Are we on the road to a US $100 oil price?

As Easter ends – and one which was simply glorious in London – those of us reacquainting ourselves with financial markets will see one particular change. That is the price of crude oil as the Financial Times explains.

Crude rose to a five-month high on Tuesday, as Washington’s decision to end sanctions waivers on Iranian oil imports buoyed oil markets for a second day.  Brent, the international oil benchmark, rose 0.8 per cent to $74.64 in early European trading, adding to gains on Monday to reach its highest level since early November. West Texas Intermediate, the US marker, increased 0.9 per cent to $66.13.

If we look for some more detail on the likely causes we see this.

The moves came after the Trump administration announced the end of waivers from US sanctions granted to India, China, Japan, South Korea and Turkey. Oil prices jumped despite the White House insisting that it had worked with Saudi Arabia and the United Arab Emirates to ensure sufficient supply to offset the loss of Iranian exports. Goldman Sachs said the timing of the sanctions tightening was “much more sudden” than expected, but it played down the longer-term impact on the market.

 

So we see that President Trump has been involved and that seems to be something of a volte face from the time when the Donald told us this on the 25th of February.

Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile! ( @realDonaldTrunp)

After that tweet the oil price was around ten dollars lower than now. If we look back to November 7th last year then the Donald was playing a very different tune to now.

“I gave some countries a break on the oil,” Trump said during a lengthy, wide-ranging press conference the day after Republicans lost control of the House of Representatives in the midterm elections. “I did it a little bit because they really asked for some help, but I really did it because I don’t want to drive oil prices up to $100 a barrel or $150 a barrel, because I’m driving them down.”

“If you look at oil prices they’ve come down very substantially over the last couple of months,” Trump said. “That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly.” ( CNBC)

If we stay with this issue we see that he has seemingly switched quite quickly from exerting a downwards influence on the oil price to an upwards one. As he is bothered about the US economy right now sooner or later it will occur to him that higher oil prices help some of it but hinder more.

Shale Oil

Back on February 19th Reuters summarised the parts of the US economy which benefit from a higher oil price.

U.S. oil output from seven major shale formations is expected to rise 84,000 barrels per day (bpd) in March to a record of about 8.4 million bpd, the U.S. Energy Information Administration said in a monthly report on Tuesday……..A shale revolution has helped boost the United States to the position of world’s biggest crude oil producer, ahead of Saudi Arabia and Russia. Overall crude production has climbed to a weekly record of 11.9 million bpd.

Thus the US is a major producer and the old era has moved on to some extent as the old era producers as I suppose shown by the Dallas TV series in the past has been reduced in importance by the shale oil wildcatters. They operate differently as I have pointed out before that they are financed with cheap money provided by the QE era and have something of a cash flow model and can operate with a base around US $50. So right now they will be doing rather well.

Also it is not only oil these days.

Meanwhile, U.S. natural gas output was projected to increase to a record 77.9 billion cubic feet per day (bcfd) in March. That would be up more than 0.8 bcfd over the February forecast and mark the 14th consecutive monthly increase.

Gas production was about 65.5 bcfd in March last year.

Reinforcing my view that this area has a different business model to the ordinary was this from Reuters earlier this month.

Spot prices at the Waha hub fell to minus $3.38 per million British thermal units for Wednesday from minus 2 cents for Tuesday, according to data from the Intercontinental Exchange (ICE). That easily beat the prior all-time next-day low of minus $1.99 for March 29.

Prices have been negative in the real-time or next-day market since March 22, meaning drillers have had to pay those with pipeline capacity to take the gas.

So we have negative gas prices to go with negative interest-rates, bond yields and profits for companies listing on the stock exchange as we mull what will go negative next?

Economic Impact on Texas

Back in 2015 Dr Ray Perlman looked at the impact of a lower oil price ( below US $50) would have on Texas.

To put the situation in perspective, based on the current situation, I am projecting that oil prices will likely lead to a loss of 150,000-175,000 Texas jobs next year when all factors and multiplier effects are considered.  Overall job growth in the state would be diminished, but not eliminated.  Texas gained over 400,000 jobs last year, and I am estimating that the rate of growth will slow to something in the 200,000-225,000 per year range.

Moving wider a higher oil price benefits US GDP directly via next exports and economic output or GDP and the reverse from a lower one. We do get something if a J-Curve style effect as the adverse impact on consumers via real wages and business budgets will come in with a lag.

The World

The situation here is covered to some extent by this from the Financial Times.

In currency markets, the Norwegian krone and Canadian dollar both rose against the US dollar as currencies of oil-exporting countries gained.

There is a deeper impact in the Middle East as for example there has been a lot of doubt about the finances of Saudi Arabia for example. This led to the recent Aramco bond issue ( US $12 billion) which can be seen as finance for the country although ironically dollars are now flowing into Saudi as fast as it pumps its oil out.

