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Saudi Arabia Would Be Fine With It If Everyone Decided To Keep ‘Cooperating’ To Drive Up Oil Prices Past 2018
On Friday, the IEA made me talk about the self-defeating dynamic gripping the global crude market again.
In their latest report, the IEA predicted that U.S. crude supply is set to push past 10 mb/d, overtaking Saudi Arabia and rivaling Russia. That is of course attributable to the OPEC+ production cuts which have helped drive up prices, thus coaxing out more U.S. supply.
That U.S. supply will (eventually) cap prices and when they start to fall again, the X-factor will be wide-open capital ma
This analysis of the oil dynamics current in play is too simplistic. The US oil price is being drug higher by Brent Crude. And, the U.S. is still a large (almost 50%) net importer of oil. The changing world price of money is going to continue to normalize the price of oil, which was sent down in dollar terms precisely when the ECB and BOJ began massive negative interest rate experiments in 2014. Now that the massive accommodation event is just about over, you will see what comes around comes around, coincidentally in 3Q’18.
Historically, oil trades at 12.5 barrels per ounce of gold in a normalized rate environment, We have a ways to go before interest rates and oil return to normal, but we are now on that path, thanks to the US Tax Reform Bill.
You can expect Europe to now push down on the fiscal policy accelerator, following the US lead, which will keep world demand for oil growing. As they do, the low volatility environment that has been witnessed in a a central bank capital controlled world will be in the dustbin of history. The US shale drillers are just keeping supply available, while they still have cheap access to some capital (it is much lower now) to make up for all the losses they incurred over the past almost 3 years. However, there isn’t enough oil left in U.S. fields to change reality for more than the short-term in a world where the Central Bank training wheels have been removed. The well life cycle is just too short, forcing an ever greater amount of capital to keep production levels from falling off a cliff. If money is free, this equation works. If the cost of capital is 20%, normal for E&P, then the production quickly begins to recede to 4.5 M bbl/day, which it was at in 2008, not the over 9M mark it is at today. I track the performance of shale oil wells, they are not what the media portrays. The production numbers will eventually correct as the cost of money rises.
when it comes to that “too simplistic” comment, I would refer you to my original post on the IEA report… here’s a fun quote:
“And it’s hilarious because oil market watchers have been telling me for the better part of a year how my assessment of this has evolved to become too simplistic (I used to write more in depth posts on oil). While that might be true, what I would say is that month after month it’s the same story. This dynamic never changes.
Until it does, I’m going to keep pushing the same narrative because there’s a certain elegance in simplicity and there’s nothing that illustrates futility more than a guy walking up the down escalator.”
I follow Berman. All here are saying mostly similar things.
Cost of capital, corp. incentives, Saudi.
…
But… they all talk too much and embellish, which just obfuscates.
There’s no professor to impress.
A few bullet points would suffice.
Precisely..Art Berman agrees with this analysis. The whole shale oil experiment is going to continue with huge depletion rates and higher costs..not exactly a formula for steady supply. Fiscal stimulus is next on the plate and, by definition, will increase demand. It will be interesting to see what the effects of higher gas prices have running head on against an economy already a patchwork of stickum and band-aids…stagflation here we come.
What “US Tax Reform Bill.”? All I saw was a bunch of sycophants throwing money at their owners.
What about the “stranded asset” syndrome? Now that everyone knows that the price of oil can go down, if the price is high today you want to bring your oil to market. Otherwise, you may get stuck with oil in the ground when the price drops. Maybe it will get cheaper to dig up that oil later with better technology, but if I were investing in these things I would want the CEO to dig it up now while the market is still ‘good’. So investors should want to incentivize the CEOs to dig it up faster.