Oil Prices In The Longer Term & Effect on Calgary

[Feruk]

I was gonna originally post this in the "FALLing house prices" thread, but figured it warranted it's own discussion...

I think most of you are incorrectly comparing this slowdown to 2009. A demand-driven issue outside O&G. Totally the wrong comparison. You've gotta look for a supply-driven issue within O&G to compare. The only one in recent years is the crash in natural gas prices. That was what? 2006/2007? Here we are 9 years later, and gas prices still haven't recovered. Only reason anyone drilled gas to this point is it was "liquids rich", now that's heading out the window.

The natural gas crash came as a result of oversaturated gas market due to advancements in multi-stage fracking and HZ drilling. Sounds familiar for oil today?? I think what we're seeing is a fundamental long-term step change in the price of oil. The most common argument against is "but new projects need $80+ to start." This argument falls flat though, because projects can become economic with a reduction in costs and no increase in pricing as well. In the area I work, costs are already down 15% and will likely go lower. Those Saudi projects that need "$90 oil" will figure out how to make it work at far lower prices.

My prediction: Oil stays at $50 (optimistic prediction here). Everyone that can get their costs down from $70 to $50 not only stay in business, but lead the industry. The rest go belly up. That probably means 20-30% permanent job losses in Alberta O&G (a decade +) and 20-30% reduction in pay for those that remain employed over the next couple years. I don't wanna sound all "doom and gloom" for housing prices, but my guess is you're better off waiting to buy next year, and even better off waiting to buy in 2 years.

Right now everyone is under the delusion that oil will somehow recover by year end. What could POSSIBLY make it recover? Let's leave out the short term spikes due to instability (Yemen, etc) and talk longer term. US and Russia will likely slow their growth (this is not a reduction, just less acceleration in growth), Canada has major oil sands project expansions to come on, Saudi will stay flat, and Iran/Libya are likely to bring their oil more into the international markets. All these are drivers for even lower prices. Really the only driver up is when Venezuela collapses, and that isn't even that significant.

I think the real question isn't when will prices go back up; it's whether the long term price (next decade) is $50 or $30...

Someone tell me why I'm so terribly wrong.

[nzwasp]

Surely demand will increase in developing countries year over year to slowly catch up with all the excess supply.

[KRyn]

I don't have anything I want to contribute to this thread, but I do look forward to reading what the general consensus is among everyone on beyond.ca.

[A790]

Originally posted by nzwasp
Surely demand will increase in developing countries year over year to slowly catch up with all the excess supply.

Main growth drivers from China and India are slowing down, and they're the two countries with the population to really drive a change on a global stage.

It's going to be an interesting few years, that's for sure.

[Cos]

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[ExtraSlow]

The comparison to the Natural Gas situation is pretty valid, but there are some differences.
Natural gas is a purely North American commodity. There is no significant export capacity off this continent, so we're dealing with a fairly localized market.
Oil has some of the same export issues, but most of the world demand is coming from worldwide supply, not North America.

Worldwide, the technologies that are supplying the oil are NOT the Multi-stage Fracturing / "shale boom" stuff. A lot of it is still conventional reservoirs accessed by various megaprojects. Those kind of projects haven't seen the step-change in supply volumes or costs that NA unconventional projects have. Does this mean that there are thousands of reservoirs worldwide ripe for application of advanced fracturing techniques, and global supply will balloon?

A lot of commodities economics happens "at the margin", so relatively small changes in supply and demand can have disproportionate influence on prices. I think that makes it more prone to large swings than stability.

Honestly, I don't have many answers. All I know is that this industry has been very good to me so far, and I have a gut feel that it will be again. Maybe that's just hopes and dreams, I can't tell.

[killramos]

The Saudis are running budget deficits. They have tons of cash on hand sure but not enough for 50 dollar oil to be the norm on the scale of decades. They are to used to decadence for them to steer the ship towards efficiency and austerity.

They snap their fingers and price goes back up. 100% their choice, and after they are done swinging their dicks they will do just that.

The world population is still increasing exponentially, other energy sources are NOT keeping pace. That's independent of Saudi.

While oil may or may not be up this year. It think its delusional to think we have 50 dollar or less oil until 2020.

As such in terms of Calgary. Some of the more overlevereged and greedy will get their dicks slapped ( corporations and individuals). But things will bounce back and life will go on. Maybe there will be a semblance of diversification and public policy changes. More likely everyone will forget 2015 just like they forgot every other slump.

[revelations]

http://www.tradingeconomics.com/char...31&type=column


40-50$ seems to be a present major hold. I dont see it personally sticking around there forever - a slow climb would seem inevitable.

