Oil, wow, WTF happened to all of the oil bugs on this site?

[Guest MarkS]

But this may help cushion the failure to reach an agreement - at least a bit.

 

From CNBC:

However, selling may be limited because of a strike in Kuwait that has taken more than 1.5 million barrels a day off line. Kuwait's workers started an open ended strike this weekend over pay and benefit cuts.

 

Mark

[opihiman2]

Oil futures down by 5%.  I hope to see Brent back to the 30's.  F U oil, LoL!  I just want to see all the weak hands completely purged from the oil markets.

[Cardboard]

Saudi Arabia has made Putin look like a fool: he himself met with his industry leaders to ensure they would honor a freeze and last week Russians were told that it was a go by the Saudis despite Iran not freezing.

 

They are also now threatening the U.S. if Congress passes a new bi-partisan bill allowing terrorism victims to sue them:

 

http://www.cnbc.com/2016/04/16/saudi-arabia-warns-of-economic-fallout-if-congress-passes-911-bill.html

 

They need a good lesson.

 

Cardboard

[Palantir]

There may be some disagreement going on between Ali Al-Naimi and Deputy Crown Prince Mohammed bin Salman. That said, Saudi Arabia's stance is perfectly rational.

[Cardboard]

How is rational the idea of losing something like $5 a barrel or $50 million a day for simply disagreeing to freeze your production for 6 months at its highest level in years or near max capacity?

 

No, my religious enemy is trying to increase its production by 500,000 barrels a day, if they are lucky, so we will do all we can to make sure we all lose $100's of millions a day on 50 million barrels a day of production. That has to be the summum in intelligence.

 

Cardboard

 

[Palantir]

How is rational the idea of losing something like $5 a barrel or $50 million a day for simply disagreeing to freeze your production for 6 months at its highest level in years or near max capacity?

 

No, my religious enemy is trying to increase its production by 500,000 barrels a day, if they are lucky, so we will do all we can to make sure we all lose $100's of millions a day on 50 million barrels a day of production. That has to be the summum in intelligence.

 

Cardboard

 

I don't think you understand the market. Ali Al-Naimi knows what he is doing. Their stance is perfectly rational, and justified by both theory and experience.

 

 

For those interested, here is a look into Mr. Al-Naimi:

 

http://www.bloomberg.com/news/articles/2015-04-12/saudi-arabia-s-plan-to-extend-the-age-of-oil

[Cardboard]

So your deep understanding of markets is what made you invest in SUNE and see that stake wiped out?

 

Cardboard

[Palantir]

I don't understand what that has to do with Saudi Arabia's stance on production levels. But since you want to change the topic, yes, that is what made me invest in SUNE. ::)

[opihiman2]

How is rational the idea of losing something like $5 a barrel or $50 million a day for simply disagreeing to freeze your production for 6 months at its highest level in years or near max capacity?

 

No, my religious enemy is trying to increase its production by 500,000 barrels a day, if they are lucky, so we will do all we can to make sure we all lose $100's of millions a day on 50 million barrels a day of production. That has to be the summum in intelligence.

 

Cardboard

 

For one, S.A. was burned before by supporting prices and cutting production when other countries did not.  In the end, if S.A. cuts production from S2 to S1, and prices go up from P1 to P2, they are probably still going to be making the same amount of revenue but lose market share.  S.A. has already said they can increase production by another million barrels.  They probably will to make up for lost revenues.

 

 

[Cardboard]

No, staying right on topic.

 

You brought up the idea of SUNE in August 2015 and this fairy tale article on Al-Naimi was published in April 2015. By the way, the guy who doesn't understand a thing about how the market works had read it at that time.

 

And now, you are saying that you bought because of Saudi Arabia, a highly levered renewable energy company that would undoubtedly be badly hurt by much lower energy prices brought on mainly by Saudi Arabia who voluntarily increased the glut? Maybe there is logic in your thesis but, at the moment I don't see it.

 

Why I am saying that this article on Al-Naimi is a fairy tale? Simply because their current war on other producers and other sources of energy has been anything but, well thought out. It was obvious to anyone for years that high oil prices ($85+) was bringing up a slew of new and unconventional energy sources: shale, oil sands, solar, wind, biomass, etc. If you have a chance to tour the oil sands in Canada, you will get a sense for how desperate humans were to find new sources of energy.

