90 seconds at 9 am: Oil price sinks

US oil price down on easing Crimea tension, higher stocks, more China shale; Thailand raises rates; gold higher; NZ$1 = US$0.849 TWI = 79.5

13th Mar 14, 7:12am by David Chaston

Here's my summary of the key news overnight in 90 seconds at 9 am, including news mainly about oil today.

There has been a sharp dip in the price of US crude oil overnight - down US$5/barrel in 24 hours - followed somewhat less sharply by other international benchmarks.

Ukraine tensions continue to ease as it becomes clearer Russia would shoot an own goal with an energy strike on Europe.

There were also reports the US is about to release some of their strategic inventories on to markets, and this is even though their local crude inventories were considerably higher than forecast last week.

And China said that its shale expansions are running ahead of forecast. OPEC said it is expecting higher demand in 2014, however.

Growing signs of weakening Chinese demand for commodities are sparking a selloff in the country's currency, its stock market and in the coal, copper and iron ore it buys. That is hurting the Aussie dollar.

Meanwhile, Thailand's central bank has cut its benchmark interest rate by a quarter-percentage point to support their economy as the country's political crisis continues. But others including the RBNZ are about to raise rates and you can follow that news at 9am today on this website.

Across the ditch, Australia yesterday sold a record A$7 bln in bonds as its deficit starts to rise.

The gold price has pushed on higher today, now up to $1,367/oz. Benchmark UST 10 year bond yields have slipped a little to 2.73%.

Our TWI is at yet another record high of 79.5 with the NZ dollar at 84.9 USc its highest against the American currency since October, 94.5 AUc its highest against the Aussie since January, and 5.21 yuan, its highest against the Chinese currency since May last year. Whether markets have properly priced in the coming OCR rise will become clear at 9am today.

If you want to catch up with all the changes yesterday, we have an update here.

The easiest place to stay up with today's event risk is by following our Economic Calendar here »

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23 Comments

by powerdownkiwi | 13th Mar 14, 8:36am 1394652981

http://kunstler.com/clusterfuck-nation/deep-state-descending/

Brent is at 109, hardly a shift.

by King of the whiners | 13th Mar 14, 9:10am 1394655009

Ahhh but the site owner is a cornucopian, doesnt believe in resource depletion. Why highlight a link about Chinese shale GAS production when the story was meant to be about the OIL price? Last time I looked the two are different.

by Plutocracy | 13th Mar 14, 10:01am 1394658070

Chevron raises projection for oil price

Chevron, the US oil group, has raised sharply its expectation of future oil prices and cut its target for production growth, as it highlighted the steep rise in costs in the industry.

Rising Capex is starting to bite the oil majors. The cheap stuff is gone and consumers can't afford to pay the true price that the big companies need. I wonder where this will end?!

by Boatman | 13th Mar 14, 11:13am 1394662409

The cheap stuff is gone , but its price since the 1973 crisis has remained relatively static as % living costs , and in real $ terms .

But there is no shortage and there is still a lot of relatively easy stuff to extract especially LNG

Whas is likely is :-

We will move to the use of altenative energy before we run out

Int eh short term engines will be deisgned to consume less fuel

Public transport busses and urban delviery vehicles will be Diesel/electric hybrids

We will adjust to prices at the pump , as we have done since 1973 , which is before most Kiwi were born

The new oil finds everywhere from Madagascar , to Central Afirca , East Africa , South Sudan , shale in the Karoo region ,LNG gas in Papua New Guinea, East timor shale in the US , and oilsands ( and shale) in Canada will ensure we have supply for may years to come .

Australia has 144, 000,000,000,000 (144 Trillion) cubic feet of convertable LNG .

At current levels of consumtion it would last about 100 years

Australia 9th on the Wikipedia list has more LNG than Iraq, Kuwait, Libya or United Arab Emirates

Australia has only used about 12% of its known resources

New Zealand is about 68th on the list

by kiwimm | 13th Mar 14, 2:01pm 1394672483

If you are assuminig that growth will continue then 100 years of current supply does not equal 100 years of supply.

Assuming energy requirements doubling every 20 years as they have down over the recent past (a small-sounding 3.5% per year) you will go through 100 years of current supply in 43 years

by Plutocracy | 13th Mar 14, 2:18pm 1394673489

I actually agree with what you say, PDK sums up the crux though which is reserves are not the issue, production rate is. The simplest analogy for those who like finance would be thinking of oil production as like withdrawing money from an ATM.

Where:

Money = Oil reserves.

Daily withdrawal amount = oil production rate.

Bank fee = EROEI (Energy Return On Energy Invested).

Consider why rate is important: Would you live like a millionaire if you had millions in the bank but could only spend $100 per day? This is the reason why reserves are a red herring. Peak oil is not about reserves, it's all about production rate. The maximal production rate determines how much useful energy (or money in this analogy) we can spend on 'stuff'. Now consider EROEI as being like a bank fee each time you withdraw.

