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Brent crude prices, the benchmark for half the world’s oil, will weaken for a second year in 2014 as U.S. output expands and threats to Middle East and North African supply ease, the most-accurate forecasters said.
Prices will average $105 a barrel in 2014, from $108.71 in 2013, according to the median of estimates from the seven analysts who most accurately predicted this year’s level in a survey last December. Brent averaged $111.68 in 2012.
Global supply is expanding as the U.S. pumps oil trapped in shale-rock formations, driving domestic output to the highest in a quarter century and curbing demand for the crude priced off Brent. Iran, Iraq and Libya will also produce more in 2014, the forecasters said. While a second annual drop for Brent would be the first consecutive retreat since 1998, prices are still about 39 percent higher than the average over the past decade.
“We’re expecting a surplus,” said David Bouckhout, the senior commodity strategist at Toronto-Dominion Bank in Calgary who was jointly the most accurate forecaster. North American “supply growth is going to remain robust and cover the expected increase in demand. The biggest concern for 2014 on the supply side is going to be Iran, while Iraq is another producer that certainly wants to see its production grow.”
Brent for February settlement lost 97 cents to $111.21 a barrel on ICE Futures Europe today, leaving prices little changed compared with the start of the year. Hedge funds and other speculators boosted net-long positions in the grade by 41 percent in the week to Dec. 24, restoring bullish bets from their second-smallest level this year, bourse data show.
West Texas Intermediate, the U.S. benchmark, slipped $1.03 today to $99.29 after settling at $100.32 a barrel on the New York Mercantile Exchange on Dec. 27. The grade is poised for an annual gain of 8.1 percent. The spread between WTI and Brent averaged $10.63 this year, compared with $3.94 over the past decade. The widening gap reflects an abundance of U.S. supply at a time of disrupted exports from Iran, Iraq and Libya.
The three most-accurate forecasters from last year’s survey were Christin Tuxen, a senior analyst at Danske Bank A/S in Copenhagen, Thina Saltvedt, an analyst at Nordea Bank AG in Oslo, and Toronto-Dominion’s Bouckhout.
Mike Wittner, head of oil market research at Societe Generale SA in New York, ranked fourth. Francisco Blanch, head of commodities research at Bank of America Corp. in New York, Jeff Currie, head of commodities research at Goldman Sachs Group Inc. in New York, and Jochen Hitzfeld, an analyst at UniCredit SpA in Munich, were joint fifth.
Expansions in supply from producers outside the 12-nation Organization of Petroleum Exporting Countries will more than cover the gain in global demand in 2014, according to the International Energy Agency. Daily non-OPEC output will rise by 1.7 million barrels as worldwide consumption adds 1.2 million barrels, the Paris-based adviser to oil-consuming nations says.
The U.S. will lead the gains as it taps shale reserves in North Dakota and Texas, the IEA said in a Dec. 11 report. Iraq plans more exports next year as part of its long-term strategy to triple production, Oil Minister Abdul Kareem al-Luaibi said Dec. 3. Iran will increase output if international sanctions are eased, Oil Minister Bijan Namdar Zanganeh said the same day. Libya will reopen export terminals closed by protests, Oil Minister Abdulbari al-Arusi said Dec. 21.
Expanding supply from Libya, Iran and Iraq is a “tail risk” rather than a probable outcome, said Societe Generale’sWittner, the most bullish of the top seven analysts. Libya will remain “an unreliable source of supply,” higher output from Iran won’t materialize until later in the year and Iraq has repeatedly missed its expansion targets, he said. Wittner anticipates an average price of $108.
U.S. President Barack Obama, speaking in Washington on Dec. 7, assessed the chances of a comprehensive deal on Iran’s nuclear program as no better than 50-50. The nation, once OPEC’s second-biggest member, is producing about 930,000 barrels a day less than at the start of 2012, data compiled by Bloomberg show.
Libyan production is close to the lowest level since the uprising that unseated Muammar Qaddafi in 2011 as armed groups blockade eastern ports, oil ministry data showed Dec. 23. Iraq’s production of 3.1 million barrels a day in November was 7 percent lower than a year earlier amid attacks on pipelines and a dispute with leaders in the country’s Kurdish region, according to data compiled by Bloomberg.
