Your "Cheat-Sheet" For Coming Oil Prices

Today I want to answer a question that I’ve heard from more than one reader about the North American oil patch, and what it’s doing to world markets. Consider this your cheat sheet.

Doubtless, you’ve heard stories about how U.S. and Canadian oil output is climbing. All true — well, most of it. In the U.S., it’s the “shale gale,” with all the new output from fracking in shale, tight sands and such. In Canada, it’s a similar share story and, of course, the oil sands boom.

I’ve written about the shale gale, both to describe it with admiration, for the technology and ingenuity involved. Also, I’ve offered cautions about believing too much of the press release kind of news, about so-called “energy independence” based on vast new volumes of oil from shale. One big issue is the “drilling treadmill” — the need to drill more and more wells to keep output up.

Let’s set that matter aside, and look at some trends…

The fact is that, drilling treadmill or no, U.S. oil output is increasing. And U.S. oil imports are declining. What does it mean?

It means that U.S. imports are falling from nations like Saudi Arabia, Kuwait, Venezuela, Angola, Nigeria, Morocco and Mexico. It also means that these nations have to find new markets for their oil. It’s easy enough to say “China will buy it,” but that’s not entirely the solution. Even China has its limits, believe it or not.

Basically, the global numbers show that more and more tanker loads of oil don’t have a home. So more and more oil hits the spot market, and this has a downward effect on overall world oil pricing — the Brent Price being the best indicator.

To some extent, it’s demonstrable that Saudi has cut back on export volumes, to keep up the price. But even then, Saudi has to export a certain amount of oil, and ring the cash register for a certain amount of money, just to balance its books. So how much can Saudi cut back? We’ll find out — sooner, likely, than later.

Consider, also, that much Iranian oil is holed up, in the Persian Gulf, due to international sanctions, while Iraq is ramping up its oil output. When these two nations kick into higher gear, a few years downstream, we’ll see more supply pressure on prices.

At the same time, North American shale oil is not just complex technology, it’s expensive, too. The economics of the new oil patch dictate prices in the range of $60 and more, per barrel, to keep the wells pumping. Yes, new barrels are coming. But they’re not cheap, and every operator has a hard nut to crack every month, to pay the bills.

A North American “Lid” On Oil Prices

The good news, in all of this, is that new North American supply seems to be keeping a lid on upward trends in oil prices. World oil demand is increasing, and every barrel gets used. One estimate is that for every 1% shortfall on global supply, the marginal price could spike up by 20%. Wow. There’s huge pricing risk built into a stalled oil supply. So let’s hope that it doesn’t stall, or you’ll pay $6 per gallon for gas, instead of $4.

Meanwhile, the economics of that North American oil have a floor, below which oil can’t fall for too long without severe disruption to supply. It’s like we’re in the eye of an energy storm. Enjoy it while we’re there.

In other words, with North American oil output growing, there’s a lid on upward price spikes. As for a price drop into the doldrums? Well, not without a global recession to kill off large parts of world demand.

Another benefit? Most of the new North American oil is moving by rail car. In terms of numbers, about 60% of “new” supply moves by rail, versus 40% by pipeline.

For example, oil from the Bakken play in North Dakota is going by rail to Philadelphia, to the old Trainor Refinery. There, the North Dakota oil gets cracked into jet fuel for Delta Airlines. Delta pipes the fuel to JFK, and has the lowest fuel-cost among all the carriers that fly across the Atlantic. North Dakota oil helps win the business for transatlantic air travel. Who could’ve predicted that?

Consider also, that much of the U.S. coal industry is in the doldrums, what with the closure of coal-fired electric power plants and lack of construction of new coal plants. Most of that coal used to move by rail, from the mines to the power stations.

Now, the slack in coal shipments is being taken up by rail shipments of oil. Again, who would’ve predicted that? We’re sort of back in the days of John Rockefeller, who controlled the oil biz by making deals about shipping oil with railroads.

Anymore? No idea is too crazy. Things that people — including me — thought were nuts just five years ago, are now the common wisdom.

Thanks for reading.

Byron King

Original article posted on Daily Resource Hunter