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POSTED BY Ed (6 mths ago)
Why oil prices can’t rise very high, for very long

Oil prices are now as high as they have been for three years. At this writing, Brent is $74.14 per barrel and West Texas Intermediate is at $68.76. These prices aren’t really very high, if a person looks at the situation from a longer term point of view than the last three years.

https://gailtheactuary.files.wordpress.com/2018/04/eia-chart-of-weekly-oil-prices-through-april-13-2018.png


There is always a question of how high oil prices can go, and for how long.

In fact, we have many resources, of many kinds, whose prices of extraction keep rising higher. For example, obtaining fresh water for the world’s population keeps getting more and more expensive. Some parts of the world need to resort to desalination.

The world economy cannot withstand high prices for any of these resources for very long. Certainly, it cannot withstand high prices for a combination of necessary resources, because people need to cut back on other purchases, in order to afford the necessities whose prices are rising.

This article is a guest post by another actuary, who goes by the pseudonym Shunyata. He explains in a different way why high resource prices cannot last, whether they are for oil, or natural gas, water, or even fresh air.

https://ourfiniteworld.com/2018/04/19/why-oil-prices-cant-rise-very-high-for-very-long/

COMMENTS

Ed (6 mths ago)
What are the possible causes and consequences of higher oil prices on the overall economy?

As a consumer, you may already understand the microeconomic implications of higher oil prices. When observing higher oil prices, most of us are likely to think about the price of gasoline as well, since gasoline purchases are necessary for most households.

When gasoline prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services. The same goes for businesses whose goods must be shipped from place to place or that use fuel as a major input (such as the airline industry). Higher oil prices tend to make production more expensive for businesses, just as they make it more expensive for households to do the things they normally do.

It turns out that oil and gasoline prices are indeed very closely related. Figure 3 plots average monthly oil prices from 1990 through early 2008, using the spot oil price for West Texas intermediate (right scale, thin blue line, measured in dollars per barrel) and the U.S. retail gasoline price (left scale, thick red line, measured in cents per gallon).

The two series track each other very closely over time: increases in oil prices are accompanied by increases in gasoline prices. As shown in the graph, the correlation coefficient (denoted “r”) for the two series is 0.98. Moreover, the monthly changes in oil prices and gasoline prices (not shown) also are very highly and positively correlated.

https://www.frbsf.org/education/files/drecon_0711c.gif


I’ve just explained how oil prices affect households and businesses; it is not a far leap to understand how oil prices affect the macroeconomy. Oil price increases are generally thought to increase inflation and reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products.

As mentioned above, oil prices indirectly affect costs such as transportation, manufacturing, and heating. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers. The extent to which oil price increases lead to consumption price increases depends on how important oil is for the production of a given type of good or service.

Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input.

High oil prices also can reduce demand for other goods because they reduce wealth, as well as induce uncertainty about the future (Sill 2007). One way to analyze the effects of higher oil prices is to think about the higher prices as a tax on consumers (Fernald and Trehan 2005).

The simplest example occurs in the case of imported oil. The extra payment that U.S. consumers make to foreign oil producers can now no longer be spent on other kinds of consumption goods.3

Despite these effects on supply and demand, the correlation between oil price increases and economic downturns in the U.S. is not perfect. Not every sizeable oil price increase has been followed by a recession. However, five of the last seven U.S. recessions were preceded by considerable increases in oil prices (Sill 2007).4

More https://www.frbsf.org/education/publications/doctor-econ/2007/november/oil-prices-impact-economy/

Ed (5 mths ago)
And here we can see... in very stark terms... the impact of higher oil prices:

Even though the average wages of an American increased 21% since 2009, the median new home price is 60% higher. Part of the reason for the higher new home price is demand but also is the higher cost. For example, the lumber price shut up 170% since the beginning of 2016. When the U.S. median new home price reached a high of $262,000 in 2006, the price of lumber was $330. Today, the lumber price isn’t quite double, but at $592, it’s pretty darn close:

https://d3hxt1wz4sk0za.cloudfront.net/wp-content/uploads/2018/05/Lumber-Price-May9-2018.png


You will also notice that the lumber price fell in mid-2014 to a low of $220 at the beginning of 2016. The falling lumber price was party due to the falling oil price. One of the significant costs for cutting and transporting lumber is energy. As the oil price fell in half by 2016, it impacted the price of lumber. However, the lumber price has increased a great deal more in percentage terms than the oil price and seems to be in a bubble or huge top formation.


https://srsroccoreport.com/the-3-stage-housing-bubble-collapse/

Ed (5 mths ago)
What would happen to the U.S. economy if petroleum prices continue their rapid rise?

University of California, San Diego, economist James Hamilton noted in a recent study that 10 out of 11 post-World War II recessions [PDF] in the United States were preceded by a sharp increase in the price of crude petroleum. The only exception was the mild recession of 1960-61 for which there was no preceding rise in oil prices.

Hamilton has also written a fascinating short history [PDF] of U.S. and global oil price shocks. Until 1974 the United States was both the world’s biggest consumer and producer of crude oil. Although domestic oil production has recently upticked, the U.S. today produces about half the oil it did in 1971. It still is the biggest consumer.

It turns out that boom/bust price shocks have been a feature of oil production ever since Edwin Drake drilled his first well in Pennsylvania in 1859. Before Drake’s well crude oil was being sold for the equivalent of $2,000 per barrel (2009 dollars). After Drake’s discovery, the price of oil collapsed by 1861 to about $2.50 per barrel.

