Energy Nonsense From the Wall Street Journal

Posted in The Petroleum Truth Report on June 18, 2017

The lead editorial in Friday’s Wall Street Journal was pure energy nonsense.

“Lessons of the Energy Export Boom” proclaimed that the United States is becoming the oil and gas superpower of the world. This despite the uncomfortable fact that it is also the world’s biggest importer of crude oil.

The Journal uses statistical sleight-of-hand to argue that the U.S. only imports 25% of its oil but the average is 47% for 2017. Saudi Arabia and Russia–the real oil superpowers–import no oil.

The piece includes the standard claptrap about how the fracking revolution has pushed break-even prices to absurdly low levels.  But another article in the same newspaper on the same day described how producers are losing $0.33 on every dollar in the red hot Permian basin shale plays. Oops.

The main point of the editorial, however, is to celebrate a surge in U.S. oil exports to almost 1 million barrels per day in recent weeks. The Journal calls lifting the crude oil export ban that made this possible “a policy triumph.” What the editorial fails to mention is that exports actually fell after the ban was lifted, and only increased because of Nigerian production outages (Figure 1).

Figure 1. U.S. Oil Exports Have Increased As Nigerian Production Has Fallen. Source: EIA and Labyrinth Consulting Services, Inc.

Tight oil is ultra-light and can only be used in special refineries, most of which are in the U.S. It must be deeply discounted in order to be processed overseas in the relatively few niche refineries designed for light oil. That’s why Brent price is higher than WTI.

It must also displace other light oil such as Nigerian Bonny Light. Civil unrest in the Niger Delta region interrupted oil output and provided a temporary opening for U.S. ultra-light to fill.  Nigerian production is now increasing so look for U.S. crude exports to decline.

Backwardated oil futures prices are another factor that favored oil exports. Since the OPEC production cuts were finalized in late November 2016, the value of futures contracts has been lower than spot price. That encouraged selling at a discount to avoid even bigger losses in coming months (Figure 2).

Figure 2. WTI Futures Moved Into Contango in June, 2017. Source: CME and Labyrinth Consulting Services, Inc.

Since early June, however, oil futures have returned to contango. Longer-dated contracts have more value than spot prices—so the fire-sale incentive to sell is over.

Friday’s editorial goes on to also rejoice in the rising tide of potential U.S. natural gas exports. This is taken by the editors as further evidence that free markets do the right thing. Perhaps they haven’t noticed that international LNG prices crashed along with oil prices, and that U.S. gas prices have almost doubled in the last year.

Asian gas demand is saturated and the price for LNG in Europe is only $4.80/mmBtu. The Journal extolls Energy Secretary Rick Perry’s approval of more U.S. LNG projects in April but a Wood Mackenzie analysis concluded that “the numbers proposed far exceed what the world realistically needs.”

The newspaper has fallen into the trap of mistaking production volumes for profit.

Shale gas and tight oil companies have shown consistent negative cash flow since the shale revolution began. Investors continue to pour capital into them in their desperate search for short-term yield in a zero-interest rate world.

The Wall Street Journal believes that the expansion of U.S. oil and gas exports demonstrates the wisdom of free markets. I think it shows just the opposite.


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26 comments on this entry


  1. There is need for the government to do more in other to reduce or finally end the Ilegal activity of oil teft in the Niger Delta region. The political will of government is another issue that most follow imedately to cusion the impact of government in the region.


  2. With Venezuela in turmoil it’s just a matter of time before the the Too Big To Fail US banks and oil companies graciously step in to help out. With Venezuela’s oil reserves, the US is going to be one hell of a world great oil super power once again……


  3. Your statement that “That’s why Brent price is higher than WTI.” really oversimplifies the global refinery situation in view of the spread history between the 2 crude oil grades. It’s not a simply story, but a one-liner does not explain it I’m afraid. Brent was not landlocked originally unlike WTI at Cushing. US had export restrictions and transportation bottlenecks. The major demand center was US Gulf Coast, which in the intervening years has changed. China and Singapore are also major refinery centers, and demand centers. Brent became the underpinning for a vast majority of countries across Asia with several countries taking physical cargo. WTI previously had a premium edge to see a wide gap, only to see the spread narrow, and depending on the day, WTI has a premium, albeit less often


  4. Chuck,

    There are no simple explanations to anything but in this case, I believe that crude oil quality/API gravity is the chief reason for the WTI-Brent spread in price.

