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Trump has won. The energy sector in the US stands at a poignant cross-road. Which route will the new administration go and how will the oil prices fare?oil price forecasts during Trump presidency By VACO GROUP HOLDINGS INC , 2016/11/30
We're on a roll when it comes to accurately predicting major geopolitical events and their impact on oil prices. In our article titled Takeover of Oil by Militias" published in 2012, we successfully anticipated that Islamic militants (ISIS) would use oil revenues to fund the formation of their own theocracy.
In 2013, in our article titled "OPEC and oil prices - is the story over" we, rightly, predicted that Saudi Arabia's failure in ensuring that OPEC countries adhered to the quota system as well as the reference prices would cause the cartel to crumble and become irrelevant. Also the same year, by mathematically analyzing the evolution of oil prices, we predicted high volatility ahead. As it turned out, oil prices plunged 40% a few months later. Clinchingly, adept at it, we also surmised that a disagreement between Russia and Saudi Arabia over a planned gas pipelinewould lead to the Syrian civil war, which we also detailed in later articles.
In May 2015, while crude oil was hovering at $50 from the previous high of $115 in June, we warned our readers that it would plummet further. Within a few months oil prices fell to the $20s.
See, with that track record, you may pardon us for bragging. Anyway, when it comes to oil prices, the oil industry and geopolitics, here are 9 predictions for the next 4 years regarding the geopolitics of oil under President Trump.Syrian war, oil prices and the Paris attacks By VACOGROUP HOLDINGS INC, 2015/12/02In our last article we predicted that thousands of hardened ISIS fighters, blending among refugees, would march into Europe undetected. We also advised our readers that this would spread distrust between European powers and borders would go back up in an attempt to stem the invasion, at the cost of slowing down European economies. We were right on all counts.On November 13th 2015, ISIS terrorists committed multiple suicide attacks in Paris, which formed the deadliest terrorist atrocity on French soil since WW2. They caused France to close borders and declare a state of emergency.There is a strange connection between these tragic events and the politics of petroleum. On the one hand, Saudi-funded fundamentalism has, within a few decades, balkanized Europe into a net supplier of jihadi fighters. On the other hand, a proxy war in Syria over a gas pipeline created the refugee crisis. These are both dire issues which few governments dare to face effectively, yet these issues will shape our world for centuries to come.France's Terrorist HotbedsAs of November 2015 both the French and German governments estimate that between 5,000 and 6,000 Western Europeans jihadis have joined the ranks of ISIS in Syria. Of these, almost half came from France and are mostly second or third-generation immigrants of Algerian descent. This makes France the largest supplier of Western jihadis. According to France's DGSE secret service 250 have returned so far, some giving TV and radio interviews about their experiences in ISIS. This media blitz occurs while they await mild prison sentences and still collect welfare benefits. Meanwhile, more than 300 candidates are considering joining ISIS and this figure is climbing.Although this "Salafist" radicalization is sometimes abusively portrayed as recent, it is a multi-generational trend spanning nearly four decades and is a consequence of the European powers' oil policies.Most European countries have no oil reserves. Shortly after the 1973 oil crisis they attempted to tie long-term partnerships with the Gulf States. As a result, oil from Saudi Arabia and Qatar still flows reliably into Europe in exchange for currency, weapons technology, and a few Saudi-funded mosques. For example, around that time Belgium signed a 99-year lease with Saudi Arabia to build the Great Mosque of Brussels, just a short distance from the Molenbeek suburbs, today considered Europe's most volatile terror hotbed. In Spain, Madrid is home to the largest Mosque in Europe, also built by Saudi Arabia. Saudi-trained conservative imams took the helms of these mosques and indoctrinated generations of followers with wahhabi and salafist rhetoric. They called on the Muslims of Europe to split away from the native European society they deem incompatible and seize power. Hence political Islam had set foot in Europe.Despite protests and warnings from conservatives, leftist European politicians not only tolerated this rhetoric, they even embraced it. They interpret it as a sort of "class struggle" in phase with their own ideology. As years went by and the Muslim population increased, Europe's socialist parties began to court the Islamic vote more assiduously under the guise of multiculturalism and tolerance. It paid off for some leftist parties who got elected repeatedly, buying votes at the cost of massive low-cost housing projects and welfare benefits targeted preferentially towards citizens of foreign descent.Unfortunately, these policies created immense low-cost housing neighborhoods, which soon tuned into a state within a state, following the salafist rethoric of self-segregation. Today some of these no-go zones are Islamist enclaves operating under near-Shariah law with no police presence. They are disconnected from the rest of France's society, but nonetheless welcome free housing and medical services, utilities and generous welfare benefits in exchange for votes. The pattern is similar in Belgium, Holland, the United Kingdom, Sweden, and Germany. Why change something that works?The perpetrators of the Paris terror attacks were all raised and radicalized in France and Belgium. However, France's socialist President Hollande was quick to point the finger elsewhere at ISIS and Syria, drawing the media's attention away from his government's accountability. This allowed Hollande to bolster state expenditure and deficits despite EU budget rules, while pledging to welcome 30,000 new Syrian refugees - new voters for the 2017 elections paid for by taxpayers. In reality, France's home-grown terrorism problem is the result of decades of complacency by Hollande's own party towards Saudi-funded political Islam - an unreasonable price for crude oil and weapons export.France's commercial and cultural exchanges with Saudi Arabia are supervised by a dedicated workgroup within the French government (Groupe d'amitie France-Arabie Saoudite) headed by politician Olivier Dassault, heir to aerospace conglomerate Dassault Defense Systems. In July 2015, France signed a record $12 billion contract with Saudi Arabia to sell helicopters, build two nuclear reactors and export advanced weapons systems to the Kingdom - though any "cultural" part in the agreement flowing back from the Kingdom was not disclosed to the public. Given the Kingdom's recent offer to build 200 new mosques for Syrian