Morris R. Beschloss 2017-09-06 05:25:17
The problem with $80 per barrel oil When so-called experts attempt to predict the price of oil later this year and early in 2018, these pundits, writing for such prestigious business publications as the Wall Street Journal, Barron’s, etc., tend to confuse those investors without appreciable background in the varied factors impacting on such critical numbers. Using the prestige and influence of such publications, online commentaries and newsletters, these projections usually are made by columnists with varying degrees of understanding about the factors impacting such critical predictions. With both supply and demand having undergone critical changes in the past three years, the following has to be considered: 1) The emergence of U.S.-based hydraulic fracturing (fracking) having become cost-effective. This has elevated America’s previous conventional oil production from less than 3.5 million barrels a day to a daily production level of 10 million barrels, equivalent to world leaders Saudi Arabia and Russia. 2) While oil prices exceeded $100 per barrel for the lightweight (WTI) versions found in most American “shales,” and an average of $110 or more for the Brent Crude version found in most of the world’s on and offshore production, the sudden mid-2014 price drop to $50 per barrel or less took most producers and oilfield extractors by surprise, occurring in such a dramatic price downturn before the end of 2014. 3) While global demand since then has remained relatively stable, this has generated a record global inventory glut. Although the many major energy exploration and production suppliers have appreciably cut their costs, this has brought the global break-even costs down to less than $60 per barrel. Many smaller marginal exploration and production oil companies have barely gotten by as the market rates settled in at $50 or less in mid-year 2017. 4) While optimists predict a substantial demand increase during the next year, this prediction is based on hope rather than reality. This resultant inventory glut has reduced prices, as the U.S. became a million-barrel-per-day exporter after the near 50-year American oil export embargo was lifted late last year. This speaks well for America’s WTI extractors, but makes the availability factor even more relevant to disproportionally larger inventories. 5) Since America’s almost exclusive “light-oil” is preferred by Asia’s less-sophisticated refineries, it puts an even greater squeeze on the dominant Mideast suppliers and offshore availability from the North Sea, bordering Norway and Scotland. Although the Saudi Arabia-dominated OPEC cartel has attempted to cut back its daily production from 32 million to 30 million barrels per day, this practically negates even Russia’s cooperation in its production downturn. To put these varied factors in perspective, an expectation by media columnists of $80 per barrel by the end of the year seems like a fancied forlorn hope. Unfortunately, most investors rely on the highly respected publications submitting these unrealistic price predictions. In the longer term, such misleading information likely will discourage investors as they begin to doubt the unsupported higher prices predicted by year’s end. U.S. GLOBAL ENERGY DOMINATION? While the U.S. health-care fiasco has sidetracked much of President Trump’s first-year ambitions (infrastructure, tax updating, manufacturing loss reversal), America’s world-leading fossil-fuel energy development is on course. Despite the current disparity in global pricing and current static overall demand, the U.S. is the only world nation dominant in the “underground commodity potential” that provides oil, natural gas, coal and less-prominent minerals such as lithium waiting to be mined in large quantities. With China the only other commodity-rich nation to compete with the U.S. in the immensity of its geography, it severely lags America in coal and oil. This is particularly so since China’s commodity reserves have been reduced by an aggressive manufacturing sector. This has grown dramatically as that of its American competition has severely shrunk in the latest multiyear timeframe. While the U.S. matches and potentially outpaces oil production of competitors Russia and Saudi Arabia’s 10 million barrels each day, only Qatar, Algeria and Russia remain the sole major competition when it comes to national availability potential. Although a presidential victory by Hillary Clinton would have totally negated coal mining in the U.S., current reversal of that trend is high on President Trump’s list of substantial revival. This factor also has provided the current administration with political advantage, since Ohio, West Virginia and Virginia are heavily dependent on the well-paying job opportunities coincident with that of coal excavation and usage; with thermal coal especially critical to the conversion of iron to steel. Although plans now are underfoot to bring significant manufacturing job opportunities, with its resultant monetary wealth, back to the U.S., this will be heavily resisted by major conglomerates, benefitting from the low-cost foreign equivalent available outside the U.S. borders. NATURAL GAS TO THE RESCUE While the global shipyard activities have swooned with China’s global pace-setting ocean trade slipping and the halving of multi-year oil pricing generating a depression in drilling platforms, the need for oil tankers has taken a disastrous downward turn. Shipbuilding, in general, has cost more than 20,000 jobs in the last year alone. But new hope has arisen, instigated by a new thrust from the unlikely U.S. fossil fuels of crude oil and natural gas. The former was engendered by a lifting of America’s 42-year-old oil embargo on offshore shipments, which has already exceeded 1 million barrels per day at mid-year 2017, and expected to double by early 2018. This is due to America’s WTI light oil, which is very popular in Southeast Asia, where refineries prefer the American version to the Brent crude from the Mideast and Europe’s North Sea reserves. But even more sensational is the prospective shipments of liquid natural gas now in the process of converting the U.S. energy all-time-high development in six conversion facilities along the U.S. side of the Gulf of Mexico. Currently, contracts for vessels to transport liquefied natural gas are picking up steam for an abundance of shale gas in America’s oil shales, and increasingly stringent global carbon air pollution regulations pushing utilities and transportation operators toward this clean-burning fuel. LNG is made by cooling natural gas (previously flared off in oil production), which allows it to be shipped over long distances in specially built ships with insulated tanks. According to Bloomberg New Energy Finance, annual global LNG production is expected to increase by 377 million tons by 2019. Estimates by Royal Dutch Shell show shipments of LNG could rise as much as 5% a year starting from 2015. While several LNG conversion facility providers already are in various processes of finalization, Freeport, Texas, is the first port outlet that will be ready for initial loading and shipment by the end of this year. To move the monumental amount to be shipped worldwide would require 180 more vessels. This is extremely timely due to the shipbuilding capabilities now far below 50% usage at this time. The offshoot of this unanticipated outburst of LNG usage worldwide will greatly enhance America’s low-cost LNG availability, which looks to be a potential market of at least 50% demand of its production. And five years hence, barring now unforeseen obstacles, America’s LNG could become No. 1 in the world, way ahead of the now-dominant Russia, Qatar, Algeria, etc. MORRIS BESCHLOSS is a global economic analyst, award-winning long-term top business executive, and avid blogger for all aspects of worldwide financial, geo-political, and economic happenings.
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