SharperDingaan Posted August 21, 2015 Posted August 21, 2015 We have no idea what OPEC may choose to do. What we know is that there is serious division within the ranks, it has become public, & that it is not sustainable. SD
shhughes1116 Posted August 21, 2015 Posted August 21, 2015 We have no idea what OPEC may choose to do. What we know is that there is serious division within the ranks, it has become public, & that it is not sustainable. SD OPEC's decision is not relevant. Amongst OPEC, the only relevant actors in this drama are Saudi Arabia Kuwait, Kuwait, and to a lesser extent Irag and UAE. Saudi Arabia and Kuwait alone are responsible for ~50% of OPEC production. Add in UAE and Irag production, and that is ~65% of OPEC production. The primary dissenting voices in OPEC are the South Americans (Venezuela, Ecuador), the Africans (Nigeria, Angola), and Iran. Saudi Arabia and Kuwait are smart. They recognize that there are two threats to their economic well-being: (1) Competing sources of petroleum production that crowd out OPEC production; and (2) Renewable energy sources that crowd out petroleum use (i.e. electric cars, synthetic substitutes for petroleum-based oils/solvents/plastics). IMHO, #2 is the primary threat to OPEC. The higher the price of oil, the more it makes sense to produce and purchase hybrids, electric cars, hydrogen cars, bio-fuel cars, and synthetic materials that replace petroleum for production of oils, solvents, and plastics. There are many folks who seem to think that the oil recovery will be V-shaped, or if not v-shaped, a relatively rapid recovery going into early 2016. I would caution those folks against that mindset. The primary actors in OPEC have strong incentives to keep oil prices very low for a very very long time. Low oil prices over a multi-year period will drive investment decisions away from renewables and alternative sources and back towards petroleum-based solutions. The Saudi's and Kuwaiti's recognize this, and I suspect they will be the driving force behind OPEC's decision to keep production high for a long period of time. And let's be honest, when have you ever seen OPEC members (other than Saudi Arabia and Kuwait) cut oil production for reasons other than war and terrorism? Every time production cuts are expected, the banana republics in OPEC expect Saudi Arabia and Kuwait to make the cuts. None of the other members are going to cut production, and the Saudi's/Kuwaiti's certainty aren't going to cut production. In fact, the Saudi's have been investing money recently to expand production beyond their current capacity.
yadayada Posted August 21, 2015 Posted August 21, 2015 Yeah agree, plus they hate Iran. Why would they care about venezuela? They know the days that OPEC controlled the market are over. So they don't need them anymore. And those countries were always cheating anyway. I disagree that they want to see prolonged low oil prices though. Since gas prices are such a tiny part of our economy, and with global warming pressures anyway, 40 or 80$ oil does not make that much of a difference. Fun fact, oil consumption in the US in 1980 was 500 billion$ on a GDP of 2.8 trillion $. So a whopping 18%! But now it is merely 2% or so. If oil doubles it is 4%.
orthopa Posted August 21, 2015 Posted August 21, 2015 If (us) Americans were smart we would welcome this chance to keep our precious resource in the ground and over time use up everyone else -s oil. I think Charlie Munger made this point. Its not going to go bad, keep it in the ground. Capitalism dictates otherwise though.
KinAlberta Posted August 21, 2015 Posted August 21, 2015 I posted this to a site back in June 2012 - trying to get Albertans to prepare for a price drop... It's a good read... try pages 15, 17, 63, 64, 66 to start with. http://belfercenter.ksg.harvard.edu/files/Oil-%20The%20Next%20Revolution.pdf
rb Posted August 21, 2015 Posted August 21, 2015 If (us) Americans were smart we would welcome this chance to keep our precious resource in the ground and over time use up everyone else -s oil. I think Charlie Munger made this point. Its not going to go bad, keep it in the ground. Capitalism dictates otherwise though. Very well put. Probably that would be the smart thing to do. Plus developed countries are at a disadvantage in extractive industries compared with EM countries due to higher labour costs. But also as you say you cannot make a capitalistic point to sit on an asset when you can make money off of it. Future oil prices would have to be astronomical in order to make sense in a DCF.
rpadebet Posted August 25, 2015 Posted August 25, 2015 http://www.cnbc.com/2015/08/25/gartman-im-on-the-sidelines-on-oil-for-now.html?trknav=homestack:topnews:7 There you go... the bottom is most likely in in Oil. Gartman's timing on these kind of things is simply unbeatable.