refugees in Germany, the $12 billion cheque to France most certainly came with strings attached, the consequences of which the average Joe - or Pierre as it may be - will endure. From the looks of it, the hands of France's ruling class are tied and it is unlikely they will stand up to Saudi Arabia.Police raids following the attacks uncovered heavy weaponry in known hotbeds, a tell-tale sign that regular law enforcement cannot keep track of terrorist activities in normal times. The Paris attacks went undetected by the DGSE secret services simply because the number of aspiring jihadis has reached a critical mass which now exceeds the service's capacity. It takes on average 20 agents to monitor a suspected terrorist, more if he is aware of being monitored. The 5,000-strong DGSE has repeatedly warned that it cannot effectively monitor homegrown jihadis because of their sheer numbers. Unfortunately, going forward, Paris-style attacks are the new normal.Syria's Civil WarAs we explained in our last article, the Syrian Civil War stems from a disagreement between the Saudis and Russia over the route for a new gas pipeline ducting Gulf gas to the lucrative European markets. Russia, whose only Mediterranean base is located in Tartus, Syria, supports Assad's initiative of a gas pipeline from Iran through Iraq and Syria (the Iran-Iraq-Syria pipeline). But Saudi Arabia's hardline Sunni Muslims wants to overthrow Syria's Assad, who is a Shia Muslim, for religious reasons. They want to run a 100 per cent Sunni-controlled pipeline from Qatar through Syria and Turkey (the Qatar-Turkey pipeline), into Europe. As a result of this disagreement a proxy war is taking place in Syria between the aforementioned powers. Meanwhile displaced Syrian refugees are flooding into Europe with jihadis in their midst.Originally, Europeans were strongly in favor of deposing Assad for so-called "humanitarian reasons". Their humanitarian concerns for Assad's repressive regime veil the truth - Europe resents depending on Russia for 40 per cent of its gas. Russian President Putin annexed Crimea and maintained a belligerent stance, pushing Europe to favor the pipeline proposal of Qatar and Saudi Arabia. The Saudi plan to duct natural gas all the way to Europe through Syria and Turkey came with a catch - Assad would have to be toppled. The US supported the initiative as Russia's only Mediterranean naval base would disappear with Assad. Thus, the Western world had itself a new plan that would bring peace and prosperity to the region. That is after the "initial shakeout" necessary to oust Assad.The "initial shakeout" didn't go as planned. Russia-backed Assad proved far more resilient than anticipated. But more importantly, western-backed Islamic militias committed such barbaric acts of terror they even made Assad, and Russia, look good in comparison. An emboldened ISIS gradually took over several of the region's oil fields to fund its operations to the tune of $50 million per month by smuggling oil into Turkey. The routes and means were well established during the previous oil embargo on Iraq and so are the financial networks that profit from it in Turkey. Today, crude oil illegally smuggled by ISIS into Turkey accounts for a fairly significant 3.5 per cent of Turkey's total oil imports. Turkey's NATO allies are starting to question her true allegiance and motivation to fight ISIS, as does Turkey's downing of a Russian jet while it was tracking an oil convoy headed for Turkey. Turkey's allegiance has become so questionable that Texas governor Rick Perry suggested that Turkey be dismissed from NATO.Turkish DelightSyria's history particularly draws Turkey's attention. For centuries most of the Middle East, including the area now known as Syria, was part of the Ottoman Empire. That Empire was ruled from the Turkish city of Istanbul by a dynasty of autocratic Sultans, called the Ottoman family. As well as ruling over most of the Middle East, the Sultan held the hereditary position of Caliph. This was the leadership of all the Sunni Muslims in the world - a Muslim Pope.The Ottoman Empire was an ally of the German Empire during the First World War. When they lost that war, the British and French governments took their revenge by splitting off all of the empire's provinces and creating colonies for themselves. Those colonies evolved into independent countries and today they are Syria, Lebanon, Israel, Iraq, Kuwait, Jordan, Saudi Arabia, Egypt, Libya, and Tunisia. The rump of the empire was left independent and in turmoil. In 1922 the army overthrew the Ottoman sultan and declared a republic, changing the Empire's name to Turkey.The leaders of ISIS want to form their own homeland by uniting Iraq, Syria and the Lebanon into one country. They will then spread out over all the former territories of the Ottoman Empire to recreate it. They also want to recreate the Caliphate. Although their aims are an homage to the Ottomans, they don't intend to invite the family back. They like the romantic notion of days gone by, specifically because those enchanting eras give glamour to dictatorship and repression. ISIS wants to wind back to the good old days when whoever was in charge could have anyone they wanted whipped or killed without the meddling of politics, courts, rights or democracy. They want the luxury of autocracy for themselves, not for some hapless descendant of the last Sultan.All of this plays well for Turkey. ISIS admires their northern neighbors and they don't include that country in their plans. The ISIS vision of an empire is the Ottoman Empire, without Turkey.Trade Not AidAlthough the Turks are members of NATO and allies of the United States, they have their own agenda, which often flies contrary to the policies of America. For one thing, they have a troublesome separatist movement in the Kurds.Kurdistan has never been an independent country and today it covers an area of Western Iran, Northern Iraq and Syria, and about a third of Turkey's territory. The overriding obsession of every Turkish government is to prevent the loss of that area which would occur with the creation of Kurdistan. Rather than give the Kurds concessions and try to befriend them, the Turks choose to repress, imprison and cull the Kurds by any means possible.America, France and Britain love the Kurds. One of the justifications for toppling Sadam Hussein in Iraq was his mass murder of the Kurds through gassing. The Kurds fought fiercely alongside the Western armies and the allies rewarded them by giving them total autonomy in their homeland in Northern Iraq, right along the border with Turkey which hosts significant crude oil and natural gas proven reserves in Iraq. This infuriated the Turkish government, as an oil-rich Kurdistan could rise militarily and stand up to Turkey.US trained and armed Kurds are the only force that has had any luck in defeating ISIS in Northern Syria. The Kurds held two area of borderland and were successfully driving ISIS back into the interior of the country. ISIS had one stretch of the border area with Turkey and used that