A supply glut will be averted because Saudi Arabia, the biggest member of OPEC, will curb output if needed, Societe Generale’s Wittner said. The kingdom’s daily production swung from 8.75 million to 10.25 million barrels over the past several years, he said.
Oil demand may exceed analysts’ expectations next year as the U.S. economy strengthens, said Bjarne Schieldrop, the chief commodities analyst at SEB AB in Oslo. The global economy will expand 3.6 percent in 2014, from 2.9 percent in 2013, the International Monetary Fund said in a report in October.
“Demand has clear upside potential,” SEB’s Schieldrop said. “Oil prices should be set to stay around the $108 to $109 level seen this year, rather than set for a really bearish development.”
U.S. crude production surged to a 25-year high of 8.11 million barrels a day in the week ended Dec. 20, government data show. That’s the highest level since September 1988.
Iraq plans to export an average of 3.4 million barrels daily in 2014, Oil Minister al-Luaibi said Dec. 3. Shipments were 2.38 million barrels a day in November, the ministry said this month. The country has said it wants to produce 9 million barrels a day by the end of the decade.
Libya will consider armed force to reopen eastern ports closed by a blockade, Ajwa Leblad News cited Oil Minister Al-Arusi as saying Dec. 16. Production in the holder of Africa’s largest oil reserves has dwindled to 210,000 barrels a day, as of November, from this year’s peak of 1.4 million barrels in March, according to a Bloomberg News survey.
Iran may be able to boost oil exports by 500,000 barrels a day following an agreement on Nov. 24 that eased some sanctions in exchange for a pause in the country’s nuclear program, Toronto Dominion’s Bouckhout said. That might expand should Iran reach a wider deal with world powers, he said. The country shipped 850,000 barrels a day in November, according to the IEA.
Iran’s improved relations with western governments may make Saudi Arabia, its regional rival, more reluctant to act as the swing producer, said Danske Bank’s Tuxen. OPEC may then be divided over who should cut to restore the balance between supply and demand, driving prices lower, she said.
“The Saudis will continue to add to an oversupplied market,” Tuxen said. “We see them cutting supplies slightly, but not enough to make up for the production increases we see elsewhere, especially in light of the Iranian-U.S. deal. They can actually deal with an oil price that falls somewhat below $100 and still be fairly well-off.”
West Texas Intermediate traded near a two-month high above $100 a barrel after U.S. crude and distillate stockpiles fell more than forecast, while exports from Libya remained curbed by port closures.
Futures were little changed near the highest settlement since Oct. 18. Crude inventoriesdropped by 4.73 million barrels to the lowest level since September last week amid an increase in refinery operations, while distillate supplies, including diesel and heating fuel, fell by 1.85 million barrels to 114.1 million, the Energy Information Administration reported Dec. 27. A possible agreement with rebels to reopen the Libyan port of Hariga collapsed, the oil ministry said Dec. 28.
“The recovery of the U.S. economy is fueling expectations of higher oil demand in the U.S.,” saidOlivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland. “Distillate stocks will end 2013 at a multi-year low for the season and that should translate into very low stocks by spring.”
WTI for February dropped 7 cents to $100.25 a barrel in electronic trading on the New York Mercantile Exchange as of 11:43 a.m. London time. It closed at $100.32 on Dec. 27, settling above $100 a barrel for the first time since October. The volume of all contracts traded was about 56 percent below the 100-day average. Prices have climbed 9.2 percent in 2013, set for a fourth annual gain in five years.
Brent for February settlement was down 2 cents at $112.16 a barrel on the London-based ICE Futures Europe exchange. Prices have advanced 1 percent this year. The European benchmark crude was at a premium of $11.91 to WTI. The spread closed at $11.96 on Dec. 27, narrowing for a third day.
While there is currently no deal to reopen the port of Hariga, negotiations with rebels holding the terminal continue, Ibrahim Al Awami, head of measurement and inspection at Libya’s oil ministry, said by phone Dec. 28. The country is pumping 233,889 barrels of crude a day, compared with a daily capacity of about 1.6 million, the oil ministry said Dec. 21.
