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Oil Markets to Stabilize


Oil markets are expected to stabilize in the coming months as decreases in investments by oil companies will produce a drop in supply, according to the chief executive of energy giant Chevron.

Chevron CEO John Watson said that oil prices are always the results of supply and demand. A global over-supply of oil pushed prices to collapse in mid-2014 from above $100 a barrel. On Tuesday, Brent crude futures traded around $43 a barrel.

As a result of cheap oil prices, investments were reduced from the industry, according to Watson. "We are in a resource sector that diminishes over time without capital. And new projects have been slowed down but also a lot of short-cycle investments. The shale oil developments in the United States, what we call infill drilling in the business, has slowed down dramatically. We're starting to see a supply reaction that will bring markets into better balance." Watson described this weekend's meeting in Doha between several OPEC and non-OPEC oil producing nations, where the idea of an output freeze is to be discussed, as an intangible that may affect oil prices in the near-term. "What will OPEC do and what will the other nations do and will there be some cooperation by those nations to reign in increases in supply or reduce supply that can affect prices," he said. And "Ultimately, it's going to come down to supply and demand and I think markets will come into better balance."

Watson also discussed the prospects for liquified natural gas (LNG). Chevron has an LNG plant in Australia to develop the Gorgon gas field. "The LNG business has been around a long time and it's entering a new level. It's maturing and we're in a place now where many projects are coming online," he said. "The planet is going to need energy going forward. LNG production is expected to double over the next 10 years."

Prices for natural gas have dropped in recent years. Year to date, the commodity's price has dropped 20%. Also, extracting LNG is an expensive undertaking. "LNG developments are multi-billion dollar developments and I don't think that will change but we can make them more productive than they have been," Watson said. "We can manage those expenses very well but there are going to be large capital costs that are going to be necessary because it takes money to liquefy natural gas, transport and re-gasify it in those developing areas."
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By Robert Holden | | fracking, Gas Prices, Natural Gas, Petroleum | 0 comments | Read more

Crude oil futures prices continue to drop due to storage

April futures delivery on the New York market continued its downward trend. Some analysts say its due to an ongoing lack of storage for oil supplies. Although fears of running out of oil storage are unfounded, oil prices likely will remain "sloppy" over the coming months.

Regardless of the facts surrounding the United States and world oil storage situation, there is still potential risk for oil prices (and energy investors) over the next couple of months. There are still several risky and negative catalysts for short-term oil prices including: 1) the psychological fear of running out of global oil storage capacity while already sitting at all-time highs in US oil inventories; 2) the risk of a sanction removal agreement with Iran that eventually brings an additional 500,000 b/d or more of oil into the market; and 3) the risk of a rising US dollar driving oil prices lower.

Analysts said that the most noticeable example of any threat to storage is being played out at the Cushing, Okla., storage hub, where crude inventories have more than doubled over the past six months (from 20 million bbl to over 50 million bbl) and now sit near all-time highs.

The market fear is that if this oil inventory build rate continued at the same pace (2 million+ bbl/week [year-to-date]), then Cushing storage capacity of about 70 million bbl will fill in the next 2 months.

Cushing is not an isolated market, for the right price, there are many storage outlets for the roughly 250 million bbl of expected global oil inventory builds that must find a home in this yearís first half.

While global inventory data is delayed and often inaccurate, we see more than enough capacity through the combination of the entire [Organization for Economic Cooperation and Development] storage picture (crude plus refined products) and floating storage. While the OECD storage facts suggest the world has plenty of storage capacity this year, we still question whether the perception or fear of record-high US inventories will be enough to send oil prices lower in the coming months.

The New York Mercantile Exchange April crude oil contract fell $2.21 on Mar. 13 to $44.84/bbl Mar. 12. The May contract fell $2.07 to settle at $47.06/bbl.
The natural gas contract for April was virtually unchanged at a rounded $2.73/MMbtu. The Henry Hub, La., gas price was $2.69/MMbtu, down 13¢.
Heating oil for April dropped 6.6¢ to a rounded $1.71/gal. Reformulated gasoline stock for oxygenate blending for April delivery was down 4.7¢ to a rounded $1.76/gal.
The April ICE contract for Brent crude oil lost $2.41, settling at $54.67/bbl, while the May contract lost $2.27 to $55.01/bbl. The ICE gas oil contract for April dropped $16 to $523.75/tonne.
The average price for the Organization of Petroleum Exporting Countriesí basket of 12 benchmark crudes on Mar. 13 was $51.66/bbl, falling $1.50.

