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Oil closes down again, lands just above $50 mark

Whatever the floor is for oil, $50 doesn’t seem to be it.

Brent crude closed just a few barrel-drops within that threshold Friday, down 85 cents to $50.11. U.S. crude fell 43 cents to $48.36. The marks are the lowest for crude since April 2009, and represented the seventh straight week of losses.

However, prices recovered from even steeper losses during the day after Baker Hughes, the U.S. oilfield-services company, announced that the number of rigs drilling for oil domestically had fallen by 61 this week, the most during a week since 1991.

Read more in Reuters.

That contraction in supply has many observers believing that prices will find the bottom soon. Former Shell Oil President John Hofmeister, one of the experts quoted in PUMP the Movie, notes that the surplus of oil we keep hearing about only amounts to roughly 1 percent of global consumption, which is about 90 million barrels a day (The U.S. uses about 18 mbd). He thinks the current slide is an “anomaly,” and that prices will begin climbing again in the spring.

Here’s what he said on Bloomberg:

At some point … we have to reassess where are we, in terms of the supply-demand equilibrium. … I call this an anomaly, in terms of oil price, but I wouldn’t be surprised to see it bottoming out … and starting to go up again late in the spring. … It doesn’t take much to wipe out this anomaly.

Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York, told Reuters:

“In my opinion we have not stabilized out yet. I do think that after seven weeks of losses, you will see a bounceback at some point, and people are waiting for that to short into. I am.”

Oil prices have dropped nearly 10 percent in two days

Oil analysts must be asking, Where’s the bottom of the oil-price plunge?

Crude dropped again Tuesday, as Brent was off $2.01, to $51.10 a barrel. In the first two trading sessions of the week, it’s down $5.32, or almost 10 percent.

More from Reuters.

U.S. crude closed down $2.11, or 4.2 percent, to $47.93.

By comparison, Brent was at $115 and U.S. crude at $107 last June.

Phillip Streible, a senior market strategist at RJO Futures in Chicago, told Reuters that “$46 to $45 is quite likely. … People, I think, are further understanding that the U.S. is becoming a powerhouse in creating crude oil and that’s not going to change anytime soon.”

But Saudi Arabia also shows no sign of reducing production quotas, an effort some OPEC members want to prop up prices. Forbes’ Nathan Vardi quoted a Saudi expert named F. Gregory Gause, a professor at Texas A&M University, who said:

“The most important thing for the Saudis is market share. They are not going to sacrifice it, they will play chicken with other producers, whether Iranian or American shale producers, in order not to lose market share and the only way they will cut production is if they get an agreement with a broad array of OPEC and non-OPEC producers to take a fair amount of oil off the market.”

CNN Money has a story about the thousands of workers supporting North Dakota’s oil boom who’ve been laid off in recent weeks, as drillers delay expansion because the cost of extracting oil from shale-rock formations is too steep compared with the going rate of crude.

Jeff Sharpe got the bad news 10 days before Thanksgiving. He and 21 coworkers at a rig in Wyoming were laid off due to depressed oil and natural gas prices.

“All my friends and family keep talking (positively) about low prices. When I say, ‘We’re all out of jobs now,’ they say ‘Oh,'” Sharpe, 32, told CNNMoney. “I don’t think they realize what’s going on in the big picture.”

Brent crude off 48 percent for the year, worst drubbing since ’08

Hey, did you hear oil prices fell in 2014?

Now that the year in oil trading is officially over, traders are counting the damage, and it’s like monitoring the progress of a boulder rolling down a mountain:

Brent crude, the international benchmark, fell another 57 cents Wednesday to close the calendar at $57.33 a barrel. Brent, as well as gasoline futures, fell 48 percent during the course of the year, making them the worst-performing commodities among the 22 markets tracked by the Bloomberg Commodity Index.

U.S. oil futures were off 85 cents Wednesday, to $53.27, and were down 46 percent for the year.

Read more in The Wall Street Journal.

The report said the oil, gasoline and diesel markets posted their worst annual losses since 2008, the year markets plunged because of the financial crisis.

Oil, gasoline and diesel markets all posted their largest annual losses since the global recession in 2008.

Wednesday’s price drop marked a “poetic end to…what ended up being a difficult year for the oil and gas industry,” said Adam Wise, managing director at John Hancock Financial Services, who helps oversee about $7 billion in energy-related investments.

