand rises steadily every year.

 

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/11/20141107_shale.jpg

[Liberty]

Gold is an entirely different animal.  Just about all the gold that has ever been mined is still around and relatively little of it is mined every year.  The only thing that has a large effect on its price is the demand (do people want to hold it or sell it off).  Oil on the other hand is quickly burned and then it is gone. Therefore the cost of production quickly effects how much is available on the market and therefor on its price.

 

I know that. I meant that in general terms, the commodity bulls always find a reason why price of their favorite thing has to go a certain way, but reality often finds ways of making it go otherwise. Obviously the specific dynamics will be different for oil and gold and potash and natural gas and nickel and copper and uranium and wheat and pork bellies and gravel...

 

 

[rkbabang]

Gold is an entirely different animal.  Just about all the gold that has ever been mined is still around and relatively little of it is mined every year.  The only thing that has a large effect on its price is the demand (do people want to hold it or sell it off).  Oil on the other hand is quickly burned and then it is gone. Therefore the cost of production quickly effects how much is available on the market and therefor on its price.

 

I know that. I meant that in general terms, the commodity bulls always find a reason why price of their favorite thing has to go a certain way, but reality often finds ways of making it go otherwise. Obviously the specific dynamics will be different for oil and gold and potash and natural gas and nickel and copper and uranium and wheat and pork bellies and gravel...

 

I was just trying to point out that the cost of production has little effect on the price of gold.  You could have the cost of production sky-rocket and still see the price of gold plummet.  Because the supply is so stable and predictable the demand is the only variable that is really in question.  The price of oil however is tied very closely to both the supply and the demand.  The demand isn't going to be weakening any time soon, and the cost of production is rising, so you can draw conclusions from that.  Of course there could be unforeseen events that change the outcome (cheap fusion power would kill the price of oil, discovery of a huge oil field with low extraction costs, or something else that effects the demand and/or supply), but in the absence of one black swan or another, I don't see oil getting very much cheaper.

 

[alertmeipp]

What puzzle me the most the demand and supply is still tight.

 

Look at the eia data that just released. We are talking about 1 percent gap.

 

 

[Uccmal]

Even if alternatives rise rapidly the cost is still forced to be above a certain level.  Price swings in O&G are pretty normal and the cycle is tight, unlike other commodities.  Pennwest has indicated they will shut in supply if it comes to that.  I haven't followed other companies but I am guessing they will do the same.  The effects will be felt first at highly levered juniors.  They just go out of business.  They cant drill just to keep the lights on.  Pennwest, Suncor, Exxon, and others have more leeway.  Shut the oil in, lay people off, and sit tight.  The price will rise in months. 

 

If you have ever seen a drilling operation you begin to appreciate the huge capital costs involved in most areas.  There is only so much you can cut with technological advancement.  You still need reams of super strong pipe, with robot controls inside to direct it horizontally.  And you still need highly trained technicians working the rigs.  Aside from The mid-east where you drill a few hundreds of feet into reservoirs straight down, everywhere else is much more expensive and much less accessible.  5000 feet of hose, pumping from a 2000 foot deep well in the Ocean cannot become much cheaper no matter how much technology advances. 

 

Its funny.  I was arguing the opposite end of this when oil was really high in the mid 2000s; on this board.  Everyone was on about peak oil and I made some comment to the effect that the entire planet had loads of untapped oil underneath it.  After all, the whole planet was covered by vegetation for hundreds of millions of years.  You just need the right technology to get at it. 

[CorpRaider]

Hey, but maybe we get a deep freeze this winter and then the market starts looking ahead to Cheniere coming online in 2015?

[kevin4u2]

And Natural Gas.  Today, very few NG producers in Canada make money.  I stuck my head in the sand for a long time when the shale gas revolution started.  Unwilling to accept reality.  All the same arguments here are being repeated.  High marginal costs, high treadmill, costs are going up, and on and on. 

