[Mick22]

For those expecting falling rig count to drop production, here is an EIA report from the 2008 crash as a guideline.

http://www.ogj.com/articles/2015/01/eia ... ction.html

A quote taken from this article.

"As an example, permits and drilling in North Dakota declined during the financial downturn of 2008-09, but production rates did not decline as substantially."

Producers are far more efficient now than they were in 2008 and their momentum of new wells coming on stream is also much faster than 2008. Those thinking we'll see a drop in production soon had best consider this report.

[Tanada]

For those expecting falling rig count to drop production, here is an EIA report from the 2008 crash as a guideline.

http://www.ogj.com/articles/2015/01/eia ... ction.html

A quote taken from this article.

"As an example, permits and drilling in North Dakota declined during the financial downturn of 2008-09, but production rates did not decline as substantially."

Producers are far more efficient now than they were in 2008 and their momentum of new wells coming on stream is also much faster than 2008. Those thinking we'll see a drop in production soon had best consider this report.

That is fine as far as it goes, but there are a couple of IMO key differences. In 2008 fracking was much less a percentage of total USA production, and secondly the 2008 crash went steeply down, hit a bottom, then went moderately steeply up over a couple months after finding the bottom in 2009 to settle over $70.00 about a year after we hit $140 in our race for the top 2008 version. After that the price ratcheted up gradually in the rest of 2009 and all of 2010 to put us back in the 90-110 band where we stayed for quite a while.

Though prices were declining all through the second half of 2014 the big drop happened in November and December and it looks like we might have already found the bottom around the first few days of February, that is a much steeper drop and a quick bounce off the bottom if we really found it and things stay creeping upward when markets open tomorrow. It that is the case then the cycle has been much faster in 2014-15 than it was in 2008-09.

[shallow sand]

Mick22. So where do you think we are headed re US oil production? 10 million bbl per day by year end with 500 oil rigs running and $35 WTI?

You have started three general threads that pretty much say the same thing? Let's get more specific.

[dissident]

Though prices were declining all through the second half of 2014 the big drop happened in November and December and it looks like we might have already found the bottom around the first few days of February, that is a much steeper drop and a quick bounce off the bottom if we really found it and things stay creeping upward when markets open tomorrow. It that is the case then the cycle has been much faster in 2014-15 than it was in 2008-09.

Indeed, the media hysteria over oil prices going to $20 per barrel is epic nonsense. I don't recall this frenzy of "infinite oil supply" propaganda back in 2008-9. The same media is basically ignoring the current global recession and its oil in the oil price drop. On this site and elsewhere we have all sorts of tin foil hat theories about Saudi Arabia flooding the market without a shred of evidence. Yet the marginal supply from Libya is supposedly responsible for the current surge in oil prices (over $60). The Saudis can only flood the market through oil tankers and there are companies that track their activity and obtain independent estimates of Saudi production. If there was any flooding it would have been identified months ago.

The year 2015 may have an average oil price well above $50. But it depends on how bad the global recession is. It could be something chronic and we will have oil prices surging and crashing with a short cycle and not 6 years using the 2008 and 2014 drops.

[westexas]

Of course, there is that pesky little problem of decline rates.

US Crude + Condensate (C+C) averaged 5.0 mbpd in 2008, and a plausible estimate for the underlying decline rate from existing production was probably about 5%/year in 2008.

IMO, a plausible estimate for the current decline rate from existing US C+C production is about 20%/year (Citi Research puts the decline rate from existing US gas production at 24%/year).

Based on the foregoing and assuming an annual US C+C production rate of about 9.2 mbpd in 2015, the annual volumetric decline from existing wells in 2008 would have been about 250,000 bpd, while the annual volumetric decline from existing wells in 2015 would be about 1,800,000 bpd.

Except for residents of Fantasy Island, it's when, not if, that the contributions from new wells can no longer offset the declines from existing wells. In other words, Peaks Happen (except on Fantasy Island, where most economists seem to live).

[Pops]

The drop in price in '08-'09 was due to failed demand, demand hasn't fallen.

The $100 price reflected low spare capacity, which increased the perceived risk (to speculators mind you) of "unplanned outages" creating shortage and the speculators would be caught short. The $50 price is a result of (I think) KSA choosing to not reduce production to defend the $100 price. That increased the "risk" that speculators would get caught long.

You gotta remember that players and speculators (obviously both upstream and down oil are a part of the speculative markets) can hedge (bet) either way, that prices will rise or that they will fall, it doesn't matter. So "risk" then is only relative to their individual bets. Just like extraction itself has nothing to do with energy and everything to do with money, the price has nothing to do with supplying a market, only with winning the bet.