as a checkpoint to trade with their much-admired neighbor.ISIS's early successes in Northern Iraq saw them seize oil fields and refineries. Rather than destroy these monuments to Western occupation, they took over them and cranked up production. However, as they are designated as a terrorist organization, they don't have access to oil trading markets to sell their black gold. So, who on earth would buy oil from terrorists? Turkey.The befriending of ISIS has worked very well for Turkey. They get a cheap source of oil, pouring $50 million a month into ISIS's coffers. On top of that, they know that one of the main ways their terrorist friends will use that money is to buy back weaponry to kill as many Kurdish independence fighters as possible.Things were going great for Turkey, until the American-backed and armed Kurds started to gear up for their final push to squeeze ISIS out of the border area, thus uniting Kurdish control of the entire southern border of Turkey. The Turkish government declared that it had enough of the terrible atrocities occurring in Syria. They joined the war in the name of freedom, and bombed the Kurds to smithereens. This helped ISIS regain control of Northern Syria, and kept the cheap oil flowing to Turkey. America did nothing.Brothers in ArmsTurkey and Saudi Arabia are the two biggest Sunni countries in the Middle East. Turkey lies to the north of the region, and Saudi Arabia lies to the south, deep in the Arabian Peninsula. Industrialized Turkey produces weapons while Saudi Arabia buys technology and arms from the West and both are smuggling some of those weapons to various Syrian rebel groups, including Al-Qaeda affiliates and unofficially ISIS. However, the economies of the two countries are very different.As a non-oil producing industrialized nation depending on Russia for 60% of its gas imports, Turkey's economy is strengthened by falling oil price, and having a plentiful supply of under-priced contraband oil on its southern border is just making life a lot easier for the people of Turkey. Saudi Arabia doesn't have a value-added economy but rely on oil production. The fall in oil prices, which are now approaching $40 per barrel due to Saudi non-respect of OPEC quotas, doesn't bode well for the Kingdom's finances.Historically Saudi Arabia was formed by a desert prince, who allied himself with religious fundamentalist warriors, the wahhabis, and took over the peninsula. This formed the Kingdom named after that prince.However, there was a price to pay for this alliance and Saud had to enforce a strict religious code, lest the wahhabis turned on him. Saud had to remain pious, lest the Wahabis turned on him. That "pious" religious code means banning music, repressing women, strict observance of the hours of prayer, and lots and lots of public beheadings. King Saud lived to a ripe old age and since his death, the rule of the Kingdom has passed sideways along the family tree of Saud's sons. The present king of Saudi Arabia is a son of the first monarch.Since then Saudi rulers have mostly remained pious - with the exception of a some of the 15,000 Saudi princes and their tabloid-worthy lifestyles once abroad - in appearance at least. While at home, royals have used oil revenue to pacify their restless subjects with lavish spending. The most aggressive subjects are "encouraged" to go see the world rather than upset the status-quo within the Kingdom. It is no coincidence that Osama Bin Laden, a Saudi, had to take his revolution to Afghanistan and today, scores of Saudi youths follow in his footsteps by joining ISIS.But, building Mosques and filling planes with fighters for Allah costs money. Although Saudi oil costs as little as $10 per barrel to pull out of the ground, the government needs a breakeven price of $95 per barrel in order to keep funding trouble abroad while keeping peace at home. Given today's low oil prices, Saudi Arabia is spending $10 billion a month of its savings to keep the country afloat. According to the IMF, it will take 5 years of their current levels of deficit to send the country bankrupt.Slippery SlopeFive years of deficit funding seems manageable. Five years is a long time, anything can happen. However, five years may be a generous estimate. Countries find financing gets harder when they get down towards the bottom of the cookie jar. Without large reserves, international lenders get jumpy and interest rates rise sharply. The country will start to face inflation and the government policy of subsidizing the prices of essential goods will become even more expensive, thus escalating the depletion of reserves. It may only take three years to drive the Kingdom bankrupt if the government doesn't reign in their spending and a costly ongoing war with Yemen doesn't help.If the Saudi Arabian government takes the necessary action to cut their budget and reduce the annual deficit, they may not last five years: cutting military spending against Yemen, heavily armed by Iran, is not an option. Cutting entitlements used to pacify ultra-conservative wahhabis would be suicidal. So transitioning Saudi Arabia into more of a value-added, sustainable economy seems the best option, however this meets cultural opposition.As of 2015, a mere 4 per cent of Saudis work in the private sector. As a whole, the Saudi private sector is 87 per cent staffed by foreigner workers. Since the oil price crashed, the Saudi government has attempted to force the private sector to hire more Saudi nationals to reduce the state cost of unemployment. But as one CEO puts it: it is "a serious battle trying to get those that they hire to actually do anything". Working for a living is simply not culturally accepted in the Islamic state. This cultural attitude explains why astonishingly, Saudi Arabia is a net importer of gasoline: it imports 25 per cent of its gas and 20 per cent of its diesel. In other words Saudis produce oil easily (by inviting in foreign companies with their own highly trained staff) but they don't "add value" by refining it. Refining crude oil may seem like such a low-hanging fruit for us westerners, yet the effort involved puts is out of reach of Saudis.To make things worse, the army of the Kingdom is mired in an unwinnable war in the country's southern neighbor, Yemen. Granted, the Saudi army is one of the best equipped in the world. The government's back-scratching with Western powers resulted in the Saudis buying an enormous amount of weaponry to keep the GDP of their allies buoyant. However this stands in contrast with the effectiveness of its service members. Commanders traditionally hold their positions because they are Saudi Royals, not necessarily because they are competent in military matters. On the ground, as many members of the western military who part-took in joint training with the Saudi armed forces have anecdotally reported, Saudi discipline is mediocre, to put it mildly. And as everyone knows, the plural of anecdote is data. Should ISIS head south and Iran-backed Yemen head north, most Saudi soldiers may simply run for the hills.