[ZenOps]

Hard to know against a US dollar.

But assuming that you would have to pay back about 1 ton of wheat for every five barrels of oil consumed (in realistic commodity terms) I do wonder how many would actually have the capacity to be that productive. In nickel terms, it would be more like 5 pounds of nickel for every barrel, in gold terms 1/15th of a ounce per barrel. In DVD "Hollywood" terms, about 5 movies for every barrel of oil.

Until such time as the US decides to go back to a "real" dollar, I assume that in US dollar terms the US will slow its mostly petrodollar debtload per family (currently $720,000 US debt per family) until they can get things figured out.

Petrodollar debt, is ridiculously one sided. Everyone burns far more than they produce, even in hollywood terms.

Unless they somehow manage to convince the elites of the world that each piece of gradeschool waterdyed macaroni art on cardboard is worth a million dollars apiece, there will continue to be strife around the world.

[USED1]

As mentioned previously, the difference between the collapse in gas vs the collapse in oil is gas is purely a domestic market whereas oil is a global market. Canada is restricted on moving its product to the global market for both oil and gas. In the world economy gas is worth much more than it is in NA.

I can't see a huge recovery in oil price in the near term, however, I don't foresee prices staying between $30-60 over the next decade. As it stands today, at the rate that a shale oil well declines and the lack of drilling in these fields they may never hit the peak rates again without the major investment that was poured in during the boom, and there won't be that appetite for it as a lot of the shale oil guys were using debt to fund the drilling.

Regardless, it will be an interesting couple of years.

[adam c]

I don't work in Oil and Gas directly but I see the effect it's having on all the business's I deal with, every week there's notice that someone or a group of people are being let go from one of our clients who don't even directly have ties to O&G... And the other concern I see is that some people feel the media is blowing this out of proportion and this isn't as bad as 2009 since this time of year usually sees a break up in the oil patch

[Sugarphreak]

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[Cos]

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[sputnik]

Originally posted by killramos
The Saudis are running budget deficits. They have tons of cash on hand sure but not enough for 50 dollar oil to be the norm on the scale of decades. They are to used to decadence for them to steer the ship towards efficiency and austerity.

They snap their fingers and price goes back up. 100% their choice, and after they are done swinging their dicks they will do just that.

When it comes to oil, Russia, China and North America could also "snap their fingers" like OPEC could and the price of oil would come back.

Unfortunately that involves cutting production and no one want to do that.

It is easy to blame the Saudis, but at the end of the day it's not like they are doing anything differently than anyone else is. They just have the means to pay for their choice and are hoping that the other countries give in before they have to.

[Sugarphreak]

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[killramos]

Originally posted by sputnik


When it comes to oil, Russia, China and North America could also "snap their fingers" like OPEC could and the price of oil would come back.

Unfortunately that involves cutting production and no one want to do that.

It is easy to blame the Saudis, but at the end of the day it's not like they are doing anything differently than anyone else is. They just have the means to pay for their choice and are hoping that the other countries give in before they have to.

I am not looking at it so much as blaming the Saudis, because i do not think this is their fault while it is in their control, as much as they really have nothing else going for them.

Russia? They will always find a way to keep trucking regardless of what happens in the rest of the world.

USA? Oil is important but even if Oil revenue 100% disappeared they are still a superpower. Besides do you realize how long it would take for the Americans to legislate a production cut when all the companies are private? They can't even approve or ban a fucking pipeline. The USA cant do anything to mitigate this. To democratic.

China is quite diversified as well.

Unless there is a shortage of sand in the near future Oil is the only card Saudi has to play. The country has to make money SOMEHOW.

[Feruk]

Originally posted by ExtraSlow
Worldwide, the technologies that are supplying the oil are NOT the Multi-stage Fracturing / "shale boom" stuff. A lot of it is still conventional reservoirs accessed by various megaprojects. Those kind of projects haven't seen the step-change in supply volumes or costs that NA unconventional projects have. Does this mean that there are thousands of reservoirs worldwide ripe for application of advanced fracturing techniques, and global supply will balloon?

That's a big concern IMO. Right now they're only going after the easy stuff. But in some places, easy stuff is gone, and they are starting to chase shales with NA frac technology. Case and point Argentina.

Originally posted by killramos
The Saudis are running budget deficits. They have tons of cash on hand sure but not enough for 50 dollar oil to be the norm on the scale of decades. They are to used to decadence for them to steer the ship towards efficiency and austerity.

They snap their fingers and price goes back up. 100% their choice, and after they are done swinging their dicks they will do just that.

The world population is still increasing exponentially, other energy sources are NOT keeping pace. That's independent of Saudi.

