Why is oil below $50 right now?

[RandomGuy]

[from 2005, yikes!!--RG]
The answer isn't as simple as "stocks are building" or "we have plenty of supply". There are a lot of different variables pulling on the oil market right now, and the signal that $46 oil sends to Average Joe isn't necessarily the right one.



Maybe a little too much oversimplification, but generally accurate. WTI is in a steep contango, which encourages refineries with available storage capacity (this is a finite amount too) to purchase prompt while it is cheap. This is why we see stocks building. If you look at inventory optimization models, you basically need to factor the cost of holding excess inventory versus the cost of running out of crude versus the cost of maintaining a JIT inventory strategy. In a contango market (prompt prices lower than forward prices), you would want to hold inventory whereas in a backwardated market you would want to move to more of a JIT strategy.

Another critical reason for lower prompt WTI prices right now, and possibily more important, is that we are coming out of refinery maintenance season. A lot of hydroskimming and cracking refineries (as opposed to coking refineries) were under turnaround turning the first two quarters, especially in Asia. The result has been a relative decline in the demand for light sweet (which is the same thing as a relative increase in demand for medium to heavy sours).

In many ways, crude is NOT cheaper right now for some refineries. Because of the relative decrease in demand for light sweet, the relative price for medium to heavy sours has INCREASED. This can be most seen by the Maya discount to WTI over the last two months, which has risen from 18 under to around 10 under. PEMEX prices Maya off a formula which incorporates Fuel Oil, WTS, Brent, and LLS. Fuel Oil has really strenghtened as it has had a major demand pull from Asia as some of their energy facilities have switched to Fuel Oil in the short term while they are in turnarond season.

As these facilities that typically run light sweet come back on line, you should expect to see a moderate rise in prompt WTI prices (forward WTI is still above $50, btw). I say moderate, because the inventory builds we have seen recently should provide an offset to the increase in demand.



This is an interesting statement, because when you really think about it, it is the "cheap" oil that is coming into more of an abundance. It is just that we are not currently prepared to do anything about it.

Now, I know you were meaning that the days of cheap WTI are over, which I agree with save for the occassional cyclical recessions in the oil market. However, the incremental supply is widely accepted to be medium to heavy sour, despite the Saudi's claim they can come up with more light sweet. One thing is for certain, there will not be a great deal of light sweet coming online domestically.

So, the "cheap" medium to heavy sour will be available in the near to medium term for anyone who wants it, but right now... who does? This is the reason for record Maya and Mars spreads this year. You can pump a trillion barrels of Maya out of the ground, but without the upgrading and coking capacity at the refineries, it doesn't do anyone any good. More on this later.



Tar sands (shale) extraction is a good alternative of sorts, and I think it is a technology that will continue to grow at $40 oil just as it will at $80. I'd have to check some assays, but I believe SynCrude is a heavy sour and has an upper price limit independent of WTI prices. As WTI gets more expensive, the SynCrude discount just gets wider. We will see SynCrude and other Tar Sand crude demand increase just because it is a good product. The problem now is logistics. There is no easy way to get the stuff down to the major refining centers and for now it will remain a Group3 feedstock.

Coal to Liquids and Gas to Liquids are also two emerging areas, but the problem now is that it takes so much coal to produce so little product. Regardless of oil prices, my opinion is we are still a long way away from seeing real breakthroughs here. However, remember these alternative technologies are MORE economical at $40 oil with a $15 gas crack than they are at $50 oil with $3 gas crack. Watching product prices will give a better indicator than watching crude as to the velocity at which R&D moves.



As I've tried to hammer for a while now, the bottleneck continues to be refining capacity, and $80 oil doesn't really do anything to open that bottleneck. For refiners, the cost of oil is an expense and high oil is not good for refineries, all else held equal.

Right now, so much of refiner's relative capital budgets are tied into having to meet regulatory specs, that it leaves less to use for building upgrading capacity or expanding refineries. We are moving to 15 ppm sulfur diesel and gasoline, and building those sulfur plants, GDUs, and HCUs costs a lot of money. Also, it will see what happens with Ethanol. Lobbyists are doing a great job at getting into the ears of their politicians, and if the push for Ethanol continues, it will pull on gasoline supply. Using Ethanol as opposed to other oxygenates requires the use of MORE gasoline.

So, we are building a lot of desulfurization capacity on the product side, but the feedstock supply side isn't getting the necessary upgrades because funds are diverted to meet regulatory spec. This just further increases the demand for light sweet... pushing prices up (and sour discounts up as well).

Also, it is important to remember that oil is a highly cyclical business and all the oil companies have seen es like this before. They are cautious to run into multi billion projects when they aren't sure this isn't just a normal part of the historical 9 year cycle (4 up, 5 down). They don't want to get stuck in a project that the economics don't end up supporting 3 years down the road. There is a bit of a Keynesian price stickiness in that regard. I'd expect prices to stick in the $50s for a few more years, before settling around the new standard of $35-45 WTI.

Heh, looks like scott might have gotten a lucky dart in the dartboard.

[boutons_deux]

What a difference a fracking boom makes.

The fracking boom didn't cause anything until the Saudis reacted by continuing producing in the face of glut, down demand.