Were consumers worried about the risk of the next tankful not being available? LOL - no.
Are consumers today worried about the risk that they will pay too much for a tankful? no.
They Just want the tank full and will pay most any price in the short term to do it.

The price of oil isn't about the value of oil, or the cost to extract and refine, is about speculation on the reliability of future supply. When the future supply is in doubt - either because it is feared to be too big or too small the "market" prices in the fear and overreacts. I believe the unprecedented price drop
on the heels of the unprecedented rise in LTO,
on the heels of an unprecedented run of low interest,
on the heels of the unprecedented length of the unprecedented highest average prices ever
kinda argue that there really is no example of this particular situation
.

[Timo]

I believe the unprecedented price drop
on the heels of the unprecedented rise in LTO,
on the heels of an unprecedented run of low interest,
on the heels of the unprecedented length of the unprecedented highest average prices ever
kinda argue that there really is no example of this particular situation.

That explanation is unprecedented! I couldn't have said it better, myself!

[sjn]

pops, are you saying “free-markets” do not work? I'm very much not a believer that they're the best method of strategic decision making, but I'm of inclined to believe they do work for the purpose of matching buyers to sellers at an agreed price.

The idea with futures-markets, is that they increase liquidity, making it easier for buyers and sellers to operate. A trader can agree a price in the futures market, removing the risk from having to find a counter-party on the spot market, with the 'speculators' taking on the additional risk. Is this the part you don't believe works? It's true that central banks, particularly the FED has allegedly been operating in various futures markets, certainly there are strong suspicions of manipulation of stock market futures buy way of monetizing futures risk. It's not speculation if you can print money.

Of course that doesn't imply what you're suggesting, if speculators were all on the same side of the bet they'd all be wiped out. It's a zero-sum game. Either future markets work as intended and the drop in prices is due to reduced market demand, or somebody is bankrolling speculators against the market. Of course, most likely, there's room for both, certainly plenty of QE money ended up financing the oil patch, in particular LTO.

[Pops]

I think the market would work fine and provide plenty of liquidity and risk management if only buyers and sellers of physical oil were involved and pure speculators were banned.

As it is, 90% of trading is paper. A billion barrels a day is the volume traded on futures markets but only 80-something are produced, everything else is gambling.

Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.

Because of speculation, today’s oil prices of about $100 a barrel have become disconnected from the costs of extraction, which average $11 a barrel worldwide. Pure speculators account for as much as 40 percent of that high price, according to testimony that Rex Tillerson, the chief executive of ExxonMobil, gave to Congress last year. That estimate is bolstered by a recent report from the Federal Reserve Bank of St. Louis.

Many economists contend that speculation on oil futures is a good thing, because it increases liquidity and better distributes risk, allowing refiners, producers, wholesalers and consumers (like airlines) to “hedge” their positions more efficiently, protecting themselves against unseen future shifts in the price of oil.

But it’s one thing to have a trading system in which oil industry players place strategic bets on where prices will be months into the future; it’s another thing to have a system in which hedge funds and bankers pump billions of purely speculative dollars into commodity exchanges, chasing a limited number of barrels and driving up the price. The same concern explains why the United States government placed limits on pure speculators in grain exchanges after repeated manipulations of crop prices during the Great Depression.

http://www.nytimes.com/2012/04/11/opini ... .html?_r=0

[sjn]

I think the market would work fine and provide plenty of liquidity and risk management if only buyers and sellers of physical oil were involved and pure speculators were banned.

As it is, 90% of trading is paper. A billion barrels a day is the volume traded on futures markets but only 80-something are produced, everything else is gambling.

Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.

Because of speculation, today’s oil prices of about $100 a barrel have become disconnected from the costs of extraction, which average $11 a barrel worldwide. Pure speculators account for as much as 40 percent of that high price, according to testimony that Rex Tillerson, the chief executive of ExxonMobil, gave to Congress last year. That estimate is bolstered by a recent report from the Federal Reserve Bank of St. Louis.

Many economists contend that speculation on oil futures is a good thing, because it increases liquidity and better distributes risk, allowing refiners, producers, wholesalers and consumers (like airlines) to “hedge” their positions more efficiently, protecting themselves against unseen future shifts in the price of oil.

But it’s one thing to have a trading system in which oil industry players place strategic bets on where prices will be months into the future; it’s another thing to have a system in which hedge funds and bankers pump billions of purely speculative dollars into commodity exchanges, chasing a limited number of barrels and driving up the price. The same concern explains why the United States government placed limits on pure speculators in grain exchanges after repeated manipulations of crop prices during the Great Depression.

http://www.nytimes.com/2012/04/11/opini ... .html?_r=0

I think we had the same discussion back when oil went to $148. My opinion then, as it is now, is speculators can only affect prices up until settlement, speculation does affect prices high, and low, but over time it balances out (unless somebody is bankrolling losing trades - i.e. manipulation) you'll go broke if you keep betting the wrong way. Unless they're willing to take delivery and sit on the oil, the various bids all have to balance out either by forced buying out the contract postion though margin calls or by completed transactions. This does mean there is a lag time during which speculators can indulge in chasing momentum, which does distort the market, and will cause prices to over- and under-shoot where they "should" be.

