FRACTIONAL FLOW

Posts Tagged ‘oil price

Will growing Costs of new Oil Supplies knock against declining Consumers’ Affordability?

In this post I present developments in world crude oil (including condensates) supplies since January 2007 and per June 2016. Further a closer look at petroleum demand (consumption and stock changes) developments in the Organization for Economic Cooperation and Development (OECD) for the same period and what this implies about demand developments in non OECD.

The data used for this analysis comes from the Energy Information Administration (EIA) Monthly Energy Review.

  • The OECD has about half of total global petroleum consumption.
  • Since December 2015 OECD total annualized petroleum consumption has grown about 0.2 Mb/d [0.5%].
    [Primarily led by growth in US gasoline and kerosene consumption, ref also figure 6.]
  • The OECD petroleum stock building was about 0.4 Mb/d during Jan-16 – Jun-16, which is a decline of about 0.6 Mb/d from the same period in 2015. This implies a 2016YTD net decline in total OECD demand of 0.4 Mb/d.
  • World crude oil supplies, according to EIA data, have declined 1.3 Mb/d from December-15 to June-16, ref figures 1 and 2.
  • The above implies that non OECD crude oil consumption/demand has declined about 1 Mb/d since December 2015.
    This while the oil price [Brent Spot] averaged about $40/b.

This may now have (mainly) 2 explanations;

  1. The present EIA data for crude oil for the recent months under reports actual world crude oil supply, thus the supply data for 2016 should be expected to be subject to upward revisions in the future.
  2. Consumption/demand in some non OECD regions/countries are in decline and this with an oil price below $50/b.
    If this should be the case, then it needs a lot of attention as it may be a vital sign of undertows driving world oil demand.
    Oil is priced in US$ and US monetary policies (the FED) affect the exchange rate for other countries that in addition have a portion of their debts denominated in US$ thus their oil consumption is also subject to the ebb and flows from exchange rate changes.

Figure 1: The stacked areas in the chart above shows changes to crude oil supplies split with North America [North America = Canada + Mexico + US], OPEC and other non OPEC [Other non OPEC = World - (OPEC + North America)] with January 2007 as a baseline and per June 2016. Developments in the oil price (Brent spot, black line) are shown against the left axis.

Figure 1: The stacked areas in the chart above shows changes to crude oil supplies split with North America [North America = Canada + Mexico + US], OPEC and other non OPEC [Other non OPEC = World – (OPEC + North America)] with January 2007 as a baseline and per June 2016. Developments in the oil price (Brent spot, black line) are shown against the left axis.

It was the oil companies’ rapid growth in debt [ref US Light Tight Oil (LTO)] that brought about a situation where supplies ran ahead of consumption and brought the oil price down.

YTD 2016, only OPEC has shown growth in crude oil supplies relative to 2015.

Unit costs ($/b) to bring new oil supplies to the market is on a general upward trajectory while the consumers’ affordability threshold may be in general decline.

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Oil, Interest Rates and Debt

At first glance it is hard to see how oil, interest rates and debt are connected. Two of them are human constructs while oil (fossil sunlight), a gift from Mother Nature, took tens of millions of years to process. Oil is an endowment extracted from a confined underground stock and is now the most dense and versatile energy source known to man.

Figure 1: Chart that shows the development of [extraction] cost of oil and interest rates (US 10 Year Treasuries) has developed since 2000 and a likely trajectory for oil extraction costs.

Figure 1: Chart that shows the development of [extraction] cost of oil and interest rates (US 10 Year Treasuries) has developed since 2000 and a likely trajectory for oil extraction costs.

Both lines are SIGNALS, and most likely plan their future based on only one of them.

The 10 Year Treasury (or similar) rate is the reference used for amongst other things to set interest rate for mortgages. Most now, aware of it or not, base their future plans on the expectations to developments of the 10 Year Treasury.

What is now playing out in the oil market may be described as below;

Low interest rates [stimulates debt growth] => Pulls demand forward => Oversupply => Deflation

How will the interest rate develop in the future?

This is important as the present huge global debt overhang weighs heavily in the consumers’ balance sheets and their affordability for costlier oil. It is also important for oil companies’ long term planning to bring costlier oil to the market.

A lasting, low rate makes higher debt loads manageable. Interest rates works both sides of the demand/supply equation.

A higher interest rate will have serious implications for highly leveraged consumers and oil companies.

The dynamics may be described as below:

Higher interest rate => lowers demand => downward pressure on price [deflation] => makes it harder for [highly leveraged] consumers/oil companies to service their debt overhang => lowers investments to develop costlier supplies

At some point in time the present oil supply overhang will come to an end. This will become reflected in a higher price.

The timing of these events creates uncertainties and the agile and financial strong oil companies will sweat out a lasting low oil price.