WTI has increased 8.2 percent in December amid reduced crude stockpiles in the U.S., the world’s biggest oil consumer. The country will account for about 21 percent of global demand this year, according to the International Energy Agency.
Crude inventories slid for a fourth week to 367.6 million barrels, according to the EIA, the Energy Department’s statistical arm. A median decline of 2.65 million barrels was forecast by analysts in a Bloomberg News survey. Refineries operated at an average 92.7 percent of capacity, the highest rate since July 12. Consumption of distillates climbed 2 percent to 4.17 million barrels a day.
“We saw some strength on West Texas based on the better-than-expected figures” from the EIA, Ric Spooner, a chief analyst at CMC Markets in Sydney, said by phone today. “There’s potential for the market to rally further if it gets more good news. The U.S. may see further improvement in economic statistics in the next few weeks.”
The EIA will next report weekly data on inventories and demand levels on Jan. 3, two days later than normal because of the New Year holiday.
Brent will drop for a second year in 2014 as U.S. oil production expands and supply threats ease in the Middle East and North Africa, a separate Bloomberg survey showed. Futures will decline to $105, down from $108.70 in 2013, according to the median estimate of the seven analysts who most accurately predicted this year’s level. Prices averaged $111.68 in 2012.
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Futures were up as much as 0.3 percent and are poised to end the year higher for the fifth time. Fighting in South Sudan, which exports about 220,000 barrels a day, has killed at least 500 people and led to the evacuation of employees from India’s Oil & Natural Gas Corp. There will be no floor or electronic trading tomorrow due to the Christmas holiday.
“There is thin holiday trading today and Brent prices are being sustained by political concerns surrounding South Sudan,” Andrey Kryuchenkov, an analyst VTB Capital in London, said by phone. “We’ll wait and see how the broader market reacts to the instability there as more news trickles out.”
Brent for February settlement rose as much as 34 cents to $111.90 on the London-based ICE Futures Europe exchange and was at $111.87 as of 12:02 p.m. in London. The contract closed at $111.77 on Dec. 20, the highest in more than two weeks. The volume of all futures traded was about 74 percent below the 100-day average. Prices have increased 0.7 percent this year.
West Texas Intermediate for February delivery was up 25 cents at $99.16 in electronic trading on the New York Mercantile Exchange. Brent was at a premium of $12.73 to WTI. The spread widened yesterday for a fourth day to close at $13.
UN Secretary General Ban Ki-moon asked the Security Council for 5,500 soldiers to add to the peacekeeping mission of 7,000 already in South Sudan. The U.S. is positioning troops in the Horn of Africa region to assist in any additional evacuations, Pentagon spokesman Colonel Steve Warren said yesterday.
“As the year comes to a close, the risk of an all out civil war that could stymie the country’s production of around 250,000 barrels a day is growing,” Vienna-based researcher JBC Energy GmbH said today in a note.
WTI’s 200-day moving average is $98.88 today, according to data compiled by Bloomberg. Futures also halted a rally near this indicator two weeks ago. Sell orders tend to be clustered around technical-resistance levels.
“Crude is seeing some resistance around the 200-day moving average, and that’s giving traders a reason not to move too far away from this level,” Ric Spooner, a chief analyst at CMC Markets in Sydney, said today. “After recent gains, we are at a level where traders might be comfortable to just wait and see if the news can catch up to the prices. People in the market would want to square these long positions.”
Gasoline stockpiles stockpiles in the U.S., the world’s largest oil consumer, probably rose by 1.1 million barrels in the week ended Dec. 20, according to the median estimate of seven analysts surveyed by Bloomberg before Energy Information Administration data on Dec. 27. Supplies have climbed the previous four weeks to 220.5 million, said the EIA, the Energy Department’s statistical arm.
Crude inventories are projected to have decreased by 3 million barrels, the survey shows.