 

A lot of that development has been heavily accelerated by their actions or creating a scarcity by hoarding their oil. When the world saw that oil was not coming out of the ground in the Middle East despite really high prices, markets found other ways to satisfy their energy needs. So I believe that instead of extending the "life" of oil, they instead reduced it by getting that genie out of the bottle quicker and now people are also incentive to reduce the cost of these to stay alive. These will not go away.

 

Moreover, when you foresee a future where lower oil prices will be needed to prevent competition, you do not create a state budget that is dependent on $100+ oil. The current impact is a budget deficit of $100 billion a year that will likely see their currency reserves largely depleted if that "war" last a few more years and will severely restrict their chance of transitioning to a non-fossil fuel economy and that is if they are able to maintain peace in their country.

 

My theory, is that they are a bunch of greedy pigs who have now seen their strategy backfire against them and on top of that, they are unable to think logically when religion enters the picture or from their rival Iran. So here they have given up on a $5/barrel oil premium (could be more, could be less: my opinion) due to markets pricing in a more stable supply level (put a hard number on it) that would have resulted in zero difference in overall oil supply at that price (Iran is increasing anyway) simply because they hate Iran. This is anything but rational.

 

Cardboard

[Cardboard]

Regarding oil, I have my own mea culpa in that I did not anticipate following the OPEC November 2014 meeting that Saudi Arabia and its Gulf allies would engage in a race to the bottom.

 

My initial thought following their decision to not cut supply was that they would let supply and demand re-balance themselves with lower oil prices $60-70. Instead they increased the glut and no, the additional revenues from the extra barrels is not making up for the loss revenues from pricing. Far from it.

 

I also did not anticipate that a president would be so hell bent on signing a deal with nothing in return from Iran except their word that they would stop nuclear weapon development for 10 years.

 

Cardboard

[Palantir]

 

For one, S.A. was burned before by supporting prices and cutting production when other countries did not.  In the end, if S.A. cuts production from S2 to S1, and prices go up from P1 to P2, they are probably still going to be making the same amount of revenue but lose market share.  S.A. has already said they can increase production by another million barrels.  They probably will to make up for lost revenues.

 

Exactly. Here is more commentary:

http://www.usnews.com/opinion/economic-intelligence/articles/2016-04-11/the-oil-price-crash-is-basic-economics-rather-than-sexy-geopolitics

 

In this highly competitive environment, trying to effect a price increase by a unilateral cut in output would be commercial suicide, because your market share would be gobbled up by a competitor instantly. What about a coordinated output cut by OPEC? Glancing back at Figure 2, operating a cartel that does not include two of the top three oil producers (the United States and Russia), and that includes geo-strategic rivals (Saudi Arabia and Iran), is almost as improbable as some of the conspiracy theories currently circulating.

 

If any of the above sounds familiar, it should – Al-Naimi has been repeating it for about 18 months, which makes analysts' affinity for conspiracy theories even more baffling. The best explanation that one can conjure up for this wholesale rejection of transparent Econ 101 principles is that those suffering from low oil prices may be trying to force Saudi Arabia into some sort of commercial error by creating public pressure. In particular, a lot of U.S. shale oil producers are going bankrupt, while Iraq will have great difficulty in attracting oil investors if prices are low.

 

Fortunately for Saudi Arabia, Al-Naimi seems to be indifferent to these long-shot lobbying efforts. And as oil investment collapses, there are good reasons to expect modest increases in oil prices in the next two years. Until then, Saudi Arabia looks likely to sustain the unique feat of being blamed for high (in 2011) and low (in 2015) oil prices despite barely changing its output – a contortion even a conspiracy theorist would be proud of.

[opihiman2]

Cardboard, no offense, but you remind me of what I find wrong with a lot of value investors nowadays: the need to be right.  Instead, I think you should have the need to win. 

 

[Uccmal]

It seems from the price reactions today that nothing any jurisdiction tries to do in terms of oil manipulation is having any effect in the face of supply and demand.  What remains to be seen is if more projects come on line or get resurrected as the prices march higher.  My best guess is that huge, long lead time projects (>10 yrs) will never come back.  A paradigm shift is happening that is making long lead projects risky. 

[Travis Wiedower]

For those interested, here is a look into Mr. Al-Naimi:

 

http://www.bloomberg.com/news/articles/2015-04-12/saudi-arabia-s-plan-to-extend-the-age-of-oil

 

Interesting article that makes a lot of sense. Saudi isn't stupid. They know peak oil demand is coming whether they like it or not. Might as well attempt to delay the day of reckoning while they figure out WTF they're going to do to make money in the longer term.