[CosmicCowboy]

The fracking boom didn't cause anything until the Saudis reacted by continuing producing in the face of glut, down demand.

what a stupid statement.

Who made it the Saudi's job to cut production so others could increase theirs?

[tlongII]

What a difference a fracking boom makes.

Looks like oil falls back down from its highs back down to below $50 the other day for US crude.

Funny is that it happened on a Democratic presidents watch, much to Yonivore's chagrin, I'm sure.

Yes, it's pretty funny considering that Democratic president had nothing to do with the fracking boom.

[CosmicCowboy]

Yes, it's pretty funny considering that Democratic president had nothing to do with the fracking boom.

I'm confident that Obama is happy the price crash is hurting Texas and Fracking in general.

[TeyshaBlue]

Drill here drill now for the win.
Gfy boutons.

[boutons_deux]

what a stupid statement.

Who made it the Saudi's job to cut production so others could increase theirs?

what? the price is down because the Saudis won't cut their productiln, they want to maintain their market share.

[boutons_deux]

Drill here drill now for the win.
Gfy boutons.

37 of 38 fracking areas are selling the barrels for more then the world price. Pipe mfr in Houston laying off workers. Only people getting ed around here are you BigOil shills and the frackers.

[pgardn]

The Saudis can't keep doing this.

So enjoy your drive now.
Come summer that extra cash savings driving won't exist.

[boutons_deux]

The Saudis can't keep doing this.

So enjoy your drive now.
Come summer that extra cash savings driving won't exist.

they have $1T+ in reserve, probably good for a couple years. probably a lot frackers are going to go s up.

[pgardn]

they have $1T+ in reserve, probably good for a couple years. probably a lot frackers are going to go s up.

You have no idea what price they pay with programs at home do you?
It won't last boots. Drive now. That summer vacation on the road... I'm bettin the airplane will still be flown.

[Blake]

"OPEC's Cheap Gas Agenda

Gas prices are plummeting, and OPEC doesn't seem likely to cut production anytime soon."

http://www.usnews.com/opinion/econom...as-prices-fall

[TDMVPDPOY]

saudis can afford to play the pricing game vs frackers

russia is only doing deals with gold bullion now

[boutons_deux]

You have no idea what price they pay with programs at home do you?
It won't last boots. Drive now. That summer vacation on the road... I'm bettin the airplane will still be flown.

strawman, I didn't say it would "last", indefinitely. I said SA would keep pumping for a year or two. Quite long enough for a lot of frackers to go s up, and default on their investors, etc which would really up US financial sector again.

[RandomGuy]

they have $1T+ in reserve, probably good for a couple years. probably a lot frackers are going to go s up.

Not as much as you might think. Many producers have hedges, and when the demand for trained people and drilling equipment dry up that will drive the price of both down, reducing production costs.

Supply/demand are dynamic forces, and will act to keep US/Canadian production more stable than one might think.

[RandomGuy]

I'm confident that Obama is happy the price crash is hurting Texas and Fracking in general.

Not quite yet, but heard some scuttlebutt that it is beginning to hit.

[RandomGuy]

what? the price is down because the Saudis won't cut their productiln, they want to maintain their market share.

Correct.

[RandomGuy]

Yes, it's pretty funny considering that Democratic president had nothing to do with the fracking boom.

Presidents generally don't.

My point, ultimately was that, despite the scaremongering, Obama's administration doesn't have the effect on energy production that the hysterical h8ters like to claim.

[CosmicCowboy]

Not quite yet, but heard some scuttlebutt that it is beginning to hit.

Not scuttlebutt at all....already thousands of job layoffs and rigs getting stacked as they finish where they are at. It's gonna get ugly.

[RandomGuy]

Not scuttlebutt at all....already thousands of job layoffs and rigs getting stacked as they finish where they are at. It's gonna get ugly.

I will take your word for it, I haven't been reading related news on it.

[Th'Pusher]

Not scuttlebutt at all....already thousands of job layoffs and rigs getting stacked as they finish where they are at. It's gonna get ugly.

So everyone should go get their CDL license so they can haul oil and make $80k a year, right CC?

The only reason someone wouldn't have a job is because they're ing worthless lazy pieces of human filth. Right CC?

[CosmicCowboy]

So everyone should go get their CDL license so they can haul oil and make $80k a year, right CC?

The only reason someone wouldn't have a job is because they're ing worthless lazy pieces of human filth. Right CC?

You sure are a stupid little .

The guys losing their jobs are on the front end of the production, not the back end.

And yeah, there are jobs out there. Might not be the "dream job" for disillusioned liberal arts majors but there are jobs.

[TeyshaBlue]

37 of 38 fracking areas are selling the barrels for more then the world price. Pipe mfr in Houston laying off workers. Only people getting ed around here are you BigOil shills and the frackers.

Idiot.
This is nothing new nor is it anything the industry hadn't seen many times before. Gfy.

[TeyshaBlue]

Scott made that point abundantly clear as well.

[Th'Pusher]

You sure are a stupid little .

The guys losing their jobs are on the front end of the production, not the back end.

And yeah, there are jobs out there. Might not be the "dream job" for disillusioned liberal arts majors but there are jobs.

Look you old . Is demand for CDL drivers for oil going up or down right now in SouthTexas? Quit parsing and stop acting like an asshole.