    WTI price was greater than Brent until late 2010 – early 2011 and that makes sense because WTI requires less refining to produce gasoline, diesel, etc.

    Brent-WTI-Price-Differential-Reversed-Late-2010-Early-2011

    The price reversal coincided with the increase not only of tight oil production but, more specifically, a substantial increase in the volume of 40-45 API gravity oil, in addition to more 45+ API oil.

    U.S.-Crude-Oil-Production-By-API-Gravity.jpg

    I believe this surge in very light oil production overwhelmed the refining capacity at that time. Adjustments were made and continue to be made by both expanding ultra-light capacity and blending although there remains a sizable over-supply of ultra-light that cannot be refined and, therefore, must either be stored or exported.

    When the Brent-WTI price differential first reversed, many of us discussed the bottleneck issue and that may have been part of the explanation but it certainly is not today and yet, the price spread remains.

    All the best,

    Art


  5. Art, nice to see you tell it like it is. There is enough energy nonsense floating around to confuse even old trader like me. I have been trading oil and gas online since 1993. Never have I seen so much confusion. I don’t even read most stuff anymore. You are about the only one I read regularly. You are certainly the only one that can cause me to pay close attention. Every oil and gas trader ought to be following you. Thanks for your no BS opinions.


  6. Art-

    Do you know where was Nigerian oil being sold before the production disruptions and where the increased US exports where going?

    Regarding US refineries, any idea if the integrated majors or downstream companies can justify converting existing refinery capacity to handle a higher blend of light oil? Seems the US is currently stock piling or exporting this oil. This “problem” as is exists for US refiners could lower US dependence on foreign oil and increase demand for the higher gravity crude being produced in the US. With the new EPA chief and the cheap feedstock, it seems a retooling of a refinery somewhere would be high on the priority list.


  7. Jeff,

    It is difficult to track trade movements but Matt Smith with ClipperData provides good insights fairly regularly.

    Before tight oil production boomed, about half of Nigerian light oil was sold in the U.S. Today, sales of light oil in the U.S. from anywhere today are effectively zero. As far as I know, most Nigerian light crude oil goes to Europe and India. There are small niche refineries in Central America and the Caribbean where Nigerian and U.S. light oil compete with each other. The lion’s share of U.S. oil exports go to Canada.

    Best,

    Art


  8. I’m happy to finally see an expert state that the frackers are not profitable when all-in costs are considered. Whenever I point this out I am treated like a heretic in the temple. It should be noted that the frackers had negative cash flows even with three years of $100 oil! I think the problem is much worse… by producing 5 mb/d of uneconomic oil… oil that should not be produced if capitalism was working properly… they have destroyed oil price discovery, caused dozens of bankruptcies, and unemployed thousands of workers. But worst of all, they have created a bust that has brought on a multi-year collapse in capital investment for the entire global industry, which will surely have tremendous consequences in the years to come.

    Thank you for your honest publications. They are a breath of fresh air among all the hype.


  9. Been working in the drilling workover industry since high school graduation in 1972. It is now, always has been and always will be chicken or feathers! As soon prices go up everyone drills, everyone drilling overloads the system with new production the boom, here comes the bust again. In a few short years we start the whole thing over again.


  10. Howard,

    Global oil supply is a highly complex and dynamic system with feedback loops that are difficult to anticipate. Decisions to spend and produce require considerable discovery and lead time so it is not surprising that the market is characterized by chronic over-shoot and under-shoot.

    Most companies believe that they are making rational decisions consistent with their internal needs. The problem is that many players are doing the same things and collectively, it often looks like madness.

    All the best,

    Art


  11. The US and worldwide have all been fitted with refineries that process heavy crude with high sulfur content in the past several decade because the disappearing of light low sulfur crude. Before the tight LTO surge here in the US, light crude of WTI like Louisiana Light Sweet (LLS) has been trading at a premium to WTI, and similar pricing was used in Asia and elsewhere — it is wellknown I believe you had wrote such stories too.

    The LTO surge here reversed the LLS to WTI premium to a discount, but not so in other parts of the world yet. Lifting the export ban will certainly reverse the similar premium worldwide with US LTO, and will give US LTO producers a fair playground.


  12. Nuassembly,

    U.S. FOB prices for ultra-light oil are the highest but there is no demand.

    Imported-Light-Oil-High-API-Gravity-Is-The-Most-Expensive-But-Has-No-Demand

    There are markets for ultra-light oil in parts of South America and Asia but there is more supply than refining capacity so it is a buyer’s market.