Inexpensive oil vanishing at alarming rate
The United States is awash in shale oil. Iran, once OPEC’s second-largest producer, is slowly ramping up output. Oil consumption growth in the Western world has been somewhere between negative and flat since the 2008 financial crisis. The “peak oil” theory has pretty much vanished, along with The Oil Drum, the bible of peak oil believers. Rest in peace.
Or turn in your grave, for the oil price charts tell a different story.
On the New York Mercantile Exchange, crude oil futures are up 13 per cent over one year. Since 2009, they have climbed every year except 2012. In Europe, the Brent crude futures are flat over the year after rising three years on the trot. Brent, the de facto global benchmark, trades at about $108 (U.S.) a barrel; West Texas Intermediate, the North American benchmark, is at $97. For the sake of argument, let’s say the world is valuing oil at $100. You would think the price would be far less as the United States challenges Saudi Arabia for top producer status.
While the oil forecasters were pumping out bearish calls, the market itself has stuck to its triple-digit price outlook. Oil buyers apparently know the Western world’s economic recovery will boost consumption, since growth and oil use are aligned. That’s not all. They also know that the math doesn’t work: Prices can’t go into gradual, long-term decline, or even stay flat, when the world’s conventional oil fields are in fairly rapid decline.
Exotic production – oil sands, biofuels, natural gas liquids – are supposed to fill the gap. But this so-called unconventional production is highly expensive and quite possibly insufficient to cover the drop off in cheap, conventional production. Prices will rise to the point that demand will have to level off or fall. The “peak oil” and “peak demand” theories are really opposite sides of the same coin.
A few days ago, Richard Miller, the former BP geochemist turned independent oil consultant, delivered a sobering lecture at University College London that laid out the case for dwindling future oil supply. His talk was based on published data from the U.S. Energy Information Agency, the International Energy Agency, the International Monetary Fund and other official sources.
The data leave no doubt that the inexpensive oil is vanishing quickly. Conventional oil production peaked in 2008 at about 70 million barrels a day and is declining by about 3.3 million barrels a day, every year. Saudi Arabia pumps about 10 million barrels a day. The math says a new Saudi Arabia has to be found every three years to offset the conventional oil drop off. Good luck. Now you know why Russians, Canadians and Americans are so keen to lock up the Arctic, the alleged keeper of vast new reserves.
About one-quarter of conventional production comes from the 20 biggest fields and most of them are in decline, some precipitously. North Sea oil production peaked at 4.5-million barrels a day in 1999. This year’s production is forecast at between 1.2 million and 1.4 million barrels a day. The so-called Forties field, the North Sea’s biggest, has been losing 9 per cent a year for more than 20 years. Ditto two other North Sea biggies – Brent and Ninian.
Great Britain shed its status as an energy powerhouse about a decade ago, when it became a net energy importer. Its energy import bill is horrendous. Last year, Britain spent almost £22-billion ($38-billion) buying foreign oil, natural gas and coal.
Repeat all over the world, from Mexico to Indonesia. Indonesia’s oil production has been in steady decline since the mid-1990s, and the country has gone from oil exporter to importer, at which point it got kicked out of the Organization of Petroleum Exporting Countries. While new exploration and technologies will extend the life of some of the gasping old fields, the long-term downward trend is intact.
The conventional fields are running out of puff just as world demand is climbing again, which can only put upward pressure on prices. This week, the IEA estimated that oil demand will rise by 1.2 million barrels a day in 2014, or 1.3 per cent, to 92.4 million barrels.
The increase is driven by economic recovery and ever-rising demand in China and elsewhere in the developing world. China is willing to pay almost any price for oil because oil drives growth more than it does in the West, where energy use is less intensive per unit of economic output. China has also developed a love affair with traffic jams. The number of cars and motorbikes in China increased twentyfold between 2000 and 2010. It is forecast to double again in the next 20 years.
The oil shills, the tech geeks and most, but not all, oil companies would have you believe that non-conventional energy will fill the gap as the cheap, easy-to-pump oil heads gently into the night. It might, but at what price and cost to the environment? Or it might not at any price.
Deep-sea production is monstrously expensive and risky, as BP found out when its Macondo well in the Gulf of Mexico blew up. The Alberta oil sands also spew out more carbon dioxide than conventional production. Most biofuels, such as U.S. corn-based ethanol, are taxpayer-subsidized economic horror shows with dubious environmental benefits.