If there were no speculators, the futures market would closely track the spot market as there would be very little in the way of a price discovery mechanism. In theory, it's the speculators that provide the analysis and insight into that process. It requires actors willing to take the risk of loss for their belief that they can beat the market.

[Pops]

I think we had the same discussion back when oil went to $148. My opinion then, as it is now, is speculators can only affect prices up until settlement, speculation does affect prices high, and low, but over time it balances

You are saying that there is no such thing as market sentiment and predictions of the future are not involved in actual contract negotiations and commercial buyers ignore futures markets when inking actual deals?

That oil today is really worth 50% less than a year ago?

Or 50% more than a week ago?

The problem is 90% or more of futures contracts are held by speculators and they don't care what happens to a 12 month contract a year from now: they aren't going to hold that contract that long. They are going to sell it in 10 minutes or 10 days - that is why a billion paper barrels are traded daily when only a tenth of that amount of actual oil is produced daily, it is the same barrel sold over and over.

They could not care less about discovering price.

If there were no speculators, the futures market would closely track the spot market as there would be very little in the way of a price discovery mechanism.

The futures market was first begun to accomplish exactly that, SJ.
There were wild price swings in the grain markets between harvest and planting time. The purpose of markets was not to "discover price" but to allow producers to obtain capital and buyers budgeting control.

You are saying that actual buyers and sellers have no incentive to analyze the market even thought they obviously have more to gain than speculators who can dump at any time.

There is no "price discovery" for example in speculating on the rainfall next year in Iowa, it is just a bet. Ditto the price of oil in 2020.

The banking act of 1933 (2nd Glass Steagal act) outlawed speculation in grain markets for that reason. Unfortunately over time we've decided the "Information Economy" needs to have gambling at it's center and use the mantra of "Price Discovery" to keep up that illusion - obviously it didn't work very well for the real estate market. Repeal of Glass unsurprisingly has preceded the 2000% increase in speculation and the biggest market crash since before Glass was enacted in '32.


I just can't see how increasing the money floating in oil futures markets 200 times could not have affected price. It's like saying that allowing commercial banks to speculate with with deposits and be immune to the risk of bad debt by creating mortgage tranches and selling them into some unregulated and opaque market didn't affect real estate prices.

It requires actors willing to take the risk of loss for their belief that they can beat the market.

That sounds like the marketing plan for an indian casino. LOL

Now tell me the benefit to the market?

[sjn]

I never said it wasn't open to abuse and manipulation. But yes, the price of oil is the price of oil. Today it's half what it was a year ago, that's what the market says, so that's what you pay (spot). Markets are always open to manipulation and corruption, and market failures are rife when there's an imbalance between the information available to each party, buyer and seller, it doesn't take speculators to achieve that outcome.

Indeed, in principle there's no need for speculators in a market, but the IDEA is that the increased liquidity makes matching bids to offers trivial, and the theory goes they help achieve some information neutrality.

Pretty much any activity we engage in is a bet; everything we do in life has associated risk and reward. That pretty much sums up life in a way. Information is essential to risk assessment, next years rainfall in Iowa isn't information, it's a guess, especially nowadays(!), however the price of oil in 2020, whether it's going to be higher or lower than today, is somewhat more subject to analysis, right? Well, at least we do like to pretend we know what we're writing about here!

Anyway, the point about the market failures, speculation certainly does make things worse. No argument there, but the market failure itself isn't due to speculation per se, but rather the fact that a number of market participants think they know something others do not and bid/sell accordingly (sentiments, predictions of the future). Speculative trend chasing magnifies the imbalance and can cause all sorts of problems. No system's perfect, right?

I agree that the MBS bubble, and subsequent bursting was certainly an excellent example, amongst many. But was the initial run-up in the price of oil a market failure, a bubble? Was the subsequent fall, rise and fall signs of market failures?

[Pops]

I think the best way to gauge supply/demand is spare capacity.
Notice on this little chart how early in the century there was a big spread between spare capacity and price but after the run up to '08 it tracks pretty close.



In '04 or so there was less than 1% spare capacity and the price was $40 but the last few years even though the spare capacity average around 2.5% the price is over $100

(I don't know if those are adjusted prices, if not that would add about $10 to the '04 price I think)
http://www.business-standard.com/articl ... 772_1.html

Well, at least we do like to pretend we know what we're writing about here!

I thought that was the whole idea!