In the past, I documented the overstatements by both the IEA and EIA in 2014 & 2015 in terms of supply, inventory, and understatements of demand. Others also noticed these distortions and, whether intentional or not, they exist and they are very large in dollar terms. These distortions, which are affecting price through media hype and/or direct/indirect price manipulation, are quite possibly the largest in financial history.
What OPEC countries fear most is a follow-up technological revolution that will lead to a second oil boom in the U.S., and that fear is now being realized.
A technological revolution spurred the U.S. oil boom that resulted in the greatest increase in domestic oil production in a century. While that has stuttered in the face of a major oil price slump and an OPEC campaign to maintain a grip on market share, the American response could be another technological revolution that demonstrates that the first one was merely an impressive embryonic experiment.
Monday’s 8% WTI crude decline is setting up a big opportunity for buyers. In addition, there could be more to come. However, this is driven by momentum, not by the fundamental conditions in the physical market.
To the point:
Demand is heading towards record levels both internationally and in the U.S.
The Greek issue is not new and it has not changed. It is just popular now as deadlines are pushed. It will fade and its drag on oil prices will ease.
In recent years, the sharp increase in oil prices that began in 2001 and the two sharp declines that followed in 2008, due to the subprime mortgage crisis, and at the end of 2014–early 2015 have renewed interest in the effects of oil prices on the macro economy. Most recently, the price of oil has more than halved in a period of less than 5 months since September 2014. After nearly 5 years of stability, the price of a barrel of Brent crude oil in Europe fell from over $100 per barrel in September 2014, to below $46 per barrel in January 2015.
In the latest weekly production data from the EIA, on the back of recent March revisions, the U.S. managed to post a 76,000 barrel per day increase in the lower 48. Production from Alaska fell by 61,000 barrels per day, putting overall U.S. output 15,000 barrels per day higher for the week ending June 12 compared to the previous week.
Discussions about a possible Grexit, from the euro or even the EU, have rarely been off the EU’s agenda over the past five years. As Greece and its creditors negotiate yet another deal, it seems unlikely that the latest round of crisis avoidance will provide a long-term solution either.
As stated previously, asset monetization by small E&P operators will start in earnest in the second half of this year out of cash flow necessity. Most, if not all, smaller market capitalization companies, public or private, are still free cash flow negative (operating cash flow less capital expenditure) and only a few of the larger ones are now, or will be, based on guidance.
They call it an oil glut for a reason.
There is too much oil in the system today. The U.S. fracking revolution has added four million barrels of oil to the global supply per day. However, that is just the U.S., and that is just since 2009. Since 1996, it is gone up about 15 million worldwide.
As the world economy has slowed, oil production has ramped up. How could that not end badly?
The fallout of the collapse in oil prices has many side effects apart from the decline of rig counts and oil flows.
Oil production in North Dakota has exploded over the last five years, from negligible levels before 2010 to well over a million barrels per day, making North Dakota the second largest oil producing state in the country.
The financial pages of Canadian newspapers have been full of headlines lately announcing the potential of two large shale oil fields in the Northwest Territories said to contain enough oil to rival the Bakken Formation of North Dakota and Montana.
