FRACTIONAL FLOW

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World Crude Oil Supplies per July 2017

In this post I present developments in world crude oil (including condensates) supplies since January 2007 and per July 2017.

  • In this post the world crude oil (inclusive condensates) supplies is split into three entities, North America [Canada, Mexico and the US], OPEC(13) and other Non OPEC [World – {North America + OPEC(13)}] with a closer look at Brazil.
  • For OPEC(13) a closer look at developments of number of active oil rigs versus developments in the oil supplies. This is supplemented with developments in the oil supplies versus the number of active oil rigs for some selected OPEC countries.
  • Looking at figure 07 for OPEC(13) the increase in its supplies as of late 2014/early 2015 followed a period with noticeable growth in oil rigs and likely capacity expansions/modifications of oil process/treatment facilities.
    The accompanying increase in OPEC(13) supplies may simply have been rationalized from a pure business desire to recover the investments (CAPEX) from these capacity expansions.
  • Finally a closer look at developments in petroleum consumption/demand and stock changes for the Organization for Economic Cooperation and Development (OECD).
    The OECD has about half of total global petroleum consumption and a major portion of the global petroleum stocks.
  • “It took a lot of costly oil to bring down the oil price. This is the magic from lots of cheap credit.”

Data from this post is primarily from EIA Monthly Energy Review October 2017.

Figure 01: 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 July 2017. Developments in the oil price (Brent spot, black line) are shown against the left axis.

It was the oil companies’ rapid growth in CAPEX leveraged by cheap debt [ref US Light Tight Oil (LTO)] and expectations of a sustained higher oil price that brought about a situation where supplies started to run ahead of consumption/demand that brought the oil price down. During the run up to the oil price collapse, supplies also grew from other non OPEC (ex North America) from developments sanctioned while the oil price was high and expected to remain so.

Following the oil price collapse several of these developments had to take considerable write downs.

This coincided with increased OPEC supplies in what became widely explained as a bid from OPEC for market share.

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Developments in Energy Consumption and Private and Public Debt per 2016

For some time I have explored the relations in developments for total debt [private and public], interest rates, Gross Domestic Product (GDP) energy consumption and thus also the oil price.

My theory has been that there are relations between changes to total debt and energy consumption and thus energy prices. Changes to total credit/debt should thus be reflected in energy consumption. Price formation is also influenced by several other factors and most prominently supply and demand balances.

To me, demand appears to be the one that is poorly understood and demand has been, is and will continue to be what one can pay for.

All transactions involving products and services require some amount of energy thus currency/money becomes a claim on energy.

During the last decades the world was in a gigantic experiment with debt expansion, most recently fueled by low interest policies which allowed to pull demand forward and for some time negate higher prices when demand ran ahead of supplies.

Debt expansions can go on until they cannot, as some economies already have experienced. In the recent decades, growth in total debt was higher than the growth in GDP (ref figure 1) and there is a strong relation between changes to total debt and GDP.

Figure 1: The chart above shows [stacked areas] developments in total private and public debt in Japan (black/grey), Euro area (yellow), US (blue) and China (red).
In the chart is also shown [stacked lines] developments on the Gross Domestic Product (GDP) for the same 4 economies.
NOTE: All data are market value, US$.
The GDP (lines) have been stacked. The bottom line shows Japan, next is (Euro area + Japan) and the top line [China] also shows the total for the 4 presented economies.
Data on private and public debt from Bank for International Settlements (BIS).
Data on GDP from the World Bank [WB]. WB GDP data for 2016 were not publicly available as this was posted.
Note that total GDP for these 4 economies declined from 2014 to 2015.

In this post I also present a closer look at developments in energy consumption and total debts [private and public] for China, Italy, Japan, Spain, United Kingdom and USA.

As of 2016 these 6 countries had about 47% of the total global energy consumption and 42% of the total global petroleum consumption.

As the private sector debt growth slowed/reversed the public sector took over and it appears that public debt growth is not as potent to stimulate growth in energy consumption [and possibly GDP], but sustains or slows the decline in total energy consumption.

Part of the explanation for this may be that much  of the increased public deficit spending is directed towards social programs (more unemployment benefits etc.) which at best may sustain demand.

The 6 countries are presented in the sequence of how I perceive how far they are into the debt deleveraging cycle.

There are other forces at play here as well, as oil companies entered into a bet that high oil prices would be sustained by consumers continuing to have access to credit/debt, which would allow the oil companies in an orderly manner to retire their steep growth in debts required to develop the costlier oil. The debt fuelled growth in investments gradually created a situation where supplies ran ahead of demand, thus collapsing the oil price in 2014.

