Comment
While the the article below from the Oil and Gas Journal debates the pros and cons of lifting restrictions on the the export of US crude the question that follows is probably more important : Can the US then determine international oil prices using its EXPORTS,and can the Saudi's and OPEC survive the onslaught? To properly understand the issue readers are also referred to the two articles below on how the shale industry is already enabling the US to become the swing producer ie the country that changes its crude oil output to meet fluctuations in market demand, taking over that role from Saudi Arabia.
While the the article below from the Oil and Gas Journal debates the pros and cons of lifting restrictions on the the export of US crude the question that follows is probably more important : Can the US then determine international oil prices using its EXPORTS,and can the Saudi's and OPEC survive the onslaught? To properly understand the issue readers are also referred to the two articles below on how the shale industry is already enabling the US to become the swing producer ie the country that changes its crude oil output to meet fluctuations in market demand, taking over that role from Saudi Arabia.
Given the Saudis and OPEC member countries dependence on oil revenues, they cannot afford to fight another price war. The Saudis are even now suffering the adverse consequences of starting the current round of price cuts.
HOUSTON, Sept. 209/02/2015
By OGJ editors
A study released Sept. 1 by the US Energy Information Administration was apparent cause for celebration for several oil and gas industry groups, which took its findings as confirmation that lifting restrictions on US crude oil exports would be a net positive for the industry as well as consumers.
EIA developed several analyses that examine the implications of removing the restrictions for the price of US and global marker crude streams, gasoline prices, crude production, refining activity, and trade in crude and petroleum products.
The study, Effects of Removing Restrictions on US Crude Oil Exports, was conducted in response to requests from US Sen. and current Senate Energy and Natural Resources Committee Chairman Lisa Murkowski (R-Alas.) and former chairman and Sen. Mary L. Landrieu (D-La.), (OGJ Online, Apr. 14, 2014), as well as current members Ronald L. Wyden (D-Ore.) and Maria E. Cantwell (D-Wash.).
Murkowski previously included language ending the 1970s-era ban in her Offshore Production and National Security (OPENS) Act, which was approved by the energy committee at the end of July (OGJ Online, July 24, 2015).
“Multiple studies have shown that lifting the export ban will improve our economic and energy security without harming American consumers,” Murkowski remarked in a statement welcoming the study. “It’s time to leave the old scarcity mindset behind and seize the opportunities provided by America’s energy resurgence.”
Higher output, bigger impact
The report applies EIA’s energy models to directly compare cases over the next decade with and without the removal of current restrictions on crude exports. Four baseline cases using EIA’s National Energy Modeling System are considered to reflect a range of outlooks for resources and technology as well as prices, which are key drivers of crude production.
For this analysis, EIA generally assumes that all streams with 50° gravity oil and above would be eligible for processing and export under recent BIS guidance.
The analysis finds no difference between projections with and without current export restrictions in two analysis cases in which projected production with current export restrictions remains below 10.6 million b/d over the next decade.
However, in two other analysis cases where production in 2025 ranges 11.7-13.6 million b/d, projections without export restrictions show increased production, higher crude exports, reduced product exports, and slightly lower gasoline prices to US consumers compared with parallel cases that maintain current export restrictions.
The variation in projected production across the four baseline cases used in the report reflect differences in the characterization of oil resources and technology as well as future crude prices. EIA notes there is a considerable spread in projected production across these cases. The removal of crude export restrictions does not lead to additional production in the reference and low oil price cases, where production remains at or below 10.6 million b/d through 2025.
However, the removal of crude export restrictions leads to additional production between 400,000-500,000 b/d by 2025 in the high oil and gas resource (HOGR) and HOGR-low price (HOGR-LP) cases that have significantly higher baseline production based on more optimistic resource and technology assumptions.
Gas prices could fall, not rise
Petroleum product prices in the US, including gasoline prices, would be either unchanged or slightly reduced by the removal of current restrictions on crude exports. EIA notes that petroleum product prices throughout the US have a much stronger relationship to North Sea Brent prices than to West Texas Intermediate prices.
In the HOGR and HOGR-LP high-production cases, the elimination of current restrictions on crude exports narrows the Brent-WTI spread by raising the WTI price. As producers respond to the higher WTI price with higher production, the global supply-demand balance becomes looser unless increased production is fully offset by production cuts elsewhere. The looser balance implies lower Brent prices, which in turn result in slightly lower petroleum product prices for US consumers.