In those days, the products of crude oil chiefly competed against ethanol as illuminants. Oil became increasingly important to the U.S. economy as it took over as the chief transport fuel. In 1900, there were 0.1 internal combustion-engine vehicles per 1,000 residents, rising to 87 by 1920, and reaching 816 in 2008.

More http://reason.com/archives/2011/03/08/oil-price-shocks-and-the-reces

Ed (5 mths ago)
Oil prices: How high before Wall Street freaks out?

History shows that when crude spikes by more than 80% in a year, it can pose serious problems, according to Brad McMillan, chief investment officer for Commonwealth Financial Network. Crude was fetching about $47 a barrel a year ago. That suggests the price to watch is about $85 a barrel. That’s roughly 19% above current levels.

http://money.cnn.com/2018/05/13/investing/stocks-week-ahead-oil-prices/index.html

Ed (5 mths ago)
Gas Is Headed for $3 per gallon. What that means for the US economy

Morgan Stanley estimates that if gas averages $2.96 this year, it would take an annualized $38 billion from spending elsewhere, an upward revision from the bank’s $20 billion estimate in January. That would wipe out about a third of the additional take-home pay coming from tax cuts this year, the analysts said.

Airlines and shipping companies will also be paying more for jet fuel and diesel—costs that may be passed along to consumers. Even companies such as Whirlpool Corp. have noted that higher oil prices have boosted the cost of materials.

https://www.wsj.com/articles/gas-is-headed-for-3-what-that-means-for-the-u-s-economy-1526209200

Ed (5 mths ago)
As oil rises, warnings emerge from U.S. retailers

Worries about rising oil prices have begun to creep into U.S. retailers’ earnings calls, and investors are raising concerns that those costs may slow discretionary spending among Americans and push down the performance of the retailers’ shares.

Walmart and Home Depot Inc also have pointed to increased transportation costs stemming from more expensive fuel and a shortage of drivers, factors that have put pressure on their margins. Walmart’s lower margins sent its shares falling 1.9 percent on Thursday.

https://www.reuters.com/article/us-usa-retail-oil/as-oil-rises-warnings-emerge-from-u-s-retailers-idUSKCN1II2WL

Ed (5 mths ago)
Summer Travel Plunges Due to Higher Gas Prices, GasBuddy Reveals
May 21, 2018

GasBuddy analyst says strong likelihood national average to hit $3 per gallon this summer

BOSTON – Rising gas prices have put a crimp in travel plans this summer as more Americans are planning staycations instead of hitting the road, according to GasBuddy’s 2018 Summer Travel survey.

According to the annual survey, only 58 percent said they will take a road trip this summer, a 24 percent decrease from last year, while 39 percent cited high gas prices for impacting their summer travel decisions, compared to 19 percent in 2017.

The decrease in motorist’s appetite to hit the road comes at a time when the national average gasoline price is at its highest point since November 2014 due to a recent rally in oil prices because of long-term OPEC production cuts, the U.S. exiting the Iran nuclear deal, declining U.S. oil inventories and high demand. Gas prices are expected to hit $2.95 per gallon on Memorial Day, a 65-cent increase over Memorial Day last year, costing motorists $1 billion more from Thursday to Monday alone.

The impact of high gas prices will be felt well beyond Memorial Day.

“With refineries now well positioned for the summer months, we may see some relief in mid-June, but expect this summer to remain the priciest since 2014 with a strong likelihood of the national average hitting the psychological $3 per gallon barrier sometime this summer should we see any unexpected outages or geopolitical tensions flare,” said Patrick DeHaan, head of petroleum analysis at GasBuddy.

https://www.gasbuddy.com/NewsRoom/PressRelease/623?fvm=1

Ed (5 mths ago)
SSE has become the last of the "big six" energy companies to announce early summer price rises, with a 6.7% average increase in gas and electricity bills.

The move will see gas prices rise by 5.7% and electricity prices go up by 7.7% on 11 July for SSE customers on variable deals.

This will mean an average £76 per year rise for 2.36 million customers.

The company said the price rise was the result of increasing costs "largely outside our control".

"We deeply regret having to raise prices and have worked hard to withstand the increasing costs," said Stephen Forbes, chief commercial officer at the company.

"The cost of supplying energy is increasing and this ultimately impacts the prices we are able to offer customers."


http://www.bbc.com/news/business-44300394

Ed (5 mths ago)
After issuing clear warnings on this program that sub-$50 oil prices were going to be short-lived, oil expert and geological consultant Art Berman returns to the podcast this week to explain why today's $70 oil prices will go higher -- likely much higher -- and start materially contricting world economic growth.

Art explains how the current glut of oil created by the US shale boom -- along with high crude output by both OPEC and non-OPEC producers -- is a temporary anomaly. Fundamentally, we are not finding nearly as much oil as we need to continue the trajectory of the global demand curve. And at the same time, we're extracting our reserves at a faster rate than ever. That's a mathematical recipe for a coming supply crunch -- it's not a matter of if, but when:

The price of oil has gone up 30%+ percent just here in the last year alone. There are some very good reasons for that.

In the United States, we've been drawing down our reserves, our inventory and the amount of oil we have in storage, consistently since February of 2017. We're going into the 15th month of drawing from storage each week because we're not producing enough to meet the need.

To those paying attention: the United States is right now producing more oil than it ever has in its history. We are a million barrels a day higher than the peak in 1970 -- the one that King Hubbert got in trouble for warning about. We're higher by 50,000 or so barrels per month of production. Yet, here we are, still sucking oil out of storage. What does that tell you? There is only one way to interpret that: We are using more than we are producing.

