[Graeme]

ANALYST: Oil Is In A Bubble That 'Will Burst Eventually And The Question Is Not If, But When'

Oppenheimer oil analyst Fadel Gheit believes oil prices are in a bubble.

Gheit says 20-30% of the current oil price reflects a “supply risk premium” that will disappear when Iran’s nuclear issue is finally resolved.

“We believe the current oil price bubble will burst eventually and the question is not if, but when and to what level,” writes Gheit in a note to clients. “Oil prices in the $US75-$85 range would help spur global economic growth, keep inflation low, boost consumer confidence, and still fund many new oil projects. Settling the nuclear issue could open Iran’s vast oil and gas resources to western oil companies, increase supplies, lower oil prices and squeeze speculation out of the picture.”

In the note, Gheit lays out his argument:

businessinsider

[ROCKMAN]

“Oil prices in the $US75-$85 range would help spur global economic growth, keep inflation low, boost consumer confidence, and still fund many new oil projects.” I don’t know if I would call current prices a “bubble” but the terminology isn’t very important either way IMHO. As far as to how much today’s prices contain a “risk premium” I’m not sure how that’s figured. I sell my oil to a broker. Neither he nor I care what will happen in the world global market in 6 months: I’m selling him 4,500 bbls of oil from one lease this month. He’ll pay me $X/bbl. He’s going to pay me what the refiner will pay him less what he keeps. The refinery doesn’t care what happens to oil in 6 months with respect to what he pays for my oil this month. He’ll refine it in a week or two and sell the products to retailers. And they’ll sell to the public in the following week or two. What profit me, the broker and the refiner make as well as what the buyers pay in the next couple of months will be old news in 6 months. IOW nothing that happens in the ME or anywhere else on the planet months down the road effects what happens with my 4,500 bbls of oil. Not once has any refiner paid me more for my oil than what he thought he needed to make a profit.

Makes more sense to focus on the dynamic IMHO. Lower oil prices = economic growth = increased oil consumption. The other side of that coin: lower oil prices = less drilling = less new production coming on. Given that most of the surge in US production has come from the shale trends two factors will come into play. First, what would prolonged $80 oil do to drilling activity? Lots of varied opinions but no one knows IMHO. But it would obviously decrease it to some extent. And given the high decline rate of those wells we could slip into a situation where not enough new wells are brought on line fast enough to offset depletion. Again, no one knows that relationship with any reasonable level of confidence IMHO.

And that brings us back to one feedback loop: lower oil prices lead to higher consumption with lower drilling activity which leads to greater supply pressure which leads to higher oil prices. Which is exactly the dynamic we have just gone through. Oil isn’t selling for $95+/bbl today because it’s costing more to develop the shale plays. The price is set by demand which, despite the sluggish economy, has stayed relatively strong. And then there’s the added pressure on global oil prices from even more robust economies such as in China.

And that seems to highlight the flaw in this model: $95/bbl oil is already spurring economic growth globally. Significantly in some countries (China) and to a lesser extent in others (USA). And the world is producing more oil than ever before. By the logic of this article oil prices shouldn’t be at their current levels. So if the bubble isn’t popping now what’s the basis for predicting a bust? Granted all dynamics go through up/down cycles eventually but the article doesn’t offer any rationale to expect a bust anytime soon other than to say “maybe”. But when/if prices do collapse it would likely coincide with a significant economic downturn IMHO which is not what their prediction is based upon. They envision low oil process coexisting with good economic times for many. As wonderful as such a time might be I have a great deal of difficulty imagining that day coming down the road. Far easier for me to imagine lower oil prices inhabiting a world of diminished economic vitality.

[Graeme]

ROCK, Thanks for your analysis. I'm sure others will always be interested to read what you have to say. However, I posted this mainly because of the potential for increased oil production from Iran now that sanctions have been partially lifted. I invite others who are better acquainted in the oil markets and geopolitics than me to comment. Will Iran continue with uranium enrichment? In the meantime, I can offer this commentary:

Iran already courting major European oil companies for increased investment, production in 2014

As Iran continues to plow ahead with furthering their uranium enrichment technology, they have wasted no time in getting to work on reversing the crippling effects of the sanctions on which they managed to convince the Obama administration and the planet’s other power players to ease up at last. Iran has some of the world’s largest and more cheaply recoverable oil-and-gas reserves, and they want to kick their economy back into gear by significantly ramping up production in 2014; hence, Iranian officials are already romancing European oil companies with potential business opportunities on which they’d like to get to work, and soon. U.S. firms have been barred from doing business with Iran for ages, but the European companies were only barred a couple of years ago with a new round of sanctions, and they might want to get back in the game if sanctions are really lifted:

hotair

[Pops]

