It Takes Two to Contango

Generali

HAMISH_MCTAVISH wrote: »

Interestingly, the difference between Brent and WTI has jumped to $12 a barrel, the glut continues in the US domestic market but appears to be easing elsewhere.

I suspect that the ban on exporting oil from the US will be removed soon or at least licences to export will be granted. The difference is such that people will start trying to smuggle oil out of the country soon.

HAMISH_MCTAVISH

Generali wrote: »

I suspect that the ban on exporting oil from the US will be removed soon or at least licences to export will be granted.

They already have been for refined products in an attempt to ease the glut.

The difference is such that people will start trying to smuggle oil out of the country soon.

Smuggling from the MEA part of EMEA has been endemic for ages, a tad harder from the US though.

I have a lot of friends high up in oil with (what they think is, anyway) inside knowledge, the majority opinion appears to be that POO has bottomed, and that Brent will trade in the 60-80 range this year.

They think tight oil (and therefore WTI) prices will remain more suppressed than Brent, with the spread continuing to be wide, until further capacity comes offline in the US, but this is happening faster than the majority of commentators assumed as known oil carrying wells are simply not being fracked to activate at the moment.

With conventional supplies, it makes sense to extract regardless of price, as you usually have many companies "sipping from the same bowl through different straws".

If you don't get it, your competitors will, and there will be less for you in the long term.

With tight oil, the oil doesn't flow until the well is fracked, so that risk of reservoir depletion from competitors simply isn't there. And as 60% of the cost is the fracking rather than the drilling it makes sense to hold off for higher prices. Which is completely different to the economics of conventional supplies and somewhere we've never been before.

The canary in the coalmine is services companies.... They've gotten "fat and happy" to quote a Texan buddy of mine. That's where the squeeze will be felt. Some think exploration and production costs for unconventional oil could decline by up to 40%. If so, then expect capacity to come back online to preserve market share... If not, then oil is headed back towards 80-100 in the medium term.

Be interesting to see either way.

Generali

HAMISH_MCTAVISH wrote: »

I have a lot of friends high up in oil with (what they think is, anyway) inside knowledge, the majority opinion appears to be that POO has bottomed, and that Brent will trade in the 60-80 range this year.

This is the disconnect. Markets agree with your mates: the future POO is sitting well above the spot price, however the spot price is refusing to budge in any significant way. Once the storage facilities are full, financial firms using contango to make money will be removed from the demand side of the pricing curve. That's likely when we may see the move downwards.

HAMISH_MCTAVISH wrote: »

They think tight oil (and therefore WTI) prices will remain more suppressed than Brent, with the spread continuing to be wide, until further capacity comes offline in the US, but this is happening faster than the majority of commentators assumed as known oil carrying wells are simply not being fracked to activate at the moment.

With conventional supplies, it makes sense to extract regardless of price, as you usually have many companies "sipping from the same bowl through different straws".

If you don't get it, your competitors will, and there will be less for you in the long term.

With tight oil, the oil doesn't flow until the well is fracked, so that risk of reservoir depletion from competitors simply isn't there. And as 60% of the cost is the fracking rather than the drilling it makes sense to hold off for higher prices. Which is completely different to the economics of conventional supplies and somewhere we've never been before.

I've no idea whether this is accurate or not but it sounds completely plausible. However, there is also a huge cost in servicing debt. Ultimately, fracking companies need cash to keep servicing debts.

HAMISH_MCTAVISH wrote: »

The canary in the coalmine is services companies.... They've gotten "fat and happy" to quote a Texan buddy of mine. That's where the squeeze will be felt. Some think exploration and production costs for unconventional oil could decline by up to 40%. If so, then expect capacity to come back online to preserve market share... If not, then oil is headed back towards 80-100 in the medium term.

Be interesting to see either way.

That will be interesting. Big miners are also talking about squeezing their servicing firms too.

Jonbvn

HAMISH_MCTAVISH wrote: »

I have a lot of friends high up in oil with (what they think is, anyway) inside knowledge, the majority opinion appears to be that POO has bottomed, and that Brent will trade in the 60-80 range this year.

I have to take this with a pinch of salt. As I have posted previously nobody inside or outside the industry has got a scooby where the POO is headed.

westernpromise

patman99 wrote: »

It used to be the case that the oil companies used to park tankers full of crude off the South English coast and not dock them until the price reached a specific level.

No it didn't

westernpromise

Jonbvn wrote: »

I have to take this with a pinch of salt. As I have posted previously nobody inside or outside the industry has got a scooby where the POO is headed.

Nobody in the industry pays much attention to flat price as it is not predictable.

purch

patman99 wrote: »

Nearly every bus sold these days is a diesel/electric hybrid with 40% better mpg than a standard diesel bus. Imagine the affect on oil prices once the lorry makers introduce the same kit.

No it isn't.

A hybrid Bus costs 3x the price of a conventional Bus, and so far not one has been sold without a Government subsidy.

As Volvo & MAN make these Hybrid power chains for Buses, and are also two of the largest manufacturers of LGV's. they have yet to come up with a hybrid engine that can power a Coach, I would expect that one to power a LGV is years away.