Combined net exports of crude and petroleum products from the US are generally higher in cases with higher US crude production regardless of US crude export policies. However, crude export policies materially affect the mix between crude and product exports, particularly in the HOGR and HOGR-LP cases, which have high levels of production.
Crude exports tend to represent a larger share of combined crude and product exports in cases where crude exports are unrestricted. Also, in cases where the level of crude production increases with the removal of crude export restrictions, total combined crude and product exports are higher than in parallel cases with current crude export restrictions in place.
Although unrestricted exports of US crude would either leave global crude prices unchanged or result in a small price reduction compared with parallel cases that maintain current restrictions on crude exports, other factors affecting global supply and demand will largely determine whether global crude prices remain close to their current level, as in EIA’s low oil price case, or rise along a path closer to the reference case trajectory.
As noted by EIA, resource and technology outcomes as well as global price drivers will affect growth in US crude production whether or not current US crude export policies are maintained.
‘Win-win’ for US consumers
“Today’s EIA report is a win-win for American energy consumers and energy producers,” said Barry Russell, president of the Independent Petroleum Association of America, in a statement released subsequent to the report. “By lifting the 4-decades-old ban on US crude oil exports, Americans would see an increase in American energy production, which would, in turn, grow our economy, create good-paying American jobs, and help lower gasoline prices for hardworking American families."
Russell last month urged further administrative action on US crude exports after the Obama administration approved a crude exchange between the US and Mexico (OGJ Online, Aug. 14, 2015). Following news of a secured agreement with Iran that would allow Iranian oil to get traded on the world market, Russell questioned why America wouldn’t allow its companies to do the same with their American-made surplus of crude.
IPAA also voiced its support in May for Murkowski’s and Heidi Heidi Heitkamp’s (D-ND) legislation seeking to lift the ban (OGJ Online, May 13, 2015).
The American Petroleum Institute also noted that “consumers could save on fuel costs if policymakers act now to lift trade restrictions on US crude oil.”
Margo Thorning, senior vice-president and chief economist for the American Council for Capital Formation took it a step further, stating, “It’s not only the increased economic growth and lower gas prices that we stand to lose by keeping this outdated energy policy in place, but our global credibility as well. This begs the question why the government is standing in the way of a policy change that it itself finds will benefit American taxpayers?”
Swing producer: A new role for U.S. shale and how to embrace it
Aug 7, 2015, 11:15am CDT
Courtesy Laurance L. Prescott, Guest contributor
Laurance L. Prescott is an associate director of
Courtesy Laurance L. Prescott, Guest contributor
Laurance L. Prescott is an associate director of
Houston-based Accumyn Consulting.
The crude oil market has been like the Texas floods of late — too much oil since 2013, too much rain this spring, and we are dealing with the consequences. No mortal could stop the floods in Texas, and OPEC could not stop the oil flood. U.S. shale had changed the game.
OPEC declined to act as the swing producer because it could not stop the unprecedented increase in world petroleum stocks (crude plus liquids), leading to May’s market surplus of 3 million bbl/day.
The excess crude oil came from U.S. shale fields. From January 2011 to January 2015, tight oil production from U.S. shale fields increased from 1.0 to 4.5 million bbl/day. In the same period, OPEC’s production fell by 0.3 percent and its market share fell from 43.2 percent to 41.2 percent, a drop representing 1.6 million bbl/day. OPEC may have held the price up until last June, but it couldn’t stop price from plummeting thereafter, as world stocks rose to unprecedented levels.
Had OPEC continued to cut production, keeping price up, U.S. shale producers would have continued dramatic growth. Where would it have stopped? With high prices, OPEC supply cuts would have been replaced quickly by U.S. tight oil production.
Instead, in November, OPEC surprised the market, changing it’s focus to market share. Price plummeted 24 percent in 18 days, bottoming out on March 13 at $43.39/bbl. U.S. oil rigs dropped from 1,575 on Dec. 5 to 635 on June 12, a 60 percent drop.