Here is another blog talking about sidelined oil :
http://www.marketoracle.co.uk/Article43457.html

Leo Drollas, the head of the Saudi-backed, London-based Centre for Global Energy Studies in a 3 December interview with New Europe on the eve of the 4 December OPEC meeting, itemized several supply-side reasons why present high oil prices are not forever. Apart from the USA's record-breaking output of oil driven by its shale-oil production, Drollas said: “Next year, Iraqi oil will increase by 300,000 barrels a day, we think at least, there will be 250,000 more from Venezuela, there will be possibly 1 more million barrels from Iran, when Iran comes back, and Libyan oil should return”.

Still rooting for a glut!

[sparky]

.
If there is a "bubble , it's not the producers which pumped it ,
their business price is pretty steady for each field , even for each well
it's the micro flip traders who create bubble ,
they buy and sell imaginary crude to each others
there is not so much money to be made ramping up the price
but making a good call when the bubble burst get them the most , the fastest
of course that illegal market manipulation if a few do it
but if everyone is playing future options musical chairs , it's "the market",
when there is 100 times more crude traded than really exist , it's a chaotic system

beside this , yes
with Libya getting back on track ( not a chance)
Iraq production increasing ( not so much in fact )
Iran going back to its normal production ( in a year at least )
other new provinces coming on line ( and old ones depleting )
yes there is going to be some more oil on the market

There is good indication that the Saudis are not being nice anymore
they seems to have cut back their production back to the 9M/b/d
the world economy is on convalescence that means an increase in demand

on the whole , and keeping in mind I have a track record as a bad tipser
the Singapore /Brent /Opec price should keep around the 100$ mark +/- 10 $

[Timo]

The whole bubble-bursting prediction depends on the sanctions being lifted from Iran, and i've been reading a whole lot of doubt about that ever happening. The US has only eased the sanctions to see how much they can get from Iran in return. In 6 months, they'll measure the progress as demonstrated by Iran, not find enough, and put the sanctions back in place. Israel and the KSA won't ever let Iran become a player in the ME oil arena, anyway. If Iran achieves any economic benefits as a result of the sanctions being lifted, it's bad news for all KSA allies in the region. Iran will grow as a threat to their present regional dominance. If the oil bubble does burst, it will result from a puncture caused by a boatload of missles fired at their nuclear fission production sites by Israel. War is more likely than $70/bbl oil.

[ROCKMAN]

I agree with all the postulated potential increases in oil production from various sources including Iran. But increased production doesn’t have to equate to increased oil on the market or lower prices. I won’t predict what the KSA will do regarding the oil exports. But I will, for the moment, become the Grand Poobah of the KSA and tell you what I would do.

First, I would sit back and take great satisfaction that my oil income has gone from $60 billion/yr to over $300 billion/yr since oil prices exploded. Second, I would take great satisfaction that other countries are increasing their exports since this doesn’t require me to spend huge sums of capex to stabilize my production to prevent much higher oil prices. Higher oil prices which could lead the world into a major recession that could drive oil price way down as happened in 1986 when oil approached $10/bbl. Third, I would take great satisfaction in cutting my exports by 2 million bopd in order to keep prices at current levels. Granted that would reduce my income by around 20% but I would still be receiving about $250 billion/yr…4X as much as I was getting before the price boom. And since I wouldn’t need to be spending a huge amount of capex to stabilize my production my income would stretch further. And lastly, I would take great satisfaction in decreasing the rate at which I deplete my finite reserves and thus allowing me more oil for internal consumption (that ELM thingy the crazy American geologist made up). And even though I have to import refined products to keep my people from throwing their own Arab Spring party, I have the Chinese building refineries in my country which will crack my oil (that is a portion of my export reduction) and relieve me of some of that import bill. IOW I can more profitably utilize the oil I don’t export by refining it.

Dang, I’m proud of myself. While reducing exports I’ve maintained high oil prices, decreased my capex expenditure for oil infrastructure expansion, made available feedstock for my refineries that will lesson my product import costs, reserved more of my future oil production for the ever increasing demands of my people, allowed other ME exporting countries to increase their production without hurting oil prices (not good to see my neighbors slide into political instability/Arab Springs), and lastly, decreased my depletion rate so I’ll have more oil to sell down the road as the world continues to deplete their finite oil resources. And all I had to do was to drop my income to what it was just a few years ago when it was 4X as great as it was just 10 years ago.