Countries like the United States and western Europe; our demand is pretty much stable. We are not a big growing economy anymore. But the emerging markets – Asia, Latin America, and Africa – they are going full bore. That is where something like 80% of world demand growth is coming from.

Never ever lose sight of the fact that the United States imports a ton of oil. I mean we are importing, on average, 7 million barrels of crude oil a day. I mean that is more than many continents use a day. Why are we importing all that when we are also producing 11 million barrels a day?

We are nowhere near energy self-sufficiency, nor do I think we will ever get there.

https://www.peakprosperity.com/podcast/114066/art-berman-think-oil-getting-expensive-aint-seen-nothing-yet

Ed (5 mths ago)
Global oil, gas discoveries drop to 70-year low: Rystad Energy

Oil and gas discoveries around the world dropped last year to their lowest since the 1940s after companies sharply cut back in their search for new resources amid falling oil prices.

https://www.reuters.com/article/us-oil-exploration-idUSKBN1521TA


https://www.rystadenergy.com/contentassets/223e36d8393742508538600b2792346f/20171221_discoveredresourcespr.jpg



Growth in oil supply next year is expected to outpace an anticipated pick-up in demand that will push global consumption above 100 million barrels per day (bpd) for the first time, the International Energy Agency said on Wednesday.

https://www.reuters.com/article/us-oil-iea-idUSKBN1950X4

100m x 365 = 36.5 billion barrels....



In order to encourage more exploration ... we need higher prices... higher prices crater the economy....


http://worldofdtcmarketing.com/wp-content/uploads/2014/09/904168_-houston-we-have-a-problem.jpg

Ed (5 mths ago)
Global Oil Fields in Decline (HSBC)

https://youtu.be/7KfVJBNX2U4

Ed (5 mths ago)
This is the full report...

Interesting that we are half way through the year... and prices are rising dramatically... as one would expect as we hit a supply bottleneck....

Will HSBC be right?



HSBC: Brace for the oil, food and financial crash of 2018

80% of the world’s oil has peaked, and the resulting oil crunch will flatten the economy

https://medium.com/insurge-intelligence/brace-for-the-financial-crash-of-2018-b2f81f85686b#.z9uwvj2gd

Ed (4 mths ago)
Game Over - Oil Prices Are Going Higher

Summary

The jig is up - even if OPEC increases production now, the production lost from Iran and Venezuela will overwhelm the market.

In a scenario where Saudi and its GCC allies ramp to max capacity, OPEC's total oil production will still fall.

Global oil market balance indicates that the oil deficit will only increase from here on out.

Once OECD oil storage levels fall to a critical level, only will oil demand destruction rebalance the oil markets.

One of our favorite movie scenes comes from the movie "Rounders." It's very rare to have an investing situation line up almost perfectly with your forecast because there are so many elements of the unknown. For example, "What will the future be?" is a good starting point. But in the case of the oil markets, there are two things that will never change: 1) the laws of physics, and 2) the laws of supply and demand. If the oil market is undersupplied, prices will go up. If the oil market is oversupplied, prices will go down.

The goal then is to just figure out where supply and demand are going. Because once you can handicap the variables in the outlook, then it's just a matter of figuring out how certain you are of those odds.

We titled this article "Game Over - Oil Prices Are Going Higher" because we will break down the OPEC variable for you. Even if the Gulf Countries (Saudi and friends) increase oil production in 2019, the world will still be undersupplied because the declines from Venezuela and Iran will offset all the increases and more.

Recap of our bullish oil thesis so far:

https://seekingalpha.com/article/4183852-game-oil-prices-going-higher

Ed (4 mths ago)
THE ENERGY CLIFF APPROACHES: World Oil & Gas Discoveries Continue To Decline

As the world continues to burn energy like there is no tomorrow, global oil and gas discoveries fell to another low in 2017. And to make matters worse, world oil investment has dropped 45% from its peak in 2014. If the world oil industry doesn’t increase its capital expenditures significantly, we are going to hit the Energy Cliff much sooner than later.

According to Rystad Energy, total global conventional oil and gas discoveries fell to a low of 6.7 billion barrels of oil equivalent (Boe). To arrive at a Boe, Rystad Energy converts natural gas to a barrel of oil equivalent. In 2012, the world discovered 30 billion Boe of oil and gas versus the 6.7 billion Boe last year:


https://d3hxt1wz4sk0za.cloudfront.net/wp-content/uploads/2018/06/Global-Conventional-Oil-Gas-Discoveries-768x533.png


In the article, All-time low for discovered resources in 2017, Rystad reports, it stated the following:

“We haven’t seen anything like this since the 1940s,” says Sonia Mladá Passos, senior analyst at Rystad Energy. “The discovered volumes averaged at ~550 MMboe per month. The most worrisome is the fact that the reserve replacement ratio in the current year reached only 11% (for oil and gas combined) – compared to over 50% in 2012.” According to Rystad’s analysis, 2006 was the last year when reserve replacement ratio reached 100%.

The critical information in the quote above is that the world only replaced 11% of its oil and gas consumption last year compared to 50% in 2012. However, the article goes on to say that the last time global oil and gas discoveries were 100% of consumption was back in 2006. So, even at high $100+ oil prices in 2013 and 2014, oil and gas discoveries were only 25% of global consumption.