The peak oil crowd has thinned out, to be sure, but it won’t disappear. Gushing U.S. shale oil doesn’t mean oil is about to become cheap and plentiful. The fall off in conventional oil production is real, and scary.
With the WTI-Brent spread at 8-month wides, RINs having collapsed, and US investors buoyed by gas prices at the pump near recent lows, the surge in crude oil prices today – by their most since October 2nd – may take some of the ‘tax-cut’ punch from the party (remember gas prices are still 11.4% above recent seasonal norms). The 2% jump in WTI (and 1.85% rise in Brent over the last 2 days) may have only pushed it back to one-week highs but breaks a trend of lower prices that many have hoped would persist. Desk chatter is that much of this move is a re-up of middle-east premia as Iran’s nuclear negotiator says no deal today.
Bear in mind that despite the euphoria over lower gas prices, they are still 11.4% above seasonal norms of the last 5 years…
Move Over FX And Libor, As Manipulation And “Banging The Close” Comes To Commodities And Interest Rate Swaps | Zero Hedge
While the public’s attention has been focused recently on revelations involving currency manipulation by all the same banks best known until recently for dispensing Bollinger when they got a Libor end of day print from their criminal cartel precisely where they wanted it (for an amusing take, read Matt Taibbi’s latest), the truth is that manipulation of FX and Libor is old news. Time to move on to bigger and better markets, such as physical commodities, in this case crude, as well as Interest Rate swaps. And, best of all, the us of our favorite manipulation term of all: “banging the close.”
The story of crude oil manipulation, primarily involving Platts as a pricing intermediary, has appeared on these pages in the past as far back as a year ago, and usually resulted in either participant companies, regulators or entire nation states doing their best to brush it under the rug. However, it is becoming increasingly more difficult to do so as the following Bloomberg story demonstrates.
Four longtime traders in the global oil market claim in a lawsuit that the prices for buying and selling crude are fixed — and that they can prove it. Some of the world’s biggest oil companies including BP Plc (BP/), Statoil ASA (STL), and Royal Dutch Shell Plc conspired with Morgan Stanley and energy traders including Vitol Group to manipulate the closely watched spot prices for Brent crude oil for more than a decade, they allege. The North Sea benchmark is used to price more than half the world’s crude and helps determine where costs are headed for fuels including gasoline and heating oil.
The case, which follows at least six other U.S. lawsuits alleging price-fixing in the Brent market, provides what appears to be the most detailed description yet of the alleged manipulations and lays out a possible road map for regulators investigating the matter.
The traders who brought it — who include a former director of the New York Mercantile Exchange, or Nymex, one of the markets where contracts for future Brent deliveries are traded – – allege they paid “artificial and anticompetitive prices” for Brent futures. They also outline attempts to manipulate prices for Russian Urals crude and cite instances when the spread between Brent and Dubai grades of crude may have been rigged.
The oil companies and energy-trading houses, which include Trafigura Beheer BV and Phibro Trading LLC, submitted false and misleading information to Platts, an energy news and price publisher whose quotes are used by traders worldwide, according to the proposed class action filed Oct. 4 in Manhattan federal court.
The method of manipulation is a well-known one to regular readers: spoofing.
Over 85 pages, the plaintiffs describe how the market allegedly showed that the Dated Brent spot price was artificially driven up or down by the defendants, depending on what would profit them most in swap, futures or spot markets. They allege the defendants used methods including “spoofing” – – placing orders that move markets with the intention of canceling them later. Platts’ methodology “can be easily gamed by market participants that make false, inaccurate or misleading trades,” the plaintiff traders alleged. BFOE refers to the four oil grades — Brent, Forties, Oseberg and Ekofisk — that collectively make up the Dated Brent benchmark.
Ironically, spoofing is one of the primary mechanisms by which the HFT cabal has also benefitted, and been able to, levitate the market to ever record-er highs on ever lower volume. That, and Bernanke of course.
What do the plaintiff’s allege?
