naked capitalism

Bob_in_MA says:

My understanding is that the costs associated with LNG are so huge that the price differential needs to be likewise huge. Remember when gas spiked here, maybe two years ago? I think it hit $12. And even then, people in the business downplayed the prospects for LNG to play a significant role.

Now it’s at $5 and I’ve read there are a lot of new wells coming online over the next year, some people are predicting a further significant price drop.

I don’t think anyone will be shipping large amounts of LNG here anytime soon.

Anonymous says:

Point 1: The fixed cost for LNG is very high, the marginal cost is low. Once LNG trains are set up they are shipped. Most are locked into long term agreements, but some have out clauses that let shipments move on the spot market. The rest of the world doesn’t have much storage for natural gas so LNG might move here very quickly because all of the storage in the world is filled.

Point 2. Drillers are getting hurt, but they are still drilling wells at a rate that is unlikely to bring down production anytime soon. They are cutting their least productive wells and there is a time lag before the cuts are even experiences.

Tudor Pickering did a nice report on drilling and how far it has to drop before the market sees a drop in production.

http://www.tudorpickering.com/pdfs/Pickering%20-%20The%20Yin%20and%20Yang%20of%20Production%20Growth%20Report%20March%202007.pdf

VangelV says:

The conference calls that I have heard are suggesting that drilling activity is falling off a cliff. Alberta’s activity took a hit last year and has yet to recover while the deep water and shale plays require much higher natural gas to justify any activity. Given the rapid declines I doubt that supply will be able to stay flat over the next few months. That leaves us vulnerable to rising prices if we get a colder than average winter or if electrical generation does not decline as much as expected.

Anonymous says:

As this theory goes, oil as a manipulated and speculative commodity is being used as a tool, like a weapon of mass destruction, to re-shape global industries, e.g, as global oil crashes in value, the correlated destruction and crash of the global auto industry begins to look like two parties at war, both of whom are positioning themselves with strategies that are at odds with each others futures.

Hence, the future interests of OPEC oil production are not aligned with Detroit and the future of Detroit auto production depends on financing that will not be linked to the current OPEC infrastructure. This economic battle for future value in the form of a stable valuation will play out with production cuts by OPEC, designed to restrict supply capacities so that oil prices will increase. Adversely, the increased oil prices and manipulated shortages will fuel the nationalized desires of many countries to reduce demand and plan ahead for greater fuel efficiency measures. Furthermore, oil production countries and OPEC-related members will be less likely to invest in or support dollar-based carry trade. Therefore, increased volatility and instability in currency markets will add pressure to future valuations related to Treasury yields that are often dependent on foreign purchases.

Nationalization, isolationism and independence will be a side-effect of this global valuation war which will force a re-balancing of global interactions in a world where oil is less and less important.

VangelV says:

Over the short term, oil prices can be manipulated in both directions but in the long run the fundamentals will ensure that the subjective opinion in the marketplace reflects the reality. At this particular point of time the precipitation is that American demand has fallen by so much that there is a major surplus of petroleum. The problem is that demand did not fall by very much on a global basis and that supply is not capable of staying flat or increasing.

In the long run, our enemy is depletion and that will offset any short term demand destruction. The IEA has concluded that existing oil fields are depleting at a rate of 9%. (The decline is greater for natural gas fields.) That means that unless we get new investment in rigs and new projects we will have a very difficult time on the tail end of the production curve. Unless that changes we will have much higher prices in the future regardless of what the pundits are saying. And if anyone is projecting higher levels of production I suggest that they look to what the companies are doing to their exploration and development budgets and to what is happening to the shares of the major drillers.