As I mentioned at the beginning of the article, global oil capital investment has fallen right at the very time we need it the most. In the EIA’s International Energy Outlook 2017, world oil capital investment fell 45% to $316 billion in 2016 versus $578 billion in 2014:

https://d3hxt1wz4sk0za.cloudfront.net/wp-content/uploads/2018/06/Total-World-Oil-Capital-Investment-Upstream-768x519.png


In just ten years (2007-2016), the world oil industry spent $4.1 trillion to maintain and grow production. However, as shown in the first chart, global conventional oil and gas discoveries fell to a new low of 6.7 billion Boe in 2017. So, even though more money is being spent, the world isn’t finding much more new oil.

I believe we are going to start running into serious trouble, first in the U.S. Shale Energy Industry, and then globally, within the next 1-3 years. The major global oil companies have been forced to cut capital expenditures to remain profitable and to provide free cash flow. Unfortunately, this will impact oil production in the coming years.

Thus, the world will be facing the Energy Cliff much sooner than later.

https://srsroccoreport.com/the-energy-cliff-approaches-world-oil-gas-discoveries-continue-to-decline/

Ed (4 mths ago)
Oil only discoveries:

https://www.vaneck.com/uploadedImages/blogs/blog-images/conventional-oil-discoveries-2016.jpg

Ed (4 mths ago)
The Wall Street Journal.

Trump wants oil that the world doesn't have to give

President Donald Trump’s request for more Saudi Arabian oil put a spotlight on growing U.S. unease about how quickly the crude sector has switched from glut to deficit, but a boost in Middle East production may not be enough to stem the price rallies that have hit consumers.

Supply disruptions in major producers like Canada and Venezuela, coupled with strong crude demand from robust global growth, have tightened the oil market faster than many analysts expected. Early Monday, Libya’s state-run oil company said it couldn’t honor contracts to deliver oil at two ports, widening outages there, after rebels blocked exports. Prices have shot up in recent sessions in response. On Friday, U.S. crude ended just over $74 a barrel, its highest since November 2014. Brent, the global price yardstick, is close to $80 a barrel. Early Monday, prices were slightly lower.


That has contributed to rising gasoline prices in the U.S., just months before the midterm elections. GasBuddy, a fuel-tracking app, estimates that prices will be around $2.90 a gallon for the Independence Day holiday, the highest on that day since 2014.


More https://www.msn.com/en-us/money/markets/trump-wants-oil-that-the-world-doesn-t-have-to-give/ar-AAzsIy3?ocid=ob-tw-enus-677

Ed (4 mths ago)
HSBC: Brace for the oil, food and financial crash of 2018

80% of the world’s oil has peaked, and the resulting oil crunch will flatten the economy

https://medium.com/insurge-intelligence/brace-for-the-financial-crash-of-2018-b2f81f85686b#.z9uwvj2gd

Ed (3 mths ago)
World's oil cushion could be stretched to the limit, IEA warns

LONDON (Reuters) - The world’s oil supply cushion could be stretched to the limit due to prolonged outages, supporting prices and threatening demand growth, the International Energy Agency said on Thursday.

https://www.reuters.com/article/us-oil-iea/worlds-oil-cushion-could-be-stretched-to-the-limit-iea-warns-idUSKBN1K20V4

Ed (3 mths ago)
Hubbert Curve’s Halfway Point May Be Imminent For Conventional Crude

The world has produced as much conventional crude oil cumulatively, as we have currently in proven reserves. Based on Hubbert curve theory, it is an indication of peak oil.

Unconventional resources have helped and will continue to help avoid severe oil scarcity, but it cannot make up for a potential permanent decline in conventional oil production.

If there is one factor which in my view stands above all in regards to why the peak oil theory supporters got it wrong, it has to do with human nature and currently prevailing culture. They felt it was a very important topic in regards to the future of humanity, which they correctly sensed that it had to have imminent implications if it was to gain social relevance. For this reason they ignored other factors such as the effects that price can have on ultimate recovery from fields, as well as to what extent it could support the production of relatively vast unconventional reserves, such as oil sands or shale.

Because they could not accept that such factors could greatly change the outlook for global oil supply they had the timing way off, in the process leading to what I consider to be a temporary, rather than permanent defeat of the theory in the eyes of the public. The reason why I believe that it is a temporary defeat, is because we are still dealing with a finite resource, which at the moment we still have a growing appetite for, which makes dismissing this theory absurd.

As far as new discoveries are concerned, for the past four years in a row, it has been significantly under 5 billion barrels, meaning that less than 10 billion barrels of oil in place per year have been discovered. Current conventional crude oil production is about 27 billion barrels per year.

I think we may perhaps be reaching the point where given the prevailing average price of the past years of around $80/barrel, we are once again reaching the point of peak maximum potential conventional oil production, in the absence increasing recovery rates.

Unconventional cannot make up for potential conventional production losses.

https://seekingalpha.com/article/4187991-hubbert-curves-halfway-point-may-imminent-conventional-crude

Ed (3 mths ago)
IEA Chief warns of world oil shortages by 2020 as discoveries fall to record lows

LONDON—Global oil discoveries fell to a record low in 2016, the International Energy Agency says, raising fresh concerns about the potential for a petroleum-supply shortage as soon as 2020.

Don’t expect output from U.S. shale producers to fill the void, the IEA said. American shale production is expected to grow by 2.3 million barrels a day or more over the next five years, but that isn’t enough to make up for declining output elsewhere.

The IEA also doesn’t expect global oil demand to stop growing any time soon, potentially turning the current glut of oil into a dearth.

The Organization of the Petroleum Exporting Countries has also sounded the alarm over the potential for a looming supply gap in the long term. Saudi energy minister Khalid al-Falih told a London energy conference last year that “there will be a period of shortage of supply.”

