Friday, July 22, 2016

On the Peak Oil (Demand) Front...

Peak Oil demand is spreading more pain and gloom throughout the Oil Patch of the global economy.

The following two articles were posted by Raúl Ilargi Meijer on The Automatic Earth yesterday and today.

The first one:  More Pain Seen For US Crude As Product Glut Adds To Gloom (Reuters)
A glut of refined products has worsened the already-grim outlook for U.S. crude oil for the rest of the year and the first half of 2017, traders warned this week, as the spread between near-term and future delivery prices reached its widest in five months. A stubborn, massive supply overhang punished crude over the winter as U.S. oil futures hit 12-year lows in February. As supply outages and production cuts increased, crude rallied and spreads tightened significantly in May. But the unusually large amount of gasoline and oil in storage, combined with expectations of a ramp-up in crude production, has made traders more bearish on the price outlook for late 2016 and early 2017.
The second one: Fracklog in Biggest US Oil Field May All But Disappear (Bloomberg)
The number of dormant crude and natural gas wells in the U.S. stopped growing in the first quarter – and may all but disappear in the nation’s biggest oil field should prices hold steady. As of April 1, there were 4,230 wells left idle after being drilled, a figure little changed from January, according to an analysis by Bloomberg Intelligence. While some explorers have continued to grow their fracklog of drilled but not yet hydraulically fractured wells, others began tapping them in February as oil prices rose, the report showed.

Crude in the $40- to $50-a-barrel range may wipe out most of the fracklog in Texas’s Permian Basin and as much as 70% of the inventory in its Eagle Ford play by the end of 2017, according to Bloomberg Intelligence analyst Andrew Cosgrove. While bringing them online is the cheapest way of taking advantage of higher prices, the wave of new supply also threatens to kill the fragile recovery that oil and gas markets have seen so far this year. “We think that by the end of the third quarter, beginning of the fourth quarter, the bullish catalyst of falling U.S. production will be all but gone,” Cosgrove said in an interview Thursday. “You’ll start to see U.S. production flat lining.”
"Higher oil prices," that is, in the $40 to $50 range, can entice the extractors to return to pump out or frack out the wells that are dormant, or just drilled and capped. Unfortunately, according to the above Reuters article, and oil price developments today, those higher prices cannot be guaranteed. As Raúl Meijer says, What’s going to happen to the lenders who made it all possible?

Now the latest from The Wall Street Journal:
Oil prices fell Friday as a glut in oil products stoked market concerns that the global crude market will remain oversupplied longer than expected. 
U.S. crude oil for September delivery recently fell 54 cents, or 1.2%, to $44.21 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 58 cents, or 1.3%, to $45.62 a barrel on ICE Futures Europe.
This simple chart explains why oil prices are so low compared to those in 2014.

Demand is not keeping up with supply, despite an amount lower than the peak extracted in July of 2015. A NEW oil production peak, projected for the end of 2016, is not expected to outstrip demand. Which means there will be an even BIGGER glut and a backup in oil supplies being delivered because consumption by the end user is not fast enough. And storing all that oil has got to cost a lot of money.

Now what's the cause of this new oil peak? It is certainly not demand. But the lenders have to be paid, the social welfare systems of the producer countries have to be supported, companies' employee payrolls have to be met (otherwise employees get laid off), and some amount has to be set aside or spent for maintenance, exploration, drilling of new wells, and overhead, especially if lenders become loath to lend any more money to the fossil fuels industry.

Eventually the oil producers and oil producing companies will have to wise up, and reduce the supply to clear out the glut and backup of oil, in order to get the prices to go back up to a level where they can make a profit, "hopefully" at a price the end consumer can afford*.

* "Hopefully" at a price the consumer can afford: this would be good for the economy, which always has to grow to keep people employed and governments to meet its obligations and lenders to be repaid, but it would be TERRIBLE for the biosphere, us and our civilization, all of which depend on a salubrious climate that doesn't change more rapidly than species and ecosystems can adapt. Burning of more fossil fuels means more Carbon Dioxide in the air which means more and faster Global Weirding... with the coming superstorms the size of continents and the strength of hurricanes coming sooner and more frequently. One already happened last winter.

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