My Enemy's EnemyThe Saudi obsession with getting at Syria has drawn the attention of Western media to the Kingdom's private funding of terrorists and lost it friends. By contrast, Iran seems more reasonable and easier to deal with. The standoff between the US and Russia, picking sides in the Syrian conflict is melting away, as the US and its allies abandon Saudi Arabia and realize that shoring up President Assad is preferable to absorbing millions of Muslims in Europe.Moreover, Europe needs a new source of gas to prevent Vladimir Putin throttling the newly liberated countries of Eastern Europe through his gas blackmail policy. However, through all of the planning and lobbying for permission to build one or other pipeline through Syria, there is one obvious outcome that everyone seems to have overlooked. Why not build both and let them compete?The Sunni/Shia religious war presages further blackmail down the line. If only the Sunni pipeline gets built, the Sunni Muslim governments of the Middle East will be able to blackmail Europe to do its bidding by turning off supplies. If only the Shia pipeline gets built, Iran can blackmail Europe, in fact you can bet that Vladimir Putin has already organized a coordinated "pricing" strategy with the Iranians.It is in Europe's interests to have three piped gas suppliers - Russia, Qatar, and Iran. That way, no single force can manipulate Europe's energy needs for political gain. Although Russia and Iran might team up, the prospects of the Sunnis in the south forming a cartel with the other two suppliers are slim. The United States has little direct commercial or political interest in any of the possible outcomes of the pipeline projects, aside for pleasing "allies" Saudi Arabia and Turkey. It is just committed to keeping Europe free, and so a powerful Putin incurs military expense for America.Plan BThe Saudis don't have a Plan B, but Iran does, and it is implementing it now. They are playing their capitulation into a diplomatic triumph and winning friends away from Saudi Arabia. As the West and Russia cease to undermine Syria's efforts to survive, those exported wahhabi insurgents will return home to Saudi Arabia with an axe to grind and a surplus of arms.The Iranian gas pipeline will be built through Syria. With the trouble in Syria over, the Americans will take less interest in the Kurds. Turkey can go back to quietly stamping on the prospects of an independent Kurdistan, and would probably be willing to see the final leg of the gas pipeline pass through their territory, thus removing the need for an underwater segment and reducing its cost while upping their geostrategic significance.With Saudi Arabia in turmoil, its ability to project influence on the world will erode itself. Without its oil output, oil prices will rise again. Without its exported petrodollars, ISIS will melt away. Turkey may grow to become the chief Sunni Muslim nation in the world - a position it held when it was the seat of the Caliphate.The Top 6 Reasons Oil Prices are Heading LowerThe evolution of oil prices is shaped by macroeconomic and geopolitical trends. Today's 6 trends indicate that a decline is in the cards.The Top 6 Reasons Oil Prices are Heading Lower By VACO GROUP HOLDINGS INC for OIL - VACO GROUP HOLDINGS INC , 2015/05/07Investors and speculators can make money in any market no matter which way prices move. In a rising market, you buy and then sell later at a higher price to make profit; in a falling market, you commit to sell and then buy later at a lower price (shorting). The key element on deciding on an investment strategy in crude oil is to work out where prices are heading.Despite the fact that falling prices can be an incentive to speculate, brokers and traders that live and breathe the oil market tend to prefer rising prices. Everyone loves to back a winner and rising numbers make those in the market feel like they have improved their status. Thus, no matter how clearly factors show prices are going lower, you will still read enthusiastic explanations that oil prices will rise soon.Some buyers and their agents may have been caught out by long-term futures contracts that commit them to high prices despite the falling spot price. Thus, they will talk up the market to try to square their books and find a pool of gullible outsiders upon whom they can dump their over-priced stock. However, readers at oil-price.net should know by now that the simple rules of supply and demand mean that the crude oil price will continue to hang around or below the $60 mark for some time to come. Here are the top 6 reasons that savvy speculators should continue to short crude oil.1. Iran ReturnsDespite heavy fines by the US authorities against anyone trading in any way with Iran, that country has still managed to continue oil production over the past few years. Sanctions against Iran have existed in various forms since the eighties when religious fundamentalists overthrew the West-friendly Shah of Iran and committed a series of terrorist attacks against Western nationals. However, sanctions ramped up to the point of shutting Iran out of the oil markets in January 2012, when the US insisted that Iran cancel its program of tests of nuclear weapons.At the beginning of April 2015 Iran signed an agreement to end its nuclear program and let in international inspectors to prove its commitment. Confirmation of Iran's compliance will remove the biting sanctions of 2012 and bring Iranian oil to international markets. Despite being stymied by US and EU sanctions, Iran is still able to produce 2.7 million barrels per day, of which 1 million is exported. The un-exported 1.7 million barrels meet domestic demand, but a large proportion is sent to storage.The world currently has excess crude oil production of roughly 2 million barrels per day, so a cash-strapped, and slightly embittered Iran could have immediate impact on crude oil prices by putting its estimate 35 million barrels of stored oil on the market the day sanctions are lifted.The impact of Iran's return to the market greatly depends on how quickly they can ramp up production. Bijan Namdar Zangeneh, Iran's oil minister, claims that the country could easily increase production by 1 million bpd within months of the lifting of sanctions. That worrying figure would increase the world's excess production by 50 per cent, which some analysts claim would push crude oil prices down to $20 per barrel. However, other analysts are skeptical.Iran's production levels were at 4 million barrels per day in 2011 before the latest round of sanctions hit. Iran's isolation and denial of technology and investment capital means its oil industry has become badly under-invested. Their ability to get back up to former production levels could also be blocked by OPEC, of which Iran is a member. Nevertheless, Iran's return will prevent the world's excess supply from being reduced and so prices will fall.2. Fracking is Not Going AwayMany believe that the 2014 fall in oil prices was specifically engineered by Saudi Arabia to knock out US oil production through fracking. Industry analysts estimated that heavy start up costs and financing requirements placed the break-even point of a fracking rig at around a $70 per barrel price of crude oil. Many saw the slump in the price of crude down to $60 and then to the $50 mark as a significant factor.Sure enough, the rig count in the USA plummeted from 1,608 in October 2014 to 747 in April 2015. Seemingly, the lower oil price had squeezed out US oil production in the higher-cost fracking sector. However, the advancement of technology and the agility of fracking producers resulted in higher output from fewer rigs. In October 2014, the USA produced just under 9 million barrels per day. In April 2015, that output had increased to just under 9.5 million barrels per day.Chinese oil production through fracking has risen to the same extent as USA production, with companies in both countries