It will be very interesting to see what Trump and Tillerson decide to do to the oil market. Trump wants the US to pump more oil and be independent from the middle east. That would require massive amounts of new drilling from the US and Canada. Which requires a high price of oil. Tillerson has a large stake in arctic drilling, which requires the US to remove its sanction on Russia, and a higher price of oil. The sanctions will be lifted from Russia. With all of the Putin cronies surrounding Trump, that will happen almost immediately. The trick is then raising the price of oil to hold steadily over $70 a barrel. That will be harder. OPEC introduced their production cut, but it is too little and all of the countries involved will cheat and over produce. So while the price will slowly creep up, it could take years before the price gets to where those two men want it. The fastest way to reach their goals is to suddenly take a few million barrels per day off the market. And the easiest way to do that is the re sanction Iran. Trump has been laying the ground work for months now. And we now live in the Trump world where the right thing to do and the best thing for Trump to do are far apart. Screwing over Iran means nothing to Trump or his supporters. They are all dangerous terrorists. And of all the fights that the Democrats will need to make in the next few years, Iran is not worth the effort. And its an action that will win kudos at home. The surge in oil prices will be an immediate help to the US oil industry. And as much as they have plans in the country Russia will not stop the US. They benefit from high oil prices by just as much. So now we all wait for January 20th when Trump is officially sworn it and the anti Iran rhetoric starts.
Oily Truths
Wednesday, December 14, 2016
Saturday, December 3, 2016
Numbers In Perspective
Here is the thing about OPEC, Russia, and their proposed production cuts. Those numbers look well and good, but are quite misleading. Lets take Russia. They have said that they will join in the OPEC deal and cut production by 300K barrels per day. Great. That’s a lot, and should ease the glut. But it really doesn’t when you look at the big picture. Because the Ruble has been almost halved in value since 2014 and oil is all sold in good old American greenbacks, the price slide of the past few years has barely affected the big Russian oil companies. And they have spent the past few years ramping up production hard. In November they were able to output 11.2 million barrels per day. They now have production almost up to the peak levels of the old Soviet Union. And in November they were able to product almost a half million barrels more per day than they were in August of this year. So while yes they will cut production, they are still producing at almost record levels. And this cut is if anything, it is just a way to bring output down to sustainable levels while looking like heroes who are helping the entire industry. And to really put the scope of this con in perspective, Russia was only producing about 10.6 million barrels per day at the time of the price crash. So while OPEC and the US were pointing fingers and blaming each other for record outputs, it was actually Russia who has been quietly unbalancing the market.
Friday, December 2, 2016
Vienna
They done did it. OPEC actually reached a deal with significant production cuts. Now we will have to see if they will actually follow through with this. They say that they want to rest of the world to cut production by 600k BPD. And that will be a lot harder to enforce. If there is to be any hope of any other global reduction it will have to come from Russia. The US is made up of two many small operators, and Trump will be president. The man who wants to bring back coal. There is no way he would even consider a production cut.
And today Russia said that they will cut production by 300k BPD. Now what that actually means to Russia is a whole other matter. Does that mean 300k barrels less than they are producing now? Or 300k barrels less than what they budget their production to be in 2017. Or will they just do what they want, and say what the market wants to hear so that they can make a few extra dollars. Who knows. And as I have learned from following OPEC, words are wind and proof is in the pudding.
Tuesday, November 29, 2016
Summit
It is going to be really interesting to see if OPEC actually agrees on anything tomorrow. They Sauds have been positioning for a cut for a while. They are producing at record levels for over a year. Slashing a million barrels per day of production would be nothing for them. Iran and Iraq know this and are playing a game where they say that they will not cut production. So the Sauds came back on the weekend and said that they are willing to not cut production and wait for the market to balance itself in 2017. Considering OPEC is an organization that likes to think of itself as a cartel, there is a lot of public posturing and infighting going on. This is all happening while Argentina is rolling around on fire, begging for a shred of relief. And Nigeria like Hydra desperately hopes that the Avengers don’t show up again.
The odds of an OPEC production cut are slim to none. The best case scenario for the market is a production freeze. It would be meaningless and accomplish almost nothing, but would be held up by the group as an accomplishment while they blame the rest of the world (America) for the oil glut.
