Author Topic: Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.  (Read 161459 times)

tombgrt

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Don't get me wrong, I'm a bull as well. Just think it is a bit easy to dismiss analysts as simpletons that only look at us production.


Cardboard

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Analysts are consensus builders for the vast majority of them which makes their forecast near useless. So they all look at the same data and before reaching their conclusion will look first at what others are saying. Ensures them to keep their job: if they are right, ok, if they are wrong, everyone else is too.

So if you take oil, they will simply tell you that it will end 2018 a bit higher than it is now because fundamentals look positive. So it will have a positive impact on your psychology if you are worried about the oil price but, such forecast won't make you any big money.

It was only a few outliers who predicted the crash in 2014 - early 2015. After that it was unpredictable because you had a president giving Iran a deal on a silver plate which wrecked the market. Currently, it is pretty clear that we are into a deficit and that inventories are depleting. Days of use to inventory have already returned to normal and are trending to a low point which will be a problem on any supply disruption: noticed Israel bombing Iran's positions in Syria this week-end and Rouhani going after the assets of hardliners because the country is doing poorly?

What is tough to predict is what is the real growth in U.S. production? And no, Lower 48 States production did not go up by 315,000 bls/d in 1 week last week! 280,000 bls/d of that was an "adjustement" made by EIA with little explanation provided... It is also hard to know exactly how much has been really cut by OPEC/non-OPEC since they really ramped-up production before removing it or what is true spare capacity?

Then we have the strength of the economy affecting demand. So it very hard to pinpoint supply and demand and related price however, if things stay as is, we should face a supply crunch in the not too distant future.

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SharperDingaan

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The only way to keep prices this low for so long - is to sell physical from inventory reserves, and replace the outfow with 'paper' barrels.  Then stop selling, let the market do its thing, and refill the reserves by taking physical for delivery against paper. Nice high prices, and for quite some time - right around the time Aramco goes to market with the biggest UW in history ;)

SD


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If the Saudis or investment bankers had found a way to manipulate the market as easily as you seem to imply, then we would never have seen $25 oil in early 2016, nor would they have a need to sell a dime of Aramco.  ::)

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SafetyinNumbers

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Significant tightening in differentials again today

http://www.psac.ca/business/GMPFirstEnergy/
Top 5 positions: ELF IAM GCM.NT/GCM PIF EFR.DB

Cardboard

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With TransCanada's Keystone back near capacity along with more trains heading South, things are slowly returning to normal. Moreover, Venezuela production keeps falling off with a new low in January. They need heavy oil to run the refineries in the Gulf and not just light oil.

http://money.cnn.com/2018/02/12/news/economy/venezuela-oil-production/

Although, I really hope that Canadians will remember this episode and not fall asleep on the need to diversify our clients base. Eric Nuttal's team calculated that every Canadian lose $500/year in taxes, royalties, etc. due to the severe discounts at which our oil is sold.

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SharperDingaan

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If the Saudis or investment bankers had found a way to manipulate the market as easily as you seem to imply, then we would never have seen $25 oil in early 2016, nor would they have a need to sell a dime of Aramco.  ::)

Cardboard

Re 2016, the (Saudi) plan appears to have been 'flood the market', drive down price; bankrupt US shale producers, and starve investment into the off-shore and oil sands. It didn't kill shale, but many would argue that it did work on the off-shore and oil sands production - & killed all kinds of planned investment. In hindsight (Saudi) would have been better off not doing it; hindsight is 20/20, and the Saudi oil minister has been replaced.

100 bbl of 'inventory' can be either 100 bbl of physical in a tank, or a 100 bbl future for delivery at a specified terminal. A 'drawdown' could be either a physical delivery from the tank, or a reduction in the nominal volume of the futures. We suspect that in the US at least, some of the physical is being switched to paper - and the process is contributing to the 'adjustments' that we keep seeing every week. Price is lower than it should be, because the physical is being bled out.

Saudi/Opec flooded, and have been 'rebalancing' global supply/demand for over a year. Today the price is higher than it was, most would suggest that current demand exceeds supply by quite a bit, and a cursory web search evidences that most ME countries have increased their 2018 budgets versus last year.

Stop the inventory bleed, and prices will rapidly ratchet - Saudi gets its IPO, US Shale goes back to work, and offshore/tar sands remains frozen out due to their long lead times. Saudi-Aramco has only been 100% 'state owned' since 1980, and has been a US/Saudi 'creation' since the late 1940's. They have been collectively manipulating the market for over 70 years. It's nothing new.

https://en.wikipedia.org/wiki/Saudi_Aramco

SD

     


 
« Last Edit: February 13, 2018, 05:52:23 AM by SharperDingaan »

Cardboard

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"100 bbl of 'inventory' can be either 100 bbl of physical in a tank, or a 100 bbl future for delivery at a specified terminal. A 'drawdown' could be either a physical delivery from the tank, or a reduction in the nominal volume of the futures. We suspect that in the US at least, some of the physical is being switched to paper - and the process is contributing to the 'adjustments' that we keep seeing every week. Price is lower than it should be, because the physical is being bled out."

