Oil Prices

[Fraser]

What does everyone think the ramifications of the erosion of oil prices going to be? Like anyone, I don't mind saving a few bucks at the pump but am more concerned with the macroeconomic effects.

Everyone loved Carney but I'm not really sure why? He didn't really doing anything, let the Canadian currency jump up due to oil demand hurting manufacturing. I think that might leave us less poised to take advantage of a reduction in energy prices. Are we going to see a recession? Is this combined with an increase to interest rates going bring our housing market back to reality? I'm curious to know what everyone thinks. From what I understand, OPEC is going to try to pull a "Walmart" and price everyone else out of business before increasing prices again.

[17to85]

Prices will bounce back before too long. The reason there is so much oil out there now is because the US is doing a lot of oil shale production and they don't need to buy as much foreign oil. How it works is the middle east has huge conventional oil reserves, cheap and easy to get out of the ground. Oil shales and oil sands are much costlier to extract and turn into something useful so it's basically a power play by OPEC. Try and get the price low so people will be forced to go back to them. They rely on all that oil money to fund their own countries though so I don't see them keeping the price low for too long. I don't know if it will have a big impact on Canada simply because a lot of the oil sands projects require big investments that have already happened so they won't just shut down major projects. There will be a slow down in some areas to be sure but it could be a good thing if it's handled well and the price isn't low long term. Cool down an over heated economy in Alberta a bit. The States will likely be hit harder because their oil shale production is much easier to just shut down. 

 

In summary this is happening because the states got themselves to a point where they're basically self sufficient in oil and the middle east doesn't like it so they've getting into a **** waving contest. I forsee it being similar to what happened 2010ish. be a brief dip and things should pick up before too long. 

 

Now I could very well be talking out of my ass and maybe it'll be a big game changing thing with long lasting effects but I just don't see it. The world isn't lessening it's demand for oil, especially if the price is going to be cheaper. 

[TBURGESS]

Alberta's economy is completely tied to the price of oil, even though they tried to change that after the NEP.  Low crude prices = major political problems in Alberta and a lower Canuck buck which affects all of Canada.  

 

The price of crude will definitely affect housing prices in Alberta, but it won't make much, if any, difference to Vancouver and Toronto as their economies aren't based on commodity prices.  IMO, the ONLY thing that will create a housing correction in Canada is a major raise in interest rates and I keep a close eye on the market.  The current market is the reality.

 

Recession?  I hope not, but lower oil prices and a lower dollar certainly won't help.  Employment numbers are the big driver.  The less people who are fully employed the less demand there is for goods and services.

[17to85]

Again though, don't get into too much of a panic over a short term drop in the price of oil. It's not bloody likely to stay low forever. It'll be a little blip and likely bounce back before too long. There will still be production of oil in Alberta and there is even more natural gas in the province than there is oil so companies might shift their focus to that if new projects in the oil sands don't get developed. It will be a slow down but if managed right it might not be a bad thing. The bottom isn't going to fall out in Alberta unless the price gets down to like $50 a barrel and stays there for years. 

[Fraser]

I'm not sure what is really going to drive the price back up. OPEC doesn't seem to want to cut supply and the US is only pumping more and more unconventional oil. Seems to be a glut of supply

[Mark H.]

I think we'll see alternatives to oil in the near future.  The key is to have a variety of energy sources.

 

I'm somewhat concerned about Canada's narrow outlook.

[17to85]

I'm not sure what is really going to drive the price back up. OPEC doesn't seem to want to cut supply and the US is only pumping more and more unconventional oil. Seems to be a glut of supply

OPEC won't keep the same production at low prices forever. They'll be trying to put some pressure on Western countries for a while but they'll eventually want to get back to higher prices, they rely on oil money to fund their countries. Supply can change pretty quick. Unconventionals are more costly and if the price stays low it won't make as much sense economically to keep producing it. I just don't see this being a long term thing, it's a short term hiccup while producers wave their dicks at each other. 

