How the US is keeping oil markets calm

America's shale oil boom and increased production in Canada have offset supply disruptions in several turbulent oil-producing nations.

By MSN Money producer May 9, 2014 2:24PM

An American flag hangs at a BP oil refinery in Wilmington, Calif. (© Jim West/Alamy)By Matthew Philips, Bloomberg Businessweek


Bloomberg Businessweek

The oil markets have plenty of reasons to be spooked.


In Libya, home to Africa's largest reserves, production has fallen more than 80 percent since militias seized control of the country's biggest ports last summer. Most of Iran's oil remains trapped as well. Sanctions aimed at punishing Iran for its nuclear weapons program have crippled its crude exports by 1.5 million barrels a day.


Nigeria is in the midst of its worst oil crisis in years: Rising violence, plus rampant sabotage and theft, have knocked out about 300,000 barrels of oil output a day. In Venezuela, which has the world's largest oil reserves, production has remained unchanged after years of underinvestment.

 

Political chaos and violence are keeping 3.5 million barrels of daily oil production off the market, according to estimates by Citigroup (C). With tensions heating up over Ukraine, pressure is building for Western countries to impose Iran-style sanctions on Russia, the world's largest oil producer. That would likely send prices soaring and push Europe, which gets 30 percent of its oil from Russia, into recession.

 

Yet through all the turmoil, oil markets have been strangely complacent. The price of Brent crude oil, the most traded oil contract in the world, fell from $110 a barrel on April 24 to $107 on May 6. The past three years have been one of the most stable periods for oil prices in recent memory, says Eric Lee, an oil analyst with Citigroup. Last year marked the smallest range of daily price movements in more than 10 years, according to the U.S. Department of Energy.

 

The oil markets remain placid because almost all the oil production lost over the past few years has been replaced by the U.S. shale boom and increased Canadian production. U.S. shale oil production started to rise quickly in early 2011, right as the Arab Spring was kicking off. Since then, daily oil output in the U.S. has climbed by about 3 million barrels, to more than 8 million barrels. Canada has added more than 1 million barrels to its daily oil output since May 2011.


"North America's shale boom has been a huge calming factor," says Lysle Brinker, an oil analyst at IHS Energy. "Without it, we might be seeing $150 oil right now."

 

It's hard to overstate the impact that rising U.S. oil output has had on global energy trade. Imports now make up only 28 percent of all the petroleum the U.S. consumes, down from 60 percent in 2005. In 2010 the U.S. was importing about 1 million barrels a day from Nigeria; now it's 38,000. Much of the oil the U.S. used to import now goes to Asia. That's helped keep markets well-supplied and prices immune from turmoil.

 

This calm may not last. Over the next five years, the world could experience an oil glut followed by a shortage. According to the International Energy Agency, which tracks oil markets, oil output by non-OPEC producers will rise by 1.7 million barrels per day in 2014, while total global demand will grow by only 1.4 million barrels. That has a lot of analysts predicting a crash in prices.

 

Underpinning this view is a rapid slowdown in China's economic growth. For years, Saudi Arabia, as OPEC's largest supplier, has had the most influence on oil prices, but some analysts believe demand from China now determines the price of oil. If that's true, prices could drop sharply. Demand for oil in China has fallen for the past two quarters, including a 3 percent drop in the first quarter of this year, according to research firm Sanford C. Bernstein. That marks the first back-to-back decline since the financial crisis of 2008-09.

 

U.S. crude stockpiles are near a record high, causing traders to cut their bullish bets on the futures market. Also, Libya is finally exhibiting signs of exporting again. Talks between Iran and officials from the United Nations Security Council, scheduled to begin on May 13, could result in the rollback of sanctions and increased exports of oil. Iraq is producing more oil than it has in 35 years. If this keeps up, then over the next two years,


"You're talking about prices in the low $70s," says John Kilduff, a partner at Again Capital, a New York hedge fund that focuses on energy.

