2-Minute Soundbite On Current State Of Affairs -- Crude Oil, Globally -- March 1, 2016

Updates

Later, 8:19 p.m. Central Time: see this link, also.  
 

Original Post

 

In a comment, a reader sent me the following note. It summarizes my thoughts exactly; I wish I could have been / would have been as articulate and succinct.

Here is the reader's note (some editing; original comment at this post):

1. Every oil well/field in the world is declining at 3% per year (or more).

2. The current world production is just 1% more than consumption (95 millions bbls daily, 94 consumed).

3. OPEC and Russia are producing as much as they can (Saudi Arabia might be holding back some heavy oil).

4. The GNP of all OPEC countries depends heavily on oil sales; most of Russia export income comes from oil. $90 plus per barrel is needed to keep OPEC & Russian economies at 2014 levels (according to Reuters, et al).

5. U.S. rig count has declined from nearly 2000 to less than 500 in the last two years. Our production is now beginning to decline.

6. To attract investors and give them a reasonable return, WTI will need to rise to $60 plus. $45 to $60 dollars will help in sweet-spots, but will not likely keep U.S. daily production above 10 million barrels. [Comment: nor will $45 to $60 help the Saudis or the Russians, much.]

7. $30 or less per barrel oil will likely lead to economic and political unrest in the Middle East and this could easily spread worldwide. Also, if oil production falls too much, price will quickly spike which could also likely lead to a collapse in the world economy. [We are already seeing this in Venezuela; there won't be social unrest as such in Canada, but they, too, will be severely hurt.]

Summary: We are on a slippery slope. Unless world oil demand decreases, which is not a good sign for the health of global economy, oil prices need to get back to levels that will sustain the free world oil industry and keep the GNP of many oil producing countries from remaining at unsustainable levels with political, economic, social, military, problems. $60 to $85 oil is needed for any level of normality in today’s world. When and how this works out is a multi-trillion dollar question.

My comments later, perhaps.  But that's about as good as I've seen in a 2-minute soundbite. Some will argue that Saudi Arabia and Russia are producing at near capacity, but I tend to agree with that.

$60-oil will be a huge help to US shale oil industry, but perhaps not enough to get big projects back on line. In addition, $60 oil will "help" Russia and Saudi Arabia, but the latter budgets for $100 oil and thus even $60-oil will not be seen as high enough. Consistently, Saudi Arabia suggests a minimum of $100/bbl; most recently in Houston the SA finance minister again said that "$100-oil is reasonable." Perhaps $60-oil helps stem the bleeding in Saudi Arabia but doesn't get them out of the woods, as they say.

I think the most interesting "new" development in the Bakken and perhaps all tight oil plays in the US (I don't know how Texas, Oklahoma are handling the glut), is the observation that companies, like EOG, appear to be drilling DUCs much more often that would seem prudent, but .... that leads to another discussion.. maybe later.

A huge thank you to the reader for sending that long note.

Later:  

Another reader sent this graphic to me shortly after the above was posted. Based on the date of Brent in the original graphic, I assume this data was prepared back in 2014. I have added a thicker red line showing the futures price for March, 2016, Brent oil, from this source.

My hunch is that with all the commitments Saudi Arabia has accrued since 2014; the amount of money it has lost; the war in Yemen; the fact it cannot rely on the US any more and needs to beef up its security, etc., etc. that $104 figure might be a tad higher now.

Venezuela is a basket case now, of course, and whatever price oil goes to in the near future isn't going to come close to helping Venezuela.

Libya is a failed nation. One must assume that much of its income from oil is unaccounted for and ends up in bank accounts overseas.

Iran? Who knows? It appears they can get along without selling any oil? LOL.