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By Bryan Gray | | fracking, Gas Prices, Natural Gas, Petroleum | 0 comments | Read more

Saudi Prince says cheap oil here to stay

Saudi Arabia's billionaire Prince Alwaleed bin Talal says that he does not expect to see $100 a barrel oil again. Currently, prices are less than $50 a barrel, and the Prince says these prices will last indefinitely.

He says current prices may dampen the United States shale revolution. As a matter of fact, a couple major rig operators have plans to cancel contracts, electing to pay early cancellation fees than to keep drilling at these prices.

As for political measures, the Prince says he doesn't believe the low oil prices have anything to do with Saudi Arabia and America strategizing to hurt Russia's president Vladimir Putin. The decision by Saudi Arabia not to cut oil production, in light of falling gas prices, was simply of keeping market share. Otherwise other oil producing countries like Venezuela, Brazil, Canada, Mexico, and even Russia would have made up the difference.

Lastly, Alwaleed bin Talal said that $100 a barrel is really an artificially inflated price. He admitted if supply remains where it is, and demand increases, we may see a modest increase in oil prices, but he expects oil to remain relatively cheap for the foreseeable future.

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By Bryan Gray | | Gas Prices, Natural Gas, Petroleum | 0 comments | Read more

Could inexpensive gas have a down side for the United States?

Suppose the decrease in gas prices, which is making virtually everyone happy at the pump has a potential down side?

Who in America is not excited about cheap oil? However, just as the U.S. was set to obtain huge profits from its shale boom the Saudi Arabian led OPEC decided to flood the market with massive supply.

So who benefits from the price drop? As of now, it seems the only benefit is for the consumer. So why bother flooding the market? Saudi Arabia is taking an income cut on its primary source of revenue at a time when it's projecting a $39 billion deficit for 2015.

One theory is that Saudi Arabia and also the U.S. are conspiring to weaken the economies of both Russia and Iran. The motives make sense. With respect to Iran, Saudi Sunni and Iranian Shi'ite regimes have long hated each other, while America is perpetually concerned about Iranian nuclear unpredictability. On the Russian front, Saudis and Russians have been at each others throats over Saudi funding of Islamic terrorism in Russia's North Caucasus region and over Russia's defense of Assad in the interests of maintaining Russian oil interests and of curtailing Islamic terrorism. Meanwhile, the U.S. currently seems intent on squeezing Russia economically.

But as much sense as a U.S.-Saudi Arabia conspiracy theory might make, there are some significant problems with it. The U.S. chose Russia as a partner over Saudi Arabia and Qatar when faced with that choice in Syria last year. There are no shared ideological interests between the U.S. and Saudi Arabia ó aside from mutual cooperation in combating the Islamic State, which both countries had a role in creating. The Saudis couldn't possibly manage to weaken the Russian economy to the point that Putin would abandon Assad and bail on Russia's associated economic interests in the region nor would America want that at a time when Assad's forces are now fighting against a common Islamic State enemy. Moreover, Russian and Saudi ministers met in Moscow in November to discuss cooperating on oil to better manage their respective economic interests. That last fact alone flies in the face of any Saudi-U.S oil price conspiracy theory.

An arguably more plausible theory is that if any nation is colluding with Saudi Arabia, it's China, the top global net importer of petroleum products and the country that's most benefiting from the bargain prices at the pump these days. China is also the only player that couldn't care less about oil revenues. Sitting in 49th place in the world for crude exports, China relies on manufacturing for its revenues. Unlike everyone else in this game, when China lays an oil pipeline in a foreign country, it's not for profit it's just a massive straw delivering the milkshake to the insatiable masses back home.

During the China-Arab Cooperation Forum in Beijing over the summer, Chinese Foreign Minister Wang Yi wrote that, "China and Arab states are working together to build the economic belt and the maritime silk road to revive the modern-day silk road. This will open a door to new opportunities for China-Arab relations."

Saudi Arabia is already China's top oil supplier, and China doesn't care about its partners' ideological preferences. It's a match made in heaven.