OPEC realized it could no longer divert price in a flooded market, acting alone. Now, shale producers must transition from price takers into swing producers, making decisions that collectively but independently help correct market imbalances and dampen market price swings. Here’s how they can and what the threats are:
1. Accept the swing-producer role
When price changes trend, shale producers need to adjust production in the same direction within one to three months of a price swing, as OPEC did.
Eagle Ford shale production shows decline rates steep enough to brake production quickly: down 28 percent from first month to third, and 50 percent to sixth. Shale production leveled out in April this year, four months after price and rigs plummeted, and has started to decline. While shale can help, shale isn’t big enough yet to swing production alone.
2. Keep pushing on costs, technology and production efficiency
The shale revolution came about from technology breakthroughs and methodology improvements. Keep pushing the envelope to improve efficiency, reduce costs and increase swing production ability.
3. Be realistic about price
U.S. shale producers can no longer be price takers, comparing current prices to their breakeven prices.
Shale producers must understand how price behaves. They can use a simple idea — a “shale threshold price ratio” to inform their price expectations. It is the current price divided by their average breakeven price. If the ratio is high, expect the current price to fall soon and quickly, as shale production ramps up. If the ratio is closer to 1, expect it to come down more slowly.
Use these new price expectations to evaluate new investments and capital decisions. It’s simple, and introduces caution. It’s hindsight, but with better informed expectations, producers may have avoided some of the bigger risks of the last five years.
4. Be cautious about antitrust
Producers need not collaborate about production decisions. What matters is sound price expectations and how producers use them.
5. Understand threats
Market forces beyond producer control affect price, such as geopolitical events and supply disruptions. Producers will form better price expectations if they stay current on expected impact and duration.
The biggest threat is continued excess supply and yet lower prices. With cost reductions up to 30 percent per well, current shale breakeven prices range roughly from $25/bbl to $90/bbl, with most between $45 and $80. A price of $30 would pretty much shut shale down. If price stays above $50, U.S. producers can help by swinging shale production.
Practical and operational issues will challenge the entire U.S. oil industry – storage, downstream, trading and capital market firms will also need to adjust to a new way of doing business.
Finally, since neither OPEC nor the U.S. can swing production alone, OPEC must help.
By the Numbers
47% — How fast U.S. shale fields increased at an annual rate from January 2011 to January 2015 — they went from 1.0 to 4.5 million bbl/day
0.3% — How much OPEC’s production fell in the same time period — and its market share fell from 43.2% to 41.2%
1,575 — Number of U.S. oil rigs on Dec. 5
635 — Number of U.S. oil rigs on June 12 — a 60% drop
Source: Accumyn Consulting
Laurance L. Prescott is an associate director of Houston-based Accumyn Consulting.
Why OPEC's losing its ability to set oil prices
Hailey Lee | @haileylee139Monday, 27 Oct 2014 | 5:22 PM ETCNBC.com
61COMMENTSJoin the Discussion
OPEC's glory days of steering global oil prices may be at an end.
U.S. shale oil will replace the Organization of the Petroleum Exporting Countries as the first-mover "swing producer," according to a Goldman Sachs report from the weekend—meaning OPEC is losing its power to set global prices for crude.
Saudi Arabia, the world's largest oil exporter, no longer has "the ability to push prices lower than the production costs of U.S. shale" because any cuts from the kingdom would "accommodate the further expansion of U.S. shale, as well as reduce Saudi profits," Goldman said.
The shift in pricing power became apparent to Goldman when U.S. shale's spare capacity, at around 5 million barrels per day, exceededSaudi Arabia's spare capacity of 1.5 million. Spare capacity refers to the amount of crude a country is able to produce in 30 days in case of an emergency.
Read More'Bipolar' markets lose the fear; are they ready to relax?
This trend has been a long time coming, but the tipping point started this year with significant cuts in West African oil exports to the U.S., said John Kilduff, energy analyst and founding partner of commodities investment firm Again Capital. U.S. shale oil has replaced West African imports, which have been redirected to Asia.
The balance was further tipped toward the U.S. when production rebounded in Libya and Iraq despite political instability, adding to an already oversupplied market, Kilduff added.
OPEC pumped 30.6 million barrels of crude oil per day in September, a jump of 400,000 barrels from August that was driven by the Libyan output rebound, found Platts, a global energy information service.