The stereotype these days for the other side of the coin is India and the Economic Times pretty much explained why a week ago.

A late surge in oil prices is expected to increase India’s oil import bill to its five-year high. As per estimates, India could close 2018-19 with crude import bill shooting to $115 billion, a growth of 30 per cent over 2017-18’s $88 billion.

This adds to India’s import bill and reduces GDP although it also adds to inflationary pressure and also perhaps pressure on the Reserve Bank of India which has cut interest-rates twice this year already. The European example is France which according to the EIA imports some 55 million tonnes of oil and net around 43 billion cubic meters of natural gas. It does offset this to some extent by exporting electricity from its heavy investment in nuclear power and that is around 64 Terawatt hours.

The nuclear link is clear for energy importers as I note plans in the news for India to build another 12.

Comment

There are many ways of looking at this so let’s start with central banks. As I have hinted at with India they used to respond to a higher oil price with higher interest-rates to combat inflation but now mostly respond to expected lower aggregate demand and GDP with interest-rate cuts. They rarely get challenged on this U-Turn as we listen to Kylie.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

Next comes the way we have become less oil energy dependent. One way that has happened has been through higher efficiency such as LED light bulbs replacing incandescent ones. Another has been the growth of alternative sources for electricity production as right now in my home country the UK it is solar (10%) wind (15%) biomass (8%) and nukes (18%) helping out. I do not know what the wind will do but solar will of course rise although its problems are highlighted by the fact it falls back to zero at night as we continue to lack any real storage capacity. Also such moves have driven prices higher.

As to what’s next? Well I think that there is some hope on two counts. Firstly President Trump will want the oil price lower for the US economy and the 2020 election. So he may grow tired of pressurising Iran and on the other side of the coin the military/industrial complex may be able to persuade Saudi Arabia to up its output. Also we know what the headlines below usually mean.

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11 thoughts on “Are we on the road to a US $100 oil price?

  1. I’m not sure to what extent an $100 oil price with MAGA it’s not been too great in the past.

    There are lots of questions;

    will Saudi roll over and increase production, to what extent can it and if it can does it want to.

    What will Russia do?

    Will Iran close the straits of Hormuz

    Can China be bullied?

    • my considered opinion

      will Saudi roll over and increase production, to what extent can it and if it can does it want to.

      A; Boe yes , want to? not really

      What will Russia do?

      A nothing much , lots of talk

      Will Iran close the straits of Hormuz

      A: a dangerous hostile act that would bring military intervention and condemnation of the RoW

      Can China be bullied?

      A; they will give little but they are pragmatic and also have an eye on a longer game than Washington.

      feel free to disagree

      Forbin

  2. Hello Shaun,

    we should not conflate oil price with electricity . Nat gas price will rise in tandem and that will cause inflation issues later one regards electricity prices .

    oil:-

    As for the oil price I do expect some volatility from the markets driven by speculation ( as they always do) due to Iranian wavers ending.

    If the average price rises enough there will be more LTO but not as much as one would expect in the short term as the best spots are already drilled. LTO isn’t that great either as there’s little diesel in it ( and hence the worry over the Libyan civil war ).

    For the UK economy the buffer that North Sea oil gave is ending as yes that dreaded work “peak oil” has happened to us.

    God knows what we are selling to buy the stuff from the rest of the world, bits of paper ? ( flipping houses doesn’t make trade goods – imports yeah , but that compounds the issue does’nt it?)

    electricity:-

    As for capacity cost estimates for UK electricity from Windmills , yes it’s cheaper per GW until you factor in the actual delivery output. Many days during the year and not always at night, wind tails off and we burn Nat Gas – still a carbon fuel. Yes we are making a few more inter connectors which apparently will replace whats left of coal ( until our neighbors supplying it need it themselves ) .

    The delivery factor of wind is now better understood and is more of an issue. Used to be a third , that is you need 3 1Mw windmills to deliver 1Mw ( average! ) . It appears now you will need 5 .

    Having replaced CFL with LED light-bulbs will not help if there’s no supply.

    As for the boast we didn’t burn coal for 90 hours , yah , we burnt Nat Gas and imported electricity from abroad during one of the lowest electricity demand times….. ( sighs) not at all unsurprising.

    fyi – China has nearly 1,000 GW of coal fired power stations in operation, China accounts for about half the world’s coal-fired power, with the United States (259 GW) and India (221 GW) . Think about it …… they’re building more and we think shutting down a couple of GW worth will save the planet ? ( deeper sighs )

    Forbin

    • Hi Forbin,
      You say that, “fyi – China has nearly 1,000 GW of coal fired power stations in operation, China accounts for about half the world’s coal-fired power, with the United States (259 GW) and India (221 GW) . Think about it …… they’re building more and we think shutting down a couple of GW worth will save the planet ? ( deeper sighs )”

      The point is people do seem to think that. Just like people think if we stop sending single use carrier bags to landfill that it will somehow have an impact on those that dump plastic at sea.

