10 thoughts on “Causes and consequences of the oil price decline of 2014-2015”

  1. Jeffrey J. Brown

    Oil Prices: Is a “V-Shaped” Recovery on the Horizon?
    Oil-field service company Core Labs offers a very bullish take on the oil market.
    http://www.fool.com/investing/general/2016/04/24/oil-prices-is-a-v-shaped-recovery-on-the-horizon.aspx

    fool.com — The price of crude oil has been battered for more than a year due to a vastly oversupplied oil market. However, that market is showing signs of improving and could be poised for a big second-half rebound. That’s the bullish take recently offered by Core Labs, which detailed its outlook for the oil market when it reported its first-quarter results.

    My comments:

    The only quibble I would have with the title is that I would describe the oil price pattern as more of a broad “U” shape.

    If we define the duration of the previous oil price decline as the number of months with monthly Brent prices below $100, before we saw a sustained oil price recovery, the previous decline, in 2008, only lasted four months.

    Using the same metric–and if we are in the early stages of a sustained oil price recovery–the current decline lasted 17 months, about four times as long as the previous decline.

    And again, when analysts discuss “Crude oil,” they generally mean Crude + Condensate (C+C), and in my opinion, we are probably in the early stages of a very sharp decline in actual global crude oil production (45 API Gravity and lower crude oil)–my premise being that only trillions of dollars in post-2005 upstream global capex has heretofore staved off a collapse in actual global crude oil production, and that very upstream global capex is now collapsing.

    And against a backdrop of a strong increase in Saudi and global net exports of oil from 2002 to 2005, annual Brent crude oil prices approximately doubled in three years, when the US and the Chindia region both showed increasing net oil imports.

    Both the US and the Chindia region are currently (for the first time since 2002 to 2005) once again showing increasing net oil imports–against backdrop of an apparently continuing post-2005 decline in Saudi and global net oil exports.

    1. Jeffrey J. Brown

      Note that following the previous (2008) oil price decline, which I would call a “V” shaped pattern, it took about two years for the total US rig count to get back prior levels of activity–and this was with the benefit of virtually unlimited cheap debt financing for the shale players.

      1. Jeffrey J. Brown

        From your linked article:

        SINGAPORE (Reuters) – A rebound in oil prices this year from 12-year lows is in danger of coming to a crashing halt, as the main engine of global demand growth for the past several years starts to sputter amid signs of a gasoline glut.

        To the extent that we have a developing gasoline glut, the most likely explanation is a global condensate glut (condensate is basically natural gasoline). In the following article, I estimated that global condensate production increased from about 5 million bpd in 2005 to about 10 million bpd in 2014, as actual crude oil production (45 API Gravity and lower crude oil) fell slightly, from about 69 million bpd in 2005 to about 68 million bpd in 2014.

        I suspect that US refiners hit, in late 2014, the limit of how much condensate that they could process, if they wanted to maintain their output of distillates and heavier refined products, which caused a build in condensate storage levels, reflected as an increase in US Crude + Condensate (C+C) inventories. The complete elimination of restrictions on US C+C exports was supposed to have reduced the US C+C inventory numbers, but US C+C export numbers are actually down year over year. Therefore, I suspect that there is little demand, either in the US or globally, for additional condensate.

        Furthermore, it appears likely, in my opinion, that US shale players borrowed billions of dollars to build up a huge surplus in a commodity for which there is little additional demand, i.e., condensate.

        And as noted above, in my opinion the only thing staving off a collapse in actual global crude oil production was the trillions of dollars spent on global post-2005 upstream capex, and that global upstream capex is now collapsing.

        Estimates Of Post-2005 US, OPEC & Global Condensate Production Vs. Actual Crude Oil Production
        http://oilpro.com/post/22276/estimates-post-2005-us-opec-global-condensate-production-vs-actua

        Excerpt:

        The most common dividing line between crude oil and condensate is 45 API Gravity, but note that the upper limit for WTI crude oil is 42 API Gravity. However, the critical point is that condensate is a byproduct of natural gas production. Note that what the EIA calls “Crude oil” is actually Crude + Condensate (C+C).

        When we ask for the price of oil, we generally get the price of either WTI or Brent crude oil, which both have average API gravities in the high 30’s, and the maximum upper limit for WTI crude oil is 42 API Gravity. However, when we ask for the volume of oil, we get some combination of crude oil + partial substitutes, i.e., condensate, NGL and biofuels.

        From 2002 to 2005, as annual Brent crude oil prices approximately doubled from $25 in 2002 to $55 in 2005, global natural gas production, global NGL production and global C+C production all showed similar rates of increase. For example, from 2002 to 2005 global natural gas production increased at a rate of 3.2%/year, as global C+C production increased at a rate of 3.3%/year.