Uccmal Posted August 25, 2015 Posted August 25, 2015 What the Saudi's are doing doesn't make alot of sense in the long term. Simple Math: 10.5 million 45/ barrel ~ 475 mill $/day Cut production by 2 million barrels and drive price to 80/barrel = 8.5 x 80 ~ 680 mill $day its become a bit of a pissing match at this point. The reasons to continue: 1) Break high cost drillers - might give them two yrs of breathing space. Cheaper US and other drilling will just pick up and create a sawtooth pattern for pricing. 2) Want to get rid of as much oil as possible at any price while the getting is good. Maybe they have decided the writing is on the wall and the long term prognosis for petroleum is poor. 3) They have lost all grip on reality and dont really understand the capitalist system of bankrupt, cleanse and repeat. I dont know how good the Saudi's are at long term planning. I am a bit dubious. They are spending billions on a couple of super mosques rather than diversifying their economy - or maybe that is diversification
kfh227 Posted August 25, 2015 Posted August 25, 2015 Saudi Arabia bases it's budget on an assumed oil price. Over the past few years they probably amassed a surplus. So they can deal with less income for a few years before the surplus is depleted. Surprisingly, I can't find a chart via Google that just gives the Saudi Arabia national debt by itself. It's all tied to GDP. And I have no time to seek this data out right now. Probably a worth while thing to investigate to aid in the ol' mental lattice work. One chart I stumbled upon looked to be fro ma study that says that Saudi Arabia won't have to worry about oil prices till 2020.
rb Posted August 25, 2015 Posted August 25, 2015 Jus a couple of points. kfh227: Saudi Arabia's debt is about $14-15. Uccmal: Saudi Arabia only sells about 7 million barrels.
Uccmal Posted August 25, 2015 Posted August 25, 2015 rb: http://www.bloomberg.com/news/articles/2015-07-13/saudis-pump-record-crude-as-opec-sees-stronger-demand-in-2016 10.5 m/ day
rb Posted August 25, 2015 Posted August 25, 2015 rb: http://www.bloomberg.com/news/articles/2015-07-13/saudis-pump-record-crude-as-opec-sees-stronger-demand-in-2016 10.5 m/ day That's true. They pump about 10.5 Mbbl, but only sell about 7. The rest they basically give away for free at home.
Cardboard Posted August 25, 2015 Posted August 25, 2015 Honestly, I don't understand these guys strategy. Like I said before, they have proven that they are unpredictable and can play a nasty game which nobody thought possible before. The previous thinking or that they would defend $85 at all costs is long gone in people's memory. Based on real storage data and not the IEA crazy and unverifiable numbers (3 million barrels a day surplus), the current imbalance is around 1 million barrels a day. Maybe a bit higher now, since China had showed an import decline of 4% in July from June. Everywhere around the world except for Iraq and Saudi Arabia, we are seeing production declines. So it would not take a big cut from Saudi's current production to really move the price up and they would obtain a much higher selling total. Moreover, if they are worried about renewables becoming a threat to them longer term, then I would think that the smart strategy would be to harvest as much dollars as possible now and to diversify their economy with these funds. So you would think that they would want a very high price and to sell as much as possible now. To get that, you cut by 500,000 barrels per day and agree with your friends to cut another 500,000 among them and tell non-OPEC producer that supply will come back fast and furious if they see any increase. Who in their right mind would invest in offshore, oil sands and even shale oil under such on-going threat? I think we would end up with an industry trying to rationalize, pay off its debt and having no interest in any project that would show more than $40 all-in costs even if oil would rally to $80. I also think in these conditions that you would see a continued non-OPEC production decline which would allow the Saudis and other OPEC members to slowly increase supply. Cardboard
finetrader Posted August 25, 2015 Posted August 25, 2015 My guess is Saudis will wait 'till all the derivative that oil companies took to hedged their production at 100$ a barrell expired so that everyone is swimmimg naked. That would bring us not before summer 2016.. Just a guess of mine
Guest Schwab711 Posted August 25, 2015 Posted August 25, 2015 Agreed cardboard and Uccmal. There's an interesting theory that the Saudi's want to stop the technological advantage the US is quickly gaining in extraction. Could be part of the decision making. It fits with what KinAlberta posted (interesting read so far).
rpadebet Posted August 25, 2015 Posted August 25, 2015 My guess is Saudis will wait 'till all the derivative that oil companies took to hedged their production at 100$ a barrell expired so that everyone is swimmimg naked. That would bring us not before summer 2016.. Just a guess of mine I think we saw 100$ oil around June end 2014. Maybe the futures curve had 100$ oil until July/August 2014. Typically the futures market is liquid until a year out, even 12 months out, it is difficult to hedge in size. So assuming they all did hedge then and assuming your rationale is sound, now would be the time those $100 hedges expire. Wait for a quarter to see the effects in PnL of companies. So this quarter and next quarter we will know..
watsa_is_a_randian_hero Posted August 25, 2015 Posted August 25, 2015 Who in their right mind would invest in offshore, oil sands and even shale oil under such on-going threat? I think we would end up with an industry trying to rationalize, pay off its debt and having no interest in any project that would show more than $40 all-in costs even if oil would rally to $80. I also think in these conditions that you would see a continued non-OPEC production decline which would allow the Saudis and other OPEC members to slowly increase supply. this is part of their strategy...not just get rid of current production, but create fear of future collapses thereby suppressing investment thereby keeping supply tight for years to come.