E.g. Withdraw $100, pay $5 bank fee = $95 dollars left to spend.

As we exploit lower and lower quality resources (as we are doing) the EROEI goes up. So using the banking analogy we are still withdrawing the same amount e.g. $100 but are paying the bank $20 instead of 5$. Suddenly, we are now left with only $80 to spend even though we withdrew the same amount of money as before (or produced the same amount of oil).

Oil production has been largely stagnant since 2005 while EROEI is has been steadily increasing. Less energy per capita is now available then in 2005. Energy = work = growth = economy.

by Alex13 | 13th Mar 14, 2:36pm 1394674569

"As we exploit lower and lower quality resources (as we are doing) the EROEI goes up".

It actually goes down. Think and try to understand things before attempting to explain them to others...

by Plutocracy | 13th Mar 14, 3:49pm 1394678984

Whoops, typo slipped in. Lucky you're onto it Alex. Thanks pal, I try to keep it simple for people like you!

by Alex13 | 13th Mar 14, 4:14pm 1394680480

I'll feel quite content if - one day - you get to understand what EROEI means. Let me know when this happens, then I'll introduce you to another challenge to fathom: and that is that the EROEI does not matter when EI is in nearly limitless abundance. But don't worry about it now, it's way too early for you...

by Plutocracy | 13th Mar 14, 4:40pm 1394682013

Woah, settle down buddy, there's no need to throw your toys out of the cot! You should tell me about this limitless abundance of energy we have access to! Perhaps you should use some of it to power our society and bring down the rising energy costs?! You could make billions.

by powerdownkiwi | 13th Mar 14, 4:41pm 1394682095

And clearly way too late for you.

There is no such thing as 'nearly limitless abundance'. - certainly not of fossil fuels volumetrically. Even all the guessed-at reserves would be gone in two more 'doubling-times', but because of cherry-picking, dispersion, both of which contribute to dwindling EROEI, that won't happen.

Failure to mitigate, coupled with an unrelenting need to 'grow', sees so many other parameters coming into play, concurrently. Why the need to keep on with QE? When was that ever needed before?

by Alex13 | 13th Mar 14, 5:12pm 1394683925

Fossil fuels are not necessarily the primary energy source on this planet – sun’s energy is. Is the latter going to disappear? – Yes, it will eventually, but not for a (long) while and not before numerous other challenges to humankind and life in general occur. Until then, the radiated solar energy to all intents and purposes is limitless. The challenge is to develop technological ways of harnessing it.

by steven | 13th Mar 14, 6:01pm 1394686867

In terms of what our "modern" society based on the present economic model that requires copious and cheap fossil transport fuel to function, fossil fuel is it.

There is no other affordable alternative to replace it, ergo BAU cannot continue.

"limitless" shows you do not understand the expotential function and doubling time from a growth model.

regards

by Alex13 | 13th Mar 14, 9:13pm 1394698396

1. You’ve bored everyone enough on this site with your “exponential function” and “doubling time” trivial mathematical notions that you are so proud to be able to grasp. Most people understood these when attending high school, which in my case is decades ago.

2. Sun’s radiated energy is indeed limitless for the purpose of this discussion.

3. Whether humankind will be able to develop ways of harnessing the limitless solar energy by transforming it into usable and useful other energy forms in time is yet to be seen. You and the likes of you are pessimistic about this, I and many other people are hopeful. Arguing about it is pointless. And I am not in the business of treating chronic depression either, sorry.

by PeakEverything | 13th Mar 14, 11:51pm 1394707878

I think you are being far to kind to the average person's ability to understand even the simplest math concept.

by steven | 14th Mar 14, 7:23am 1394734995

1 & 2. You clearly failed then, or certianly are unable to utilise what you learned.

3. I am an engineer, you are a far right wing/libertarian type whose political blinkers are stopping you looking at the facts.

The point is to take action on it as the other aspect is time and scale...

Clearly such thought is beyond you.

regards

by Alex13 | 14th Mar 14, 9:31am 1394742661

What you have been "engineering" is thousands of posts on this site using (stealing) your employer-paid time. That surely goes a long way to help the "time and scale" aspects...

by Plutocracy | 13th Mar 14, 6:08pm 1394687303

So what you're saying is we need to use technology (depend on fossil fuels) to produce solar technology which can harness more solar energy?

https://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/

Maybe you should read that to see why this may prove to be a challenge. Be warned, he's a physics professor and he will mention EROEI.

by powerdownkiwi | 13th Mar 14, 1:46pm 1394671574

Um, Boatman - I've come across that type of comment many times.