[Fraser]

I'm not sure what is really going to drive the price back up. OPEC doesn't seem to want to cut supply and the US is only pumping more and more unconventional oil. Seems to be a glut of supply

OPEC won't keep the same production at low prices forever. They'll be trying to put some pressure on Western countries for a while but they'll eventually want to get back to higher prices, they rely on oil money to fund their countries. Supply can change pretty quick. Unconventionals are more costly and if the price stays low it won't make as much sense economically to keep producing it. I just don't see this being a long term thing, it's a short term hiccup while producers wave their dicks at each other.

but why would opec blink first if they a are the low cost produce. Surely most opec countries have enough in SWF to ride this out for a while?

[17to85]

It's not about blinking first. Everyone wants higher price oil, this is purely about OPEC nations feeling threatened because there are other oil producers now. They're just trying to flex some muscle. As I said, US oil shale production will be the first to go, there's already too much invested in the Canadian oil sands for them to shut down. So it'll be a temporary lowering of the price and then it'll rebound. Overall if no one panics it might be for the best. Keeps the Alberta economy from over heating, draws out production for longer etc etc. 

[iso_55]

I'm not sure what is really going to drive the price back up. OPEC doesn't seem to want to cut supply and the US is only pumping more and more unconventional oil. Seems to be a glut of supply

[Fraser]

It's not about blinking first. Everyone wants higher price oil, this is purely about OPEC nations feeling threatened because there are other oil producers now. They're just trying to flex some muscle. As I said, US oil shale production will be the first to go, there's already too much invested in the Canadian oil sands for them to shut down. So it'll be a temporary lowering of the price and then it'll rebound. Overall if no one panics it might be for the best. Keeps the Alberta economy from over heating, draws out production for longer etc etc.

but they aren't flexing their muscle's. Normally they flex their muscles by cutting production to increase prices. They are basically admitting that they can't do that any more because it wouldn't increase prices, it would just eat into their market share. I doubt US is going to stop fracking either just because they came later to the party then Canada and have less skin in the game. If were waiting for companies to curtail production to bring supply and demand back in line, that isn't a blip in the radar, its a pretty long process especially with the high amount of fixed costs already invested.

With Europe crawling and Asia slowing down, I don't see this playing out too fast.

[17to85]

no it is flexing the muscles because it hurts American production and forces them to come crawling back to the middle east. It's all about trying to stay relevant. 

[Fraser]

so a supply cut is a sign of weakness? C'mon man.

[Atomic]

Interesting article on this topic from the "Globe and Mail" (whatever that is):

 

http://www.theglobeandmail.com/globe-debate/a-textbook-example-of-competition/article21834658/

 

For 27 years in my graduate energy seminar, I’ve struggled to convince bright master’s and PhD students that oil prices might actually result from competition rather than a price-fixing conspiracy of oil companies and the Organization of Petroleum Exporting Countries cartel. But this year, my task was easier.

We start by reviewing several commodity prices – potash, lumber, copper, oil – which shows that the oil market is not atypical. We see that all oil producers receive the same price, which is usually at or above the production costs of the most expensive suppliers, such as Alberta’s oil sands and North Dakota’s shale oil. Low-cost producers, like Saudi Arabia, get more profit from each barrel.

Then I ask them what should happen if the oil price were competitive under various scenarios – a war in Libya or Iraq, rapid economic growth in China or India, a technological advance that lowers the cost of producing shale oil, a tightening of vehicle efficiency regulations in the United States, a global economic recession. We check their predictions against actual history, and some begin to doubt.

I next ask them to guess the number of oil producers worldwide. Like most people, they dramatically underestimate the number of state and private oil companies, and especially overlook the hundreds of smaller operators. Collusion starts to look complicated.

I ask why, in a competitive market, oil’s price might be above the cost of the highest-cost producer. The students then brainstorm on the reasons people might bid up the price – expectations of future shortages of a non-renewable resource, suspicions that oil producers are overestimating their reserves, fears about conflicts affecting oil exporters. They admit the plausibility of a “seller’s market” where even a competitively determined price stays above the production cost of Alberta’s oil sands.

