Friday, January 13, 2012

Downside Risk in Global Oil Markets -- How Likely?

Recent articles on The Oil Drum and Financial Times are warning of the risk for an oil price decline within the next several months. Veteran energy blogger Brian Westenhaus and even one of our own energy analysts have also warned of the possibility for a near-term downward trend in oil pricing. Here's more: forecast is that the crude oil price will fall dramatically during the first half of 2012, possibly as low as $45 to $55 per barrel...As the price collapses we will see producer nations generally and OPEC in particular once again going into panic mode, and genuinely cutting production. _More from Chris Cook in The Oil Drum
Here is a Financial Times blogpost looking at the effect of a downward plunge in global oil prices on oil producers that are dependent upon energy exports to finance national budgets:
A drop in oil prices from the current level of around $113 a barrel to, say, below $85 (Brent pricing) would likely shift policy-making in these countries in more unpredictable directions, both positive and negative, as governments would be forced to turn to other sources of revenue.

Markets are shifting their focus from this year’s decline in OPEC production due to the Libyan conflict – to increases in output as Libya comes back on stream and Iraqi production grows in 2012.

Countries including Russia, Nigeria, Venezuela, and most importantly, Saudi Arabia, have recently ratcheted up the oil price assumptions that are used in national budgets. The shift toward higher assumptions has been driven by recent high prices, but more importantly, by growing spending needs.
_Eurasia Group in Financial Post
If these higher-price assumptions prove faulty, Russia, Venezuela and Iran in particular will be hard-pressed to provide enough social spending to contain popular and political discontent.

Meanwhile, the shale oil & gas revolution is spreading to China, and will soon be pushing up production in a wide array of locations on multiple continents. Such a runup in hydrocarbon production in nations that are traditionally seen as consumers rather than producers, will shift the global energy picture noticeably -- and alarmingly, for many energy exporters who are playing it too close to the edge in terms of spending.

Trends in coal to liquids (CTL) and how CTL will help reduce demand for crude oil

Significant risk of economic downturn in China, reducing global demand for commodities including crude oil.

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Blogger Hell_Is_Like_Newark said...

Cook maybe right:

The price of oil is being propped up in part not due to demand from the end user, but from fiat money being exchanged for commodities such as oil.

We could see a repeat of 2008 where oil price plummeted. The trigger, if it happens IMO will be the strengthening of the US dollar. Oil will be dumped suddenly on the market as oil is turned back into $$$.

Based on the research I am doing, Oil prices need to be above $60 per bbl to justify the expansion of GTL. And above $40 for GTL to provide positive cash flow.

Hopefully the price won't drop too much as it would pull the rug out of the new sources of energy that have come on the market in the past 5 years. That would just set us up for another price spike a few years down the road.

7:50 AM  
Blogger al fin said...

Good point. A lot of institutional investors seem to be treating oil as a store of value, like gold, rather than as a commodity. They could be in for a big surprise.

As you say, if the oil price drops below about $50 or $60 a barrel and stays there more than a week or so, a lot of unconventional energy projects may be put on hold, at least temporarily.

I suspect that will not happen. Of course, I confess that I did not expect oil to drop quite so low as it did in early 2009, either.

11:19 AM  
Blogger Hell_Is_Like_Newark said...

I actually got to talk to an engineer at Velocys (found out about them via your blogs).

They have sold some of their Micro Channel GTL systems, but none are in operation until April or May of this year. Petrobas, the Brazilian oil company is hosting a demonstration unit with the help of a Japanese firm (think it was Toyo.

Based on the numbers I got from Velocys, at present gas prices ($3 per million BTU) their system will produce liquids at a barrel of oil equivalent price of $36. This includes operating expenses. So at $50+ per BBL of light sweat crude, you would have a decent margin per bbl of liquids produced.

Of course, their tech may have unforeseen problems.. but a pilot plant will uncover those issues soon enough. I am going to keep an eye on them.

12:22 PM  
Blogger Whirlwind22 said...

Yeah but wasn't peak oil suposed to happen in 2005? How will this happen if the Iran situation escalates into open military confrontation.

6:03 PM  
Blogger Hell_Is_Like_Newark said...

Iran tried to shut down the Persian Gulf before. The military confrontation was referred to as 'Operation Praying Mantis'. Iran lost a good chunk of their naval force. Iran backed off and the oil continued to flow.

6:25 PM  
Blogger Benjamin Cole said...

Interesting post.

In general, throughout, history, commodities become cheaper, as man gets better at developing and using commodities.

The world is awash in capital now, looking for a home---and speculation has been pushing up commodities, seen as a store of value.

Can't say when but we may see a huge collapse in some commodities prices.

8:04 PM  
Blogger Benjamin Cole said...

Commodities get cheaper over time, as man gets better at developing and using.

Right now, a lot of capital worldwide is looking for a home, and speculating in commodities.

We could see a big dump.

8:08 PM  

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