Kovel represents plaintiffs Kevin McDonnell, a former Nymex director, as well as independent floor traders Anthony Insinga and Robert Michiels, and John Devivo, who held a seat on Nymex and traded for his own account. The complaint says the plaintiffs are among the largest traders of Brent crude futures contracts on Nymex and the Intercontinental Exchange. The four, who don’t specify the amount they are claiming in damages, seek to represent all investors who traded Brent futures on the two exchanges since 2002.
The plaintiffs allege that in February 2011, defendants manipulated the trade of Forties-blend crude, one of four grades used by Platts to determine the Dated Brent benchmark, which represents the price of physical cargoes for delivery on the spot market.
Shell offered to sell shipments to keep the price of Forties “artificially low,” according to the plaintiffs.
Morgan Stanley (MS) was the only buyer for one of four such orders, or cargoes, totaling 2.4 million barrels of oil, the traders said. The Feb. 21, 2011, transaction was prearranged to set a lower price for Dated Brent, according to the complaint.
So how was such wholesale manipulation able to continue for over a decade? Simple – same reason why nobody “knew” anything about the Libor cabal until recently – alligned financial interests of every participating party, in this case Platts, a unit of McGraw Hill Financial – the same parents as Standard & Poors rating agency – and all the other major commodity players in the space.
“By BFOE boys,” the plaintiffs said in their complaint, “this trader was likely referring to the cabal of defendants, including Shell, which controlled the MOC process.” The claimants also alleged that in September 2012, Shell, BP, Phibro, Swiss-based Vitol and Netherlands-based Trafigura rigged the market through “a combination of spoofing, wash trades and other artificial transactions” in the Platts pricing process.
The defendants pressured the market downward at the start of the month by colluding to carry out irregular and “uneconomic” trades, according to the lawsuit. They drove prices higher later that month, it said.
The four traders said Platts was “reluctant to exclude” the irregular trades because BP and Shell are “significant sources of revenue” to Platts.
Or, said simpler, don’t ask, don’t tell, and keep cashing those checks.
Full lawsuit can be read below:
* * *
And in other news, the CFTC just charged DRW Investments with price manipulation by way of “banging the close” in Interest Rate Swap Futures Markets.
Defendants allegedly manipulated the IDEX USD Three-Month Interest Rate Swap Futures Contract by “Banging the Close”
The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Donald R. Wilson (Wilson) and his company, DRW Investments, LLC (DRW). The CFTC’s Complaint charges Wilson and DRW with unlawfully manipulating and attempting to manipulate the price of a futures contract, namely the IDEX USD Three-Month Interest Rate Swap Futures Contract (Three-Month Contract) from at least January 2011 through August 2011. The Complaint alleges that as a result of the manipulative scheme, the defendants profited by at least $20 million, while their trading counterparties suffered losses of an equal amount.
According to the Complaint, in 2010 the Three-Month Contract was listed by the International Derivatives Clearinghouse (IDCH) and traded on the NASDAQ OMX Futures Exchange, and was publicized as an alternative to over-the-counter, i.e., off-exchange, products. Wilson and DRW believed that they could trade the contract for a profit based on their analysis of the contract. At the end of 2010, Wilson caused DRW to acquire a large long (fixed rate) position in the Three-Month Contract with a net notional value in excess of $350 million. The daily value of DRW’s position was dependent upon the daily settlement price of the Three-Month Contract calculated according to IDCH’s methodology. As Wilson and DRW knew, the methodology relied on electronic bids placed on the exchange during a 15-minute period, the “settlement window,” prior to the close of each trading day. In the absence of such bids, the exchange used prices from over-the-counter markets to determine its settlement prices. Wilson and DRW anticipated that the value of their position would rise over time.
The market prices did not reach the level that Wilson and DRW had hoped for and expected, according to the Complaint. Rather than accept that reality, Wilson and DRW allegedly executed a manipulative strategy to move the Three-Month Contract market price in their favor by “banging the close,” which entailed placing numerous bids on many trading days almost entirely within the settlement window, none of which resulted in actual transactions as DRW regularly cancelled the bids. Under the exchange’s methodology, DRW’s bids became the settlement prices, and in this way DRW unlawfully increased the value of its position, according to the Complaint.