Price at the pump unfortumately isn't the problem - energy return on the energy invested, is. Below a certain point, the real making of real wealth (not the artificial boosting of invisibles or of existing items like houses) cannot 'pay'. That's not a matter of having 'enough money', it's a matter of having 'enough grunt'.

No grunt, no underwrite,

Yes, we will "have supply for many years to come" - but that's not the problem. The quality, rate of supply of, and contension for - are the problems.

Aternative energy we will indeed move to - but the EROEI is so far below that of oil (and always will be) that it won't support BAU. Eclectric and hybrids use fossil-fuelled electricity - so they're not really renewable in most places (85% coal, in Australia).

Classic case of setting up a mental wish (middle-class-continuance-of-lifestyle) then trying to make the facts fit the wish.

Good to see you added "at present rate of consumption" - now factor in cherry-picking, diminishing rate of efficiency gains, descending EROEI, and reduction in export availability.

by Alter Ego | 13th Mar 14, 2:28pm 1394674085

Plus the hidden costs to the environment.

http://www.huffingtonpost.com/2014/03/12/fracking-earthquakes-ohio-hilc…

by King of the whiners | 13th Mar 14, 4:42pm 1394682148

Just in case folk can't access the FT article Plutocracy linked to, here it is the same news covered by Reuters:

http://www.reuters.com/article/2014/03/11/chevron-investor-idUSL2N0M80S…

Bottom line - big oil knows the game is up, future production declines openly acknowledged (it is to be expected as all the major oil companies are slashing future CAPEX), even in an environment in which they predict the price of oil will continue to rise.

Should be front page news.

Won't be.

by King of the whiners | 13th Mar 14, 10:27pm 1394702859

This Reuters piece is getting a lot of attention - here it is being interpreted more effectively than I did:

Chevron Corp, the second-largest U.S. oil company, cut its 2017 production forecast on Tuesday by 6 percent, citing project delays and asset sales, while saying high prices have pushed its new baseline for oil to north of $100 a barrel. This is really telling. Their production decrease is NOT the result of project delays and asset sales — it is because of depletion. The other things are merely preventing them from offsetting that depletion. This is a tacit admission of what their decline rate from existing production is.

The company, like many of its peers, has seen mixed results from heavy spending to lift oil and natural gas production, and shareholders in the sector are pushing for more cost discipline. Cost discipline? This is putting lipstick on a pig. Producing oil costs what it costs, and costs have gone up not for lack of discipline but due to more challenging production environments which is due to (dare I say it?) Peak Oil!

Chevron trimmed its 2017 production outlook to 3.1 million barrels of oil equivalent per day (boepd) from a previous forecast of 3.3 million boepd, but stuck to plans to spend $40 billion this year on capital projects, about as much as last year. So where’s the discipline? With discipline like that who needs indulgence? Paying the same for less, sounds like Peak Oil to me.

“Our growth strategy remains intact, though some things have changed,” Chief Executive John Watson said at the company’s analyst day in New York. “Our travel strategy remains intact, though some things have changed.” Captain of the Titanic.

Despite the more cautious production forecast, Chevron raised the oil price used in its planning models to $110 a barrel from $79. Exxon Mobil, the largest U.S. oil company, is using a similar level of $109 a barrel in its budgets, based on 2013 average prices. Yowsuh! Their planning model has been using $79 a barrel? Do their offices have windows? Do they have any contact with the real world?

“There comes a point when some projects just won’t be able to compete for capital” below $110 per barrel, Watson told reporters after the analyst meeting. There comes a point INDEED! Does anyone smell higher oil prices in the offing?

“When prices increase, it’s just arithmetic at that point,” he said. I’m glad to know that arithmetic comes into play at SOME point.

While Chevron has insisted on keeping capital expenditures high, many of its peers have cut spending, bowing to investor demand for reduced spending on exploration projects and boosts to dividends and share repurchases. Those darn investors. Did they actually expect to get something in return for their investment?

So the best goes on. Oil companies face the music and try to paper over it in the best corporate-speak they can muster. Their target oil price is now in line with reality, but it seems that even at that target they are having trouble justifying expenditures. Drip, drip, drip.

by Casual Observer | 13th Mar 14, 4:58pm 1394683124

Has anyone heard of Shepherds-Hill, investment brokers (?) in Hong Kong that has an Australian ph number for kiwis? A young friend phoned me to say he had had a cold call from someone saying they were from this company and were offering him an 'investment' in home heating oil investment options. (He does have some funds invested in oil in a North American stock market and we are wondering if they got his details from that register). When asked how they got his details he was told it was from their 'marketing dept'. It sounded like a very slick and almost believable pitch. My young friend though thought it odd that the salesman kept calling him 'mate' so hence the call to me. There is a website for this company but it threw enough flags up for me to tell my young friend to stay well away as I thought it was a scam. It's not on the Dept of Internal Affairs site so wondered if anyone has heard of this company.