I remember making a thread here many years ago about 5 dollar per gallon gasoline, which in hindsight is a bit silly. Crude benchmarks never reached that level from 2008 again, and at that time, US production was starting its ramp up which would famously become known as the shale revolution. Higher cost producers in the USA were able to extract far more product from oilwells. Where did they get the money to expand Exploration and Prouction? Simple, the low interest rate environment vis a vis ZIRP ( zero interest rate policy).
Now comes the inevitable question on everyone's mind: will gas prices remain at these levels? the $30-$40 barrel benchmarks seem unsustainable. But backed by weakened foreign currency compared to the dollar, slowing economies like china...oil looks to remain below 100 for some time. The problem is supply, and there is too much of it - to the tune of 1.2 mbpd in excess when compared to a worldwide consumption of roughly 94.8 mbpd in 2016. We won't see 5 dollar gas for a long time. But, don't get used to sub $2.00 gas either. Here is why:
(1) Company capital expenditures are getting slashed, and highly leveraged E&P companies are going to go bankrupt. Baker Hughes reports the number of oil rigs in the USA, and we stood at something like 1100 rigs in 2014, and are down to ~400 now. Interestingly enough, production has not fallen as much as one would expect - from 9.6 mbpd to 9.1 mbpd. (million barrels per day). What does this mean? The US producers are resilient folk. They won't go quietly into the night. However, many companies *have* provided guidance for 2016 where exploration and production expenditures will be less. The take away is that domestic production will decline...probably faster than the EIA (Energy Information Administration) forecasts. Domestic companies are staying afloat this year thanks to hedging some production and minimizing downside, but most won't achieve break even cash flow with 60 dollar oil.
(2) These prices are unsustainable for Russia and all members of OPEC. Unlike our the US, members of OPEC must balance budgets using oil revenues. Russia's economy is inexorably tied to oil as well. These proceeds fund social programs in these countries, and any cutbacks in these programs will cause civil unrest. Saudi Arabia has had to cut into their financial reserves, and (while wealthy), will run out of money in due time. You can smell their desperation when they want to launch an IPO for the worlds largest Integrated oil company, Saudi Aramco ( 10 times the size of exxon mobil) in order to raise cash. But their problems pale to OPEC member Venezuala who are undergoing massive budget shortfalls, and 250%+ inflation. That country is sadly on the verge of collapse.
Suadi Arabia plays the oil game very well. They are the low cost producer so they can ramp up or cut production to control costs. Look in 2008 when oil prices crashed after the recession. OPEC agreed to a production cut, and prices stabilized thereafter. So why don't they do it again? The answer is simple- the USA is now a significant producer. Since 2008, we have roughly doubled our production thanks to the shale revolution. The Saudi's are flooding the market to put us out of business, and retain their market share. However, I don't think their plan worked out as quickly as they wanted since we are still producing at a high clip. However, at these levels, production declines are inevitable. Also Saudi Arabia does not want to lose market share to their sworn enemies who just had their sanctions lifted...the Iranians. Iran wants to come online and reclaim about 0.5 mbpd more than their current production.
Where are we at now: No one wants to cut production. Poorer participants *can't* cut production since they have financial obligations to meet. If Saudi Cuts, than someone like the US or worse yet Iran might grab market share. So on the 20th of this month and the 1st of April (Oil Fools day) , OPEC and non OPEC members are meeting to discuss a potential "freeze" of production. At best, everyone wants to sign up for a production freeze...but I suspect OPEC and non OPEC members will cheat on their quotas, or simply not agree much as Kuwait has.
Will we have low gas prices forever? No. What people forget is that our entire economy's lifeblood is oil. Consider some simple facts. First, we are consuming more oil than ever before. Even with China's slowdown last year, demand increased last year something like 2.5-3%. Next, the supply side of the equation is roughly 1% more than demand, which are narrower margins than we saw in the 80s when we had persistent low oil prices. Consider that hundreds of billions of capex have been cut for finding and getting new oil, any shocks to the supply side of the equation will cause rapid increases of oil prices. large companies can't just make a huge well appear from thin air and make up for lost production should supply become the limiting constraint of the equation.
So enjoy the low gas prices while they are here. I'll leave you with one last thought. Larger cars are being purchased again as if the nightmare of 2008 never happened. Gasoline demand is increasing and was roughly 9.4 mbpd last week when compared to the peak last summer of roughly 9.6 mbpd. In fact, it will be very likely that our gasoline demand will far exceed the amount during any year in the past 10 years. Now, gasoline demand isn't the entire picture, but couple one unknown into financial forecasts ( faster than expected demand growth as we have seen), and faster than expected production declines...and things could get interesting.
My prediction is that oil stays in the 30-40 dollar range for a bit in 2016 We might hit 60$ oil by the end of the year. Where we go after that depends on so much, I won't bother to try reading into a crystal ball. I think driving this summer will be cheap! Hoorah!