Of course, there’s no way to predict what the KSA will actually do. But I do like my plan. The KSA could flood the market with oil which would decrease oil prices which would decrease their income. After all they are selling all they can at $95+/bbl today. Maybe they could increase production 20% to increase the amount of oil they sell but if prices drop 20% they would be still be netting the same income as today, taxing their production infrastructure, depleting their reserves faster and increase their capex expendatures to maintain production levels. Again, not saying they wouldn't take that course but it does seem like a foolish move and I haven't notice the KSA doing many foolish things over the years. Except, of course, when they flooded the market with oil in 1986 and crashed the price of oil down to 10% of current levels.

[Pops]

The KSA could flood the market with oil which would decrease oil prices which would decrease their income.
... [OR]
... Except, of course, when they flooded the market with oil in 1986 and crashed the price of oil down to 10% of current levels.

Those are options the story I linked came up with.

The other conclusion has less to do with suppliers and more to do with the consumers. If, as the OP speculated, $75 oil leads to economic growth and $100 oil leads to stagnation, we must now be in an oil-supply constrained economy. So any drop in oil price that happens as a result of what little shut-in oil there is coming back to market will juice a starving economy and that "glut" will quickly lead once again to constraint and higher prices because that isn't "new" oil, merely existing oil that has been cut off.

.

[Tanada]

The KSA could flood the market with oil which would decrease oil prices which would decrease their income.
... [OR]
... Except, of course, when they flooded the market with oil in 1986 and crashed the price of oil down to 10% of current levels.

Those are options the story I linked came up with.

The other conclusion has less to do with suppliers and more to do with the consumers. If, as the OP speculated, $75 oil leads to economic growth and $100 oil leads to stagnation, we must now be in an oil-supply constrained economy. So any drop in oil price that happens as a result of what little shut-in oil there is coming back to market will juice a starving economy and that "glut" will quickly lead once again to constraint and higher prices because that isn't "new" oil, merely existing oil that has been cut off.

.

For what its worth I think we are in the new oil price window pretty much for good because at this point OPEC and everyone else knows they can sell oil for $90-$120 a barrel. If all that 'constrained' oil comes back into the market and the price drops below $90/bbl then OPEC or someone will reduce production enough to get the price back up. They have zero incentive to drop the price today, why would they have an incentive if a few million barrels of additional oil comes back into the market? Meanwhile depletion never sleeps and every country past peak declines a little bit every year. The secondary tight shale boom in the USA is great for the USA but doesn't impact the world depletion rate by a heck of a lot. Just look at the world as a whole, the USA has added about 2 MMbbl/d of production in the 2010-2013 window, yet world wide production has barely quivered.

[ROCKMAN]

“The secondary tight shale boom in the USA is great for the USA”. I'll give my good friend T a poke in eye and dispute such statement. True that the increase US production reduces the number of bbls we import. But at what price? And more importantly, does it reduce the amount of US $’s we ship out of the country for imported oil?

But my premise hinges on why we have the surge in US oil production. The answer seem rather obvious to me: much higher oil prices than we had 6 or 8 years ago. While we’re importing less oil then we were back then we are paying considerable more for that oil. IOW our oil balance of trade has worsened in the last 6 or 7 years despite importing less oil. In 2005 the US imported 5 billion bbls of oil and paid $200 billion for it. Today we are importing about 3.8 billion bbls of oil per year and are paying about $350 billion per year.

The boom in shale production has been great for the oil patch…actually much more so for the service companies than the operators. But for the rest of the country? US consumption peak in 2005 at almost 21 million bopd. We’re now down to almost 18 million bopd. IOW when oil as $40/bbl in 2005 the US consumers were spending $300 billion/yr for their oil. Now they are spending over $600 billion/yr.

So when were times better for the US? In 2005 when the consumer was spending $200 billion for imported oil and $300 billion for all the oil they consumed or today when they are paying $350 billion/yr for their oil imports and over $600 billion/yr for all the oil they consume? Seems pretty obvious the US isn’t doing nearly as great now during the shale boom as it was doing before the shale plays kicked in.

Or more simply: how many folks here are happier paying $3.25/gallon of gasoline today than they were in 2005 when they were paying $2.25/gallon?

[vision-master]

Oil companies have been given 'handout's from the taxpayer for too long, it's time to STOP the Koch brothers subsidies and get new energy on the market, the old paradigm must come to an end.

STOP the welfare to the oil companies.

Big oil gets big subsidies

[joewp]

Price bubble? Nah.

Production bubble? Yep.