Then I describe the 1986 oil crash, with prices staying low for the next 16 years. They acknowledge that it was a huge loss for oil companies and wonder why, if the companies had the power to raise prices. They also see that a “buyer’s market” can endure. Once production capacity is built, companies will keep producing, even if they have to accept low prices that barely cover operating costs.

Companies will also frantically cut costs and innovate when prices are low. For example, before 1986, analysts agreed that new North Sea investments needed a $30 oil price. But within two years, new investments were taking place with the price below $20.

Indeed, the 1986 experience provides insight for today. Over the previous five years, OPEC producers rapidly lost market share as demand fell and supplies increased from Alaska, the North Sea, Mexico and Russia. OPEC had no alternative but to let the price fall. Had it kept cutting production in an effort to maintain the price, the cartel would have lost even more money, as non-OPEC investors drove its market down even further. If you are the low-cost producer in a buyer’s market, your options are limited. But your survival chances are better.

This lack of options for OPEC has rarely been mentioned in the news media over the past few weeks. Instead, we hear about a game of chicken between OPEC, Russia and the United States, a fight to see who will blink first. OPEC is not playing chicken. Its members are doing what any low-cost producer would have to do in a buyer’s market: cutting price to slow the decline of market share, and worrying about the next innovation that springs more oil from the Earth’s crust.

Once students reach this stage, they’re ready for the big questions. First, I ask them to predict the average price of oil for the next 20 years. Thinking about all of our scenarios, they realize the difficulty. Predictably, they fall back on what energy experts do; they forget about collusion and focus on how depletion might cause prices to rise, while innovation might cause them to fall. Future cost of production is seen as the key to determining future prices.

Then, I ask them to predict the oil price if humanity acts to keep the average global temperature from rising more than 2 degrees Celsius. Now they understand why experts say this will cause a falling demand for oil, and with it a falling price. How low might it fall? Maybe we’ll get a sense of that in the days and weeks to come.

Finally, I treat my students to my own prediction. I predict that even if oil prices are extremely low next September, my new students will still believe they’re rigged.

[Mark F]

Here's a ramification. also, according to the article, shipping rate has doubled. another impediment to north american exports of oil. All, bad for Alberta and parts of the Canadian economy. pitfall of a resource based economy, but let's hope this doesn't last. Who knows what the Saudis are up to. 

 

 

"(Reuters) - An aggressive strategy by Mideast Gulf producers to exploit the lowest oil prices in five years to defend market share is showing signs of bearing fruit as U.S. crude exports to Asia grind to halt.

Asian refineries have suspended imports of condensate, a light crude oil produced from the U.S. shale boom, just four months after they began in favour of cheaper Middle East grades, according to trade and industry sources."

 

 

 

http://www.reuters.com/article/2014/12/01/us-usa-asia-crude-idUSKCN0JF2D920141201

[Mark F]

hello?

[SPuDS]

Who the bleep cares? Gas is almost under 90'cents a litre!! This is awesome.. (Minus all economical ramifications lol)

Im still stunned it's outta triple digits..

[AtlanticRiderFan]

Who the bleep cares? Gas is almost under 90'cents a litre!! This is awesome.. (Minus all economical ramifications lol)

Im still stunned it's outta triple digits..

I know, right??? I haven't seen double digit gas in literally YEARS. Great to finally see cheap gas in the prairies instead of the usual 120-130 BS.

[TBURGESS]

I wish for double digit gas prices.  It's still $1.17 here in the lower mainland, where there are extra taxes so drivers can pay for the Skytrain and buses they don't use.

[AtlanticRiderFan]

Yikes, that's a lot still. Must be just a prairie thing right now. Seems too good to be true though. They'll probably jack up the prices again in no time. That's what happened a several years ago iirc. Prices were like 70¢, and then they went all the way up to $1.40.

[17to85]

Yikes, that's a lot still. Must be just a prairie thing right now. Seems too good to be true though. They'll probably jack up the prices again in no time. That's what happened a several years ago iirc. Prices were like 70¢, and then they went all the way up to $1.40.