Shale “is not enough by itself,” the IEA’s Mr. Birol said.

https://www.wsj.com/articles/iea-says-global-oil-discoveries-at-record-low-in-2016-1493244000

Ed (3 mths ago)
While the U.S. reached a new record of 11 million barrels of oil production per day last week, the top five shale oil fields also suffered the highest monthly decline rate ever.


This is bad news for the U.S. shale industry as it must produce more and more oil each month, to keep oil production from falling.

According to the newest EIA Drilling Productivity Report, the top five U.S. Shale Oil fields monthly oil decline rate is set to surpass a half million barrels per day in August.


Thus, the companies will have to produce at last 500,000 barrels of new oil next month just to keep production flat.

Here are the individual shale oil field charts from the EIA’s July Drilling Productivity Report:

https://srsroccoreport.com/top-u-s-shale-oil-fields-decline-rate-reaches-new-record-half-million-barrels-per-day/



https://d3hxt1wz4sk0za.cloudfront.net/wp-content/uploads/2018/07/US-Shale-Oil-Monthly-Decline-Rate-AUG-2018-768x563.png

Ed (3 mths ago)
In just the first seven months of 2018, the total monthly decline rate from these top shale fields increased by 26%. These massive decline rates are the very reason the shale oil and gas companies are struggling to make money.

A perfect example of this in play is PXD, Pioneer Resources. Pioneer is the largest shale oil producer in the Permian. According to Pioneer’s Q1 2018 Report:

Producing 260 thousand barrels oil equivalent per day (MBOEPD) in the Permian Basin, an increase of 9 MBOEPD, or 3%, compared to the fourth quarter of 2017; first quarter Permian Basin production was at the top end of Pioneer’s production guidance range of 252 MBOEPD to 260 MBOEPD; as previously announced, freezing temperatures in early January resulted in production losses of approximately 6 MBOEPD; Permian Basin oil production increased to 170 thousand barrels of oil per day (MBOPD); 63 horizontal wells were placed on production.

Pioneer spent $818 million on capital expenditures (CapEx) for additions to oil and gas properties (drilling and completion costs) during Q1 2018, brought on 63 horizontal wells, and only added 9,000 barrels per day of oil equivalent over the previous quarter.


So, how much Free Cash Flow did Pioneer make with oil prices at the highest level in almost four years??

Well, you’re not going to believe me… so here is Pioneer’s Cash Flow Statement below:


https://d3hxt1wz4sk0za.cloudfront.net/wp-content/uploads/2018/07/Pioneer-Resources-Cash-Flow-Statement-Q1-2018-768x567.png


https://d3hxt1wz4sk0za.cloudfront.net/wp-content/uploads/2018/07/Top-US-Shale-Companies-Q1-2018-Free-Cash-Flow-768x490.png

rrruriko (3 mths ago)
What is this implying (TEST)

Ed (3 mths ago)
It is indicating... that we have a big problem....

Ed (3 mths ago)
How an oil glut could swiftly turn to an oil shortage

Oil industry analysts and executives fear a looming global supply crunch is on the horizon, even as Texas and other parts of the nation keep churning out more oil than ever.

U.S. oil prices could spike from about $70 a barrel now to levels not seen since mid-2014 when oil hovered above $100, analysts say. That would be great for Houston’s oil-rich economy, but only until skyrocketing gasoline prices and supply disruptions spawned a global economic slowdown.


“It’s even more worrisome in a time like this when you have significant geopolitical risks coming from different spots in the world.” said Jamie Webster, senior director at Boston Consulting Group’s Center for Energy Impact in Washington.

Of particular concern is a shortage of global spare oil capacity, Webster said. Many oil-producing countries are on the decline, while others are pumping out almost as much as they possibly can. There’s little remaining margin to boost production if supplies dwindle.

The world’s three largest oil producers — Russia, the United States and Saudi Arabia — are all increasing their outputs this summer, which sent U.S. oil prices from a 45-month high of more than $74 a barrel in mid-July down below $70 per barrel this week. To keep prices low, the White House is even considering releasing more oil from the nation’s Strategic Petroleum Reserve, which happened last in the aftermath of Hurricane Harvey.

These moves, however, leave Russia and the Organization of the Petroleum Exporting Countries with little remaining quick-start oil supplies that can be churned out in an emergency at a time when there’s varying levels of instability and conflict in oil-producing countries like Venezuela, Libya, Nigeria, Iraq and Iran.


More https://www.houstonchronicle.com/business/article/How-an-oil-glut-could-swiftly-turn-to-an-oil-13092902.php

Ed (3 mths ago)
Risks are rising that oil prices will cause next recession

- The last five economic recessions all were preceded by a spike in crude oil prices.

- The recent rise in the price of oil has raised the likelihood of a recession, according to market forecasts.

- As Warren Buffett said back in July 2008, as the price of gas went above $4, "exploding" inflation was the biggest risk to the economy.

- But the boom in hydraulic fracturing means that the U.S. oil market has increasing ability to rebalance supply and demand.