 

Here is an interesting video from the EIA on shale drilling productivity.  I like the graphs at 1:47 that show shale gas productivity per well is up 8x and shale oil productivity per will is up 11x in the past 6 years. 

 

To compare this to baseball, we are still in the top of the first inning. 

 

well i phrased that badly, I should say unlikely :). I mean just look at the cost curve. Costs have been going up and not down. And they will only go up in the future. A lot of production will start losing money below 60-70$.

 

Didn't they say the same thing about gold?

[JAllen]

Also, because non-conventional wells are so prolific and gush out a greater proportion of the total oil in the first year, even if we did have a supply imbalance, the price would be pushed down a few months later with greater supply.  Before, with conventional wells, it might've taken a couple of years to really add much supply.

[treasurehunt]

 

This is cost curve currently:

http://www.rystadenergy.com/Images/News/BreakevenPrices_Image1.JPG

 

A couple of questions.

 

1) Does the cost in this cost curve include items such as land acquisition, exploration etc? In other words, does the curve show the marginal cost of producing oil or the does it also include the amortization of upfront costs? It seems to me that it might make economic sense to produce oil as long as the oil price is substantially higher than the marginal cost of production.

 

2) Natural gas prices in the US have been less than $5 per MCF for almost six years. Do you think the highest cost gas producer has a cost of less than $5 per MCF?

[anders]

1) Does the cost in this cost curve include items such as land acquisition, exploration etc? In other words, does the curve show the marginal cost of producing oil or the does it also include the amortization of upfront costs? It seems to me that it might make economic sense to produce oil as long as the oil price is substantially higher than the marginal cost of production.

 

Im confident its marginal cost and doesnt include other overhead costs such as geology, exploration, non cash charges etc. This since its easier for management to focus resources where they can bring in extra marginal revenue - controlling their incremental cost.

 

As a side not, what is the overall breakeven point in oil price..? I red an article from nigeria a couple of months ago where he said that they cannot any longer produce oil under $70 at the expense of its people for westerners to continue driving mercedes. Saudi recently fixed their contracts forward not a long time ago, venezuela put the cost at 80.. moreover, we have moved from onshore to offshore to ultra deep water so my guess is that with todays market price in brent oil, we are at around the level where it starts to hurt..

 

Cheers! 

[Uccmal]

I figure the trigger that raises prices will come from the mid-east as usual.  The Saudi's talk tough but they have a huge populace that needs to be placated.  The same goes for the other mideast players. 

 

The Russians are a different bird.  People there will suffer, for mother Russia, as they always do.

[yadayada]

ironically , middle east will be better off if the world will not use much oil anymore. Or at least the general population.

[Uccmal]

Worlds,

 

Nice analysis!

[yadayada]

Don't you think long term they will be better off? They are kind of leaning on oil now. Kind of the same how poor countries generally do better if all help from outside stops. They collapse and are forced to deal with it, and the corrupt regime is usually removed. Just seems oil is causing so much unrest and conflict over the long run in these places.

[yadayada]

It is interesting that if you look at Iran and egypt in the middle of the 20th century, it looked like it was very friendly towards the west.

 

What are the most important factors that islam got so extreme in a lot of those parts of the world? You see girls without headscarfs in Iran in old black and white pictures. You could take a van and travel to like afghanistan in the 60's right?

 

Is it the west, israel conflict and then a combo of some evil puppet masters with a lot of oil money wanting to take out some low cost competition?

 

Btw this is a unrelated interesting piece on oil price manipulation

http://online.wsj.com/articles/SB10001424127887324682204578517064053636892

[CorpRaider]

You know what would be great?  If the western hemisphere became so awash in oil that we wouldn't even care about any of those middle eastern dynamics.  It would be like the period from the end of the last crusades to 1973.  Then the Sunni and Shia could go and emulate Europe of several hundred years ago and kill one another over their minor religious differences as much as they want until they get their fill and have an enlightenment, or not.