Wednesday, April 04, 2012

I Will Gladly Pay You in 2018 Prices for My Oil Shipment Today

The 2018 futures price for Brent crude is $30 less than the 2012 front month contract. This has triggered some conversation in regard to the concept of whether near to intermediate term oil shortages -- peak oil -- is still being taken seriously by markets.

"Peak oil is over for sure," said Olivier Jakob, managing director at Swiss Consultancy, Petromatrix. "In 2008, everything was 'peak oil' all over the place, but now it's not really a theme any more."

Analysts say that while prices for oil well into the future don't always predict where they will actually end up, in part because economic conditions can change, this wide disparity between current and futures prices is unusual and gives an indication of current market thinking. The price for a May contract of Brent crude is now $30.63 a barrel above that of a contract for delivery in December 2018.

To be sure, the gap could narrow if oil prices pull back or if the consensus shifts to expect a faster increase in demand for oil that would compensate for some of the additional supply. Still, the marked diversion in prices marks a flip in the relation between the two contracts from just two years ago.

"So much has been done in terms of shale development that everyone recognizes it's going to be a bit longer before we get to the peak-oil dilemma," Mr. Jakob said.

In the U.S., oil production is likely to increase by a fifth over the next 10 years, largely because of the development of shale oil fields and offshore drilling in the Gulf of Mexico, according to estimates from the U.S. Energy Information Agency, an arm of the U.S. government. _WSJ
One has to assume that the 2018 prices are adjusted to 2012 dollars. Otherwise, the accelerating debasement of the US dollar will make that 2018 price much lower than it appears.

The take-home message would seem to be that markets anticipate a global economic slowdown and demand destruction between now and 2018.

Interestingly, the Russian government is predicting much nearer term drops in the price of oil:
The price for Urals oil set a record at $122.6 per barrel in March showing growth of 14.3% comparing to the same period in 2011. But they expected to drop to $102 by the end of the year as producers such as Saudi Arabia boost supply.

“There’s also a possibility that Iraq resumes supplies or shelf oil would enter the market, it would limit oil price growth,” according to Nabiullina.

Meanwhile the authorities confirmed its forecast for oil prices in 2013 and 2012 at $97 and $101 per barrel respectively. _RT
Of course much depends upon whether Russia continues to ramp up international tensions in Iran and elsewhere in MENA. Russian oil production will also affect global markets, as will Russian market plays on commodities exchanges.

Regardless, it is clear that both Canada and the US are ramping up oil production as well as gas production. Gas production is significant in this regard, as multiple ways of substituting cheaper gas for more expensive oil are being perfected. The same will eventually be true for coal, as soon as the energy starvationists and carbon hysterics can be ejected from control of the governments of western coal producers.

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Blogger Whirlwind22 said...

Wonder how bad the gas price spike will be this summer? With all of the international tension and the East Coast refineries shutting down. And Saudi Arabia not being able to produce more crude from their peak of 2008 or something.

7:46 AM  
Blogger Cal Abel said...

There are other factors that can lead to depressed prices even with fixed supply of petroleum in the ground. The main is the ability of the economy to be able to support the price of a barrel of oil. I think the disparity in the futures contracts has more to do with the optimism/pessimism of the traders of the future of the economy.

Take a look at the rate of production increase in oil for a given price today and 15-years ago. You will find that the rate of increase in production todays is lower for a given price than 15-years ago. The question is what sort of physical process can cause such a dynamic?

The idea of peak oil is not a question of if, but rather when. The timescale of replenishing depleted oil reserves is much longer than the economic horizon. This relationship will result in a transient equilibrium based off of the functional relationship between ground oil production, extraction, and discovery.

The functional relationships that you are using are giving you inaccurate data. Here is a simple test. Can your model predict the transient equilibrium? If it can then it is not completely worthless if it can't throw it out and hit the books again, because your model will only work in a world of fairies and unicorns (Germany).

Take a look at simple conservation laws, a basic time dependent mass balance should be adequate. If you are looking to incorporate price, then it gets more complex.

8:24 AM  
Blogger al fin said...

WW22: When commenting here, please use the term "gasoline" when referring to the common liquid fuel. On this blog, "gas" refers to something in the gaseous state, usually natural gas.

Cal: Yes, I revised the article -- probably after you read it -- discussing the very real possibility of intermediate term market pessimism.

"The idea of peak oil is not a question of if, but rather when . . ."

You might call that a truism, which is not much on which to hang one's hat, in any practical sense. It is a matter of timing, and for the past 160 years or so, the timing of peak oil doomers has been consistently premature.

It is indeed very difficult to foresee oil prices in the future, particularly with the primary global currency in full debasement mode, and with so many political leaders closely tied to faux environmental dogmas of energy starvation and carbon hysteria, politically.

National oil companies in most third world oil dictatorships tend to mismanage oil fields, neglect oilfield maintenance, and are slow to adopt technologies that would allow them to boost production. Even Russia falls into that category. Fortunately, Saudi Arabia has been willing to pay outside experts so far, without trying to rip them off too badly, like all the rest.

Doomers think they know more than they actually know about the state of proved reserves and reserves soon to be proved in the near to intermediate future. If they bet on their delusional beliefs, they tend to lose.

Most of the shortages and price hikes that spur doomers on to exalted circle jerking have to do with political factors and the normal cyclical activity of markets than with any mystical "state of oil reserve depletion."

12:17 PM  

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