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abarrelfullabarrelfull wrote on 21 Dec 2009 06:50


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How America can Turn Low Oil Prices to Long Term Advantage

created: 10 Dec 2014 10:07
tags: price usa

rating: +2+x

A low oil price is a wonderful opportunity in the short term, as it releases money to be spent on other things and improves the current accounts of importing countries. In my opinion, it can also be turned into a long term opportunity.

Firstly the lack of production growth in the short term is actually a blessing. Infrastructure that was not sufficient can be developed. Quality of life issues that impact production regions, such as housing and public services, can be dealt with. Issues over the environment and regulation can also be straightened out. Oil companies will focus on improving cost efficiency and will no doubt develop better technologies, when under cost pressure. When production growth resumes again, it will be much more sustainable.

Only the oil companies are losers from the current situation, not society as a whole. This is why this idea stinks. Throwing free trade out the window, to help a small number of companies is a really bad idea

If the USA wants to wean itself off imported oil, it need to increase production AND reduce consumption. The best way to reduce consumption is to tax fuel at the pump. Given that pump prices have fallen so much, this is a very opportune time to make such a move. As it will reduce consumption in the medium term, and because the USA is the world's largest consumer, oil prices will be marginally lower in the long term, meaning that some of the tax will be paid for by oil producers.

Meanwhile, giving permission to Keystone XL, would improve the supply situation in the medium term, and a government that increases taxes on fuel, can tell the environmentalist to butt out on Keystone, which is in America's interests.

So you reduce CO2 emissions and increase energy security at the same time. A perfect win. It will not happen of course, but that doesn't mean that it shouldn't.

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Low Oil Prices are a Boon for European Refiners

created: 08 Dec 2014 13:02
tags: price refinery

rating: +2+x

Since oil prices have started falling, European Refiners have been extremely happy, as product prices have not fallen in step, and this has led to refinery margins that they haven't enjoyed for years. This effect is however, undoubtedly temporary. As Crude settles into a new normal, the product prices will eventually catch up and margins will fall to lower levels.

There are a number of reasons, however, why I think that the new price environment will be helpful for Europe's beleaguered refiners.

  1. Rapid rising crude production in the USA, gave us a huge Brent/WTI spread, and American refiners a massive advantage. The spread is now miniscule
  2. Europe's natural gas is largely sold at Crude Oil indexed prices. These will come tumbling next year, reducing energy costs. Relative to US competitors, the disadvantage will be much less.
  3. US gas producers rely a great deal on good prices for liquids. With lower liquids prices, gas production will decrease, increasing prices
  4. Russian refinery upgrades are creating stronger competitors, as the capability of producing Euro V compliant fuels increases. The combination of sanctions & low prices will slow this trend to a crawl
  5. Working capital needs will be less, particularly important for heavily indebted companies.
  6. Europe suffers from cyclical demand destruction, especially in the South. Low oil prices will spur demand
  7. Oil producers headlong rush into refinery investments will slow down as they need to preserve their cash

All in all, Europe's refiners will enjoy a much better 2015 than most of the recent years, whilst US refiners will see most their advantages reduce or disappear.

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Saudi Arabia Did Not Have a Choice

created: 03 Dec 2014 10:45
tags: opec prices upstream

rating: +2+x

Much has been written about the decision of OPEC not to cut its production, taken at the 166th Meeting held last week.

By the time the meeting was held, most market players had come to the conclusion that there would be no change, but even the small remaining hopes of positive language were shattered. Oil prices fell further and are languishing at levels many thought impossibly low just two years ago.

Not so long ago, the consensus was that Saudi Arabia, the driving force behind OPEC decisions, needed $90 dollars a barrel to balance its budget, and so would defend that price.

That proved to be false.

So what was it that drove the decision, and what can we expect for the future?

  1. Firstly, I don't think that the Saudis had much choice. There have been very big increases in supply and stagnant growth. The amount that would have to be cut in the short term to defend $90 per barrel would probably need to be bigger than acceptable
  2. A cut of even a million barrels per day may not have worked, and OPEC would have been exposed as a paper tiger
  3. If it worked in the short term, US tight oil production would have continued to rise, gradually nullifying the impact
  4. The impact of low oil prices hurts others much more that the Gulf States
    • Venezuela, a regular cheater, is in big trouble and will see its production shrink as it cannot invest
    • Iran, the Gulf States number one enemy is already hurting from sanctions and may be forced to a decision on their nuclear programme, which interests the Saudis even more than it does the Israelis
    • Russia was already in trouble, as mature fields decline and massive investments are needed in their replacements. The political environment has made this a challenge. Sanctions have made this even more difficult, as Russian companies struggle with financing. Now low oil prices have made it impossible. This story is one small example of the problems.
    • In general, new projects need huge investments. Low oil prices are forcing companies everywhere to postpone projects

So over the medium term, we can expect to see investments fall and therefore the global production capacity will decrease. Don't forget that production from mature fields declines at a significant rate, and most investment only replaces production, it doesn't increase it.

I don't think that US tight oil is the issue. The business well established, infrastructure is in place or being built, and experience has been gained. Low prices will hurt production, but that can quickly come back on again. It will however slow down new developments elsewhere, which is an important target for OPEC

Even a few months of prices at this level will create a level of uncertainty that will impact investment decisions over the next few years. Given that heavy crude and deep water developments are a major part of the investment portfolio, this will prove to be evr more significant as time goes by.

So what does OPEC do next?

If the oil price stabilises at today's level, a small cut in 6 months time might increase prices enough to give a decent boost to revenues without taking them high enough to spur investment. It would certainly work better than a cut today, which probably would have achieved nothing

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