If the Saudis and Chinese are wheeling and dealing on oil prices for rewards to be specified later, then Russia, North America and Europe will eventually all end up sobbing into their alcoholic beverages of preference as their liquid gold drops in value.

And while the customers may enjoy the price break now, government and industry oil-revenue loss will come back to bite us in the form of job losses and fiscal cutbacks requiring even more U.S. debt to be bought up by its primary holder: China.

For now we all get to enjoy the cheap gas.

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By Bryan Gray | | fracking, Gas Prices, Natural Gas, Petroleum | 0 comments | Read more

Increased Oil Production results in lower prices at the pump

The plummeting price of oil is the biggest energy story in the world right now. The results are cheap gasoline for the United States while not as good news for mostly oil producing economies like Russia and Venezuela.

In June, the price of Brent crude was up around $115 per barrel, by mid-December, it had fallen nearly in half, down to $59 per barrel.

For much of the past decade, oil prices were high — bouncing around $100 per barrel since 2010 —because of soaring oil consumption in countries like China and conflicts in key oil nations like Libya. Oil production couldn't keep up with demand, so prices spiked.


But beneath the surface, many of those dynamics were rapidly shifting. High prices spurred companies in America and Canada to drill for new, hard-to-extract crude in North Dakota's shale formations and Alberta's oil sands. At the same time, demand for oil in places like Europe, Asia, and the US began tapering off, thanks to weakening economies and new efficiency measures. Not only that, the conflict in Libya was slowly easing.

By late 2014, the world’s oil supply was on pace to surpass demand, and by September prices started falling sharply.

As prices fell, many experts waited to see what OPEC would do. OPEN is the largest oil cartel in the world. Would they reduce production to prop prices up (as many OPEC nations like Saudi Arabia and Iran need higher prices to balance budgets)? However at the November conference OPEC did nothing. Saudi Arabia wanted to retain market share. As a result oil prices went into free-fall.

Lower prices are good news for consumers, especially in Japan and the United States. Contrast for some countries, it’s bad news for nations like Russia and Venezuela who are more reliant on oil sales.

This led to a boom in "tight oil" production. The US alone has added about four million new barrels of crude oil per day to the global market since 2008.

Up until very recently, however, that US oil boom had surprisingly little effect on global prices. That's because, at the exact same time, geopolitical conflicts were flaring up in key oil regions. There was a civil war in Libya. Iraq was a mess. The US and EU slapped oil sanctions on Iran and pinched its oil exports. Those conflicts took more than 3 million barrels per day off the market:

Even more significantly, oil demand in Asia and Europe are weakening — particularly thanks to slowdowns in China’s and Germany’s economies. More broadly, oil demand has been stagnating around the world. The United States, once the world's biggest oil consumer, saw big cutbacks in industrial oil use after the recession, while gasoline consumption has flatlined as fuel-efficient cars became more widespread. At the same time, countries like Indonesia and Iran have been cutting back on fuel subsidies.

That brings us to OPEC, a collection of oil-producing nations that pumps out about 40% of the world's oil. In the past, this cartel has tried to influence the price of oil by coordinating with other members.

At the meeting in Vienna on November 27, there was much intense debate among OPEC members about how best to respond to the drop in oil prices. Some countries, like Venezuela and Iran, wanted the cartel (mainly Saudi Arabia) to cut back on production in order to prop up the price. These countries need high prices in order to "break even" on their budgets and pay for all the government spending they've racked up:

On the other side of the debate was Saudi Arabia, the world's largest oil producer, which was opposed to cutting production and willing to let prices keep dropping.


"We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the market behaves," said OPEC Secretary-General Abdalla El-Badri at the November meeting..

As of now it’s fair to say that OPEC is engaged in a "price war" with the United States. This could result in it being more expensive to extract shale oil from formations in places like Texas and North Dakota. So Saudi Arabia and others are betting that as long as the price of oil keeps falling, some US producers may become unprofitable and may go out of business, and thus the price of oil will stabilize.

A big question: Will low oil prices kill the US shale boom?

Nobody quite knows the answer to this question. How low prices need to go to rein in the US oil boom? Analysts often focus on a metric called the "breakeven price" for oil-drilling projects. This is in light of the U.S. Energy Information Administration that expects overall U.S. oil production to grow another 700,000 barrels per day.

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By Bryan Gray | | Gas Prices, Natural Gas, Petroleum | 0 comments | Read more

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