Not even a Libyan oil fire can stop price slide

Oil prices briefly spiked Monday, in apparent reaction to a fire at the Libyan oil port of Es Sider the past few days.

But prices settled down again, to their lowest levels since May 2009, after the blaze was put out in three of the six oil tanks, Bloomberg reported.

Libya was pumping about 352,000 barrels of crude a day until a rocket attack at the port on Christmas Day reduced production to 128,000 barrels a day. In 2010, Libya was pumping about 1.6 million barrels a day, but that was before the overthrow and killing of longtime ruler Muammar Gaddafi in October 2011, an event that unleashed a civil war.

The attack at Es Sider was enough to prompt an early rally in the commodity Monday, but by the end of the trading session Brent crude was down $1.57, to $57.88. The U.S. benchmark, WTI, fell $1.12, to $53.61. That’s the lowest level since May 1, 2009.

Reuters reported:

The rally followed by the steep drop showed the market’s fears about oversupply are not going away, said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut. “Every time the market tries to pick itself up, it’s just another wave of selling,” he said.

Tim Evans, an energy analyst at Citi Futures Perspective in New York, told Bloomberg that neither the violence in Libya, nor the reduction in the growth rate of U.S. drilling, was enough to make a dent in the worldwide glut of oil. “We’re looking at a significant supply-demand surplus through the first half of 2015,” Evans said.

Bloomberg added:

“The loss of a couple hundred thousand barrels from Libya will have a minimal impact on the global supply balance,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by phone. “There’s about 2 million barrels a day of excess production right now, so this will just tighten things a little.”

Explaining all the nutty conspiracy theories about oil

The Washington Post has a good explanation why so many leaders — including Vladimir Putin — might believe that other players are conspiring to set oil prices low, putting pressure on nations like Russia that rely so much on the high price of oil to balance their budgets.

To understand this particular conspiracy theory, one must look at the nature of conspiracy theorists, and here WaPo cites some knowledgeable experts on the subject:

… the psychological research suggests that conspiracists don’t just believe one conspiracy theory. They often believe lots of them. And many of the conspiracies have similar structures — suggesting there are deeply powerful but unseen players working behind the scenes to shape world events.

“A lot of conspiracy theories take as their premise that there’s a small group of people who are plotting to control something, to control the government, the banking system, or the main energy source, and they are doing this to the disadvantage of everybody else,” says University of California-Davis historian Kathy Olmsted, author of “Real Enemies: Conspiracy Theories and American Democracy, World War I to 9/11.”

It might be natural for some people to believe in oil conspiracies, because oil itself is so vital a commodity around the world, and oil producers — notably OPEC — do, in fact, collude to keep their prices at a certain level. That’s the reason they formed the cartel in the first place.

But another motivator is that “struggling leaders need somebody to blame.”

In Putin’s case, finally, we must recognize that a conspiracy theory like the one above is politically expedient — especially in newly perilous economic times. “Governments use conspiracy theories in order to convince their people to support them,” says [University of Utah history professor Robert Alan] Goldberg. There’s no better way to rally support than to suggest to your people that outside forces — not supply and demand, but malicious schemers — are out to get them.

General: Dependence on oil a ‘serious’ national security threat

With gasoline prices at five-year lows, it’s easy to lose sight of the realities of U.S. dependence on oil. We’re still beholden to other nations for much of our supply; we still have to expend much energy and resources defending the free flow of oil around the world; and we still need the long-term solution of alternative fuels to keep prices low.

One person who’s done a lot of thinking about this is retired U.S. Air Force Gen. Ronald Keys, who lays out the argument for reducing our consumption of oil in a guest piece for The Hill. Keys, who spent 40 years in the Air Force (and flew combat missions in Vietnam), is now chairman of the Military Advisory Board at the CNA Corporation, a nonprofit military research group.

Keys writes:

Our nation’s over dependence on oil is a serious threat to our national security—militarily, diplomatically, and economically. It limits our ability to act on the world stage and increases the likelihood that we will send Americans in uniform into harm’s way. It leaves us open to impacts from wildly gyrating prices …

And:

Importing less oil will loosen the bonds that tie us to regimes that don’t always have our nation’s best interests at heart. That will make it easier for the United States to act in its own national interest on the world stage, and make it less likely that we will have to send troops to defend the free flow of oil.