The "adjustments" that you are referring to are not inventory adjustments but, adjustments made on production "estimates".

Your theory does not quite add up or I don't follow you. We are in backwardation right now and not in a contango: short term price or spot is higher than the one for future delivery.

What this means is that the markets perceive a shortage of physical product available right now but, not as much in a few months from now since producers (U.S.) will ramp up production alleviating the shortage. Effectively, it means that traders have lost control and cannot manipulate price with the paper market. Much harder anyway and here is why:

Producers or the other side of the trade that you are talking about cannot hedge profitably future production or at the same price that they obtain today. This means hedge losses on the income statement and promising to deliver at a lower price which their investors don't like. So the offering for paper or futures has shrunk since producers are not incentivized to lock a large portion of their future production.

If what you are describing was happening (traders selling inventory and buying a future), you would see futures a few months out climbing in price or getting closer to spot to attract commitment from producers. I am not seeing it.

What you are describing is what happened to gold in the late 90's when it was in a "permanent" contango and some producers kept hedging forward and many years out at ridiculously low prices but, still higher than spot. There was also a lot of gold inventory being leased for a tiny amount of interest which added to available physical supply.

It worked for quite a while until it didn't but, another major difference between gold and oil is that all oil inventories can be consumed in about 30 days, so it is very hard to mess with the numbers IMO.

The real culprits for a low price IMO is misinformation surrounding real production and real demand. The media, EIA, IEA (today) are all doing their best. The media keeps cheering every "green" announcement no matter how insignificant they are and also cheers any drop in the oil price or increase in the rig count with sensational words and touting how great U.S. production is (which is really stupid by the way because they should create shortage fears instead to raise the oil price and force adoption of renewables). Then analysts rely on biased data from two large organizations who appear to be paid by Western world powers to keep the oil price low which in turn helps their economies.

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« Last Edit: February 13, 2018, 07:28:04 AM by Cardboard »

SharperDingaan

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Agreed we're talking about the EIA production estimates, and dont get why they are so large and oscillating. This is a EIA core reporting function, they have been doing it for a long time, and they have historically been reasonably good at it. Accepting that their people haven't suddenly become incompetent (more than usual), something relatively 'new' must be occurring - either in scale, or brand new.

Agreed we are in backwardation, but we think the markets view that global production will ramp up further along the strip is BS. We agree that it might be the case for US shale, but have a very hard time seeing how total non-US production grows in any significant way net of annual depletion. We also expect that a SA/Opec would take physical out of the market and start re-filling reserves, were there a sudden spike.

Agreed that much is made of the market view expressed in strip pricing.
But we also know that there is broad research indicating that for predictive purposes the accuracy of strip pricing is BS, and it rapidly gets worse the further out on the strip one goes. To prove it - all one need to is take the strip one year ago, and compare it against the actuals for the predicted periods. Roll the data back to when Saudi/Opec began flooding the market, to see just how bad it actually is.

Our own view is that we are essentially making a market bet against an algorithm (the use of strip pricing) that will continue to be employed until it doesn't work anymore. When it fails we expect disruption similar to the VIX implosion last week, and a rapid price spike. We have no idea when the 'discontinuity' will occurr, but are increasingly certain that it will.

It's also perfectly normal. The 'Big Short' immortalized how a whole market can know there's a problem, yet fail to act - even when it would be extremely profitable to do so. Bitcoin has shown how easy it is to convince entire generations that price can only go up - even in the face of extensive rationality that suggests otherwise.

Don't fight it. Simply position yourself to benefit instead.

SD
 
 

Cardboard

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"We agree that it might be the case for US shale, but have a very hard time seeing how total non-US production grows in any significant way net of annual depletion."

I think it is all based on what OPEC/non-OPEC "say" that they have removed from the market or that can come back on line at the flip of a switch. The cushion is seen as plentiful.

Comparing these futures to the VIX debacle is not a bad idea at all. Brent futures are in between $55 and $56 from Nov 2020 until Dec 2025. There are lots of speculators in this large paper market that will face significant loss on any disruption in supply. And these by the way, are guaranteed to come. It is just a matter of when?

There is very little true spare capacity, inventories are essentially back in line and demand of 100 million barrels/day is coming at the end of 2018 vs what was thought to be 2020 prior. Gotta to love the IEA...

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