adopting and improving the same technology. In a world with an excess production of 2 million barrels per day, America's increased production means that oil prices are not about to rise. China's increases compound that situation.3. OPEC is IdlePrevious oil price falls have been keenly countered by OPEC, the cartel of oil producing nations, centered mainly on Middle Eastern producers. Whenever oil prices fall, OPEC cuts quotas to its members, limiting their production and causing the price to rise through reduced output.Saudi Arabia is by far the biggest producer in the OPEC club and the opinion of its oil minister, pretty much rules the actions of OPEC. If OPEC members decide to cut their production, but Saudi Arabia refuses to play ball, the resolution to cut would have no impact on oil prices, and thus be a worthless exercise.Fracking started to provide the USA with a means of achieving energy independence. The country has already become a net exporter of gas, and similar performance in oil production would remove the USA's dependence on the Middle East for its oil supplies. Saudi Arabia's dominance of American oil supply enables them to entice the USA to deploy its military in the Persian Gulf at the direction of Saudi foreign policy. The Saudis want to return to the days of US dependence on Arabian oil and so refuse to cut their production in the face of falling prices.Despite the apparent failure of the Saudi production tactic, OPEC shows no signs of changing its policy. The Saudis seem to be determined to continue forcing the price of crude down to squeeze out US production, but as fracking gets cheaper, output will continue to expand and the price of crude oil will continue to fall.4. Russia Produces MorePolitical analyst point out that oil prices fell dramatically around the time that Russia invaded the Ukraine and the EU dithered over imposing the sanctions that the USA demanded. Although Europe did eventually go along with the policy of punishing Russia through trade restrictions, their reluctance to really hit hard has undermined US strategy.Eyeing the success of an embargo on oil sales in bringing Iran to the negotiating table, the US administration, the theory goes, decided to depress the price of oil in order to bankrupt Russia and force it to cancel plans to take over the Ukraine. The Russian economy is overwhelmingly dependent on oil and gas exports, because it has little successful industry and is unable to match the West in the development of technology.Saudi Arabia also has a cause to complain about Vladimir Putin's behavior. The Saudis loathe Bashar Assad, the President of Syria and want to see him overthrown. American and European governments seemed willing to play along with this policy until the Russians threw their support behind Assad and European determination folded. Without any significant allies to share the burden, the USA cancelled their planned invasion of Syria. The infuriated Saudis decided to take matters into their own hands and collapsed the price of oil with the intention of punishing Russia, not US frackers.Vladimir Putin and his administration have complained loudly and frequently that the oil price fall was deliberately aimed at attacking the Russian economy. However, the steadfast determination of unrealistic quotas haunts the Russian mentality as an overhang of the Communist era. Putin needs money to continue his glorious and domestically popular policy of reassembling the Russian Empire. The Russians refuse to bend to market forces and so have made up the shortfall in their budget caused by falling oil prices by pumping out more oil. The Russian need for income means they are unlikely to make a tactical cut in oil output. Increased production adds to the downward pressure on crude oil prices.5. ISIL's Days are NumberedThe Islamic State of Iraq and the Levant are said to be causing havoc with oil production in the Middle East. ISIL, originally called "the Islamic State of Iraq and Syria," first came to the world's attention when they threatened takeover of northern Iraq and Syria in the autumn of 2014 – just after the USA declared they would not intervene in Syria to overthrow its president.Oil analysts talk up the oil price by warnings over ISIL's actions. However, the revolutionaries only managed to grab a small portion of Iraq's oil wells and actually increased production of their new assets in order to fund their cause. The ISIL bogeyman delayed the fall in oil prices by about a month and the havoc they have wrought across the Middle East has since failed to block that overproduction of 2 million bpd.ISIL's greatest success in wrecking an oil producing country came in Libya, where they apply different tactics to the oil industry. Rather than profiting from Libya's oil wells, ISIL has been destroying them, thus knocking out a major oil producing nation. Simultaneous increases in production in the USA, China and Russia, however, mean that the loss of Libyan output has had no impact on the glut of crude oil in the world. The panic pricing in the oil markets that the group's initial appearance caused has withered away.Europe's willingness to turn a blind eye to ISIL's activities in Libya came to an abrupt end in mid-April. Deciding to knock out oil production, rather than profit from it, ISIL turned to Libya's other money maker – people smuggling. The short distance between the Libyan coastline and the Italian island of Lampedusa makes the former slave trading ports of Libya ideal routes for illegal immigrants to sneak into the EU. Unfortunately, the greed and carelessness of the smugglers has resulted in overloaded ships sinking in the middle of the Mediterranean.The death toll through drowning of ISIL's passengers has reached headline-grabbing levels and Europe's major military powers have resolved to put an end to the organization's activities. Although the smuggling gangs are the proposed targets of European airstrikes, the difficulty of identifying those activists means that Europe will have to restore a legitimate government to Libya in order to stop human trafficking.It is significant that the proposed European strategy is to join Egyptian military efforts. The Egyptians have been routinely bombing ISIL in Libya since February. ISIL is easier to attack than other terrorist groups. With a standing army, rather than a terrorist cell structure, such as that of Al Qaeda, ISIL is more visible, and so can be engaged by a traditional military response. Its system of local governors and administrators require offices and infrastructure that are fixed and easy to bomb. The imminent defeat of ISIL in Libya means the oil industry there will be able to rebuild, the world's oil production excess will increase and crude oil prices will fall further.6. No DemandThe excess supply in the oil market could easily be mopped up by increased demand. However, there is no great leap in growth expected in the world for the next couple of years. Energy efficiency and investment in renewable energy, such as solar, has permanently reduced demand for oil in most of the developed world.Both the Federal Reserve and the People's Bank of China have announced they are ending their loose monetary policies. This free money pumped around the world inflated the prices of property, stocks, bonds and commodities. Part of the reason the oil price rose through 2013 and early 2014 was simply that the excessive amount of dollars in circulation had to be invested in something. Now that money has to be paid back, the asset price inflation of the past two years will be reversed.The BRIC economies have failed to continue their stratospheric growth into 2015. In fact, some developing nations, like Brazil, are now in recession, with tumbling currencies cutting their populations' spending power. World trade is falling and demand for oil will fall with it. With few prospects of increased demand for oil, the chance of its price rising is zero.
