Oil Warning: The Crash Could Be the Worst in More Than 45 Years
There's only one thing holding back a price rebound. It's a big thing.
Morgan Stanley has been pretty pessimistic about oil prices in 2015, drawing comparisons with the some of the worst oil slumps of the past three decades. The current downturn could even rival the iconic price crash of 1986, analysts had warned—but definitely no worse.
This week, a revision: It could be much worse.
Because? You guessed it: Supply.
http://www.bloomberg.com/news/articles/2015-07-23/oil-warning-crash-could-be-worst-in-more-than-45-years
i know a couple people here at the asif came from the oil drum after it closed its virtual doors. i used to lurk there on occasion. i'd love to hear their opinion on this, since their speculations are probably far more accurate than mine.
Well willi and I were on TOD back in 2005 so I guess you mean us. Besides TOD I have hung around the Peakoil.com website since that time frame also, as well as some actual oil business experience and many friends and family who are still in the business. I have some depth but would not consider myself a 'real' expert on all aspects of the oil business.
To get the one thing clear which always pops up when TOD or Peak Oil is mentioned. By the generally accepted definition of peak oil, as was used by most commentors on TOD, Peak Oil was correctly predicted and
did happen. Nothing which is occurring in the production and supply of oil today negates that point. While traditional oil production did peak there was never going to be this great crash which many glommed onto - there are always crashistas like there were about peak oil just as there are about sea ice, methane, etc. The folks who really understood the business knew about non-conventional supplies and the techniques which could be used to get at those supplies. This huge ramp up of non-conventional production is what has generated the situation we have today. That plus a host of geo-political situations which have impacted which countries are able to produce - think Libya, Iraq, Iran, etc.
To the gist of the article about prices going very low and staying down for some time. I have actually posted here about that very issue a number of times. The big surge in non-conventional production which has pushed the Canadian and the US production numbers so high was always a very fragile situation as it is very expensive oil to produce. If we had not had the peaking of conventional production and the surge in demand which drove prices so high much of this non-conventional production would have not happened. There would have been no profit in it. But prices did go high and free money became available due to central bank responses to the great financial crisis. So off we went. The result was a huge ramp up in production. But unbeknownst to most was that much of this non-conventional production was never profitable in a traditional sense. With current prices almost none of it is making a profit. The way most of the fracking companies made money in this game was stock fluffing. Hit a well and trumpet new reserves and the stock jumps. All the insiders sell a bunch of stock and make millions. They know that cash flow is not covering costs and that depletion rates are horrible. But this game can be played forever as long as prices are high enough and loans are essentially free.
But we finally reach the point that supply is just too far over demand and prices start down. The Saudi's decided that they have had enough with carrying everyone and contrary to expectation and US political pressure they decide to stop acting like patsies and more like John D. Rockefeller - they go all capitalist on us the bastards. They don't cut production - but ramp it up even higher. Run the high cost producers out of business - that being all the fracking companies and the tar sands producers. All it takes is time to wait out the hedged production contracts and wait for borrowing costs to rise. Loan rates will shoot up and limits will be lowered by the banks since the low crude prices result in much lower valuations for those reserves which were generating all the stock windfalls. These valuations are set 2 times a year - next in Oct I believe. Come Oct if prices are still where they are now or quite a bit lower many loans will be cut off and another large percentage of the fracking companies will go bankrupt. The blood will continue to flow for at least a year or more still. Maybe longer depending on overseas developments.
Should Iran actually get the sanctions lifted and be able to produce and sell significant amounts of their oil on the market they can produce at least as much as the frackers were. I am pretty sure that a significant percentage of the high resistance to the Iran deal from the Republicans in the US is more related to Iran ramping up production than the nuclear issue. Many of these folks are bought and sold by the fossil fuel industry and they do not want Iran being able to add oil to the markets as it guarantees many of the US firms will go broke and employment in their states will suffer.
The frackers who are still in business will produce as much as they can to get the maximum cash flow as cash flow keeps their heads above water. But the tide is running against them and if the current situation of a global surplus can be maintained they will all eventually die.
Eventually enough expensive production will disappear that prices will once again start rising. And one could expect them to go pretty high eventually. I would expect that to happen when the global economy builds following the current downturn which is gathering steam right now. It could easily be years before that happens and prices could easily go much lower than they are. But there is no guarantee as global events can always change those dynamics. Israel could attack the Iranians, Iraqi production could by hit by a negative turn in the situation there, Saudi could find itself dealing with its own internal issues, and so on. It is very complicated stuff and it is always pretty clear what just happened when one looks back but if one can lock down general trends going forward they are doing pretty good.
All a kind of side show even if it is very interesting, since if we were doing it right we would not be doing any more exploration for any fossil fuels as we know where more of the damn stuff is than we ever dare burn. And we would be shutting down the use of fossil fuels so fast that there would, for the duration, be way more available than we would allow demand to be. No more burning coal, get rid of cars, all that stuff we will not be willing to do for a few decades more. Because we're just stupid as a general rule.