 

Longer term, the problem may be an insufficiency of oil. Crude is becoming much more expensive to produce. Major oil companies have increased spending on exploration and production by 14 percent a year since 2005, only to see their combined production fall. This has many big oil companies lowering their capital spending in 2014: ExxonMobil (XOM) has announced it will cut spending by 6 percent, Chevron (CVX) by 5 percent. Royal Dutch Shell (RDS/A) is looking to reduce spending by 20 percent this year.


"Oil majors are being eaten alive" on exploration costs, says Steven Kopits, an oil analyst at Princeton Energy Advisors. Charles Maxwell, a veteran energy analyst, says that lack of spending today will eventually lead to higher prices. "That's going to bite us big time," he says. "2019 is going to be hell." 


More from Bloomberg Businessweek


27Comments
May 9, 2014 5:23PM
avatar
We have Record Supplies and plenty of Crude. In fact we have so much that we are Exporting our finished product supplies to others at the expense of the American Consumer. All this BS about supply disruptions are just that, more BS in order to continually scam Consumers, Again.
May 9, 2014 4:21PM
avatar

Would it not be more appropriate to say they are keeping prices at a near term of the highest prices in History...Not counting the temporary $140 a bbl. a few years back.

Stagnating the barrel price close to $100 dollars and $3.50-4.50 at the pumps per gallon.


Getting the Consumer to go along with how much it cost to get the Energy out of the ground, process it and then transport it to Market...

We are accepting those numbers, without any questions.

May 9, 2014 5:58PM
avatar
The oil production in the US is transforming the geo-political landscape in favor of the US. It is time we flex this strength and isolate countries that are hostile to our interests.      
May 9, 2014 5:42PM
avatar

there's something to be said for having a ceremonial figurehead for your country like England.  It allows them to recognize their politicians for the bums they truly are.

I'd love to have an intelligent conversation on the Keystone XL pipeline.  I feel global warming is a serious and imminent threat for our country and our species - but one way or another Canada is going to find a way to get that oil out of the ground and onto the market, then maybe we should negotiate for something we can all agree we need.

 

Why not require that, running parallel to the keystone pipeline,  a freshwaterpipeline as well(Canada has an awful lot of big lakes). If we're going to cause global warming one way or another, we might as well secure freshwater for "America's bread basket"

May 10, 2014 1:51PM
avatar
 The big Democrat contributor and anti-oil billionairre in California--Tom Steyer---is the major reason Obama won't commit to the Keystone pipeline.  I suspect he will eventually lose influence and the pipeline will be built.
May 9, 2014 5:59PM
avatar
I didn't see our imports from Canada mentioned and the price we're paying for it.  Is it a stable amount?  The last time I knew, and it very well may have changed a bit since we got into the hyrdro shale oil is that we imported over 50% of our oil from Canada.  Does anyone know the status of that?
May 9, 2014 9:55PM
avatar
LOL does it get much funnier than that!
May 9, 2014 8:41PM
avatar

Tate...Seems the Keystone X Pipeline, or K-Line Extension is nothing but a Political football.

The majority of hold-ups can actually be attributed to the State of Nebraska,,,

True, that Obama has been riding the fence somewhat on any decision, but truly is not the reason for it not being built yet, as what some Republican Operatives, would have people believe...

Remember this is a Mid-Term election year, and such items as Keystone, Benghazi, Putin/Russia, FED's QE, Jobs and Recoveries are going to be "talking points."


The US State Department has more or less cleared the Pipeline, for Environmental Impact.

Obama's hands are still somewhat tied, because of Nebraska Courts action and injunctions by Landowners along with Environmentalist and Interested parties.

And Obama cannot really usurp "State's Rights" or won't.

Included along with that, it also pleases his environmental "greenie base."


The Governor of Nebraska okayed the pipeline extension to cross through his State..

Landowners and environmentals, said that could not be done according to State's Constitution on his authority..The Issue will be heard and decided on, in the Supreme Court of Nebraska about Sept/Oct....Then it's very possible we could see some positive action out of Washington by Congress and the current Administration, probably the latest by early 2015?