    Please see my comments to Chuck.

    All the best,

    Art


  13. Art has done it again. It is a pleasure to see how Art uses his knowledge and the facts to succinctly explain what the Wall Street Journal does not understand. It is almost always the same. Read an article/story about something that you witnessed or is in your area of expertise and you begin to wonder about nearly everything written in most of the newspapers/magazines. Much of what is written in The economist and the Financial Times (London) is not only well written, but fact based.


  14. LTO or its equivalent naptha (C5-C8) in Asia FOB Qingdao is about $600/ton or about $70/barrel right now. There should be advantages for US LTO even if it is a buyer’s market right now.
    It’s confusing to me — “U.S. FOB prices for ultra-light oil are the highest but there is no demand.”
    US is exporting ultra light oil API >55 at a discount to WTI right now and still make more money than selling or parking at home. The higher FOB price here in US reflects there is still demand outside US, and even selling at $48/barrel gives US LTO profit at home and advantages in Asia.


  15. It’s too bad Mr. Berman is convinced that problems and distortions in the oil market–and perhaps, from his perspective, any market–are due to free market forces. Probably exporters are overbuilding natural gas LPG facilities, just as speculators have bid stocks and bonds way too high, technology firms are investing too much in cloud infrastructure, and households and investors have lifted house prices to unrealistic heights.
    ear.

    My guess is Mr. Berman attributes such distortions in our mixed economy to the remnants of our economic freedom, rather than to government interventions that warp incentives and, via money printing, fund wasteful ventures. But that is false reasoning, based on misconceptions about price formation, competition and the market process.

    If Mr. Berman chose to think carefully about economics, as he does about the oil market, he would discover that ideas he thinks “everyone knows” are not true, and that capitalism is unfairly maligned by people who feel as he does.


  16. Mark,

    What you wrote is too convoluted for me to understand clearly.

    You should feel free to address me directly vs. speaking through an anonymous third person about someone named Mr. Berman who is not in the room.

    I understand the reason for the award you were given.

    Art


  17. World Oil just included a map in their latest issue showing break even prices for shale plays. Do you think they are reasonable?


  18. Chris,

    Do you have a link? I don’t see anything recent on World Oil showing shale play break-even price?

    Thanks,

    Art


  19. Received the map in my June issue of World Oil.


  20. Received the map in my June issue of World Oil. It was an insert


  21. Christopher,

    I no longer subscribe to World Oil.

    Sorry,

    Art


  22. Art (as I take it you want to be addressed), you wrote, “The Wall Street Journal believes that the expansion of U.S. oil and gas exports demonstrates the wisdom of free markets. I think it shows just the opposite.”

    That statement is loaded with implications about the moral value of economic freedom. I am not trying to pick an argument over nothing; the meaning of what you wrote is that distortions in the oil market are due to market failure. I thought your analysis of the oil market was good, until your closing sentence, which unjustly indicts economic freedom for overbuilding etc.

    What I wrote is not convoluted, but it may be reasoning that perhaps you have not thought through.


  23. Art (as I take it you want to be addressed), you wrote, “The Wall Street Journal believes that the expansion of U.S. oil and gas exports demonstrates the wisdom of free markets. I think it shows just the opposite.”

    That statement is loaded with implications about the moral value of economic freedom. I am not trying to pick an argument over nothing; the meaning of what you wrote is that distortions in the oil market are due to market failure. I thought your analysis of the oil market was good, until your closing sentence, which unjustly indicts economic freedom for overbuilding etc.

    What I wrote is not convoluted, but it may be reasoning that perhaps you have not thought through.


  24. In my view WSJ published this article to calm the nerves of shale investors, who experienced an implosion of their stockholdings over the last weeks. So, the message is : everything is ok, the vision still works. However, as the depletion rate of the combined Bakken, Eagle Ford and Permian fields increased from less than 40% five years ago to 85% today, investors should be very concerned if the vision of shale as a cheap and plentiful energy source is still viable.


  25. Hello Art- What do you make of the relatively soft NG prices we have seen so far this summer? DO you suppose the tight supply will ever trump the moderate weather we are experiencing so far? HAve been a little surprised prices are not higher…


  26. Always glad to see a new post of yours. Consistently amazes me that TV personalities like Sean Hannity, newspapers of record like the WSJ, and the White House (!) have it so wrong.