TwoCitiesCapital Posted August 25, 2015 Posted August 25, 2015 Who in their right mind would invest in offshore, oil sands and even shale oil under such on-going threat? I think we would end up with an industry trying to rationalize, pay off its debt and having no interest in any project that would show more than $40 all-in costs even if oil would rally to $80. I also think in these conditions that you would see a continued non-OPEC production decline which would allow the Saudis and other OPEC members to slowly increase supply. this is part of their strategy...not just get rid of current production, but create fear of future collapses thereby suppressing investment thereby keeping supply tight for years to come. So....buy the ones that will survive :)
Uccmal Posted August 25, 2015 Posted August 25, 2015 rb: http://www.bloomberg.com/news/articles/2015-07-13/saudis-pump-record-crude-as-opec-sees-stronger-demand-in-2016 10.5 m/ day That's true. They pump about 10.5 Mbbl, but only sell about 7. The rest they basically give away for free at home. Hadn't thought of that. Tx.
Uccmal Posted August 25, 2015 Posted August 25, 2015 Who in their right mind would invest in offshore, oil sands and even shale oil under such on-going threat? I think we would end up with an industry trying to rationalize, pay off its debt and having no interest in any project that would show more than $40 all-in costs even if oil would rally to $80. I also think in these conditions that you would see a continued non-OPEC production decline which would allow the Saudis and other OPEC members to slowly increase supply. this is part of their strategy...not just get rid of current production, but create fear of future collapses thereby suppressing investment thereby keeping supply tight for years to come. Makes sense. Scare away the investors for a good few years and no one wants to drill anything that cannot be profitable at $40.
orthopa Posted August 26, 2015 Posted August 26, 2015 Just thought about this. We are r getting into hurricane season and there are a couple that have been percolating in the Atlantic. Does that even have an effect this year with deep sea drilling the last thing that companies want to do? What effect would a hurricane have on knocking out a bunch of refineries and deep see drilling platforms.
Cardboard Posted August 26, 2015 Posted August 26, 2015 On the geopolitical side, there is something really bizarre going on. http://www.startribune.com/russia-s-putin-hosts-middle-east-leaders-at-air-show/322836261/ These are supposedly American's friends. What are they doing in Russia looking to buy warplanes or regular airplanes? Boeing, Airbus, Lockheed anyone??? Also, why did the Saudis promised to invest over $10 billion in Russia recently following an official visit? They are hurting them like crazy with their over-production and making the Siberian-China pipeline a bad project. Then we have the U.S. currently sending F22's to Europe to send a message to Russia or in support of NATO and at the same time we have a joint naval exercise between Russia and China. Finally, if it is not scary enough, this stuff! What is true and what is not? http://www.israelnationalnews.com/News/News.aspx/191966#.Vd0GKZtRFjo http://www.theglobeandmail.com/news/world/netanyahu-repeatedly-pressed-for-iran-attacks-but-was-rebuffed-by-military/article26064799/ Cardboard
rb Posted August 26, 2015 Posted August 26, 2015 Cardboard, I think it's admirable that you're trying to make some sense of all those things. But seriously I think it's futile to try to understand the middle eat. You may loose your mind in the process. You should give that up. Your contributions to this board are much too valuable to be lost over that.
shhughes1116 Posted August 26, 2015 Posted August 26, 2015 On the geopolitical side, there is something really bizarre going on. http://www.startribune.com/russia-s-putin-hosts-middle-east-leaders-at-air-show/322836261/ These are supposedly American's friends. What are they doing in Russia looking to buy warplanes or regular airplanes? Boeing, Airbus, Lockheed anyone??? Also, why did the Saudis promised to invest over $10 billion in Russia recently following an official visit? They are hurting them like crazy with their over-production and making the Siberian-China pipeline a bad project. Then we have the U.S. currently sending F22's to Europe to send a message to Russia or in support of NATO and at the same time we have a joint naval exercise between Russia and China. Finally, if it is not scary enough, this stuff! What is true and what is not? http://www.israelnationalnews.com/News/News.aspx/191966#.Vd0GKZtRFjo http://www.theglobeandmail.com/news/world/netanyahu-repeatedly-pressed-for-iran-attacks-but-was-rebuffed-by-military/article26064799/ Cardboard I wouldn't read anything into that. Shopping around for military hardware and aerospace equipment is a pretty common practice, even if just to get some leverage when dealing with the western companies like Lockheed, Boeing, etc. They may have also learned a little bit from Iran's experience after the Shah was deposed. Iran had a bunch of american military hardware (primarily fighter planes), but could not operate any of the fighter planes because the United States government prohibited american companies from supplying parts needed to keep the planes operational. The same thing happened with Iranian civil aviation...you would be frightened if you saw some of the civil aerospace equipment they are operating right now.
SharperDingaan Posted August 26, 2015 Posted August 26, 2015 A lot of this is also petro $ recycling; when you are bad at consumer products you sell weapons instead. More telling is that for Russia to be running a large enough deficit with the ME to make it necessary, they must have been swapping Russian for ME Crude in quantity - and need these sales to square up the accumulated price difference. If the weapons create some tension in the ME, that is not a bad thing for pricing either. The SA investment smells like a bribe to slow down construction, put roughly 250M bbl (at $40/bbl) of in-situ ME crude in Russian hands, & create a joint incentive to cut back. Find some difficulties, co-operate to stabilise the price at $60/bbl - & there is an extra $5B in it for you. All good, as it suggests change is afoot. SD
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