ConclusionThe major oil producers have done nothing to cut production since October 2014, and they are unlikely to consider cutting output any time soon. The USA, Russia and Saudi Arabia each have different reasons to continue high output, but all three are just stockpiling oil because they cannot find enough immediate buyers. Add on the inevitable return of Iran and Libya and the prospects of the 2 million bpd excess production in the world reducing can be seen to be impossible.Monetary tightening will reduce world growth and remove asset price inflation. Lower growth, coupled with lower need for oil through efficiency and environmentalism, means demand for oil is not going to exceed supply for a long time to come. The oil price is not going to rise any time soon.How Markets Influence Oil Prices By VACO GROUP HOLDINGS INC 2015/03/31You would have read here, at VACO GROUP HOLDINGS INC, that oil producers and refineries use the Brent Crude Index and the West Texas Intermediate Index (WTI) to settle contract prices for oil delivery. The real-world contract price for oil can vary widely, despite whatever the current price of WTI and Brent Crude is at the time of contract negotiation.The basic mechanism for settling a price in any market is the principle of supply and demand. If people want more of a commodity than suppliers have available, then the price goes up; if there is more of a commodity available than people want to buy, then the price goes down. Delivery times, delivery costs, storage availability, the weather, the economy, market "sentiment," and the availability of money and credit can all influence the price of oil.The Futures MarketThe Brent Crude and WTI indices both display the average price for oil reported by the big buyers and sellers of crude oil. This is the "spot" price, which means the cash price for a barrel of oil where the transfer of ownership occurs now. The futures market deals with a forward price. When a buyer strikes a futures contract for crude oil with a producer, the contract contains an agreement that the sale will occur at a specified point in the future and at a specified price. The buyer does not pay then and there – that would be the spot price reported by Brent or the WTI. Instead, the contract is meant to be paid in 3 months time, or 6 months time, or one year ahead, for example.So a buyer and a seller may sign a contract for the immediate transfer of ownership and an immediate payment, but with delayed delivery – that would be dealt with on a commodities exchange. If the contract specifies delayed transfer of ownership and a synchronized payment at a future date, that contract would be dealt with on the futures market. Given that the only difference between the spot price and the forward price is the date of transfer of ownership and payment, then you would expect that the two prices should be fairly well coordinated. They usually are, but at the moment, the two markets are out of synch. This situation presents opportunities for speculators and can artificially raise immediate demand for any commodity or service, which will increase the price.
Contango and BackwardationYou would expect that the forward price of oil should be a prediction of what the spot price will be on a certain date in the future. You should be able to look at the 3 months forward price today and expect that experts are saying "this is what the spot price of crude oil will be if you check again in three month's time." However, this is not always the case. Sometimes, the forward price of a futures contract can be higher than the expected future spot price as well as the current spot price. This situation is called "contango."The opposite of contango is called "backwardation." This is where the forward price is lower than the expected spot price. Both contango and backwardation send signals to technical analysts and generate instructions to buy or sell contracts that have nothing to do with real-world demand or supply. In normal conditions, most futures contracts are in backwardation, because the buyer would otherwise have no incentive to commit to a future purchase.In effect, the futures contract offers the buyer a discount on the expected spot price and the contract's existence provides the supplier a guaranteed sale, which is worth the loss of a small part of future income. A contract will go into contango if the commodity to be provided is expected to become difficult to source around the date of the contract's maturity. Thus, the buyer is prepared to pay a little more in order to secure future supplies. The predicted spot price is calculated on analysts' expectations of the scarcity or abundance of a commodity on the contract's date of maturity. Therefore, contango is a rare occurrence and happens when a market suddenly turns due to an unforeseen event, creating shortages that experts didn't expect at the time the contract was negotiated. Those shortages could be caused by a Civil War, disrupting production, a shortage of tankers to transport the oil, or an unforeseen rise in the cost of storage, due to overproduction.ExampleContango occurs where a producer creates an agreement with a buyer so that the sale will happen in three months time at a price of $45 per barrel. The current (spot) price is at $50 per barrel, but both the buyer and the seller were advised that the price of oil will fall in the next three months. After completing the contract, the buyer then receives a call from a broker, who offers to buy the contract for an equivalent price of $55 per barrel, so the futures contract is now worth more than the price per barrel written into the contract.If a broker calls the buyer and says "hey, buddy, I'll take that contract off your hands, but I'm only going to $42 per barrel, and you pay me the shortfall now," then the contract is in backwardation. As the delivery date of a contract draws closer, the value of the contract will draw closer to the expected spot price on the date of maturity. Thus, the broker that bought the contract in contango will lose money. Contango and backwardation generally occur when producers and suppliers suddenly find themselves in desperate need of immediate cash and are prepared to take a loss on their obligations in exchange for immediate payment.You may hear that oil market is currently in contango. However, when oil market analysts use that term, they use a slightly different definition to that used for contracts.Market ContangoPeople are only likely to take a loss on their futures contracts if they are desperate, have been duped, or have made the wrong guess on the future price. Markets, as a whole, don't generally all make the wrong decision at the same time – in order to buy at a discount, someone else has to be selling at a loss. When market reporters write that the oil price is in contango at the moment they use the simpler contango definition of when the forward price is higher than the spot price. On contracts, the price the contract sells for has to be higher than the expected spot price in order to be defined as being in contango.
