Welcome to this page, although it's odd you are looking at it....
I decided to camp on this url until I can get my friend to start his own blog. The man needs an outlet.
But he also drafts these brilliant editorial gems based on his voracious appetite for the opinions of others; he's the master of a good analogy, and one of my favorites is about the Moai, or Big Stone Heads of Easter Island - hence the name Big Stone Heads (tm), which is now officially taken for the purposes of blogging about things political, social, and/or just annoying.
If I can't convince my friend to take over, I might start ripping off his copy and posting it here. So, if you like thoughtful, opinionated, doominess, with some diversions on things like the Lada and Zombies, check back; maybe we can offer you a respite from a sincerely messed up world.
I've expanded the lexicon to include peacock feathers and sand castles, so as to have a broader repertoire of terms to capture the range of ways we collectively spend (waste?) our aggregate efforts.
ReplyDeleteI continue to dither on whether to post to this blog as myself, or a pseudonym, and if posting whether to focus on the silliness of our global and US economic systems or on the specifics of likely financial and energy issues.
ReplyDeleteI'm pretty sure nobody will ever see this blog except a few friends and family, so really it probably doesn't much matter. Maybe I should see what Lissa wants to see......
A reposting of a my recent Facebook post, with some commentary by others, for posterity.
ReplyDeleteMy notes:
- Dollar continues to strengthen, putting pressures on emerging economies with dollar-denominated debt. US economy has about the most momentum of any, but still has a ways to go. Those heavily invested in emerging economies should be sweating it about now.
- EU is weakening, and only Germany is showing bright spots, but for every positive sign there is a negative one to match. France and Germany will struggle with sanctions against Russia. Greece may ratchet up their negotiations as elections approach, with Germany upping rhetoric to match. The current uncertainty helps nobody in the Eurozone much.
- Russia is hurting, and burning through forex reserves quickly. China is helping, and the tighter alignment there is a key longer-term strategic concern. Still, Russian debt will head to junk status soon.
- KSA continues to talk down the price of oil as well as taking action to make it so. Nothing is changing there anytime soon, it seems.
- Tanker rates seem to be maintain at a fairly high level, as cheap oil gets bought eagerly. Almost 1Mbpd appears to be going into the Chinese SPR, which has supported long-haul tanker rates. This should be temporary, though, assuming the Chinese economy stays weak (and it may get weaker). Then, tanker rates will plummet.
- It appears this shipping owners are already worried, as they are signing long-term leases that indicate floating storage will occur again (first time since mid-2000s that I noticed, though maybe there was some in 2011) as traders look at contango in the futures chains. So far, maybe 10Mbbl has been leased, but there are a lot of older ships that could be cheaply used for storage (maybe 50Mbbl total?), and if not those will go to scrap if lease rates stay low.
- Cushing is still mostly empty, as the Keystone XL South Leg was completed a year or so ago and emptied the US glut. This is reflected in the convergence of WTI and Brent pricing back to long-term norms (from the wide split of the past few years). There is maybe 60Mbpd of storage available in Cushing now, and that should fill in the next 60 days if the glut persists.
- Filling up floating storage, Cushing, and the Chinese SPR will take a while assuming a 2Mbpd glut. KSA can help it out by opening the taps a bit (from about 10Mbpd recent production to a burst at 12Mbpd, for example), if they want to hurry things along.
- Other commodities are dropping too. Many, like iron (and even gold and silver) are energy-intensive to produce, and so a drop in oil reduces the production cost, and drops in the global economy cut demand, so prices are dropping to match. A lot of iron has been going to build ships to transport iron ore for a Chinese market that doesn't need it now, so as iron demands drops and the ships get overbuilt, both ore and shipping will plummet. Shipping rates are already very low, versus recent history.
So, unless there is a major economic recovery (which hardly ever occurs quickly) or a major conflict that pulls off a couple or three Mbpd of production, prices are going to drop further. I assume the intelligent market has priced in much of the above, but probably not completely.
I figure we'll know the bottom when global production begins to drop and we see storage fill up. Usually US storage is high in early Q2, so 90 days might be as good a bet as any for a bottom. I still think there is another leg down to go, into the 30's. I'm still not sure if we'll push down to the marginal cost of production (short term cost) versus the marginal cost to drill (long-term investment decisions), but we could. Not sure quite where that would put the floor, but I bet it's closer to $20 than $40/bbl.
Anybody up for a war somewhere? Anyone?
My buddy Trey's response:
ReplyDeleteKSA is talking down prices to hurt the players in their backyard that are effectively breaking the rules. They're showing OPEC and the world who's boss. My prediction of 43-47 price of oil is looking like we may overshoot lower. Perhaps 30s? But then again, capital is fleeing rapidly, we're due for a dead cat bounce which we've yet to see...
Rigs are falling at current pace we'll be down 600+ rigs by summer. That will have a marked impact on supply. Not only for oil but gas.
I think the US is finally on track, we'll know a lot more when we have Jan data in Feb. Germany is fine, I think lower prices will bolster the EU and China and perhaps India.