“The case for $150 oil is based on the fact that major oil companies slowed capital spending devoted to the search for new sources of supply to their lowest point in a generation, mostly outside of the U.S., when crude oil moved as low as $30 in 2016, Bernstein analysts led by Neil Beveridge wrote. Companies like ExxonMobil and Chevron curtailed capital spending to protect their share prices with stock buybacks and dividends, the report said, and that means a shortage of new supply…

““If we do get oil prices of $100, $125 or $150, you reach a severe pain threshold, and not just for the U.S.” said Bernard Baumohl, chief economist of the Economic Outlook Group in Princeton, New Jersey. “There’s nothing vague or ambiguous about it. You reach a pain threshold in the triple digits, and there is a much higher probability of a global downturn. … It would be cataclysmic.’’”

https://www.cnbc.com/2018/07/13/risks-rising-that-oil-prices-will-cause-next-recession.html

Ed (56 days ago)
An American hypothesis


IS DONALD TRUMP THE FIRST ‘ECONOMIC REALIST’?

When the historians of the future get around to writing up our current era, one of the things likeliest to strike them will be the difference between what is actually happening and what most decision-makers think is happening. Historically, it is fascinating to speculate on how many of the worst decisions of governments have sprung from false interpretation and incorrect information.

From a contemporary perspective, what is evident now is an ever-widening chasm between conventional economic evaluation and the actual trend of events. Where conventional interpretation sees growing prosperity and contained financial risk, you don’t have to step very far outside the box to see a process of economic deterioration, elevated risk and, most seriously of all, a growing threat to the stability of currencies.

For regular readers, of course, this is familiar fare. We know that an economy hampered by a rising trend in the energy cost of energy (ECoE) is being subjected to an ultimately-futile process of denial based on credit and monetary adventurism.

Rather than revisiting this strategic theme, the aim here is to pose a theoretical question, and see where it leads.

Here is the question – what would a government do if it did recognise these realities, and came to understand that prosperity is already declining in the West, and may, before long, turn downwards in the emerging market (EM) economies, too?

It is beyond doubt that such a recognition would bring about drastic changes, both in assumptions and in policy. What follows is an examination of what those changes might be. It’s also safe to assume that these changes would be resented by those still wedded to the conventional, and that their mystification would lead rapidly to anger, suspicion and hostility.

It is suggested here that, if any government anywhere in the world is behaving in ways which are consistent with this pattern, it is the Trump administration. To what extent can Mr Trump be credited with – or, by some, accused of – acting on the basis of ‘new reality’?

More https://surplusenergyeconomics.wordpress.com/2018/08/24/133-an-american-hypothesis/

Ed (49 days ago)
Denmark swings to net oil importer after North Sea production decline

COPENHAGEN, Aug 30 (Reuters) - A 25-year period for Denmark as a net oil exporter is set to end this year following output declines in the North Sea, the country’s energy agency said on Thursday after slashing its long-term oil production forecast.

https://www.reuters.com/article/denmark-oil/denmark-swings-to-net-oil-importer-after-north-sea-production-decline-idUSL8N1VL1Y6


https://pdf.reuters.com/pdfnews/pdfnews.asp?i=43059c3bf0e37541&u=2018-08-30T092951Z_GFXEE8U0QDRLD_1_RTRGFXG_BASEIMAGE.PNG

Ed (49 days ago)
The emerging markets are already starting to blow up under the pressure of oil at current prices coupled with the stronger $.

“Irene Cheung, senior strategist for Asia at ANZ, said that rising oil prices will be more of a concern, particularly for countries with current account deficits. That will be a factor that will weigh heavily on emerging currencies, she told CNBC.

“More expensive oil leads to a higher import bill for countries which are net importers of oil. Higher oil prices also lead to a widening current account deficit — a measure of the flow of goods, services and investments in and out of the country.”

https://www.cnbc.com/2018/08/31/argentine-peso-and-turkish-lira-crash-pressuring-emerging-currencies.html

Ed (45 days ago)
The Next Financial Crisis Lurks Underground

Fueled by debt and years of easy credit, America’s energy boom is on shaky footing.

About 20 years ago, an entrepreneur named George Mitchell proved that it was possible to get lots of oil and gas out of parts of the earth long thought to be sucked dry, by injecting liquid at high pressure into a horizontal well below the surface. About 10 years ago, fracking — the common term for this process — began in earnest.

In that short amount of time, fracking in America has turned the energy world upside down. A decade and a half ago, Congress was hand-wringing about impending shortages of oil and natural gas. By the end of 2015, President Barack Obama lifted the ban against oil exports. Today, America is the world’s largest producer of natural gas and is an oil powerhouse, ready to eclipse both Saudi Arabia and Russia.

This has led to muscular claims about American energy wealth. Erik Norland, executive director of CME Group, a derivatives marketplace, calls fracking “one of the top five things reshaping geopolitics.”


Some of fracking’s biggest skeptics are on Wall Street. They argue that the industry’s financial foundation is unstable: Frackers haven’t proven that they can make money. “The industry has a very bad history of money going into it and never coming out,” says the hedge fund manager Jim Chanos, who founded one of the world’s largest short-selling hedge funds.

The 60 biggest exploration and production firms are not generating enough cash from their operations to cover their operating and capital expenses. In aggregate, from mid-2012 to mid-2017, they had negative free cash flow of $9 billion per quarter.

These companies have survived because, despite the skeptics, plenty of people on Wall Street are willing to keep feeding them capital and taking their fees. From 2001 to 2012, Chesapeake Energy, a pioneering fracking firm, sold $16.4 billion of stock and $15.5 billion of debt, and paid Wall Street more than $1.1 billion in fees, according to Thomson Reuters Deals Intelligence.

That’s what was public. In less obvious ways, Chesapeake raised at least another $30 billion by selling assets and doing Enron-esque deals in which the company got what were, in effect, loans repaid with future sales of natural gas.