Ironically your mention of a "freshwater pipeline" being built with it, is kind of funny..

Part of the past hold-ups dealt with the "shortcut" K-line going through a sensitive environmental area, known as the "Sandhill's Region" and crossing one of the "largest fresh water aquifers" in the World, known as the Olgalaha or something like that.? 

May 9, 2014 6:53PM
avatar
because these oil is out of the market the oil trades at $100 a barrel for texas crude.If these oil would be in the market oil will trade for $70 making life easier for workers and middle class people all over the world and reduce deaths of poor people for starving or illness in poor countries.Of course Obama doesn't care of worker and middle class people
May 10, 2014 11:22AM
avatar
Like the late George Carlin said " It's all B.S. and it's bad for you". No matter what, the Big Oil Co's rake in billions and were supposed to be happy with $4.00 + a gallon.
May 9, 2014 8:08PM
avatar

Yeah probably pump prices do vary all the way to $4.50, I was more or less quoting prices in and around the Midwest...

Canada, supports about 30% (OR USE TO) to a third of the oil we (US) supposedly use.


Much of their oil is heavier and/or Tar Sands oil, and is discounted about 25-30% to WTI or Texas/Oklahoma crude prices..(West Texas Intermediate).

Brent (better oil) and North Sea, are price about 10% or more.

Oil from different places all over the World, vary in different prices, due to refining ease and of course, transportation cost.

May 9, 2014 3:43PM
avatar
"Market gains slip away"

Like hot air from a leaking balloon. Like fiat money off the fed printing presses. Like life prosperity and free enterprise from a former United States of America. Like Obama's idea of an "efficient" Wal-Mart. Since WHEN is efficient a good replacement for an economy? If you truly like "efficient", Mr. President... the Moon has no nay-sayers on it. Take the next rocket there... save on the return fare by not buying that ticket. 
May 9, 2014 9:00PM
avatar

Canada and or Provincial Governments, British Columbia and Alberta, are in process of extending or building the TM..Trans Mountain Pipeline to the West and ports on the Pacific..

Being able to export oil mostly to Asia, with China probably being the biggest customer.

China has offered engineering, construction and funding to help secure preferences.

Canada is not going to sit on their hands forever, and wait for our Political Games to end.


A similar process is proceeding to the Eastern Ports to expand or add capacity for mostly export.

The Keystone may not yield a lot more oil to U.S. storage and usage, but will provide a thousand or so jobs that will be temporary, a couple to few years; And roughly 50-100 permanent jobs afterwards...They are very good paying jobs.

Increasing Refinery use in the Gulf region and supplying some oil to others areas where it can be refined....Along with access to terminals and shipping on the Mississippi River and then the Gulf shipping areas....Don't really think all the oil and product will be exported, depends on demand here in the U.S. and Politics probably.?

May 9, 2014 7:39PM
avatar
And still we paying for GAS between $ 3.50 to 4.50 depending where you are living in USA. No matter how much additional supply is there, Oil companies will mark Barrel of oil about 100 dollars and they will sale themselves for refining and Gas price will be always high, rather will continue to go North direction, higher and higher.
May 9, 2014 6:08PM
avatar
if the Canadians want to sell the oil,  let them put a pipeline across their country,  last I knew they have access to the same oceans we do.  we have enough ticking time bombs buried underground here in the united states.
May 9, 2014 6:04PM
avatar
Lets hope the Canadain pipe line never gets approved or they will be able to sale more oil to China and raise gas prices even higher.
May 10, 2014 5:31PM
avatar
US strategy for energy independence:  Get all of our oil out of the ground and us it up as fast as possible.  
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
274
274 rated 2
447
447 rated 3
698
698 rated 4
633
633 rated 5
652
652 rated 6
650
650 rated 7
491
491 rated 8
268
268 rated 9
125
125 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.