OIl is below 70 dollars a barrel and still falling because there is an over supply globally, prices won't get jacked up until the price comes back up as supply gets cut and that will take some time to happen. Companies don't just shut down their production instantly. OPEC has already said they won't cut supply so the first to be cut will be American oil shale production, if a low price persists then you'll see oil sands production cut, but that would require several years to really see a big impact, too much investment already to just walk away from because prices are down. 

[Rod Black]

It's not about blinking first. Everyone wants higher price oil, this is purely about OPEC nations feeling threatened because there are other oil producers now. They're just trying to flex some muscle. As I said, US oil shale production will be the first to go, there's already too much invested in the Canadian oil sands for them to shut down. So it'll be a temporary lowering of the price and then it'll rebound. Overall if no one panics it might be for the best. Keeps the Alberta economy from over heating, draws out production for longer etc etc.

but they aren't flexing their muscle's. Normally they flex their muscles by cutting production to increase prices. They are basically admitting that they can't do that any more because it wouldn't increase prices, it would just eat into their market share. I doubt US is going to stop fracking either just because they came later to the party then Canada and have less skin in the game. If were waiting for companies to curtail production to bring supply and demand back in line, that isn't a blip in the radar, its a pretty long process especially with the high amount of fixed costs already invested.

With Europe crawling and Asia slowing down, I don't see this playing out too fast.

Agreed. There is no clear conspiracy to shut down North American producers. The boogey man is a great theory when fact isn't used. A few overly levered juniors or mids might be forced to idle some rigs, and this will cause them to amalgamate or be purchased at very good prices. Gasoline prices will harden when demand increases.

[Rod Black]

Yikes, that's a lot still. Must be just a prairie thing right now. Seems too good to be true though. They'll probably jack up the prices again in no time. That's what happened a several years ago iirc. Prices were like 70¢, and then they went all the way up to $1.40.

OIl is below 70 cents a barrel and still falling because there is an over supply globally, prices won't get jacked up until the price comes back up as supply gets cut and that will take some time to happen. Companies don't just shut down their production instantly. OPEC has already said they won't cut supply so the first to be cut will be American oil shale production, if a low price persists then you'll see oil sands production cut, but that would require several years to really see a big impact, too much investment already to just walk away from because prices are down.

Of course you mean 70 bucks. However OPEC has only said they are not cutting NOW. The higher cost producers within OPEC are outraged at that decision. OPEC made a decision but is far from unanimous. They have to revisit this issue in a few months as well. There is way more oil in the ground than just American shale that could be curtailed. What happens first is the capital drilling programs will be curtailed before any current producing rig is shut off. This stuff happens all the time in the resource industry. As an example Mines produce all the time during a dip in the Underlying commodity.

[Mark F]

no conspiracy?

 

you might be wrong 

 

Nov 28

 

"(Reuters) - Saudi Arabia's oil minister told fellow OPEC members they must combat the U.S. shale oil boom, arguing against cutting crude output in order to depress prices and undermine the profitability of North American producers.

Ali al-Naimi won the argument at Thursday's meeting, against the wishes of ministers from OPEC's poorer members such as Venezuela, Iran and Algeria which had wanted to cut production to reverse a rapid fall in oil prices.

They were not prepared to offer big cuts themselves, and, choosing not to clash with the Saudis and their rich Gulf allies, ultimately yielded to Naimi's pressure.

"Naimi spoke about market share rivalry with the United States. And those who wanted a cut understood that there was no option to achieve it because the Saudis want a market share battle," said a source who was briefed by a non-Gulf OPEC minister after Thursday's meeting."

 

"Secretary General Abdullah al-Badri effectively confirmed OPEC was entering a battle for market share.

Asked on Thursday if the organization had a answer to rising U.S. production, he said: "We answered. We keep the same production. There is an answer here".

 

I guess it's not a conspiracy when it's so openly stated.

[Fraser]

I would say a cut to increase prices would be more of a price fixing action. They aren't even "flooding" the market with cheap oil, just refusing to scale back existing production. The lowest cost producers has a competitive advantage.