Profiting from ContangoOil price speculators make money from contango simply by buying crude oil for delivery now and then writing out a futures contract to a buyer. This is the classic way merchants of non-perishable goods make money – buy when the market is low, wait for demand to increase and then sell at a higher price.You may realize that, as a small investor, you are not in a very good position to keep thousands of dollars of oil. The contango speculators rarely hold onto the oil they buy themselves. Instead, they contract out the transport and storage to specialist companies. However, as with any market speculation, even the big players can get caught out.ComplicationsPeople and companies that make money from contango are simply exploiting the differences between the prices on two markets – the crude oil market and the futures market. However, in order to make sure to profit from the transaction, those speculators need to research the conditions in the many other markets that impact on the price of oil.The price of storage facilities and specialist oil transport rises and falls with supply and demand. A speculator has to be careful that these two intermediate costs do not wipe out the entire margin he expects to make by holding oil. The cost of insuring the oil both while in storage and in transit should also be considered. Traders also tend to hedge most of their risk and that costs a percentage as well.The contango play is a form of financing because it enables one person to avoid storage costs while another takes on that risk and expense for a profit. The speculator would only go into a crude oil arbitrage transaction if he could make more money than he could on some other form of speculation. This is an opportunity cost. What other profits is the trader losing out on by tying up his money in oil storage for a period of time?
Wider Price ImplicationsTraders in oil can profit from contango speculation without even getting involved in the arbitrage transaction themselves. In 2005 and 2006, contango in the crude oil market caused speculators to buy up oil tankers and use them as storage facilities. A large proportion of the supply in the market was mopped up by people buying simply to hold. The use of tankers to hold the oil meant the traders took care of their storage and transport needs with one facility. Analysts estimate that the 2005 contago fad added between $10 and $20 to the price of oil.AnalysisThe 2005 contango buy-up was the result of attempts to profit from panic in the market. Analysts expected an impending shortage looking forward from a market where supply and demand were in equilibrium. The sudden rush by speculators to buy up physical crude oil made the prediction of shortages a self-fulfilling prophecy, and in fact heightened shortages, thus increase the price of crude oil.Today's oil market is oversupplied and is predicted to continue in oversupply for some time to come, so market contango does not make sense as a difference between what oil costs now and what it will cost in the future. Tip sheets and financial reporters have noticed the current contango - or shall we say super-contango - and are now reminding their readers of what happened in 2005. However, contango is unlikely to cause a rise in the price of crude oil this time around.The 2005 panic was caused by a prediction of imminent oil shortages. Those conditions do not apply today. Oil refiners are adjusting their output at the moment because they are coming out of winter and adjusting to summer. Demand is lower in summer than in winter, so demand for oil is actually about to drop. The current oversupply will get worse.Brokers like a rising market and may be attempting to recreate the conditions of 2005 by encouraging speculators to soak up the excess oil on the market and store it for a while. Once the upward momentum in the market begins, everyone will profit by selling off their stored oil. However, as the future market will still be over supplied, speculators will still have to keep buying and storing vast quantities of oil in order to create a shortage.
Real Contango ProfitsUnfortunately, for any syndicate of multi-billionaires out there, there just isn't enough storage available to divert enough oil from the market to get the indexes rising again. The US oil industry's main storage facility at Cushing, Oklahoma is almost at full capacity, thanks to US refineries stopping production for maintenance in February.The difference between the spot price and the forward price of crude oil is time. Buying and holding oil passes time and bridges between the spot and forward price. However, the futures market does not point to the real source of profits to be made from contango. The forward price is the spot price plus the cost of storage. Storage is becoming in short supply, and therefore, is getting more expensive. In order to extract the profits from contango you need to buy oil storage facilities.Current Oil Prices Create Opportunities By VACO GROUP HOLDINGS INC , 2015/02/19The oil industry relies on a steady stream of exploration and innovation in order to locate and exploit ever more remote and inaccessible reserves of oil. Periodically, new technology opens up new oil fields and those methods are exploited to the point of creating a glut in the market. New producers need to price themselves into the market and this factor causes a fall in the price of oil. The rapid expansion of shale oil production in the United States in recent years is an example of this phenomenon. Shale oil production incurs higher costs than traditional oil extraction in well-established sites, such as West Texas and the Arabian Peninsula.The recent fall in the price of oil to below $50 per barrel threatens to shut off the more expensive oil production facilities. That means shale oil, which in the US typically has a $70 per barrel breakeven point. Therefore, the newcomers to the oil market have created market forces that threaten their own survival. The USA does not produce enough oil for its own needs and the rest of the world has grown rich supplying that shortfall. Existing suppliers are not prepared to cut their production in order to enable American domestic producers to meet all of the USA's energy needs. Therefore if the United States is ever going to achieve energy independence, American oil producers need to cut their costs to the level at which they can profit at lower prices. Their one hope is to exploit the very factor that made non-conventional oil extraction possible in the first place – technological innovation.Established ProductionWhen an oil company starts to develop an oil field, it does so on the basis of market forecasts and cost projections. Investors and lenders make their own predictions about global oil requirements before investing money in these enterprises. The startup costs for new wells, especially in the field of shale oil extraction, are so great that the bulk of the costs of production occur before extraction even begins. An unexpected fall in the price of oil does not specifically shut down existing production; rather it prevents, or postpones the development of new reserves.Oil companies and their backers are faced with a dilemma because oil wells are not so easy to mothball. Production requires specialist workers and supplies. If an oil field becomes unprofitable, a closed well would leave behind unpaid bills and bankrupted business owners. The contractual obligations of the extracting company mean that calls for compensation could drive the business into bankruptcy. Thus, established oil wells continue in production, but exploration and development (E&P) of new wells is postponed. As a result of the failure to replace exhausted