To me the sequence of events is:

Changes in credit/debt => Changes in energy consumption => Changes in GDP

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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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Bakken(ND) Light Tight Oil – Update with Sep – 15 NDIC Data

After years of following developments in extraction of light tight oil (LTO) in the Bakken, the oil price, studying actual well production data from the North Dakota Industrial Commission (NDIC) and the SEC 10-Q/Ks filings for several companies heavily exposed to the Bakken, a quote from Shakespeare’s Macbeth comes to the fore of my mind:

All causes shall give way: I am in blood

Stepp’d in so far that, should I wade no more,

Returning were as tedious as go o’er:

                                              (Macbeth: Act III, Scene IV)

For me the Macbeth quote very much sums up the predicament many Bakken LTO operators now find themselves in.

Figure 01: The above chart shows developments by vintage in LTO extraction from the Middle Bakken/ Three Forks/Sanish formations in Bakken (ND) as of January 2008 and of September 2015 [right hand scale]. The color grading shows extraction by month. Development in the oil price (WTI) black line is shown versus the left hand scale.

Figure 01: The above chart shows developments by vintage in LTO extraction from the Middle Bakken/ Three Forks/Sanish formations in Bakken (ND) as of January 2008 and of September 2015 [right hand scale].
The color grading shows extraction by month.
Development in the oil price (WTI) black line is shown versus the left hand scale.

What this study/update present:

  • With the decline in the oil price the average well as from the 2012 vintage will struggle to reach payout and become profitable.
    (The oil price decline reduces the portion of the more recent wells that are on trajectories to reach payout and become profitable.)
  • The 2015 vintage follows the 2014 vintage closely, suggesting that around 20% of the wells of 2015 vintage are on a trajectory to reach payout and become profitable.
  • The underlying decline from the legacy wells is strong. The extraction from all the wells started between Jan 2008 and Dec 2014 declined by close to 440 kb (or about 41%) from Dec 2014 to Sep 2015.
  • Some of the early wells (2008 vintage) have been restimulated (refracked) and the effects are short lived and the economics of this looks questionable, at best.
  • A near steep decline in LTO extraction from the Bakken is baked into the cake due to the financial dynamics created by a lasting low oil price.
  • An average of around 136 wells/month were added so far in 2015 while extraction declined close to 60 kb/d, suggesting 140 – 150 wells needs to be added each month to sustain present extraction levels.

Studying the SEC 10-K/Qs for several of the companies that are heavily weighted in the Bakken shows that natural gas and NGLs (Natural Gas Liquids) are weighing down the financial results for many companies.

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Written by Rune Likvern

Monday, 30 November, 2015 at 21:49

World Crude Oil Production and the Oil Price, August 2015

In this post I present some of my observations and thoughts about the developments in the oil price, supply and demand, exchange rates (relative to the US dollar), petroleum stocks and what near term factors are likely to influence the oil price.

  • The price of oil (and other commodities) appears to have been influenced by the central banks’ policies post the GFC of 2008 (Global Financial Crisis, primarily the Fed as the US dollar is the world’s major reserve currency) with low interest rates which allowed for growth in total global credit/debt.
  • As the Fed confirmed its end of QE3 (QE; Quantitative Easing) program by the fall of 2014, the oil price started to decline. This decline became amplified by an oversupply resulting from years of debt fueled high capital expenditures by the oil companies to develop supplies of costlier oil for the market to meet expectations of growth in consumption.
  • With the end of QE3 the US dollar rapidly appreciated versus most other major currencies, which offset some of the decline in the oil price in most economies (oil is priced in US dollar), the exceptions being the US and China (which has its currency pegged to the US dollar).
  • Demand and consumption of oil (actual data so far only for the US) responded to the price collapse by some growth. However the world’s growth has not been sufficient to close the gap between supplies and consumption, thus sustaining a downward pressure on the oil price.
  • The oil price collapse motivated oil companies with low variable costs (OPEX) to compensate some of the loss of cash flow by increasing their production (volumes), thus creating a dynamic where growing supplies went looking for demand.
  • The oil price collapse and a period with a favorable contango spread incentivized a strong build in stocks and as stocks remain at elevated levels, it may take some time before stocks return to “normal” levels.

Figure 1: The chart above shows the developments in the oil price [Brent spot, black line. The red line is the smoothed one year moving average] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy relies heavily upon. The financial system is virtual and thus highly responsive. NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

Figure 1: The chart above shows the developments in the oil price [Brent spot, black line. The red line is the smoothed one year moving average] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy relies heavily upon. The financial system is virtual and thus highly responsive.
NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

The big unknown is how demand will develop. A global economy struggling with too much debt while running out of quality collateral will at some point experience the drags from growth in the services of the growing total debt. Continued growth in global credit/debt will increasingly be directed towards the services of the growing total amount of debt (kicking the can down the road as the economic productivity from additional credit/debt diminishes).

  • As growth in global credit/debt slows, comes to halt or deleveraging sets in, this will affect demand and prices, also for oil.

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