But the take home message here is simple: no matter the pervasive manipulation everywhere else, and seemingly by everyone including such titans of ethical fortitude as Steve Cohen, gold is not, repeat not, never has been, never will be manipulated.
While the White House spied on Frau Merkel and Obamacare developed into a slow-moving train wreck, while Syria was saved from all-out war by the Russian bell and the Republicrats fought bitterly about the debt ceiling… something monumental happened that went unnoticed by most of the globe.
The US quietly surpassed Saudi Arabia as the biggest oil producer in the world.
You read that correctly: “The jump in output from shale plays has led to the second biggest oil boom in history,” stated Reuters on October 15. “U.S. output, which includes natural gas liquids and biofuels, has swelled 3.2 million barrels per day (bpd) since 2009, the fastest expansion in production over a four-year period since a surge in Saudi Arabia’s output from 1970-1974.”
After the initial moment of awe, pragmatic readers will surely wonder: Then why isn’t gasoline dirt-cheap in the US?
There’s indeed a good explanation why most Americans don’t drive up to the gas pump whistling a happy tune (and it has nothing to do with evil speculators). Let’s start with the demand side of this equation.
Crude oil consists of very long chains of carbon atoms. The refineries take the crude and essentially “crack” those long chains of carbon atoms into shorter chains of carbon atoms to make various petroleum products. Some of the products that are made from petroleum may surprise you.
|Top 10 Things You Didn’t Know
Use Compounds Made from Crude Oil
The United States has the largest refining capacity in the world and is still by far the largest consumer of oil in the world (though China is beginning to catch up), and its refineries require 15 million barrels of oil a day. That means even though, due to the shale revolution, domestic production has dramatically increased to about 8 million barrels, the US still has to import between 7 and 8 million barrels of expensive foreign oil a day.
Let’s take a look at who the US buys the imported oil from. (Now that I finally figured out my way around the new Windows 8—which, by the way, really sucks—I can even add some color to my tables.)
Millions of barrels
exported to US per day
Canada is blue because it is not only friendly with the US, but also has the ability to increase oil production. The other countries are red because they either have decreasing oil production, or the country is not on good terms with the US government, or the production may be at risk for various reasons. The “red countries” all sell oil to the US at higher prices than does Canada.
As I said, the US imports about 7 million barrels of oil a day, and our top 5 exporters make up between 5.6 and 6.8 million barrels while the rest is split among other countries.
This means that even though the US has significantly increased its oil production in the past five years, a good chunk of oil has to be imported at much higher prices. And higher crude oil prices for refineries means higher prices at the gas pump.
But that’s not the only issue: The “new oil” produced from the shale oil fields in the Bakken and Eagle Ford formations isn’t cheap. Both the Bakken and Eagle Ford have been hugely successful, and an average well in either region can produce over 400 barrels of oil per day.
That may sound like a lot, but drilling thousands of meters into the ground (both vertically and horizontally), then casing and fracking the well, costs millions of dollars. And the trouble doesn’t end once the well has been drilled: oil and gas production can drop as much as 50% in the first year.
Think of it as running on a treadmill—but the incline gets steeper and steeper the longer you run. That’s the current reality of America’s oil production.
Now, these areas also have to deal with declining legacy oil production (“legacy” meaning older oil wells that produced before fracking became popular) due to depletion rates. Freeze-offs, and even hurricane season can affect the legacy oil wells’ production decline.
As the old wells begin to deplete, they need to be replaced by unconventional wells with horizontal drilling and hydraulic fracturing. Even though these new wells provide an initial burst of production, they decline very quickly. That means you need to drill even more wells just to keep up—and the vicious cycle continues.
The costs, as you can imagine, are forbiddingly high. Even in known oil-rich regions like the Bakken and Eagle Ford, the all-in cost of extracting a barrel of oil from the ground can cost as much as US$75 per barrel (for comparison, Saudi Arabia can produce oil for as low as US$1 per barrel). To put it in simple terms: cheap oil in North America is a thing of the past.