well, the North Dakota rig count has plummeted to 135, the lowest level since 2010.Furthermore, the establishment of a support network in areas of the country not traditionally known for oil production means that there are many times more businesses investors and workers with a stake in the continuation of oil production than those directly involved with extraction. During the boom years new towns were created and small settlements were expanded at breathtaking speed. Those newly established communities of restaurateurs, teachers and municipal workers are not just going to pack up and go back to where they came from. A sudden stop to production would produce bankruptcies far beyond the oil sector. Fortunately, the suppliers of extraction equipment have also had to compete to win business. Although oil producers might not have bothered to investigate innovative techniques and machinery during boom times, they are more likely to pay attention to cost cutting innovations now.TransitionComputers, smart phones and flat screen TVs are three examples of how expansion of production, economies of scale and the advancement of innovation bring prices crashing down. The innovators that first created the possibility of fracking have not been idle over the past decade. The technology surrounding non-conventional oil extraction has continued to be refined and the costs of drilling and processing equipment have fallen steadily. The oil price crash may not create a new market for innovation, but will rapidly accelerate the advancement of technology that was already underway.The shale oil industry experienced a Gold Rush mentality during the dash to expand, which ground to a halt in October 2014. Whereas the boom years belonged to the risk takers and the high payers, the low cost era will be dominated by accountants and engineers. Executives need to justify their high pay and protect their profit-linked bonuses, and their usual method for preserving their income is to lay off manual laborers. This phase of cost cutting has already begun: Schlumberger, the world's largest oilfield services company decided to slash their workforce by 9,000; Weatherford International, another major oilfield services operation cut their 60,000 staff by 14,000 in 2014 and has announced a further round of redundancies lopping 5,000 more from the payroll in 2015. Globally an estimated 100,000 oil workers were laid off. However, Schlumberger and Weatherford International do not intend to wind up their businesses. Like many they will turn to technology to replace their lost workforce with automation.TechnologyCost-saving technologies include more efficient exploration methods, onsite automation systems and intelligent production monitoring software. Big players in the oil services industry have been keeping ahead of the pack with big R&D budgets. Likewise some promising smaller companies which invested in R&D during boom times are seizing opportunities in reducing oil extraction and production costs. One NASDAQ-listed company, Recon Technology, Ltd. (RCON) especially shines in this regard. Recon has developed a patented fracking method called "Frac BHD" which slashes the costs of extracting oil from shale through horizontal drilling, as well as an assortment of highly automated systems which increase production and distribution efficiency. As such, Recon Technology earned the distinction of being the first non-nationalized Chinese oil company listed on a US stock exchange.Recon Technology is an independent company, but it benefited from associations with state-owned Chinese oil companies including giants Sinopec and China National Petroleum Corporation. These government-owned oil producers follow firm 5-year plan commitments. The Chinese government is determined to develop fracking and catch up with westerners at a lower price point. This goal enabled Recon to pursue R&D efforts to make their own fracking system cheaper, while expanding operations into the oil frontiers of Turkmenistan and Kazakhstan.Recon has built up its business by proving that shale oil extraction in China is commercially viable. They endeavored to create profitable extraction in a location that was previously thought to be unviable. The company's initial methods incorporated the Frac-Point completion system produced by the American oil services company, Baker Hughes. Sinopec now has 1,100 shale oil wells, where previously China had none.Recon examined the specific challenges of fracking in China to develop their Frac BHD system, which the company predicts will be even more economical once it hits the market in March 2015. Frac BHD is a multi-stage stimulation system, as is Frac-Point. The equipment is used in open-hole horizontal well fracturing and Recon claims that Frac BHD maximizes reservoir productivity and saves well completion time. The new Chinese system incorporates safety features to reduce the incidences of setting accidents, thus speeding average well completion time and slashing costs further.Schlumberger has a system called "HIWAY", which includes mixing fibers into the grit that blasts out shale oil and gas. The addition of fibers keeps newly blasted channels open and reduces the need for redrilling. Halliburton's "RapidFrac" system cuts water needs for fracking in half and is a much faster process to implement than the methods that are currently widely used in the industry. Lower water needs reduce the amount of supply trucks going to a fracking site and less water forced into the ground reduces hazards and targets resources more accurately, thus reducing both costs and environmental impact.Baker Hughes has evolved an existing technology of sending plastic balls down an extraction pipe, which is a variation on Schlumberger's concept of including fibers in the grit to keep cracks open. The Baker Hughes balls dissolve, eliminating the problem of getting the balls out of the well.Haliburton's UniStim employs water pumped out of the ground locally rather than freshwater that needs to be trucked or piped in to the work site. A Canadian company, GasFrac, has eliminated the use of water in fracking entirely. It employs a propane-based gel. The Colorado School of Mines is developing a method termed "cryogenic fracturing." This involves causing fissures through contact with liquid nitrogen. Frackers are also reducing costs by using gas or solar power instead of diesel for drilling rigs and pumps.
The FutureThe example of Recon Technologies is striking, because they introduced technology from Baker Hughes into China to Sinopec, and later came up with a comprehensive system including fracking as well as an assortment of intelligent software solutions which monitor and control pumps and pipelines, thus reducing human error, waste and expenses. Strinking as well is the fact that the US upstream sector is no stranger to sourcing foreign components: for years US land drilling rigs have incorporated key Chinese components such as triplex mud pumps at a substantial saving. Today the US oil industry is realizing that beyond cheaper hardware the next saving opportunity lies in advances including more automation: intelligent control systems requiring less physical workforce, less downtime and improving yields of existing wells. Exploiting cost-cutting technology will make US shale oil production profitable again, but the industry needs to evolve quickly to survive the Saudi onslaught on oil prices. In fact, the price pressure on US producers could get even worse and so the vital importance of developing cost-cutting technologies becomes more imperative. A trend of cheaper unconventional extraction is already underway and the shale oil fight back has begun.
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