[Packer16]

I think the Saudis are missing that peak demand is not effected by oil prices as long a subsidies are strong and technology is really driving peak demand not prices.  There already enough incentives with subsidies to develop the technology.  What is preventing a faster transition is the state of technology not the economics because the subsidies are ensuring the short term economics for the alternatives are OK. 

 

Packer

[opihiman2]

I think the price action of oil is getting interesting.  Yesterday, I thought that if oil closed much higher than the open, there is a lot of strength in the buy side.  Today just confirmed it.  It seems to me that the market is looking for any reason to push oil prices higher.  I think that's a good sign for a short term trade going long.  Long term, though...who knows

[Travis Wiedower]

I think the Saudis are missing that peak demand is not effected by oil prices as long a subsidies are strong and technology is really driving peak demand not prices.  There already enough incentives with subsidies to develop the technology.  What is preventing a faster transition is the state of technology not the economics because the subsidies are ensuring the short term economics for the alternatives are OK. 

 

Packer

 

Yeah I'd be interested to know the relationship between oil price and alternative energy investments. I'm sure it does have an effect but, like you, I think they might be overestimating the degree. Probably only affects it at the margins as major alternative energy projects are long-term. I don't think Elon or guys developing fusion etc really give a damn what oil is.

 

That article referenced Merrill claiming $60 vs $100 oil pushes peak demand to the right by five years. My faith in that number isn't much though.

[Palantir]

The alternative energy threat is still only part of KSA's strategy here, and part of the emphasis on alternative energy is really commentary on the author's part. I don't think it is the most important takeaway from the article. The key thing to keep in mind is that their goal is to let other producers exit the market.

[influx]

I also did not anticipate that a president would be so hell bent on signing a deal with nothing in return from Iran except their word that they would stop nuclear weapon development for 10 years.

Cardboard

 

I read somewhere, Iran is supposed to be a potential US ally so that ME US allies can bypass Syria to Europe..or as an alternative to Syria

[Valuebo]

http://www.artberman.com/wp-content/uploads/LGS_Returning-To-Market-Balance-How-High-Must-Prices-Be-To-Save-The-Oil-Industry_18-May-2016.pdf

 

Interesting presentation from a week ago.

[Valuebo]

Definitely surprised by projected break-even oil prices for each country. :o

[Jurgis]

I want to know what they are smoking when they say $86 is a break-even oil price for Saudi Arabia.

 

Perhaps this includes one-palace-per-prince overhead.

 

Edit: ah, they say:

 

"few OPEC countries are competitive with unconventional plays when OPEC fiscal budgetary costs are included"

 

I don't think the "break-even price" means what they say it means.

[Pelagic]

I want to know what they are smoking when they say $86 is a break-even oil price for Saudi Arabia.

 

Perhaps this includes one-palace-per-prince overhead.

 

Edit: ah, they say:

 

"few OPEC countries are competitive with unconventional plays when OPEC fiscal budgetary costs are included"

 

I don't think the "break-even price" means what they say it means.

 

Including budgetary costs makes the calculation a bit nebulous as the way the report is written it makes it seem like the only option is for oil to reach the break even price. Countries, even those heavily dependent on oil, have other options open to them to cure budgetary shortfalls. Just look at Venezuela, they've shut off power for half the week and Saudi Arabia is going to sell a stake in Saudi Aramco - point is there are other ways to correct budgetary shortfalls than hoping oil rebounds, some better than others clearly.

 

Speaking of Venezuela, I didn't see a break even price for them.

 

This infographic gives similar data but puts an even higher budgetary break even on most of the OPEC nations. http://graphics.wsj.com/lists/opec-meeting

 

Almost makes you wonder what Kuwait is doing differently since they're close to break even at today's prices.

[Cardboard]

Instead of consolidating assets in safe North America on the cheap and cherry picking, Big Oil continues to invest in far flung places:

 

http://finance.yahoo.com/news/despite-oil-slump-chevron-invest-230128447.html

 

The same Chevron has assets under fire in Nigeria right now. They also got kicked out of Venezuela and had to rely on international arbitration to get something.

 

Or then they do like Shell and go hunt for oil on the coast of Alaska at very high cost and raising the ire of environmentalists. Then they abandon and write-off billions.

 

Shareholders of these companies need to ask some tough questions to their leaders.

 

Cardboard