Oil’s On The Rise, Here’s Why…

In the past few weeks, pricing has strengthened. The U.S. benchmark West Texas Intermediate (WTI) is in the $90+ range per barrel. The international oil standard, Brent crude, is hovering over the $100 range per barrel. What’s going on?

There are two things. One is Iranian saber rattling in the Persian Gulf region. Anti-Iran economic sanctions officially kicked in earlier this month, on July 1. So the Iranian generals and admirals are talking tough, shooting rockets into the stratosphere and such. It’s all for show. Real fighting — against the U.S. Navy and Air Force — is bad for business.

In a sop to sordid reality, the overall Iran sanctions policy has more holes than a brick of Swiss cheese. Iran is still exporting oil, although perhaps not as much as the country’s leaders would like. So when the rockets fly, it merely helps goose up the price for oil.

Along those lines, there’s a game of “musical tankers” out on the high seas. Iran owns a significant tanker fleet — over 20 large vessels. In recent weeks, the ships acquired new paint jobs and registrations. This is to remain “legal” to haul oil. On occasion, the Iranian ships turn off their satellite-transponders, so nobody knows where they are (well, almost nobody). Then the ships pop up hundreds of miles away, hauling oil.

Will refiners buy “illegal” Iranian oil? Well, they’re not supposed to. And I’m sure that you’re shocked — shocked! — to know that such things occur.

Every oil field has its own unique chemistry, so some very simple, fast tests will reveal whether or not a refiner is buying Iranian oil under doctored bills of lading. But in the world of big oil and big money? Hey, not everybody plays by American and Western rules — including numerous “close allies” of the U.S.

Another recent example of what can happen in the oil patch was the shutdown of oil production offshore Norway — of as much as 2 million barrels per day (which is 2.5% of the globe’s daily crude oil flow, and about the consumption of, say, France).

The Norway issue has to do with a labor dispute between Statoil and its offshore workers union. The workers get paid about $160,000 per year for about 15 weeks annually of actual work on the rigs. Plus, they can retire at age 62. It’s nice work, if you can get it.

Statoil wants to raise the retirement age to 65, and the workers threatened a strike. Statoil pre-empted the strike with a lockout. Thus, the company began the process of shutting in wells and oil fields.

By now, if you’ve been watching the news, you will have seen that Statoil is now back in production. After a short window of missed production, the strike was effectively brought to an end by the Norwegian government.

What’s more important to world oil prices? Belligerent Iranians? Or angry Norwegians? Well, ironically, the Norwegians are more effective at shutting in their own oil than the West is at keeping Iranian oil off the market. Go figure.

But the ultimate effect is the same. When disruptions affect the world’s already-tight supply of oil, there’s only one place for prices to go…higher.

Peak Cheap Oil

Despite a spreading sense that there’s plenty of oil out there in the world — now and for long into the future — I submit that we’re still on the backside of the old-fashioned M. King Hubbert-style Peak Oil curve.

That is, mankind has pretty much found and drilled up all the cheap stuff, so we’re certainly into — at least — the “Peak Cheap Oil” era. Looking ahead, the world’s big, new supplies of oil will come from expensive plays and/or politically difficult jurisdictions.

For expensive plays, look no further than the U.S., where the average directional-drilled fracked well in, say, the Bakken or Eagle Ford play is in the $10 million range, with a fairly steep decline curve.

That is, it takes more and more money, more and more steel and equipment, more and more labor… to get the same amount of oil as in the olden days. And then the wells deplete on you much faster than in the past. It’s like a squirrel cage, in which we’re running faster and faster, just to — at best — stay in the same place.

When it comes to dicey jurisdictions, think of Iran and the Middle East, and add in all of the other places where making large investments in big oil is very problematic. Venezuela? Argentina? Libya? Nigeria? Elsewhere in west Africa? The South China Sea?

Oh, and consider that China — for all the headlines about its economic problems — is busy buying up all the oil rights its firms can lay hands on.

Meanwhile, many of the traditional oil exporters have less and less oil available for international sale, due to their own rising internal consumption. The trends are not our friends on this point.

Peering into the future, I see nothing “easy” about the energy industry in general, or the oil biz in particular. We’ve got hard, tricky, fickle investing in front of us.

That’s all for now. Best wishes…

Byron W. King

Oil’s On The Rise, Here’s Why… was originally featured in The Daily Resource Hunter. Check out the newest Daily Resource Hunter research video “The Price of Gas Explained”.

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