[SeaGypsy]

Every few weeks since the very short price collapse in 2009 we have another pundit linked here predicting something along these lines- why?- Wishful thinking mostly. For reasons eloquently put above.
The average new production cost is around the late $70's cost. A sustained drop to anywhere near these levels is virtually impossible in the current market- not going to happen. I'm waiting until end of year before predicting for 2014- have been in the top few predictors in the world for a few years now (from what I can see we have several more accurate price predictors than anyone else in the world). The price is what it is, and will remain substantially above $90 BBL for the time being.

[Tanada]

“The secondary tight shale boom in the USA is great for the USA”. I'll give my good friend T a poke in eye and dispute such statement. True that the increase US production reduces the number of bbls we import. But at what price? And more importantly, does it reduce the amount of US $’s we ship out of the country for imported oil?

But my premise hinges on why we have the surge in US oil production. The answer seem rather obvious to me: much higher oil prices than we had 6 or 8 years ago. While we’re importing less oil then we were back then we are paying considerable more for that oil. IOW our oil balance of trade has worsened in the last 6 or 7 years despite importing less oil. In 2005 the US imported 5 billion bbls of oil and paid $200 billion for it. Today we are importing about 3.8 billion bbls of oil per year and are paying about $350 billion per year.

The boom in shale production has been great for the oil patch…actually much more so for the service companies than the operators. But for the rest of the country? US consumption peak in 2005 at almost 21 million bopd. We’re now down to almost 18 million bopd. IOW when oil as $40/bbl in 2005 the US consumers were spending $300 billion/yr for their oil. Now they are spending over $600 billion/yr.

I dispute your disputation!!!

From my point of view if we had not had the tight oil boom in the USA displacing so much demand from the world market then economically things would be even worse. Sure we are paying a LOT more in 2013 than we were in 2005, but we are not paying as much as we were in the summer of 2008 either.

If it were not for the tight oil boom upping the USA production by 1 MMbbl/d or 1.7 or whatever today's figure is then we would be price rationing to reduce demand to meet supply. Even worse if we did not have the tight oil boom in the USA the WTI price would have been leading the Brent price for the last three years constantly just as it did for the two decades prior to 2010, that means the citizens of the USA, among which I am a member, would have been paying at minimum 10% more for oil just to equal the world price.

Sure 2005 prices were nice for the economy and all, but if we are going to survive peak oil dynamics we have to adapt to a world of oil scarcity, and the current persistent prices are helping people adapt to that future decline more than the rosy $32.00/bbl oil ever did in the 2000-2005 era. That era is over and done with, time to get used to it and move on preparing for the next price increase.

[ROCKMAN]

“… if we had not had the tight oil boom in the USA displacing so much demand from the world market then economically things would be even worse”. If oil prices had not increased 300% then the US would not have had the surge in production. Are you arguing that the US economy has benefited from a 300% increase in the price of oil? You can’t it both ways: higher US oil production has not helped the US economy. You can’t have one (increase in US oil production) without the other (increase in oil costs to the American consumer). Now if we had this surge in production and were still paying $40/bbl then the argument would have merit. But we aren’t. Again, very simply: is the US doing better today by shipping 150 billion more $’s per year overseas for our oil import then we were in 2005? Is the US consumer doing better today paying $300 billion more per year for the oil they’re consuming compared to 2005? Are you happier paying $1 per gallon of gasoline then you were in 2005? How much you pay to fill your gas tank isn’t determined by how much oil is being produced in the US. It’s determined by the price of oil.

Fine if you want to change the discussion from 2005 to 2008. According to the EIA oil averaged $94.04/bbl in 2008 and will average $97.64 in 2013. Thanks to demand destruction and some voluntary conservation the US consumers is spending $1.806 billion/day for the oil they use today vs. $1.833 billion/day they were spending in 2008. But in 2008 we didn’t have the surge in US production you’re so proud of. We averaged 5.1 million bopd and now we’re doing 7.6 million bopd… a 49% increase.

So to clarify: since the shale oil boom began in 2008 while US production has increased 49% the price of oil has increased 3.8%. And this is brag worthy? The US total bill for oil may have decreased by 1.4% but we should probably give some thanks for that to all those millions of Americans who were glad to lose their jobs thanks to demand destruction so we could lower out oil bill. LOL.

Refute away…it won’t change any of the numbers.

[Subjectivist]

Interesting viewpoints, with tight oil the price is up 300% but supply allows the economy to struggle along. Without price up 300% no tight oil and not enough supply so price skyrockets like 2008, economy collapses driving price down, economy recovers and price occilates back up ratcheting as high as possible. Economically we would be in the toilet, but we would not be spending as much on oil because fewer people would be working.