Tuesday, November 15, 2016
Trump And OPEC
It will be interesting to see what the Trump administration will do in regards to oil and OPEC. Trump is a hater of all things middle eastern, and all “bad deals”. Obama lifting the sanctions on Iran qualifies as both. Leading up to the election Trump was outspoken against that deal, as is the Republican party as a whole. So it would make sense for Trump to reverse it and put the sanctions back. It’s no skin off his nose, and he gets to both spite Obama and win praise from congress. It would also take millions of barrels of production per day out of the market which would significantly boost the price of oil and make a lot of US petroleum companies happy. It seems like a no brainer. The fallout of that deal would be interesting to see. The Sauds would be thrilled. It would both boost the price and oil and reduce Iran’s clout in the region. While also allowing OPEC to flatten their production numbers without Saudi Arabia or Iraq being forced to cut their production. It would mess with Russia and their aspirations in the region. Russia has been making large investments into the Iran. However it would push the Iranians further under Russia’s umbrella strengthening Russia’s alliances in the region. The Chinese would be put in an interesting position. They have been purchasing as much cheap oil as possible to build their reserves and offset the continuing decline of their domestic production. As the largest importer of oil and exporter of manufactured goods, this period of cheap oil is helping them immensely. However as much as they can threaten to cut off the US supply of iphones, they are terrified of getting on the wrong side of Trump. They know he can and will sanction the hell out of them, even if it will hurt the US more. So with renewed US sanctions they will have to avoid Iranian oil completely. We will have to wait and see when happens when Trump is finally able to put pen to legislation.
Tuesday, November 8, 2016
The Problems With Fracking
Over the weekend Oklahoma suffered a 5.0 magnitude earthquake. Normally something like this wouldn’t even be a blip in the news, except that it happened just a few miles from Cushing. The same Cushing where the US has a half trillion barrels of oil in storage. And that should be deeply troubling. Those tanks are not built to withstand earthquakes, and why should they be. They are in Oklahoma, not normally a hotspot of seismic activity. Except that in recent years it has become one. And all of it can be traced directly to the oil and gas industry. Oklahoma is the poster child of hydraulic fracturing, so it is no surprise that they are the first place to feel the negative effects of it. It has long been established that pumping fracking fluid into the ground will contaminate drinking water, but the earthquakes are a new phenomenon. It turns out that fracturing rock and then pumping waste water deep underground will mess with fault lines and create man made earth quakes. This has been going on for years, but the quakes have been mostly so small that they are only perceptible to seismometers. They are now ramping up. Multiple quakes have now happened over a 5.0, a strength where they can now be felt and cause damage. And as the state continues fracking this will not stop. Right now they are still in the slight denial/make it go away stage. Oil companies are being forced to stop injecting waste water near towns that are experiencing earth quakes. It will be interesting to see how far this continues and just how strong these man made quakes can become. This is all uncharted territory to geologists. Never before has human kind been able to create earth quakes. And we are now creating thousands with no sign of stopping.
Wednesday, October 26, 2016
Time For The Sauds To Nut Up
It was inevitable, but the tentative deal that OPEC struck to curb production is falling apart. Iran wants to keep increasing output to get back to their pre sanction levels, Libya seems to have it together enough that they can increase output, Venezuela has manipulated their bond market enough to keep the creditors off their backs for another year. Even Nigeria seems to have made enough peace with the Avengers that production is on the rise. But the death knell is Iraq. They are in the process of taking back Mosul from ISIS, and want to increase production to pay for this military action. So this deal looks doomed, and the price of oil will drop back under $50. Unless somehow Saudi Arabia unexpectedly decides to grow a pair and slash their production. There is precedent for them to do it. Shaving a few million barrels per day off of their output would bring the market into stability and would drive the price per barrel up to the $70 per barrel range. It would bring them some goodwill with a lot of countries and show that they are still a power in the market. And knowing that they legitimately have a few million barrels per day in reserve would give them a lot more clout when they threaten to flood the market. Even if they cut production, they would still be the largest producer in OPEC and the de facto power within that organization. And if the price of oil does come back up the rest of the member countries would have enough financial breathing room that they would be more amicable to production decreases of their own, and the orders of the Sauds. However it makes too much sense and the Sauds are too bitter and petty, so the deal next month will fall apart and the current status quo will remain.