I hope you all enjoyed the 5 year anniversary of the 5 dollar gas thread. Lets get a discussion going!
Now comes the inevitable question on everyone's mind: will gas prices remain at these levels? the $30-$40 barrel benchmarks seem unsustainable. But backed by weakened foreign currency compared to the dollar, slowing economies like china...oil looks to remain below 100 for some time. The problem is supply, and there is too much of it - to the tune of 1.2 mbpd in excess when compared to a worldwide consumption of roughly 94.8 mbpd in 2016. We won't see 5 dollar gas for a long time. But, don't get used to sub $2.00 gas either. Here is why:
(1) Company capital expenditures are getting slashed, and highly leveraged E&P companies are going to go bankrupt. Baker Hughes reports the number of oil rigs in the USA, and we stood at something like 1100 rigs in 2014, and are down to ~400 now. Interestingly enough, production has not fallen as much as one would expect - from 9.6 mbpd to 9.1 mbpd. (million barrels per day). What does this mean? The US producers are resilient folk. They won't go quietly into the night. However, many companies *have* provided guidance for 2016 where exploration and production expenditures will be less. The take away is that domestic production will decline...probably faster than the EIA (Energy Information Administration) forecasts. Domestic companies are staying afloat this year thanks to hedging some production and minimizing downside, but most won't achieve break even cash flow with 60 dollar oil.
(2) These prices are unsustainable for Russia and all members of OPEC. Unlike our the US, members of OPEC must balance budgets using oil revenues. Russia's economy is inexorably tied to oil as well. These proceeds fund social programs in these countries, and any cutbacks in these programs will cause civil unrest. Saudi Arabia has had to cut into their financial reserves, and (while wealthy), will run out of money in due time. You can smell their desperation when they want to launch an IPO for the worlds largest Integrated oil company, Saudi Aramco ( 10 times the size of exxon mobil) in order to raise cash. But their problems pale to OPEC member Venezuala who are undergoing massive budget shortfalls, and 250%+ inflation. That country is sadly on the verge of collapse.
Suadi Arabia plays the oil game very well. They are the low cost producer so they can ramp up or cut production to control costs. Look in 2008 when oil prices crashed after the recession. OPEC agreed to a production cut, and prices stabilized thereafter. So why don't they do it again? The answer is simple- the USA is now a significant producer. Since 2008, we have roughly doubled our production thanks to the shale revolution. The Saudi's are flooding the market to put us out of business, and retain their market share. However, I don't think their plan worked out as quickly as they wanted since we are still producing at a high clip. However, at these levels, production declines are inevitable. Also Saudi Arabia does not want to lose market share to their sworn enemies who just had their sanctions lifted...the Iranians. Iran wants to come online and reclaim about 0.5 mbpd more than their current production.
Where are we at now: No one wants to cut production. Poorer participants *can't* cut production since they have financial obligations to meet. If Saudi Cuts, than someone like the US or worse yet Iran might grab market share. So on the 20th of this month and the 1st of April (Oil Fools day) , OPEC and non OPEC members are meeting to discuss a potential "freeze" of production. At best, everyone wants to sign up for a production freeze...but I suspect OPEC and non OPEC members will cheat on their quotas, or simply not agree much as Kuwait has.
Will we have low gas prices forever? No. What people forget is that our entire economy's lifeblood is oil. Consider some simple facts. First, we are consuming more oil than ever before. Even with China's slowdown last year, demand increased last year something like 2.5-3%. Next, the supply side of the equation is roughly 1% more than demand, which are narrower margins than we saw in the 80s when we had persistent low oil prices. Consider that hundreds of billions of capex have been cut for finding and getting new oil, any shocks to the supply side of the equation will cause rapid increases of oil prices. large companies can't just make a huge well appear from thin air and make up for lost production should supply become the limiting constraint of the equation.
So enjoy the low gas prices while they are here. I'll leave you with one last thought. Larger cars are being purchased again as if the nightmare of 2008 never happened. Gasoline demand is increasing and was roughly 9.4 mbpd last week when compared to the peak last summer of roughly 9.6 mbpd. In fact, it will be very likely that our gasoline demand will far exceed the amount during any year in the past 10 years. Now, gasoline demand isn't the entire picture, but couple one unknown into financial forecasts ( faster than expected demand growth as we have seen), and faster than expected production declines...and things could get interesting.
My prediction is that oil stays in the 30-40 dollar range for a bit in 2016 We might hit 60$ oil by the end of the year. Where we go after that depends on so much, I won't bother to try reading into a crystal ball. I think driving this summer will be cheap! Hoorah!
I hope you all enjoyed the 5 year anniversary of the 5 dollar gas thread. Lets get a discussion going!
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