Crude Oil and oil markets

[anon46773462]

Did I notice a change last week in the oil traders’ navigator settings? Wednesday’s EIA crude inventories release showed a significant increase above expectations. There was a sell-off but nothing as deep as I would have expected to see only a few weeks back. Even an oil apprentice like me was looking for a level to go long. Then on Friday the US rig count rose again by 15 to a new high since Sept 2015, according to the Baker Hughes’ report. But again, selling response was muted.

I have seen some reasons for this declining bearishness, including:

• Canadian rig count dropped by 23 and therefore offset the US count.

• Tanker shipping is dropping, reflecting the impact of OPEC/NOPEC production cuts.

• Overall decrease in crude inventories globally outside the US figures (e.g. Iran used up its stored reserves).

But then it seemed we entered a new era of concern factors on Friday, when the US administration ordered a missile strike against Syrian military installations as a response to the alleged use of chemical weapons by the Syrian government.

Although this event was very much described as a stand-alone response, it clearly sent out a global message that underlined the US administration line that it is prepared to use force alone, if necessary, to protect its own and other global interests. But it is also increasing global tensions especially with Russia, Syria’s main ally.

The attack occurred during the Chinese president’s visit to the US. This was a visit that would fairly obviously have also included discussions about the North Korea situation. China has strong ties with N.Korea. I was therefore interested to read this morning that the US military is now moving a navy strike force towards the Korean peninsula, including an aircraft carrier and other warships.

There is no doubt that N. Korea has been aggressively talking of building its nuclear capability and the US has specifically declared its readiness to act alone if seen as necessary. There has already been increasing tensions in the China seas in S.E. Asia before this latest development.

Does this all mean that the key focus is now moving back to possible geopolitical tensions and their possible implications on oil supplies and prices? If so, these pressures will only add to the incubating bullishness for oil prices resulting from the shift away from concerns about growing reserves towards increasing energy demands instead.

This is certainly what we are seeing on the Daily and Hourly charts at present.

[anon46773462]

Whilst reading up on some oil exploration information I came across the term “tight oil”. So what is tight oil?

In an earlier post I wrote about oil grading according to its density as light, medium or heavy grades. When referring to tight oil we are dealing with light and medium grades with low viscosity, which, in principle, are capable of naturally flowing through the reservoir rock to the well bores.

However, the ability to flow through the rock also depends on the permeability of the rock itself. Where the permeability is sufficient to permit the oil to flow though it then conventional extraction methods can be used. But when the permeability of the rock reservoirs is so low that the oil cannot flow effectively through it in spite of its low viscosity then it is termed tight oil and its extraction requires unconventional methods using technologically advanced drilling and completion processes such as horizontal drilling with multi-stage fracturing.

Tight oil is therefore more expensive to extract than using conventional methods, but there are extensive reserves available and they become more attractive and competitive as the available more-accessible reserves begin to dwindle and the costs and efficiency of the required advanced technologies are reduced.

There are several different categories or “plays” in which tight oil is extracted. For example, the oil in the fringe areas of conventional oil fields, which may not be as economically accessible as in the main areas, can be recovered with new technologies. Shale oil is another type of play where the rock is of a tighter permeability and therefore requires different techniques to recover the oil content.

The technologies used to recover tight oil include:

• horizontal drilling, where drilling starts vertically and then turns horizontally into the oil rock and continues for up to 3-4km.

• hydraulic fracturing (fracking), where existing or new fractures are forcefully opened up to facilitate the flow of oil. This is done by pumping water + additives into the fractures under high pressure and then filling the fractures with sand or ceramic beads to keep them open.

• micro-seismic events, where man-made events release energy sufficient to create fractures or cracks that can be filled with sand or ceramic beads which allow the oil to flow through.

Source: Canadian Society for Unconventional Resources (CSUR)

[anon46773462]

Prices held well over the weekend and all charts are positive, so I am looking for more on the upside.

But I am concerned right now with being right on this S/R band that seems to have been significant ever since the start of the OPEC/NOPEC production cuts last December.

An aggressive stance would be to re-instate now my long position from last week that I closed for the weekend, but a more cautious approach would be to first wait and see if today closes above this band. At this stage, I am going with the cautious view and will at least wait until the NY session:

(P.S. 5-day low is 49.86 from 4.4.)

[anon46773462]

Price has remained firm all day and certainly looks likely to close above that band on the daily chart tonight.

The upward pressure seems due partly to a further outage from Libya when its largest oilfield (Sharara) again shut down over the weekend as a result of the ongoing internal security problems there (link to Libya profile in OP post no.1 ).