Read MoreDespite washout, hedge funds not bailing on energy
OPEC's loss in pricing power is a consequence of not taking U.S. producers more seriously and cutting prices earlier for clients, said Phil Flynn, senior energy market analyst at Price Futures Group.
"Only a year ago, OPEC was still in denial, but with the slowing global economy, they can't laugh off U.S. production anymore," Flynn said.
By 2019, U.S. shale oil production will jump to 9.6 million barrles per day, from 8 million now, according to forecasts from the Energy Information Administration. In comparison, Saudi Arabia currently produces 9.6 million barrels of crude oil a day.
OPEC’s next move
All that said, market watchers across the board expect OPEC to remainhighly influential when it comes to the price of oil.
The group will likely cut production when the core countries meet in Vienna on Nov. 27, according to Kilduff. "OPEC is in the process of playing chicken with the market," he said. "But their hand will be forced and they will eventually cut, with the Saudis taking on the bulk of it."
OPEC has absorbed lower oil prices up until this point, declining to cut output in a bid to maintain market share.
Read MoreHow the US shale boom will be felt around the world
"The main reason why OPEC is not cutting production is they realize that U.S. shale is a serious threat to their global oil space," Flynn said.
The cyclical nature of the oil industry makes it unlikely that OPEC has lost its price-setting power permanently, Kilduff said: "There's a boom, bust and a new era upon us all the time. So, the jury's still out on the long-term sustainability of U.S. shale production."
Hailey LeeNews Associate
The crude oil market has been like the Texas floods of late — too much oil since 2013, too much rain this spring, and we are dealing with the consequences. No mortal could stop the floods in Texas, and OPEC could not stop the oil flood. U.S. shale had changed the game.
OPEC declined to act as the swing producer because it could not stop the unprecedented increase in world petroleum stocks (crude plus liquids), leading to May’s market surplus of 3 million bbl/day.
The excess crude oil came from U.S. shale fields. From January 2011 to January 2015, tight oil production from U.S. shale fields increased from 1.0 to 4.5 million bbl/day. In the same period, OPEC’s production fell by 0.3 percent and its market share fell from 43.2 percent to 41.2 percent, a drop representing 1.6 million bbl/day. OPEC may have held the price up until last June, but it couldn’t stop price from plummeting thereafter, as world stocks rose to unprecedented levels.
Had OPEC continued to cut production, keeping price up, U.S. shale producers would have continued dramatic growth. Where would it have stopped? With high prices, OPEC supply cuts would have been replaced quickly by U.S. tight oil production.
Instead, in November, OPEC surprised the market, changing it’s focus to market share. Price plummeted 24 percent in 18 days, bottoming out on March 13 at $43.39/bbl. U.S. oil rigs dropped from 1,575 on Dec. 5 to 635 on June 12, a 60 percent drop.
OPEC realized it could no longer divert price in a flooded market, acting alone. Now, shale producers must transition from price takers into swing producers, making decisions that collectively but independently help correct market imbalances and dampen market price swings. Here’s how they can and what the threats are:
1. Accept the swing-producer role
When price changes trend, shale producers need to adjust production in the same direction within one to three months of a price swing, as OPEC did.
Eagle Ford shale production shows decline rates steep enough to brake production quickly: down 28 percent from first month to third, and 50 percent to sixth. Shale production leveled out in April this year, four months after price and rigs plummeted, and has started to decline. While shale can help, shale isn’t big enough yet to swing production alone.
2. Keep pushing on costs, technology and production efficiency
The shale revolution came about from technology breakthroughs and methodology improvements. Keep pushing the envelope to improve efficiency, reduce costs and increase swing production ability.
3. Be realistic about price
U.S. shale producers can no longer be price takers, comparing current prices to their breakeven prices.
Shale producers must understand how price behaves. They can use a simple idea — a “shale threshold price ratio” to inform their price expectations. It is the current price divided by their average breakeven price. If the ratio is high, expect the current price to fall soon and quickly, as shale production ramps up. If the ratio is closer to 1, expect it to come down more slowly.
Use these new price expectations to evaluate new investments and capital decisions. It’s simple, and introduces caution. It’s hindsight, but with better informed expectations, producers may have avoided some of the bigger risks of the last five years.
4. Be cautious about antitrust
Producers need not collaborate about production decisions. What matters is sound price expectations and how producers use them.