While oil may or may not be up this year. It think its delusional to think we have 50 dollar or less oil until 2020.

Saudis had very little to do with this glut. Their production's been pretty steady for a long time. It's the US nearly doubling production in a decade. So if the Saudis cut, price will rise, and the US will eat up the new supply bringing price back down. End result for Saudis is less market share. They know this, hence they will never cut regardless of budget concerns.

Originally posted by Sugarphreak
I would expect that they will be forcing people off gas in favor of CNG or public transit in the next couple of years. I believe that both Taxi's and a large percentage of buses already run on CNG. If I had to guess, I would say that demand there will start going down towards 2020.

While I agree with most of your point, totally disagreed on CNG making any difference. You're still producing CO2...

Originally posted by USED1
As mentioned previously, the difference between the collapse in gas vs the collapse in oil is gas is purely a domestic market whereas oil is a global market. Canada is restricted on moving its product to the global market for both oil and gas. In the world economy gas is worth much more than it is in NA.

As it stands today, at the rate that a shale oil well declines and the lack of drilling in these fields they may never hit the peak rates again without the major investment that was poured in during the boom, and there won't be that appetite for it as a lot of the shale oil guys were using debt to fund the drilling.

World oil price is under $5/bbl different. Therefore, there is no difference between it being a NA market and world market. If anything, gas being a NA market just means it dropped FIRST, and the world oil market is now catching up.

Also, what "lack of drilling" are you seeing in these shale fields down south? A slowdown sure, but production continues to rise in all the big ones except maybe MB Bakken. So far the declines have been well overtaken by new production coming on. No observable change in trend yet, and we're 6 months into the downturn. Rig counts decrease weekly, but not by anything substantial. Companies are mostly still talking production growth in 2015.

[killramos]

Originally posted by Feruk


Saudis had very little to do with this glut. Their production's been pretty steady for a long time. It's the US nearly doubling production in a decade. So if the Saudis cut, price will rise, and the US will eat up the new supply bringing price back down. End result for Saudis is less market share. They know this, hence they will never cut regardless of budget concerns.

Just because it isn't their fault doesn't mean they wont fix the problem.

I'm not convinced i agree with you re: the Americans eating up new supply. US shale boom is pretty unsustainable on a world reserves standpoint. Nothing about it is long term, esp at their current pace.

Saudi on the other hand has plenty of legs. and like i said. A country like theirs cannot run long term deficits. The luxuries they have and their military are the only thing keeping that country, well a country.

Take away their HUGE oil money and they are no different than yemen.

[Perceptionist]

When I look back 1 year ago from today, WTI was at $100/bbl. From 2011 - 2014 WTI was consistently $90-$100/bbl. Today it is $50/bbl.

Production growth in the US has been significant over the past 3 years, increasing from roughly 6 to 9 MMbbl/d. This is the supply increase that most experts suggest is the cause for the drop in global crude pricing. But when looking at total global demand/consumption of oil, the number is north of 90 MMbbl/d. The US only produces 10% of the worlds oil, and the huge shale oil boom in the US was roughly a 3% increase in global supply over that period.

For context, the global demand for oil increased by roughly 1 MMbbl/d per year over that 3 year period. So the US production growth essentially made up the entire increase in global demand. Significant? yes. But enough to keep the price of oil depressed for many years? I don't believe so.

The sharp price drop has hit the US oil patch hard, as can be seen by the plummeting rig count and slashed capital budgets. Many of these horizontal multi-stage frac wells exploiting shales in the US have first year decline rates of 60 - 80%. Keeping the production flat in many of these plays requires significant drilling programs to offset the high decline rates. When US production begins to drop, it will fall fast and hard. Although this drop won't be a large % of global production, I believe it will be enough for the speculators to drive up the futures market quite rapidly, the same way it was driven down.

On the demand side, cheap energy costs must be driving growth all over the world. While carbon emissions and their impact on the planet have been identified, I don't think enough is being done to make any significant change to growth in global demand. Emerging markets want the high consumption lifestyle we are all accustomed to and have little concern for long term global consequences.

I believe the combination of a North American production decrease and strong growth in emerging markets due to low energy costs will push the crude oil price back up in the short to medium term.

[EM2FTL]

Originally posted by Feruk

What could POSSIBLY make it recover? Let's leave out the short term spikes due to instability (Yemen, etc) and talk longer term.

Great post, this part stuck out for me. I could see longer term instability in the Middle East, perhaps through some combination of religious/political extremism and impending fresh water resource-access issues. A conflict that embroiled the entire region could take many years to resolve and would have huge implications for production.