And:

Oil prices will always fluctuate, but the need to cut our nation’s oil dependency will endure. This need doesn’t get any less urgent just because pump prices tick downwards for a while.

“Natural Gas: The Fracking Fallacy” — a debate over the recent article in Nature

Nature ChartT’was the week before Christmas, a night during Chanukah and a couple of weeks before Kwanzaa, when, all through the nation, many readers more interested in America’s energy supply than in the fate of Sony’s “The Interview,” were stirring before their non-polluting fireplaces (I wish). They were trying to grasp and relish the unique rhetorical battle between The University of Texas (UT), the EIA and the recent December article in Nature, titled “Natural Gas: The Fracking Fallacy,” by Mason Inman.

Let me summarize the written charges and counter charges between a respected journal, university and government agency concerning the article. It was unusual, at times personal and often seemingly impolite.

Unusual, since a high-ranking federal official in the EIA responded directly to the article in Nature, a well-thought of journal with an important audience, but relatively minimal circulation. His response was, assumedly, based on a still-unfinished study by a group of UT scholars going through an academic peer review process. The response was not genteel; indeed, it was quite rough and tough.

Clearly, the stakes were high, both in terms of ego and substance. As described in Nature, the emerging study was very critical of EIA forecasts of natural gas reserves. Assumedly EIA officials were afraid the article, which they believed contained multiple errors and could sully the agency’s reputation. On the other hand, if it was correct, the UT authors would be converted into courageous, 21st century versions of Diogenes, searching for energy truths. The article would win something like The Pulitzer, EIA would be reprimanded by Congress and the UT folks would secure a raise and become big money consultants to a scared oil and gas industry.

Just what did the Nature article say? Succinctly: The EIA has screwed up. Its forecasts over-estimate America’s natural gas reserves by a significant amount. It granted too much weight to the impact of fracking and not enough precision to its analysis of shale play areas as well as provide in-depth resolution and examination of the sub areas in major shale plays. Further, in a coup de grace, the author of the Nature piece apparently, based on his read of the UT study, faults the EIA for “requiring” or generally placing more wells in non-sweet-spot areas, therefore calculating more wells than will be developed by producers in light of high costs and relatively low yields. Succinctly, the EIA is much too optimistic about natural gas production through 2040. UT, according to Nature, suggests that growth will rise slowly until early in the next decade and then begin to decline afterwards through at least 2030 and probably beyond.

Neither Wall Street nor producers have reacted in a major way to the Nature article and the still (apparently) incomplete UT analysis. No jumping out of windows! No pulling out hairs! Whatever contraction is now being considered by the industry results from consideration of natural gas prices, the value of the dollar, consumer demand, the slow growth of the economy and surpluses.

Several so-called experts have responded to the study in the Journal piece. Tad Patzek, head of the UT Austin department of petroleum and geosystems, engineers and “a member of the team,” according to the Journal, indicated that the results are “bad news.” The push to extract shale gas quickly and export, given UT’s numbers, suggests that “we are setting ourselves up for a major fiasco.” Economist and Professor Paul Stevens from Chatham House, an international think tank, opines “if it begins to look as if it’s going to end in tears in the U.S., that would certainly have an impact on the enthusiasm (for exports) in different parts of the word.”

Now, generally, a bit over the top, provocative article in a journal like Nature commending someone else’s work would have the author of the article and UT principal investigators jumping with joy. The UT researchers would have visions of more grants and, if relevant, tenure at the University. The author would ask for possible long-term or permanent employment at Nature or, gosh, maybe even the NY Times. Alas, not to happen! The UT investigators joined with the EIA in rather angry, institutional and personal responses to the Journal. Both the EIA and UT accused Nature of intentionally “misconstruing data and “inaccurate…distorted reporting.”

Clearly, from the non-scholarly language, both institutions and their very senior involved personnel didn’t like the article or accompanying editorial in Nature. EIA’s Deputy Administrator said that the battle of forecasts between the EIA and UT, pictured in the Journal, was imagined and took both EIA’s and UT’s initiatives out of context. He went on to indicate that both EIA’s and UT efforts are complementary, and faulted Nature for not realizing that EIA’s work reflected national projections and UT’s only four plays. Importantly, the Deputy suggested that beyond area size and method of counting productivity, lots of other factors like well spacing, drilling costs, prices and shared infrastructure effect production. They were not mentioned as context or variables in the article.

