Asset management, Commodity price, Commodity risk, Hedging, Market trends, Oil market, Risk management, Trading, Trend following, Uncategorized

How we navigated the oil price roller coaster

Extreme price events are far and away the greatest source of external risk facing oil and gas producers and other energy-dependent companies. Frequency and severity of such events has been increasing dramatically since about 2005/2006 causing ocasionally severe pain for many industry participants.

Case in point was the 70% oil price collapse through 2014 and 2015, from over $100 to below $30 per barrel. In the aftermath of this decline, U.S. mining industry – which includes oil and gas producers – reported losses of $227 billion, wiping out eight previous years’ worth of profits as the following chart shows: Continue reading

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Commodity price, Commodity risk, Economics, Energy crisis, Hedging, Inflation, Oil market, Policy, Social development

Is an epic energy crunch in the making?

Last year I published a report with the (justifiably) bombastic title, “$500 per barrel: could oil price rise tenfold?” One of my central claims was that producing oil requires investment of real capital including materials, equipment and highly skilled labor, and that, “as more and more resources are required to generate the same amount of liquid fuels, energy production is becoming ever more expensive to society in real terms.” Thus, as it becomes more expensive in real terms (as the deteriorating EROEI figures indicate), the fact that energy has recently become cheaper in nominal (dollar) terms can only be a temporary abberation. EROEI stands for energy return on energy invested; in the early 1900s, we obtained 100 barrels euqivalent of oil per barrel invested (EROEI of 100 to 1); today we are at about 15 to 1 globally and at 11 to 1 in the USA. Continue reading

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Commodity price, Economics, Energy crisis, Hedging, Market research, Oil market, Trading

Saudis to unveil the big secret? Not likely.

Over at OilPrice.com Nick Cunningham wrote that Saudi Arabia might finally reveal one of its closest kept secrets as they prepare to sell some 5% of its oil monopoly, Saudi Aramco, to the public. The Saudis and their Wall Street bankers expect Aramco to be valued at $2 to $3 trillion, which would generate north of $100 billion for the Saudis and massive underwriting fees for Wall Street Banks.

Since both the Saudis and Wall Street hope for the highest possible valuation for Aramco, we should not expect that they’ll “unveil” anything less than the rosiest plausible figure for their oil reserves. Continue reading

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Commodity price, Energy crisis, Hedging, Market research, Market trends, Oil market, Trend following

5/5: $500 oil and how to manage the looming uncertainty and risk

Let us recap what we covered in parts 1, 2, 3 and 4 of this report. In spite of the low price of oil (just below $50 at the time of this writing) and predominantly bearish market sentiment, the “big picture” suggests that we are facing a grave energy predicament. Petroleum producing countries, especially members of OPEC, have been vastly overstating their oil reserves. Production of oil from conventional sources is in an irreversible decline. Over the next 15 years, the EIA projected that production will fall over 40% short of demand. New drilling technologies, and this includes fracking, are unlikely to impact this shortfall in a meaningful way.  These conditions have led the UK’s Ministry of Defence to predict in 2012 that oil price could rise to as high as $500 per barrel over the next three decades, causing crises of unforeseeable proportions. For the oil market participants, the trillion dollar question is how to cope with the looming uncertainty and risks. Continue reading

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Commodity price, Economics, Energy crisis, Hedging, Market psychology, Oil market, Uncategorized

4/5: Sources and quality of oil market information

This posting is part 4 in the 5-part series on the future energy crisis we are likely facing. Here are parts one, two, and three. My research to try and establish facts about oil supply and demand led to many dead-ends where you must take the information at face value and hope that it is true. For example, we’ve all heard (again) about tanker-fulls of unsold crude oil floating around the world. Ultimately, this information is based on hearsay. For example, Bloomberg reported how oil companies are seeking supertankers to store 20 million barrels of crude oil [i] (that sounds like a lot, but it represents only a few hours’ worth of global demand). Continue reading

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Commodity price, Energy crisis, Market research, Oil market

3/5: Revisiting the peak oil hypothesis

As we discussed in part 1 and part 2 of this series, the world is facing a dire energy predicament; world oil reserves are fast dwindling and new extraction technologies won’t be able to reverse global production declines. By all accounts, it appears that we are past the point of peak oil and today we take another look at the peak oil hypothesis. One of the key thoughts in this report is that, as oil production becomes more expensive in real terms, it must also become more expensive in nominal, or dollar terms. That it has recently become cheaper in dollar terms can only be a temporary aberration. Continue reading

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Commodity price, Energy crisis, Market research, Oil market

2/5 Oil production and the evolution of drilling technologies

Technology is another element comprising the happy talk about the world’s inehxhaustibly abundant oil supplies. As with Saudi Arabia (and other nations’) reserves, the reality is quite different from what is commonly presented. The argument is that oil reserves calculus changed in the last decades as drilling technologies iproved. That, in part, is how the mushrooming oil reserves numbers are justified even in absence of large new oil field discoveries. Unfortunately, experience hasn’t borne out this optimism and the idea that drilling technologies may have turned Saudi Arabia’s 110 billion barrels of proven reserves into 790 billion barrels is unrealistic, to put it politely. Continue reading

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