Anyone trading this? The basic idea I’ve heard is that there is increased global supply and Saudi Arabia seems to be comfortable with lower prices, hoping that the countries with higher breakeven prices will cut their output instead. Anyone have different perspectives?
From Reuters: Iran ($136), Nigeria($124), Algeria ($119), Venezuela ($117)
We see ridiculous swings in nat gas prices every winter whenever a storm moves through and people freak out like its never happened before, is this what were seeing now? Just an overreaction to a supply/demand dynamic that we all knew about?
Natural gas price spikes in North American are a function of demand and storage shortfalls. There can actually be regional scarcity if weather is extremely cold. As in sorry, we can’t make delivery to your house and you can freeze to death tonight kind of scarcity. Production and shipping capacity doesn’t equal peak demand so storage is important. And I think with more extreme variations in winters, you’ll see more storage constraints. High natural gas prices are an important conservation signal in times when real shortage is possible. US natural gas production in January 2014 was 70bcf and consumption was 104bcf. Storage in April 2014 was 60% below average and there was only 10 days use left in the tank. My point is NA natural gas price swings aren’t really an overreaction, whereas oil tends to be more speculative. I think we are seeing a speculative over reaction here. Oil is needed. To produce the oil needed and earn a fair return companies need $90-100/bbl. End of story. If that fair return doesn’t exist, companies won’t invest and production will fall off and prices will rise again until enough oil is produced to meet demand. Unless you can point to some massive fields that can be developed with a 15% IRR at $60/bbl, I’m not worried long term. But this could be a painful year.
Zerohedge has been all over this for weeks now, but it’s finally catching on in the more mainstream news outlets. Go to pretty much any major news outlet and look it up. Here’s one to get you started.
I’ve heard that, too but is that good policy for the U.S., being the largest oil producer in the world? These unconventional producers in the U.S. invest TONS of capital; their cash flow statements for the most part suck b/c capex is through the roof. The oil and gas industry has had a very large, positive impact on U.S. economic activity b/c unconventional production is so service and equipment-intensive. Obviously, gasoline prices declining helps the U.S. consumer but the industrial/manufacturing sector will be hit if oil falls another 10%-20%. Petrochemicals, midstream, railcars, trucking, metal service centers are investing a lot due to the growth in production, too. For the last few years I’ve heard how there is no growth capex in the U.S. but the oil and gas industry has not at all shy to invest. Oil price declines hurt NGL pricing too, and that suppresses other natural gas/NGL drilling, too. I think the U.S. economy has benefited tremendously from unconventional oil and gas drilling, and if that goes away it’ll hurt. Unconventional oil/gas has a large multiplier. Will lower gasoline prices offset that? I don’t know.
I suppose a happy equilibrium can be met; $80/bbl oil still incentivizes a good deal of oil and gas drilling in the U.S., Saudi Arabian social spending is supported and if it hurts Russia at the same time that’s a task accomplished but I’m a little skeptical that oil prices can be controlled that effectively.
I get the theory, but the U.S. itself can’t be the one pulling the levers b/c it’s a high cost producer. It’s Saudi Arabia that has the power (how much power they truly have is another question). Oil is a precious resource for Saudi Arabia and it won’t last forever, so playing geopolitical games with it is questionable policy but it’s an interesting debate.
The whole point is we’re doing this in conjunction with Saudi Arabia. Obviously we need them on board to manipulate prices. Why do you suppose we don’t bomb the hell out of them when they finance terrorism and breed terrorists like an ant colony? So in times like these we can remind them they will do what we say…and they are.
We can’t openly fight Russia so we use official sanctions and other tools, like suppressing the price of oil, to change the behavior of Putin’s supporters. Once they start losing money, not to mention the general recession this could cause if we can pull it off long enough, Putin will lose that 80% approval rating faster than you can say “thanks Obama.”
Well, his economy is stagnant at the moment. The sanctions are taking their toll and expected to detract 1 to 1.5% from GDP. Oil around $80 would subtract another 1.7% in 2015. So, do I think Putin cares about his economy going from no growth to negative 3%? Yes, I think that would cause him to look to his own house instead of trying to grab more land. But, again, the real pressure would come from his buddies that control all that oil. Start to squeeze them and Putin will lose a lot of powerful allies.
Who is this “we” manipulating prices? Are we selling from the Strategic Petroleum Reserve? No. Is there significant evidence that the U.S. government has had a hand in pushing oil companies to increase production? Not that I’ve heard about it.
I did a simple regression of U.S. and Russia real GDP (% change QoQ) on real oil prices (% change QoQ). I get about 0.02 for the U.S. and 0.045 for Russia since Q1 2000. This means that a 10% decline in real oil prices will reduce U.S. GDP growth by 0.2% and Russian GDP growth by 0.45%. However, since U.S. GDP is like 5 times larger than Russia, the dollar value of the effect is twice as large for the U.S. than Russia. Hence, we would cause more absolute harm to ourselves than Russia by pursuing such a policy.
As I’m sure you know, there are all kinds of reasons why that regression is worth nothing, the most important being that during the period you regressed the oil price sky rocketed due to the commodity boom…which was good for Russia and which the US rebounded into.
How does the agreement work with the Saudis. Did Clinton brief Bush? And then Bush briefed Obama? Are they all buddies and part of a club? Do they all just spin false narratives about thier backgrounds to throw us all off? How do I become a member?
I think historical perspective is important here. A big part of why the USSR fell was because of a long term (5 years +) decline in oil prices back in the 80s which underminded the economy and led to constrained supply of basic goods. The US economy is diverse and can weather a supply glut in oil much longer than Russia can.
But, you’re forgetting a few huge factors. First, the U.S.’ economy is actually growing - albeit slowly. All else equal, we can withstand a drop in oil prices better than Russia who doesn’t appear to have the GDP wiggle room. Second, Putin’s power is reliant on a few oligarchs. Our first priority is to squeeze them until they turn on Putin, not to ruin Russia’s entire economy. Third, the U.S.’ economy is more consumer based than Russia’s so, while your regression may be valid, there’s hope the additional money people save at the pump will find its way back into the economy more efficiently than pretty much anywhere else on earth.
AND - all of this presupposes the people in charge actually know what they’re doing. That’s a gigantic question mark.