Where is the price of crude going? You take my answer to the bank
January 29, 2015
January 29, 2015
It’s not what you say, it’s when you don’t say it – A bit long for a bumper sticker but snappier than “conspicuous in absencia,” a phrase I just made up because it sounds thoughtful.
Both phrases apply to a situation where an important or controversial subject is made more so by ignoring it. The best and most recent example of this is in the recent State of the Union address by President Obama. Conspicuous by its absence was any referral to the Keystone (now re-named Millstone) XL pipeline.
Does this bother me? Not really. Procrastination is something the president worries about tomorrow and every day has another tomorrow. The longer this sitcom goes on, the less I see an immediate need for the pipeline to our NAFTA partners south of the border.
Much to the dismay of the oil sands deniers, this crude will, and is, making its way to market using existing approved pipelines and increasing precarious and carbon choking crude by rail as a delivery mode alternative.
The Seaway Line from Cushing to the Gulf was twinned and opened in December 2014, increasing the delivery volume from 400,000 to 850,000 bpd. The southern leg of the XL, also from Cushing to the Gulf was up and running this month with a capacity of 700,000 bpd of new volume. The Flanagan south line running from Illinois to Cushing also recently began to flow at 600,000 bpd with a design capacity of 880,000 bpd.
So tweaking existing pipelines has increased delivery capabilities by 2,030,000 bpd. Moving to the rail alternative, this volume has been projected to increase from the 200,000 bpd in 2013 to 700,000 bpd by 2016. These are all new capacities to be added to the existing flow through.
Canadian exports of crude to the U.S. are at record levels – 3,260,000 bpd; so the delivery systems are not choking with over supply at this time. The choke point will come in the fourth quarter of 2016 when Oil Sands production will increase by 912,000 bpd.
Despite the efforts of OPEC – or should I say the Saudis – existing oil sands facilities unlike shale oil operations, will not cut back on production as operating costs are in the $30 to $33/barrel range, comfortably below todays WTI $47/bbl price level. In addition, 80% of oil sands costs are fixed and projected out 30 years. Shale oil operations on the other hand, and the real Saudi target in this game of chicken, have high initial costs and a well life of four years maximum.
Shale oil operations do have an advantage over conventional and oil sands production methods. In the event that crude prices suddenly recover they are able to get back in the game very quickly – in a matter of two to five months – something I am quite sure the Saudis are aware of.
So where is the price of crude going? Here’s my go to the bank answer: “Somewhere.”
But wait. I’m no expert because I’m not a banker like those at Goldman Sachs who in October last year called for crude to average $75/bbl in the first quarter of 2015.
Umm. Today we are at $47.50/bbl. Hey! That’s almost $30/bbl below the Goldie number. What’s a bank supposed to do? Change the forecast that’s what. And that’s what they did on January 12, 2015 when their new crystal ball told them that WTI instead of $75/bbl would end up at $47.15/bbl.
It’s magic! That’s pretty well where the price is today!
It’s not what you say it’s when you shouldn’t say it.
~ The Grouch
Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada. All posts by Roger McKnight