The market has priced in some of the above, no doubt but as we've discussed before, spending a month or two overshot to the low side isn't uncommon. Is it already oversold? Yeah a bit for long term supply/demand balance. But is it oversold for the current supply demand balance? maybe not...
I agree with Q2, I've said March-April-May for the bottom. If its closer to $20 we have major problems and risk a huge spike to the upside later. $20 goes below recovery costs on SAGR in many instances and might be below lifting costs for a few of the less efficient operators.
Marginal cost of production is already pretty low on shale and traditional basins for the big players...in fact marginal cost to produce, ie, lifting costs is going to be in a range from about $8 to $15.
Consequences are bad if we dip into the 20s...very bad. That will result in a spike and perhaps world wide recession in 2017 or so. Lets hope that doesn't happen.
Agree NG will recover. 2017 only happens if oil spikes, the spike won't be this year unless something very unexpected happens. Market will be reasonably balanced in 2016 otherwise prices generally rise through 16 exiting at 125+ and into 2017 with perhaps new records tested (under my spike scenario, which would be preceded by a dip into the 20s for awhile this year, I think this is unlikely but possible).
A few more observations from the weekend, e-mailing with my brothers:
ReplyDeleteLooks like oil is going to consolidate for a few days before working down another step. Really whether it goes up or down from here depends heavily on what happens as surface storage fills up. Right now, oil is still selling quite
quickly, with a LOT going to China, probably for their newly expanded SPR.
Cushing has only refilled about 1.8Mbbls in the past couple of weeks, but still has 50Mbbl of empty capacity (it was about full a year ago).
The first floating storage tankers have been leased for a year or so each, but it's not clear they are filled yet -- those hold 2-3Mbbl each. Really, there is not much glut yet, and the drops are being driven by a lot of news and market momentum on top of modest drops in consumption and increases in production, but a glut is coming.
So, as long as production is going someplace, prices will hold. Once the remaining storage fills, if it does, prices will likely drop again. The real "bottom" is the marginal cost of production for existing wells, which is a far
cry from the marginal cost of drilling for new wells that dominated the past couple of years.
I'm quite sure if KSA and OPEC in general continue as they are, we'll see $30 oil. If I were KSA, I'd quietly open the taps a bit to push a glut along. Unless China and/or the EU recover, or a war knocks off production, it's going
to be a long time until prices recover.
What would be interesting would be for the US to add a $20 tariff on imported oil. That would shift the dynamics a good bit, but I doubt the US would do that. Next best step would be war in Russia or collapse in VZ.
Response to some questions:
ReplyDeleteI think those in the Refining industry are painting an overly rosy picture, for several reasons.
>> 1) A good bit of the downturn in crude prices is due to slack consumption. Consumers don't buy crude, but refined products, so at the point that crude is
in glut the refined product market will be highly competitive and slack as well.
Nobody should be investing for near-term capacity growth.
>> 2) Most of the consumers aren't in the middle of the US, so Tulsa refineries only benefit from local consumption......which is in an area driven by oil
revenue. The coastal refineries are closer to population centers, and those are in areas that are going to be doing better on average. So, the mid-continent refiners are going to take more than their fair share of a hit.
>> 3) Joe Public and Suzy Retirement Fund Manager lump all O&G together, so investors are going to be cautious across the board. Those not affected by the
slowdown will recover faster, as they should, but the entire sector gets hit.
>> 4) If consumption is slack, pricing gets aggressive. Not only will expansion not be needed, but lower margins on lower sales means less money to invest for
routine maintenance as well.
>> Steel plants are already laying off. Iron prices are way down. Iron ore was $175 about 3 years ago, and today it is $68. I'd say that anybody who is selling commodities should expect some slow-down.
>> I think the dollar is going to be strong for a while. For those poor countries with dollar-denominated debt, that will suck. As the reserve currency, everybody wants dollars. If the dollar weakens, then US industry will
benefit. Unless a fast-crash happens, the gov't will adjust and raise taxes if everybody is getting a lot of repatriated dollars, or sell more bonds to suck up loose dollars. We certainly won't be importing as much in such a world, though.
>> I think you, I, and many others aren't thinking right about debt in a purely fiat economy. Our gov't is built using the constructs of a gold-backed dollar, but fiat-alone has a different set of rules. I think the US is better situated than the EU, who has the same issue with legacy thinking but worse rules, and worse behavior of their member states (who apparently can run debts but not
print money). At least most US states only have debt in dollars.......
Saw some interesting news about Ukraine, and the fact that besides VZ there are few countries as close to financial collapse. Ukraine basically needs a bailout from the EU (some would say good money after bad), but they are also a horridly corrupt society so any money that heads that way WILL be absconded with. Heck, their central bank found that its stacks of gold were actually painted bricks....nor even a good forgery, really.
ReplyDeleteI'm struggling to decide whether to focus just on energy or just on global economics, or a mix of both. The former I know more about, but the latter is arguably more important.
Cheap oil impacts all sorts of other energy sources, and causes some interesting inversions. Gasoline is now under $1.50 wholesale, and under $2.00 at point of sale. Ethanol is over $2.40, and diesel is about $1 more than gas around here. Ethanol was supposed to lower fuel prices, and since there is blending mandate the average gallon of fuel is actually more expensive than it would be if it were 100% gas. Political pressure will be to relax the mandate and devastate that nascent industry....and KSA would be fine with that, I'm sure.
