The oil tsunami is coming
Thursday, 22 November 2018
By Bernd Struben
- Fading away
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‘You’ve got an awful lot of production that can come in very economically.’
Patricia Yarrington, Chief Financial Officer, Chevron Corp
‘We’re going to see a re-acceleration of well completions in the Permian in the second half of 2019. The pipelines are going to fill up very quickly.’
Corey Prologo, Head of Oil Trading, Trafigura Group Ltd
Do you remember when the world was supposed to run out of oil?
The dire predictions were enough to keep any petrolhead up at night.
Global oil production peaked in the late 1960s and began a steady decline in the 1970s.
Then the 1973 energy crisis hit. That’s when the Arab members of OPEC cut back sales to US and western markets, largely in protest over their support of Israel in the Yom Kippur War.
I was only five at the time, living in the US.
I knew nothing about the war.
But I remember the long rows of cars lined up at the petrol stations in Virginia. And I recall how the big, powerful US Fords and Chevys were replaced — almost overnight — by econoboxes seemingly powered by hamsters running on treadmills.
It was all part of a desperate effort to stretch our oil supplies just a little further into the future.
The experts were united. The science was in. (Sound familiar?) The world was looking at running out of oil by 2020.
In the 1980s and 90s, new technologies allowed oil to be discovered and extracted from deeper in the earth and further beneath the sea. The experts were forced to push back their ‘end of oil’ forecasts to 2030 and eventually 2040.
No full pardon. But at least a stay of execution for the combustion engine.
I’m sure you know what came next.
That’s right. Shale oil.
Fracking technology has essentially closed the door on the end of oil speculations.
Not because the Earth’s oil supply is now unlimited. But it is so abundant that crude will continue to power most of our vehicles until EVs and hydrogen fuel cell cars can match or beat the combustion engine on range, power, and price.
When they can do that without subsidies, Adam Smith’s invisible hand will take care of the rest.
That time will come. But it’s not here yet.
In the meantime, the US Energy Information Administration reports that US crude stocks rose 4.9 million barrels last week. The increase once again beat analysts’ expectations. And it confirms the US has surpassed Saudi Arabia and Russia as the world’s largest oil producer.
More, after the markets…
Overnight, the Dow Jones Industrial Average was flat, up 0.95 points, or 0.00%.
The S&P 500 gained 8.04 points, or 0.30%.
The battered tech sector enjoyed the biggest bounce, with the NASDAQ up 0.92%.
US markets will be closed tomorrow (overnight our time) for the Thanksgiving holiday.
In Europe, the Euro Stoxx 50 index finished up 37.84 points, or 1.21%. Meanwhile, the FTSE 100 gained 1.47%, and Germany’s DAX closed up 177.76 points, or 1.61%.
In Asian markets, Japan’s Nikkei 225 is up 89.94 points, or 0.42%. China’s CSI 300 is down .78%.
In Australia, the S&P/ASX 200 is up 44.63 points, or 0.79%.
On the commodities markets, West Texas Intermediate crude oil is US$54.63 per barrel. Brent crude is US$63.45 per barrel.
Turning to gold, the yellow metal is trading for US$1,225.63 (AU$1,687.96) per troy ounce. Silver is US$14.49 (AU$19.96) per troy ounce.
Gold has proven remarkably stable over the past month, as stock markets, cryptos and oil — among others — suffered big falls and daily price swings.
This time last month, gold was trading for US$1,222.10. It hit a peak of US$1,233.43 on 1 November. And a trough of US$1,200.37 on 12 November. That’s a tight range given the recent market jitters.
But with political and economic shocks looming, gold — the classic safe haven asset — could break that range and go much higher. According to resources analyst Jason Stevenson, that scenario is looking very likely. And he’s got his eye on a few stocks that could rocket on a rising gold price.
I’ll have more for you on that next week.
Moving on to cryptos, one bitcoin is worth US$4,486.71. The US$110 overnight rally halts, for now, bitcoin’s price crash. Is this just a pause before the next leg down? Or could bitcoin be set for a new rally?
The Aussie dollar is worth 72.61 US cents.
Getting back to oil…
If you’ve been following along with Port Phillip Insider, you’ll likely remember that on Monday the reclusive Billionaire’s Trader showed the following chart:
Oil prices have given the ‘hint’
Click to enlarge
In explaining the chart, he wrote that, ‘The sharp sell-off in the oil price has caused the first break below the highest low in the uptrend from a previous wave.’