Few are aware of that the costs of accessing our real capital (like oil) that runs our economies are rapidly increasing.

What is different this time is that the oil price may remain lower for longer than the estimated full cycle break even costs for new developments.

The suggested path for costs is believed in the near term to come down as oil service companies have reduced their prices to shoulder the burden from the recent price collapse. Over time, the capacities of the service companies will become aligned with the demand for their services and products. At some point, as the oil price recovers and investments pick up, the market mechanisms will bring the prices from the service companies up as the service companies also need to make a profit to stay in business.

In figures 4 and 5 are shown how the combination of lower interest rates and a lasting, high oil price encouraged the oil companies to rapidly take on more debt to develop costlier oil on the expectations that consumers had remaining ability to take on more debt/credit to pay for this, thus allowing the oil companies to retire their debts.

The oil companies’ behavior in the recent decade is reminiscent of group think. Few expected the oil price to collapse, though the oil industry itself repeatedly point out the cyclical nature of the oil price.

The aggregate of developments (primarily driven by an amazing growth in the extraction of light tight oil [LTO]) gradually resulted in a supply overhang that made the oil price collapse.

The costs of extracting real capital, like oil, has been rapidly increasing, yet we are making decisions for the future as if it were decreasing, based on the price of capital (money). This is a short term phenomenon that will last until supply and demand become balanced.

The present situation with an apparent oil glut and low prices is a temporary false signal.

This may also be the case with the low interest rates.

The near future will reveal how the competition for available funds to service a still growing huge global debt overhang fare towards the need to fund developments of costlier oil.

Can an increasingly leveraged global economy handle both higher oil prices and interest rates and still remain on its growth trajectory?

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Norwegian Crude Oil Reserves And Extraction per 2015

In this post I present actual Norwegian crude oil extraction and status on the development in discoveries and reserves and what this has now resulted in for expectations for future Norwegian crude oil extraction.

This post is also an update of an earlier post about Norwegian crude oil reserves and production per 2014.

Norwegian crude oil extraction peaked in 2001 at 3.12 Million barrels per day (Mb/d) and in 2015 it was 1.57 Mb/d, growing from 1.51 Mb/d in 2014.

The Norwegian Petroleum Directorate’s (NPD) recent forecast expects crude oil extraction from the Norwegian Continental Shelf (NCS) will decline to 1.53 Mb/d in 2016.

Figure 01: The chart shows the historical extraction (production) of crude oil (by discovery/field) for the Norwegian Continental Shelf (NCS) with data from the Norwegian Petroleum Directorate (NPD) for the years 1970 - 2015. The chart also includes my forecast for crude oil extraction from discoveries/fields towards 2030 based on reviews on individual fields, NPD’s estimates of remaining recoverable reserves, the development/forecast for the R/P ratio as of end 2015. Further, the chart shows a forecast for total crude oil extraction from sanctioned discoveries/fields (green area, refer also figure 02) and expected contribution from Johan Sverdrup (blue area) [at end 2015 estimated at 1.76 Gb; [Gb, Giga (Billion) barrels, refer also figure 06] and this development phase is now scheduled to start flowing in late 2019.

Figure 01: The chart shows the historical extraction (production) of crude oil (by discovery/field) for the Norwegian Continental Shelf (NCS) with data from the Norwegian Petroleum Directorate (NPD) for the years 1970 – 2015. The chart also includes my forecast for crude oil extraction from discoveries/fields towards 2030 based on reviews on individual fields, NPD’s estimates of remaining recoverable reserves, the development/forecast for the R/P ratio as of end 2015.
Further, the chart shows a forecast for total crude oil extraction from sanctioned discoveries/fields (green area, refer also figure 02) and expected contribution from Johan Sverdrup (blue area) [at end 2015 estimated at 1.76 Gb; [Gb, Giga (Billion) barrels, refer also figure 06] and this development phase is now scheduled to start flowing in late 2019.

Sanctioned Developments in Figure 01 represents the total contributions from 7 sanctioned developments of discoveries now scheduled to start to flow between 2016 and 2019.

My forecast for 2016 is 1.50 Mb/d with crude oil from the NCS.

My forecast shown in figure 01 includes all sanctioned developments and not discoveries (refer also figure 08) and contingent resources in the fields. The forecast is subject to revisions as the reserve base becomes revised (as discoveries pass the commercial hurdles) which likely will fatten the tail of the presented forecast post 2020.

My forecast assumes some reserve growth, but does not include the effects from fields/discoveries being plugged and abandoned as these reach the end of their economic life.

Discoveries sanctioned for development and Johan Sverdrup (with an expected start up late 2019) is expected to slow down the decline in Norwegian crude oil extraction.

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