But Chesapeake bled cash. From 2002 to the end of 2012, Chesapeake never managed to report positive free cash flow, before asset sales.

In early 2015, another famous hedge fund manager, David Einhorn, went public with his skepticism at an investment conference. He had looked at the financial statements of 16 publicly traded exploration and production companies and found that from 2006 to 2014, they had spent $80 billion more than they received from selling oil.

A key reason for the terrible financial results is that fracked oil wells show a steep decline rate: The amount of oil they produce in the second year is drastically smaller than the amount produced in the first year.

According to an economist at the Kansas City Federal Reserve, production in the average well in the Bakken — a key area for fracking shale in North Dakota — declines 69 percent in its first year and more than 85 percent in its first three years. A conventional well might decline by 10 percent a year. For fracking operations to keep growing, they need huge investments each year to offset the decline from the previous years’ wells.

Because the industry has such a voracious need for capital, and capital costs money, fracking could not have taken off so dramatically were it not for record low interest rates after the 2008 financial crisis. In other words, the Federal Reserve is responsible for the fracking boom.

Amir Azar, a fellow at the Columbia University Center on Global Energy Policy, calculated that the industry’s net debt in 2015 was $200 billion, a 300 percent increase from 2005. But interest expense increased at half the rate debt did because interest rates kept falling. Dr. Azar recently called the post-2008 era of super-low interest rates the “real catalyst of the shale revolution.”

More https://www.nytimes.com/2018/09/01/opinion/the-next-financial-crisis-lurks-underground.html

Ed (38 days ago)
Scotland’s oil and gas industry revival may be jeopardised by a slump in exploration to find fresh deposits which have hit a 50-year low, an industry report warns today. The recovery in production levels could be poised to fall away again in the coming years…

https://www.scotsman.com/news/politics/north-sea-at-crossroads-as-drilling-slumps-to-50-year-low-1-4797826

Ed (25 days ago)
Major Traders Are Talking About $100 Oil Again

Major trading houses predict crude-price spike later this year

https://www.bloomberg.com/news/articles/2018-09-24/major-traders-see-return-of-100-oil-due-to-u-s-iran-sanctions?srnd=premium-asia



According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

http://www.iea.org/textbase/npsum/high_oil04sum.pdf

Ed (24 days ago)
“Are we nearing another financial crisis? … the economic expansion is very mature, now about a decade old. Another downturn is only a matter of time. Global “synchronized growth” ended earlier this year, with emerging markets running into trouble. The U.S. is largely alone with robust GDP figures, and it is hard to believe that this rate of growth can be sustained with the expansion slowing elsewhere…

The icing on the cake could be high oil prices… The stage is set for a downturn in the next year or two.”

https://oilprice.com/Energy/Energy-General/What-Will-Trigger-The-Next-Oil-Price-Crash18362.html

Ed (24 days ago)
“The 73rd United Nations General Assembly opens on Tuesday in New York with world leaders bracing for the next global crisis – and the rest of us uncertain about what they would do if it comes.

“Don’t be fooled by the fact that U.S. markets hit record highs this past week, that global growth remains steady, or that the Trump administration in its first two years has escaped any crisis of the sort that came with the 9-11 terrorist attacks of 2001, the 2003 Iraq War or the Lehman Brothers meltdown of 2008.

“In my many years of taking the global pulse around UN week, where more than 120 leaders will gather, I’ve seldom seen or sensed such uneasiness and uncertainty. I’ve never known a time when the potential sources of volatility have been so widespread geographically.

“The debate, hence, has become less about the likelihood of a crisis and more about what form it might take, with what severity it will strike, and whether world leaders will have the capacity to contain it.”

https://www.cnbc.com/2018/09/21/a-new-global-crisis-is-brewing-as-un-general-assembly-meets.html

Ed (24 days ago)
“The global economy could face a “relapse” of the crisis that rocked the world a decade ago, the Bank of International Settlements (BIS) warned in its annual report on Sunday, stressing that there would not be enough “medicine” available to treat the problem this time, AFP reported.

““Things look rather fragile,” BIS chief economist Claudio Borio told reporters. “There is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse.””

http://www.atimes.com/article/bis-warns-global-economy-could-suffer-serious-relapse/

Ed (17 days ago)
The prospect of $100-a-barrel crude is once again on the table as members of the Organization of Petroleum Exporting Countries show little willingness to fill the supply gap left by U.S. sanctions on Iranian oil. For Asia’s worst-hit emerging markets this year -- the Philippines, Indonesia and India -- rising oil prices are a double whammy on top of weak currencies, worsening the outlook for inflation and the current-account gap.

Higher oil prices are an added threat. Of Southeast Asia’s main economies, the Philippines has the strongest correlation between oil and inflation at 0.84, according to calculations from Bloomberg Economics’ Tamara Henderson.

While inflation of 3.7 percent in August is below the central bank’s medium-term target of 4 percent, there are growing worries that a weaker rupee and elevated prices of oil, India’s biggest import item, could combine and drive it above that level in the coming months. The Reserve Bank of India expects oil averaging around $78 a barrel to stoke headline inflation by 30 basis points.

