This month’s blog focus is on upbeat articles discussing oil and gas prices and the pricing cycles. These articles cover everyone — from the operator down to the refinery.
Commodity Price Cycles: Explained by an Expert
August 11, 2015
- Oil and natural gas are the lifeblood of modern economies. Together, they account for close to 60% of global commercial energy consumption. Even in future scenarios with a high penetration of alternative energy sources or technologies, oil and natural gas are expected to maintain a share of ~ 50% by the middle of this century; more business-as-usual scenarios forecast a share of 60% or more.
What is the Interplay Between Oil, Natural Gas, and Alternatives?
- Natural gas is an important feedstock but the growth in gas has come primarily from the electric power sector, where it has been replacing oil and other fuels.
- Although there is a level of dichotomy between oil-exporting and -importing countries, generally speaking, “lower” oil and gas prices provide a boost to the world economy.
- Globally, the price of natural gas delivered by pipelines or as LNG is linked to the price of oil through formulas.
- This pricing is a historical remnant of the long-term contracts needed to develop long-distance pipelines and LNG value chains.
- In the US, natural gas and oil prices are mostly independently determined in their own markets.
Why Did the Price of Oil Spike in 2008 and Remain High Between 2009 and Late 2014?
- These boom-bust cycles result primarily from the inherent time inconsistency between business cycles and the investment cycle of upstream projects, which can be as long as 10 years for conventional projects.
- There are factors other than the demand and supply fundamentals that impact the price, although eventually these fundamentals govern the price formation.
- The great majority of the world’s oil resources are controlled by governments, often via national oil companies (NOCs).
- This paucity of data regarding resources and NOC operational and financial performance is probably one of the most significant challenges facing analysts trying to understand long-term prospects of the global oil supply.
- In addition, geopolitical factors and financial trading of “paper barrels” contribute to volatility and cycles.
- The same factors are also behind the quick recovery of the oil price after the 2009 collapse.
- With such uncertainties, trading tends to add a risk premium to the price.
State of Oil & Gas: Swinging Oil Prices Are Nothing New. (T. Boone Pickens, “Trust Me, I’m 87”.)
June 11, 2015
- Everyone knows America’s oil and gas industry is in bad shape. Or is it? If you take a longer look, the future of the oil and gas industry isn’t that bleak.
- Thanks to our ability to ramp up production, America is playing a key role in setting the price of oil. That hasn’t happened in decades.
- Price swings like this are nothing new.
- By the end of the year, I predict the price of oil will stabilize around $70 per barrel. Guess what happens then? The rig count will start to climb. Furloughed workers will get rehired.
Improving Operator Returns
- There is a school of thought that the dramatic collapse in prices and oversupply of oil that has affected our industry and has added challenges facing deepwater and mature developments, is a recent phenomenon. However, with extraction costs having nearly quadrupled over the past 10 years, it has been clear for some time that a “rethink” is required to make extraction financially worthwhile and to help operators improve their returns. To secure a reasonable return on investment, it is important for operators to optimize production in mature fields.
New Ways of Collaboration
- There are numerous areas in which operators and their partners can work together in new ways to reduce the expense of subsea developments and gain efficiencies across the life of a field.
- For example, it makes a great deal of economic and operational sense for service companies to be involved at the earliest possible stage in the development of a field.
- Similarly, standardization can have a dramatic effect on the cost base with, among other things, potential savings in terms of preorder and stock material, and access to volume that helps drive down cost per unit.
Improving Project Execution
- On a more general level, service companies can help operators increase their returns by improving their own project execution.
- A spirit of collaboration can help companies share ideas on execution, bring about a reduction in hours spent on projects through lean operating models, and become more cost-effective as a result. It cannot be overstated how important efficiency improvements are as both service companies and their customers’ weather the downturn.
- Framework agreements are an option that some operators choose to employ. These are useful methods of securing long-term assurances around price, quality, and quantity. They can help strengthen the relationship between operators and their partners as both parties work closely together to reduce life-of-field costs, improve efficiency gains, and simplify processes.
- As difficult as downturns are, they can be invaluable catalysts for positive change, especially when it comes to fostering new ideas and different business models.
U.S. refineries are running at record-high levels
August 10, 2015
- Gross inputs to U.S. refineries exceeded 17 million barrels per day (b/d) in each of the past four weeks, a level not previously reached since EIA began publishing weekly data in 1990. The rolling four-week average of U.S. gross refinery inputs has been above the previous five-year range (2010-14) every week so far this year.
- Lower crude oil prices and strong demand for petroleum products, primarily gasoline, both in the United States and globally, have led to favorable margins that encourage refinery investment and high refinery runs.
Reducing Risk in Oil and Gas Operations
- According to the IEA’s World Energy Outlook, global energy demand will grow by more than a third over the period to 2035, driven largely by rising living standards in China, India, and the Middle East, which together will account for 60% of that increase.
- Total U.S. motor gasoline product supplied is up 2.9% through the first five months of 2015, and trade press reports indicate that demand is also higher in major world markets such as Europe and India so far this year compared with 2014. Total U.S. petroleum product supplied (a proxy for demand) is up 2.5% through the first five months of the year compared with 2014. Much of the refinery output is reaching global markets, as net exports are 19% higher this year through May.
- EIA’s STEO expects U.S. refinery runs will reach new highs next summer, averaging 16.9 million b/d in third quarter of 2016.
U.S. refiners find the oil market’s sweet spot
August 6 2015
- Low crude prices and strong demand for gasoline are creating near-perfect conditions for oil refineries across the United States, especially those geared towards maximizing gasoline production.
- Valero, the country’s largest independent refiner, made a gross margin of more than $13 on every barrel of oil processed in the second quarter, and a net margin of almost $8.50, both the highest since 2007.
- The volume of crude processed by U.S. refineries last week hit a record 17.1 million barrels per day (bpd), 680,000 bpd above the prior-year level and almost 1.5 million bpd above the 10-year seasonal average.