So, the US produces expensive oil and relies on imports of even more expensive oil. And since the refiners need to make money as well, this means higher prices at the pumps. Who loses? The US consumer, of course.
What would help lower gas prices? Building more pipelines to deliver cheaper Canadian oil to refineries in the US and decreasing the refineries’ dependence on expensive foreign oil. Until these new and much safer pipelines are built, rail has to pick up the slack. Almost 400,000 railcars full of oil are expected to be shipped in 2013, compared with just 9,500 railcars in 2008, a whopping 41-fold increase.
But rail is not the answer. In fact, transporting oil by rail is much more dangerous than transporting it by pipeline. Just last week, we wrote about two recent accidents, one of which claimed 47 lives.
Federal and state taxes at every step of the gasoline-making progress make the pain at the pump even worse. The US government already takes more than 60% of the divisible income from every barrel of oil produced… and another 50 cents per gallon at the pump.
Then there’s the matter of Obama’s supposed “Green Revolution” and how America would be saved through the use of alternative energies. Obama wrote massive checks to different renewable energy firms that went belly-up, the most famous of them all being solar panel manufacturer Solyndra, whose bankruptcy cost American taxpayers more than $500 million. Obama is also a heavy supporter of ethanol (his home state of Illinois, after all, is the third-largest ethanol-producing state) and has increased the targets for the use of ethanol in transportation.
Someone has to pay for all of these subsidies, so why not get the dirty, evil oil companies to pay for them? Keep in mind, though, that the oil companies have enough lobbyists and lawyers to keep the government at bay—so the higher prices will be passed on to the consumers.
To sum up why the price of gasoline is so high even though the US is producing so much more oil than before:
- The high cost of American oil production
- Even higher costs due to imported (non-Canadian) oil
- Obama not allowing cheaper Canadian oil to flow to the refineries via pipelines such as the Keystone XL
- The taxes on crude are used to fund Obama’s green dream—his green-energy “legacy”—and his love for ethanol and the taxes at the pump will not decrease
So what does this mean for you, the consumer?
You have two options: You can gripe about high gas prices… or you can choose to profit from the situation, no matter how dire. If you’re the former type, so long, and I hope you enjoyed my missive today. If you’re the latter, let’s talk money.
Who am I? Well, I kinda look like this guy…
|Good day in the markets||Bad day in the markets|
But really, I’ve had a pretty good run. Here is my audited return since January 1, 2012 (green column on the left).
I stand by my performance and offer anyone reading this article a guarantee: if you try the Casey Energy Reporttoday and do not think that it’s the absolute best energy newsletter in the business, you get all your money back, no questions asked.
I’m not saying I’m perfect (my wife reminds me daily that I’m not ), but I’m willing to put myself out there and offer you a challenge to expand your knowledge and become a better investor. All of my past newsletters, going back to 2006, are up on the Casey website, and I want you to check them out.
I have lost money on investments (anyone who says they haven’t is a liar), but I made sure I learned something from every harsh experience. And overall, I’ve made much more than I’ve lost. Our energy portfolio has been delivering +50% gains since January 1, 2012.
Right now, I’m the first to publish on what I think is going to send my track record to the moon. I’m on to an investment theme that I believe has the potential to make 10-fold returns for investors who play it right. That theme is the European Energy Renaissance.
Doug Casey and I are convinced that new technologies applied in the Old World will bring huge New World profits. But don’t take my word for it—I challenge you to try out my research. Click here to take me up on my 100% money-back guarantee.
- Oil falls below $98 on plentiful supply (kansascity.com)
- Retail gasoline prices across Texas down 2 cents (wfaa.com)
- Gasoline could fall to $3 a gallon as crude prices continue to drop (jsonline.com)
- White House confident on winning Hill support on Syria but scrambling to get votes – Fox News (foxnews.com)
- A force 10 times bigger than Syria is driving oil prices higher (business.financialpost.com)
- Worldwide loss of oil supply heightens Syria attack risk (telegraph.co.uk)
- Oil Steadies Around $114 As Supply Worries Ease (lubepoint.wordpress.com)
- Syrian conflict stokes prices at the pump (globalnews.ca)