It’s worth reviewing his full analysis on why the technicals are indicating an end to oil’s lengthy bull run. You can find all that in our website archives.
And if you joined his ‘Speed Trading’ Masterclass, keep an eye on your inbox for some updates. You should also have received a special new video last night.
Anyway, the technical analysis he worked through on oil is backing the fundamental picture that the world is awash in oil. And OPEC’s ability to hold the West hostage with output cuts is fast fading.
That’s even truer when you take Saudi Arabia out of the organisation. These days the Saudi’s ties to the West, namely the US, are far more important to the Saudi royals than any relations with fellow OPEC members.
And as you can see in the chart below, the 15 members of OPEC now produces less oil than the US, Russia, and Saudi Arabia — the world’s top three producers.
Click to enlarge
Soaring US oil production — along with a strong hunch that Putin and Saudi King Salman would play nice with Trump and ramp up output — is why I was confident WTI crude would drop back below US$60 this month.
I made that call during oil’s bull run, when most analysts were still forecasting higher prices, with many even betting on a return above US$100 per barrel. And part of their reasoning was fears over OPEC.
Not that you should completely disregard OPEC’s ability to influence the market. But the next time you hear analysts forecasting price spikes in the lead up to an OPEC meeting (the next one is on 6 December), keep the following in mind, from Bloomberg:
‘OPEC’s bad dream only deepens next year, when Permian producers expect to iron out distribution snags that will add three pipelines and as much as 2 million barrels of oil a day…
‘The U.S. energy surge presents OPEC with one of the biggest challenges of its 60-year history. If Saudi Arabia and its allies cut production when they gather Dec. 6 in Vienna, higher prices would allow shale to steal market share…
‘Now growth is speeding up. In Houston, the U.S. oil capital, shale executives are trying out different superlatives to describe what’s coming. “Tsunami,’’ they call it. A “flooding of Biblical proportions’’ and “onslaught of supply’’ are phrases that get tossed around.’
The interplay between the oil price and the raft of shale producers able to turn on or off the taps at little notice is a crucial piece of the puzzle.
Many shale explorers run into issues when the price falls below US$50 per barrel. Indeed, with the price dipping to US$53.43 on Tuesday, some shale explorers are pausing their expansion plans.
According to data from Baker Hughes, 885 rigs are currently drilling for crude in the US. That’s down from 888 last week. Not a big fall, but it offers a good hint of where the oil price is likely to bottom over the mid-term.
Either way, there’s little doubt that the resurgence in US production has hamstrung OPEC’s supremacy faster than anyone could have predicted even a few years ago.
Just have a look at the following graph, a picture that tells far more than the usual thousand words:
Click to enlarge
Only 10 years ago the US was still importing over 11 million barrels of oil per day. It’s now possible that as early as next year, the US will be a net oil exporter. The last time that happened was in the 1940s.
As if that wasn’t enough bad news for OPEC nations, NOPEC is gaining traction in the US Congress. And unlike previous presidents, Trump may well back the anti-OPEC bill.
Also from Bloomberg:
‘The Department of Justice is formally reviewing antitrust legislation aimed at reining in OPEC’s power over oil markets, according to a department official…
‘Bipartisan, anti-OPEC bills have been introduced in both the House and Senate, though neither chamber has voted on the measures yet.
‘The House Judiciary Committee in June approved the “No Oil Producing and Exporting Cartels Act,” or NOPEC bill, which would give the attorney general the authority to file a suit against OPEC for trying to control oil production or to affect crude prices. It would amend the Sherman Antitrust Act of 1890, the law used more than a century ago to break up the oil empire of John Rockefeller.’
Should NOPEC come into effect it will be another nail in OPEC’s coffin.
But the measure may be overkill…not to mention 45 years too late.
With a tsunami of oil on the horizon, OPEC looks to be dying a natural death.
Now before signing off, don’t forget to check out the latest from The Australian Tribune:
‘Will Victoria Lead the Nation in Legalising Marijuana?’
‘Canada has done it. Uruguay and the Netherlands have done it. And a growing number of US states have done it too.
‘Will Victoria be the next to turn its back on the failed war on drugs and legalise cannabis?
‘Reason Party leader Fiona Patten believes the state is…’
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