As a net fuel importer, higher oil prices would add another wrinkle to the policy plans of Indonesia. The government has already limited imports through a number of measures, including boosting the use of biofuels in order to reduce reliance on fuel from abroad.

https://www.bloomberg.com/news/articles/2018-09-30/for-emerging-asia-s-tightening-plans-oil-is-one-more-headache

Ed (17 days ago)
Emerging Markets Slammed By Soaring Oil Prices

With currencies across the developing world tumbling as a result of a toxic mix of global trade tensions, the strong dollar and rising U.S. interest rates, dollar-denominated crude has become all the more expensive. And while the price of Brent crude, the international oil price gauge, has risen by 22% this year in dollar terms, its cost has doubled if you’re buying in Turkish lira. It is up 39% in Indian rupees and 34% in Indonesian rupiah. And don't even mention Argentina.

https://www.zerohedge.com/news/2018-10-01/emerging-markets-slammed-soaring-oil-prices

Ed (17 days ago)
Oil heading to $100 & OPEC is ‘powerless to prevent it’ – analyst

Crude prices will likely reach $100 per barrel for the first time since 2014, and OPEC has no leverage to prevent such a scenario, an analyst has warned.

“Nobody wants to get caught short, full in the knowledge that more Iranian barrels are poised to be removed from the market,” Stephen Brennock, oil analyst at PVM Oil Associates, said in a research note published on Monday, as quoted by CNBC.

On Monday, Brent crude surged above $83 per barrel as Iran continues losing its crude exports ahead of US sanctions which come into force in November. “Against this backdrop of dwindling Iranian oil supplies, the focus will turn to meek levels of global, or more accurately, Saudi spare capacity,” Brennock said.

Saudi Arabia has been unable to offset the lost Iranian crude exports. And “this essentially leaves the world’s only swing producer powerless to prevent a supply shock and subsequent price spike in the final quarter of this year,” he added.

Iran could lose up to 1.5 million barrels per day when US sanctions kick in early November. In May, Iran sold 2.71 million bpd abroad, nearly three percent of daily global oil consumption.

The US is rapidly increasing its production. In September, it hit a record 11.1 million bpd, according to data from the Energy Information Administration (EIA). That is an increase of almost a third since 2016. However, the increase in US production is not enough to offset the loss of Iranian output.

https://www.rt.com/business/440068-oil-opec-iran-sanctions/

Ed (15 days ago)
“Philippine annual inflation rate likely continued to climb in September, keeping the pressure on the central bank to raise interest rates further to prevent consumer prices from spiralling out of control.

The consumer price index in September was seen to have risen by 6.8 per cent, a Reuters poll of 12 economists showed, faster than the 6.4 per cent increase reported in August, due to rising global oil prices…”

https://www.businesstimes.com.sg/government-economy/philippine-inflation-seen-moving-closer-to-7-in-september-poll

Ed (15 days ago)
Inflation and ‘Arab Spring’

The reason people read the Miles Franklin newsletters – for FREE, no less – is because unlike the MSM, we tell the unvarnished TRUTH.

And no place is the PROPAGANDA as thick as when TPTB attempted to hide the root causes of civil unrest; as we are seeing in Egypt, Turkey, Argentina, Brazil, and Portugal – let alone, the seething boil in places like India, Japan, Greece, and Cyprus.

In my view, the root cause is INFLATION; as never in history has the fatally-flawed fiat currency monetary system been utilized worldwide. The so-called “Arab Spring” – for example – is actually a GLOBAL phenomenon; i.e., an inflationary cancer spreading from those most vulnerable to those most “immune” – inevitably, claiming ALL of its victims.

Think about it; and consider what “seers” like “GERALD CELENTE, PATRIOT” have forecast for years. Starting with 2011’s “Arab Spring,” we have seen the ill-effects of accelerating inflation spread like a PLAGUE. From “MENA’s” like Tunisia, Algeria, and Egypt; to the “PIIGS”; to Argentina, Brazil, India, Turkey, Cyprus and Japan – MASSIVE economic, political, and social uprisings have begun.

In my view, we have reached the LOW POINT of global stability of our lifetimes; with the potential of going from bad to worse at any moment …

Moreover, the issue is not entirely about food; but instead, a composite of ALL of life’s necessities.

Outside of food, NOTHING stokes global inflationary pressures more than crude oil prices – and now that they are BREAKING OUT, be prepared for the potential for RECORD GASOLINE PRICES…


https://www.milesfranklin.com/inflation-and-arab-spring/

Ed (15 days ago)
“The International Monetary Fund (IMF) has called for further monetary tightening by Tunisia to tackle the North African country’s record levels of inflation. Tunisia’s inflation rate stabilized at 7.5 percent in August, unchanged from July, after hitting 7.8 percent in June.”

https://uk.reuters.com/article/us-tunisia-economy-imf/imf-calls-for-further-tunisian-interest-rate-rise-to-curb-inflation-idUKKCN1MC1AW

Ed (9 days ago)
Oil prices are ‘entering the red zone,’ warns International Energy Agency chief

That warning comes from Fatih Birol, executive director of the International Energy Agency, in an interview with Bloomberg.

He added that expensive energy “is back at a bad time, when the global economy is losing momentum. We really need more oil.”

https://www.marketwatch.com/story/oil-prices-are-entering-the-red-zone-warns-international-energy-agency-chief-2018-10-09


Actually.... we need more cheap to produce oil....


HIGH PRICED OIL DESTROYS GROWTH

According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

http://www.iea.org/textbase/npsum/high_oil04sum.pdf


OIL PRODUCERS NEED $100+ OIL

Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

Ed (8 days ago)
HSBC: Brace for the oil, food and financial crash of 2018

80% of the world’s oil has peaked, and the resulting oil crunch will flatten the economy

https://medium.com/insurge-intelligence/brace-for-the-financial-crash-of-2018-b2f81f85686b#.z9uwvj2gd


Hmmmmm.........


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