[John_A]

Oil companies have been given 'handout's from the taxpayer for too long,

and they have done because American's REFUSE to boycott their product!! It isn't the crack sellers problem that there is a crack consumer, the consumer should kick the habit, and then the crack seller will no longer have a market. Don't pretend it is the SELLERS fault that Americans are crude guzzling monsters, and if the companies can give them what they want, and its legal, it has nothing to do with HANDOUTS and everything to do with the crack habit itself.

Resist the urge! Reduce all crude usage everywhere! Unite!

STOP the welfare to the oil companies.

How about you stop the welfare to oil companies first. Last I looked you were tooling around in some gas guzzling monstrosity just like every other "do as I say, not as I do, and make sure you punish the other guy first!" American.

[John_A]

The US total bill for oil may have decreased by 1.4% but we should probably give some thanks for that to all those millions of Americans who were glad to lose their jobs thanks to demand destruction so we could lower out oil bill. LOL.

Refute away…it won’t change any of the numbers.

Consumption didn't go down just because of the unemployed. It certainly took a hit in 2008 when the economy went into the toilet, but it has been years since the recession ended, and the predatory lenders, real estate construction folks and others who took the hit for Americans treating their homes as ATM don't drive near as much as the activity being wracked by oil companies in North Dakota burning gas and diesel like there was ever even a peak oil!

The only reason unemployment still persists is because America has subsidized it for a few years now, goodness gracious americans nowadays can't even be counted on to go find employment in those same oil fields because...it might be cold! And I can sit here and mooch off government benefits of one sort or another, why in the world would I display any gumption and actually go out and get a job! The oilfield folks might require actual work!

[Tanada]

“… if we had not had the tight oil boom in the USA displacing so much demand from the world market then economically things would be even worse”. If oil prices had not increased 300% then the US would not have had the surge in production. Are you arguing that the US economy has benefited from a 300% increase in the price of oil? You can’t it both ways: higher US oil production has not helped the US economy. You can’t have one (increase in US oil production) without the other (increase in oil costs to the American consumer). Now if we had this surge in production and were still paying $40/bbl then the argument would have merit. But we aren’t. Again, very simply: is the US doing better today by shipping 150 billion more $’s per year overseas for our oil import then we were in 2005? Is the US consumer doing better today paying $300 billion more per year for the oil they’re consuming compared to 2005? Are you happier paying $1 per gallon of gasoline then you were in 2005? How much you pay to fill your gas tank isn’t determined by how much oil is being produced in the US. It’s determined by the price of oil.

Fine if you want to change the discussion from 2005 to 2008. According to the EIA oil averaged $94.04/bbl in 2008 and will average $97.64 in 2013. Thanks to demand destruction and some voluntary conservation the US consumers is spending $1.806 billion/day for the oil they use today vs. $1.833 billion/day they were spending in 2008. But in 2008 we didn’t have the surge in US production you’re so proud of. We averaged 5.1 million bopd and now we’re doing 7.6 million bopd… a 49% increase.

So to clarify: since the shale oil boom began in 2008 while US production has increased 49% the price of oil has increased 3.8%. And this is brag worthy? The US total bill for oil may have decreased by 1.4% but we should probably give some thanks for that to all those millions of Americans who were glad to lose their jobs thanks to demand destruction so we could lower out oil bill. LOL.

Refute away…it won’t change any of the numbers.

I think what we have here is a failure to communicate.

All I am saying is, if the tight oil boom had been a failure then the world economy would be in even worse shape than it is in right now. I am not exactly cheery that I have to pay so much for fuel, however I am also pragmatic enough to know that higher price cuts use and lower use is less CO2 emissions. That isn't to say the lower use in the USA has slowed emissions, it has not, but if I look for the silver lining things are getting worse at a slower rate due to higher prices.

[Graeme]

Iran Seen by IEA Unable to Sustain Increase in Crude Exports

Iran, once OPEC’s second-largest oil producer, will be unable to sustain an increase in crude exports that support its economy when some measures to curb those shipments are eased, the International Energy Agency said.

The European Union said last month that it intends to suspend a ban in December or January on insuring tankers carrying Iranian oil. The U.S. said it will stop forcing buyers to cut purchases, even if they still aren’t allowed to increase them. The concessions are in return for commitments from the Persian Gulf state to provide more information on its nuclear program, which western powers claim is intended to make weapons. Neither the EU nor the U.S. lifted sanctions on importing the nation’s oil.

bloomberg