The principal investigators from UT indicated that positing a conflict between the EIA and themselves was just wrong. “The EIA result is, in fact, one possible outcome of our model,” they said. The Journal author “misleads readers by suggesting faults in the EIA results without providing discussion on the importance of input assumptions and output scenarios. “Further, the EIA results were not forecasts but reference case projections. The author used the Texas study, knowing it was not yet finished, both as to design and peer review. Adding assumed insult to injury, it quoted a person from UT, Professor Patzek, more times than any other. Yet, he was only involved minimally in the study and he, according to the EIA, has been and is a supporter of peak oil concepts, thus subject to intellectual conflict of interests.

Nature, after receiving the criticism from UT and EIA, stood its ground. It asserted that it combined data and commentary from the study with interviews of UT personal associated with the study. It asked for but only received one scenario on gas plays by EIA — the reference case. It was not the sinner but the sinned against.

Wow! The public dialogue between UT, the EIA and Nature related to the article was intense and, as noted earlier, unusual in the rarefied academically and politically correct atmosphere of a university, a federal agency and a “scientific” journal. But, to the participants’ credit, their willingness to tough it out served to highlight the difficulty in making forecasts of shale gas reserves, in light of the multitude of land use, geotechnical, economic, environmental, community and market variables involved. While it is not necessary or easy to choose winners or losers in the dialogue, because of its “mince no words” character, it, hopefully, will permit the country, as a whole, to ultimately win and develop a methodology to estimate reserves in a strategic manner. This would be in the public interest as the nation and its private sector considers expanding the use of natural gas in transportation, converting remaining coal-fired utilities to environmentally more friendly gas-powered ones and relaxing rules regulating natural gas exports. We remain relying on guesstimates concerning both supply and demand projections. Not a good place to be in when the stakes are relatively high with respect to the health and well-being of the nation.

On a personal note, the author of the article in Nature blamed, in part, the EIA’s inadequate budget for what he suggested were the inadequacies of the EIA’s analysis. Surprise, given what the media has often reported as the budget imperialism of senior federal officials, the Deputy Administrator of EIA, in effect, said hell no, we had and have the funds needed to produce a solid set of analyses and numbers, and we did. Whether we agree with his judgments or not, I found his stance on his budget refreshing and counterintuitive.

Can ethanol benefit from a drop in oil prices?

A new school of thought has emerged that ethanol may actually benefit from the recent fall in oil prices, to nearly half their level of a few months ago.

The main exponent of this theory is Andrew Topf, writing on OilPrice.com. His logic is sound, and there are a few recent developments to back him up. It isn’t a sure thing, but there is a strong possibility that ethanol could emerge from the current oil price plunge as a winner.

Here’s the argument Topf makes: He acknowledges that ethanol prices have fallen along with gas prices, so the market doesn’t look very promising. Also bedeviling the industry is the foot-dragging by the Environmental Protection Agency, which has not yet set a renewable goal for ethanol for 2014. The EPA is supposed to set a number every year that specifies how much corn ethanol will be consumed. This is supposed to be enough to meet the 10 percent standard that ethanol is supposed to meet in replacing gasoline every year.

Buffeted by this uncertainty, however, the industry has taken its own initiative and started exporting ethanol. To its surprise, the market has proved very favorable. Canada, the Philippines and Japan have all proved to be receptive to the idea of stretching their gasoline supplies with ethanol. Green Plains, Inc., one of the major U.S. producers, is going to export 15 percent of its product in the fourth quarter of 2014. “We are booking export sales into 2015, extending into the third quarter of next year,” Green Plains president and CEO Todd Becker told investors in a conference call in October. “We typically have not seen export interest that far out in the future.”

The U.S. has pursued contradictory policy on ethanol from the beginning, giving the encouragement of the 10 percent mandate, coupled with subsidies and tax breaks going back to the 1990s. Then became President Bush’s mandates, which guaranteed a market for ethanol through 2023 and also specified a market for cellulosic ethanol, which has never materialized — even though the EPA has charged refiners for a product that didn’t exist.

So what will happen with ethanol amid falling oil prices? One straw in the wind came in South Bend, Indiana, where a corn ethanol plant that had been closed for several years finally reopened. The chances for the plant to succeed are much greater now that corn prices are at their lowest in five years, Purdue University agricultural economics professor Christopher A. Hurt told The Times of Northwest Indiana. “I think the prospects appear to be quite favorable for that plant if they can get it up and running as quickly as possible,” he said. And that doesn’t take into account the possibilities for export to countries that are dependent on imported oil.