      I’m at a loss on a lot of the general view of energy and other pollution, why for example was so much of the recent disruption in London focused on disruption public transport?

      Say we do go carbon neutral in five years as is demanded, I’m sure that China, the USA and India won’t so by how much will the worlds emissions have gone down?

      What will the UK, having reduced it’s emissions to zero look like an good will we feel about that and how much will the USA, China, India et al thanks us?

      • “God knows what we are selling to buy the stuff from the rest of the world, bits of paper ? ( flipping houses doesn’t make trade goods – imports yeah , but that compounds the issue does’nt it?)”

        Forbin,
        Agree we aren’t selling enough stuff to the rest of the world to balance the books and haven’t done for decades, we have a structural balance of trade deficit with the rest of the world, the Bank of England obviously has to balance the books and does so by printing the difference – one of the many reasons why sterling is in perpetual devaluation, the policy of zero interest rates exacerbates the problem as capital is mis-allocated towards property speculation rather than productive investment that could be exported and reduce the deficit.

  3. Don’t rule out the effect of the Fed capitulating on raising interest rates, it sent a clear message to the markets that it is no longer in control of either interest rates or QE, and is completely controlled by Wall Street and the stockmarket. Further falls in the stockmarket can now only mean cheaper money and thus higher oil prices, they are now inextricably linked.

    • Hi Kevin

      Thanks for reminding me of a subject I meant to add to the article. That is that we are already seeing a side-effect of the higher oil price as the US ten-year Treasury Note yield is now 2.57% rather than the 2.35% nadir of the end of last month. I am not saying that is all due to the higher oil price but some of it is and it will effect the economy via higher fixed-rates for mortgages and commercial borrowing.

      Then we have an effect in the other direction with stock markets with oil shares in them rising with the UK FTSE 100 closing over 7500 tonight.

    • The Fed has always been under the thumb of Wall Street (as it is the major clearing banks which own the damn thing, it is a private corporation which is anything but ‘Federal’)

  4. Ah yes the fine details in the oil trading market (as you know Shaun from being a futures/derivatives/options trader).
    1. U.N. mandated changes in bunker c (high sulfur content) starting in 2020 (for ships-5 per cent market).
    2. Texas refinery shutdowns/retooling (now!-this summer) in partial consequence ( Texas sweet yummy- Venezuela, Alberta high sulfur yuckk!!).
    3. No one has analyzed the role (high oil prices/truck sales crash) had just prior to the financial meltdown. (chartists please). Instigating factor- never discussed!!
    4. Amateur alert!! Do NOT attempt to play this market.
    5. The Nov 2018 natural gas short squeeze wipeout (as you mentioned shaun) should be a warning. 800 lb gorillas can move the market any way they want. (wow look at those people in shorts- c’mon Boyz it’s dinner time -let’s change the tide and see who’s naked- a sad fact learned by un-Noble House)

    • Nothing is real it’s all manipulated to the benefit of those in positions of power.
      The misguided think voting for Obama or Trump will make a difference if it did they wouldn’t be on the ballot paper.

      “ They want to have a war to keep us on our knees
      They want to have a war to keep their factories
      They want to have a war to stop us buying Japanese
      They want to have a war to stop industrial disease
      They’re pointing out your enemy to keep you deaf and blind
      They want to sap your energy incarcerate your mind
      They give you rule Brittania,gassy beer ,page 3…..”

  5. Sorry for the late comment but the Bank of Canada just released its April Monetary Policy Report today and its take on oil prices is of interest: “Global oil prices are assumed to remain near recent average levels The per-barrel prices in US dollars for Brent and West Texas Intermediate have recently averaged close to $70 and $60, respectively. These prices are about $10 higher than assumed in the January [Monetary Policy] Report.” Although the BoC has considerably lowered its projection for real GDP growth in 2019 from 1.7% in January to 1.2% in April, its April projections for growth in 2019Q2, 2019Q3 and 2019Q4 are 1.3%, 2.3% and 1.7% respectively, all at annualized rates. Except for 2019Q2, these are all in line with the BoC’s January statement that following 2019Q1, the pace of economic activity would exceed the potential output growth rate, which was then pegged between 1.5% and 2.1%. As Doug Porter of BMO noted, a key reason to anticipate a growth recovery in the rest of 2019 was higher oil prices, which would help the Alberta economy in particular. Although some Canadian provinces are hurt by higher oil prices, as an oil-exporting country, Canada as a whole benefits from them. (Only the 1.3% projection can be found in the April MPR but the 2019Q3 and 2019Q4 projections can be gleaned, with a possibility of rounding error, from information provided. The BoC used to publish all projections of annualized quarterly growth rates for the full projection period, but stopped doing so under Poloz.) The comparable projections of BMO Capital Markets are 2.3%, 2.2% and 1.5%.

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