5. Understand threats
Market forces beyond producer control affect price, such as geopolitical events and supply disruptions. Producers will form better price expectations if they stay current on expected impact and duration.
The biggest threat is continued excess supply and yet lower prices. With cost reductions up to 30 percent per well, current shale breakeven prices range roughly from $25/bbl to $90/bbl, with most between $45 and $80. A price of $30 would pretty much shut shale down. If price stays above $50, U.S. producers can help by swinging shale production.
Practical and operational issues will challenge the entire U.S. oil industry – storage, downstream, trading and capital market firms will also need to adjust to a new way of doing business.
Finally, since neither OPEC nor the U.S. can swing production alone, OPEC must help.
By the Numbers
47% — How fast U.S. shale fields increased at an annual rate from January 2011 to January 2015 — they went from 1.0 to 4.5 million bbl/day
0.3% — How much OPEC’s production fell in the same time period — and its market share fell from 43.2% to 41.2%
1,575 — Number of U.S. oil rigs on Dec. 5
635 — Number of U.S. oil rigs on June 12 — a 60% drop
Source: Accumyn Consulting
Laurance L. Prescott is an associate director of Houston-based Accumyn Consulting.
Why OPEC's losing its ability to set oil prices
Hailey Lee | @haileylee139Monday, 27 Oct 2014 | 5:22 PM ETCNBC.com
61COMMENTSJoin the Discussion
OPEC's glory days of steering global oil prices may be at an end.
U.S. shale oil will replace the Organization of the Petroleum Exporting Countries as the first-mover "swing producer," according to a Goldman Sachs report from the weekend—meaning OPEC is losing its power to set global prices for crude.
Saudi Arabia, the world's largest oil exporter, no longer has "the ability to push prices lower than the production costs of U.S. shale" because any cuts from the kingdom would "accommodate the further expansion of U.S. shale, as well as reduce Saudi profits," Goldman said.
The shift in pricing power became apparent to Goldman when U.S. shale's spare capacity, at around 5 million barrels per day, exceededSaudi Arabia's spare capacity of 1.5 million. Spare capacity refers to the amount of crude a country is able to produce in 30 days in case of an emergency.
Read More'Bipolar' markets lose the fear; are they ready to relax?
This trend has been a long time coming, but the tipping point started this year with significant cuts in West African oil exports to the U.S., said John Kilduff, energy analyst and founding partner of commodities investment firm Again Capital. U.S. shale oil has replaced West African imports, which have been redirected to Asia.
The balance was further tipped toward the U.S. when production rebounded in Libya and Iraq despite political instability, adding to an already oversupplied market, Kilduff added.
OPEC pumped 30.6 million barrels of crude oil per day in September, a jump of 400,000 barrels from August that was driven by the Libyan output rebound, found Platts, a global energy information service.
Read MoreDespite washout, hedge funds not bailing on energy
OPEC's loss in pricing power is a consequence of not taking U.S. producers more seriously and cutting prices earlier for clients, said Phil Flynn, senior energy market analyst at Price Futures Group.
"Only a year ago, OPEC was still in denial, but with the slowing global economy, they can't laugh off U.S. production anymore," Flynn said.
By 2019, U.S. shale oil production will jump to 9.6 million barrles per day, from 8 million now, according to forecasts from the Energy Information Administration. In comparison, Saudi Arabia currently produces 9.6 million barrels of crude oil a day.
OPEC’s next move
All that said, market watchers across the board expect OPEC to remainhighly influential when it comes to the price of oil.
The group will likely cut production when the core countries meet in Vienna on Nov. 27, according to Kilduff. "OPEC is in the process of playing chicken with the market," he said. "But their hand will be forced and they will eventually cut, with the Saudis taking on the bulk of it."
OPEC has absorbed lower oil prices up until this point, declining to cut output in a bid to maintain market share.
Read MoreHow the US shale boom will be felt around the world
"The main reason why OPEC is not cutting production is they realize that U.S. shale is a serious threat to their global oil space," Flynn said.
The cyclical nature of the oil industry makes it unlikely that OPEC has lost its price-setting power permanently, Kilduff said: "There's a boom, bust and a new era upon us all the time. So, the jury's still out on the long-term sustainability of U.S. shale production."
Hailey LeeNews Associate
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