The ethanol effort is often criticized as one that wouldn’t even exist were it not for government support that has boosted it all the way. The entire farm bloc are now supporters of ethanol. However, to everyone’s surprise, when the subsidies ended, ethanol production kept increasing!

Now that ethanol has found a market abroad, it is possible that even amidst falling oil prices, the industry will be able to even keep growing. Ethanol still has a high octane level and substitutes for much more noxious chemicals by blending with gasoline. Its role as at least a 10 percent additive seems secure. Now let’s find out if ethanol can find a place in the world market as well.

Saudis might actually increase oil output

Saudi Arabia isn’t cutting production anytime soon, despite lobbying from some of the 12-nation cartel’s members to try to stem falling oil prices. In fact, the Saudis might actually boost output to gain new customers.

Reuters reported that Saudi Arabia’s oil minister, Ali al-Naimi, said it’s not in OPEC’s interest to cut production quotas no matter how far prices fall:

After a weekend of comments from several Gulf OPEC members reiterating their intent not to intervene in oil markets, despite oil prices that have halved since June, Ali al-Naimi told the Middle East Economic Survey it was “not in the interest of OPEC producers to cut their production, whatever the price is” — his starkest comments yet.

Naimi also said the Saudis might boost output instead to grow their market share and that oil “may not” trade at $100 again. “The best thing for everybody is to let the most efficient producers produce,” he told a conference in Abu Dhabi at the weekend.

Olivier Jakob, an oil analyst at Petromatrix OIl in Switzerland, commented in an earlier version of the Reuters story:

“We are going down because you have some OPEC ministers who come every day making statements trying to drive the market down. … They come every day to convey the message that they are not doing anything to restrict supplies and that they basically want oil prices to move lower to reduce production in the U.S.”

Brent crude dropped $1.33, to $60.05.

Ben Casselman: The conventional wisdom on oil is always wrong

This is something we knew already: Oil prices fluctuate. Like all commodities, prices go up, and then they go down, and few experts know exactly why, or how far, or for how long trends will endure.

But FiveThirtyEight.com’s Ben Casselman, who used to cover the oil patch for The Wall Street Journal, outlines (in typical well-executed FiveThirtyEight style), all the ways that people have gotten oil predictions so horribly wrong this year.

Here’s one of the many instructive passages from his piece:

It isn’t just that experts didn’t see the shale boom coming. It’s that they underestimated its impact at virtually every turn. First, they didn’t think natural gas could be produced from shale (it could). Then they thought production would fall quickly if natural gas prices dropped (they did, and it didn’t). They thought the techniques that worked for gas couldn’t be applied to oil (they could). They thought shale couldn’t reverse the overall decline in U.S. oil production (it did). And they thought rising U.S. oil production wouldn’t be enough to affect global oil prices (it was).

Now, oil prices are cratering, falling below $55 a barrel from more than $100 earlier this year. And so, the usual lineup of experts — the same ones, in many cases, who’ve been wrong so many times in the past — are offering predictions for what plunging prices will mean for the U.S. oil boom. Here’s my prediction: They’ll be wrong this time, too.

Among the many reasons why pundits’ crystal balls are so often murky: various factors go into the makeup of prices; and the economics of oil-field drilling are complicated, which is why even “break-even” declarations about when oil-shale drilling in Texas or North Dakota might become unprofitable can be off base as well.

As to the first point — all the factors that comprise the fluctuating price of oil — Cassleman writes:

In July 2008, my Journal colleague Neil King asked a wide range of energy journalists, economists and other experts to anonymously predict what the price of oil would be at the end of the year. The nearly two dozen responses ranged from $70 a barrel at the low end to $167.50 at the high end. The actual answer: $44.60.

It isn’t surprising that experts aren’t good at predicting prices. Global oil markets are a function of countless variables — geopolitics, economics, technology, geology — each with its own inherent uncertainty. And even if you get those estimates right, you never know when a war in the Middle East or an oil boom in North Dakota will suddenly turn the whole formula on its head.

But none of that stops television pundits from making confident predictions about where oil prices will head in the coming months, and then using those predictions as the basis for production forecasts. Based on their track record, you should ignore them.