The payback for hybrids and EVs will now be much, much longer than with $4 gas. Everybody will quickly go back to buying trucks and SUVs, with a knock-on impact to CAFE fleet numbers, and of course there will be a push to relax the aggressive target numbers.
There is a bit of a bubble in auto loans, with a new subprime deliquency issue....not as big or serious as mortgages in 2008, but a problem nonetheless. Cheap loans will buy expensive trucks and SUVs with bad mileage, rather than the trend in 2008 pushing toward smaller cars that were cheaper and more efficient. In a few years, just as prices roar back, used car buyers will be stuck with all of these, while the affluent will simply buy something new and efficient if needed. Gas mileage is a regressive penalty. I'm sure KSA won't mind.
Progressive transportation, like trains and buses, are likely to be skewered by dropping ridership, just as they were gaining momentum. I'm pretty sure KSA won't mind.
Low oil prices put pressure on renewables, too. You can't sell EVs into cheap gas, and conversions from heating oil to NG or solar, or even spending on insulation, will be less likely.
Any hope of cost-emphasis naturally reducing fossil fuel use to combat the potential for climate change is now gone for a few years at least. Low prices would be a great time to roll-in progressive taxes on carbon fuels, but the political climate isn't going to support that.
A few years back I had the opportunity to spend time with my company's wind segment expert, and in a few minutes we came to agreement we'd both like to see $8 natural gas. It wouldn't be hard to find similar common ground for $4 gasoline, too. Not much about this situation is going to please environmentalists, climate change activists, advocates for public transit or walkable cities, promoters of renewables, or those who simply want to see better efficiency.
Last week another leading indicator of glut arose -- the leasing of crude carriers for long-term floating storage.
ReplyDeleteThis week, there is a new indicator -- early termination of drill rig leases. 61 rigs went idle, and drilling companies are saying that customers are paying penalties to exit contracts.
Oil stocks are above the 5 year average already, and heading up. Until the rig slowing results in production drops, the glut will expand. In 4 to 6 months, the US could be bumping against storage capacity limits.
Recent abrupt drops in rig count may pull the slack out a little quicker, though, and that would be a good thing for US production stability and global price stability. The longer the glut persists, the lower the low will be, and the harder the wall on the other side when the glut disappears.
The Baltic Dry shipping index ticked up a bit today, for the first time in months, which may indicate the global slowdown is reaching bottom. I suggest we wait through earnings season before getting too excited, though.
Interesting news from Greece, with the populist party stressing its plan to reduce cuts. On the one hand, it's hard to see how Greece can survive with half of its population retured: "With a workforce of 2.7 million paying for retirees of roughly the same number, creditors have insisted that pensions be pared back. The demand has been the centrepiece of Athens receiving a new “precautionary credit line” when its €240bn (£187bn) financial assistance programme runs out. It is also a condition of any future talks over the rescheduling of Greek debt, at 177% of GDP not only the largest in the EU but by far the biggest drain on the economy."
By comparison, Florida has about 3.3M retirees and 8M employed workers (not everybody unemployeed is retired -- kids, at-home spouses, prisoners, etc.), and at the projected worst in 2030 it won't be as bad as Greece. But here's the important point: Florida won't have to support EVERYBODY, as many will have pensions paid by other states or the Fed gov't, and its cost of living is significantly less than some of the retiree donor areas (like New York City).
But on the other hand, the Eurozone should have seen this coming. Draghi's planned QE doles out funds to member countries based on their paid-in rates, which the wealthy countries will get more easing than the poorer ones....which means money will flow from Germany to Greece. On the surface this sounds good, but unless Greece does a lot of effective work with that income, they'll see that money get sucked up in taxes and not much added productivity for the locals -- and with half the country retired, somebody needs to be making a lot of stuff for daily life! If Greece is a retirement haven, and a vacation spot, then the right answer is for Greece to devalue its cost and standard of living until other Europeans want to visit, retire there, buy their stuff, or even travel there to work....and all of this would be easier if Greece had it's own economy, but no more pleasant. With rampant corruption, skewed taxes, and slack work population, Greece is going to have a hard row to hoe regardless.
The simple truth is that Germany likes selling stuff to the rest of the EU, and pats itself on the back for selling a lot of stuff but doesn't want to acknowledge gratitude for others who buy it. Greece doesn't have spare money, and it can't print its own anymore than Florida can print dollars. The current Draghi plan won't give Greece much more money to spend on German stuff -- it'll give Germany more money to spend on Greek stuff. Germany already has enough money, and Greece is short stuff, so it's hard to see how this will much help. Instead, Greece needs to deflate, and Germany needs to expect less exports......and the EU should spend money getting people employed instead of loosening credit.
The last time prices were this low, we were in a global recession with 4+Mbpd spare production. So, it would seem either:
ReplyDelete1) We're in a major recession and don't know it yet
2) Oil is oversold
3) Production has more than 4Mbpd spare.
It might be some combination of the three.....