        From 2005 to the 2011 to 2013 time frame, annual Brent crude oil prices doubled again, from $55 in 2005 to an average of $110 for 2011 to 2013 inclusive, remaining at $99 in 2014. From 2005 to 2014, global natural gas production increased at 2.4%/year, while global C+C production increased at only 0.6%/year. Given that condensate production is a byproduct of natural gas production, the only reasonable conclusion in my opinion is that increasing global condensate production accounted for all, or virtually all, of the post-2005 slow rate of increase in global C+C production, but let’s examine the available data.

        1. PeakTrader

          According to the article I cited, who knows when supply and demand balance. It took roughly 10 years to reverse rising or high oil prices.

          “Singapore, traders have started storing excess gasoline aboard tankers as they run out of onshore storage.

          Goldman Sachs already warned late last year that an emerging glut in refined products would eventually spill back into the crude market.

          “If all the major consumers sell off their gasoline, it begs the question who will buy it?” said one Singapore fuel trader. “The answer is that much will remain unsold and in storage, and once that happens prices will crash.””

          1. Jeffrey J. Brown

            A continuing reminder: When we ask for the price of oil, we generally get the price of either WTI or Brent crude oil, which both have average API gravities in the high 30’s, and the maximum upper limit for WTI crude oil is 42 API Gravity. However, when we ask for the volume of oil, we get some combination of crude oil + partial substitutes, i.e., condensate, natural gas liquids (NGL) and biofuels.

            In my opinion, actual global crude oil production (45 API Gravity and lower crude oil) effectively peaked in 2005, while global natural gas production and associated liquids, condensate and natural gas liquids have (so far) continued to increase.

  3. AS

    Jeffrey,
    What is the best source of the production statistics you mention, so as one may keep track of the data? I assume it is one of the many EIA data groups.

    Thanks

    1. Jeffrey J. Brown

      For production, consumption and net export data for the (2005) Top 33 net exporters, I relied on the EIA International Energy Statistics data base. Here is a link for total petroleum liquids production, by country, for 2002 to 2014:

      http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=55&aid=1&cid=regions&syid=2002&eyid=2014&unit=TBPD

      Unfortunately, the EIA has not yet updated their 2014 natural gas production data and total liquids consumption data.

      Note that the EIA periodically revises their data, and you can download the data in an Excel format.

      BP releases their data usually in June, for the preceding year. They track total petroleum liquids for production and total liquids for consumption. Unfortunately, their consumption data base is incomplete, insofar as the (2005) Top 33 data base is concerned.

      When BP releases their 2015 data, I am going to try to put together a 10 year retrospective look at net exports using EIA + BP data.

      For what it’s worth, following is a link to the short article from 10 years ago, where I introduced the Export Land Model (ELM):

      http://www.theoildrum.com/node/984

      My concluding paragraph:

      As predicted by Hubbert Linearization, two of the three top net oil exporters are producing below their peak production level. The third country, Saudi Arabia, is probably on the verge of a permanent and irreversible decline. Both Russia and Saudi Arabia are probably going to show significant increases in consumption going forward. It would seem from this case that these factors could interact this year* produce to an unprecedented–and probably permanent–net oil export crisis.

      *2006

      Note that the Oil Drum editor changed my original text in the final sentence from “will interact” to “could interact.”

      In this introductory article, I focused on the three top net exporters at the time, Saudi Arabia, Russia and Norway. Using EIA data, at the time I wrote the article their combined net exports increased from 15.3 million bpd in 2002 to 19.0 million bpd in 2005 (total petroleum liquids + other liquids), a 7.2%/year rate of increase. Using the Rule of 72, at this rate of increase their combined net exports would have exactly doubled in 10 years, to 38 million bpd in 2015.

      I didn’t get everything right 10 years ago, but the (2005) Top Three net exporters’ combined net exports fell from 19.0 million bpd in 2005 to 17.7 million bpd in 2014 (using BP consumption data for 2014).

      So, as annual Brent crude oil prices approximately doubled from $25 in 2002 to $55 in 2005, the (2005) Top Three showed a 7.2%/year rate of increase in net exports, and as annual Brent crude oil prices doubled again, from $55 in 2005 to an average of $110 for 2011 to 2013 inclusive (remaining at $99 in 2014), (2005) Top Three net exports fell at 0.8%/year. This contributed to the overall post-2005 decline in global net exports of oil.

    2. Jeffrey J. Brown

      Correction:

      For production, consumption and net export data for the (2005) Top 33 net exporters, I relied on the EIA International Energy Statistics data base. Here is a link for total petroleum liquids + other liquids production, by country, for 2002 to 2014:

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