Additional pressure is linked to the Syrian situation and G7 discussions regarding possible further sanctions against Russia unless it distances itself from the Syrian leadership.

I took a couple of quick long trades today but I am not going to go long overnight. With the upcoming inventories data in the next two days I prefer to stick to day trades here and just buy into the dips.

If the inventories data shows a draw, starting the summer season then this will undoubtedly give a strong boost to prices, considering the current bullish sentiment. But if the US crude stocks remain high then there may well be a good dip to buy into. Personally, I see no reason for selling at all at present. It is more a question of what is a good level to buy at…

El Sharara oilfield, Libya

[anon46773462]

Prices held overnight above and around the $53 level buoyed by the same continuing sentiments:

• new and ongoing geopolitical concerns resulting from the US air strike on Syria and its impact on relations between US, the G7 countries and Russia

• growing concerns about the increasing ternsions between the US and North Korea following the movement of US naval forces closer to the Korean peninsular and resultant North Korean threats, together with China’s possible response

• continuing disruptions in Libya’s oil production, even though Libya is not a major producer

• further optimistic comments, especially from Kuwait, that OPEC will extend its production cuts to the end of year

• anticipations that US crude oil stocks will start to decrease as the seasonal demand for oil products increases.

Later today we have the weekly API US crude and oil products statistics, followed tomorrow by the EIA weekly Crude Oil report. Last week saw contradictory divergence beween these two sources with the API reporting a draw and the EIA reporting a build.

Today’s API release, according to one source, is expected to confirm a 316,000 barrels build in crude stocks and a 1.761 mill barrels drop in gasoline.

It is maybe worth bearing in mind that this is a short week ahead of the Easter weekend, and after tomorrow’s EIA report we might start to see profit-taking on Thursday from speculative positions that have surely remained long throughout this recent upmove, a move that has seen little reason to doubt continuing gains…

[I]5-Day low still at 49.86 (from 4.4.) Current 5-Day trade started on 29.3. at 48.45, current open profit as at yesterday’s close = +470 pips . This now exceeds the previous short trade end-profit of +408 pips. Trades according to “High-5” method rules here.[/I]

[anon46773462]

Russia has the eighth largest oil reserves in the world, and according to the US EIA, is the third largest producer of oil after the US and Saudi Arabia. It is also the third largest energy user.

Most estimates of proven oil reserves in Russia tend to concentrate on those in western Siberia and the Urals-Volga regions, which currently supply about two-thirds of Russia’s oil. However, there are other potentially huge reserves elsewhere including East Siberia, Russia’s Far East, and the Russian Arctic - much of which is still unexplored.

Russia’s own estimate of its current oil reserves stands at 29 billion tons which, based on existing consumption rates, would be depleted some time in the 2040’s. But Russia also has other oil reserves that are currently more expensive, more geologically complex and more distant from its traditional regions of production, which are still to be explored and developed as and when technology develops and recovery costs fall.

For example, Russia’s vast shale/tight oil reserves are on a scale similar to those of the US and include the gigantic tight-oil formation, the Bazhenov Suite, which is the largest shale deposit in the world and covers a territory of more than 1 mill km2 and contains an estimated minimum of 20 bill tons of oil. However, Russia’s tight oil currently needs at least an oil price level of 55-60 USD per barrel to break even, compared with a conventional oil breakeven level in the 20-30 USD per barrel range. Once Russia’s tight oil technology develops and recovery costs fall then these shale deposits will become a significant resource.

In addition to these other regions and sources, enhanced oil recovery techniques and supplementary exploration are revealing new opportunities within Russia’s conventional oil reserves. For example, the discovery of the Velikoye field in the Astrakhan Oblast with its estimated additional reserves of 330 mill tons.

Currently Russia produces over 10,000 million barrels of oil per day, representing about 12% of the world’s oil and has a similar share of global oil exports. Oil production fell sharply after the collapse of the Soviet Union to around 6 mill barrels per day and is only now returning to its previous levels achieved during the Soviet Union era.

Over 70 percent of Russian oil production is exported, mainly to European countries. The remaining 30 percent is refined locally. Russia’s economy is therefore clearly highly dependent on its income from oil and natural gas products. Its technological development and advance in recovery techniques has therefore been seriously hampered by both the drop in oil prices in recent years as well as by the various sanctions currently in force.

The biggest Russian oil company is Rosneft followed by Lukoil. All oil trunk pipelines (except Caspian Pipeline Consortium) are owned and operated by the state-owned monopoly Transneft.

Prirazlomonya platform. (Photo: Gazprom Neft)

[anon46773462]

It has been a very quiet day ahead of the API release. There were some opportunities for some quick buys, but one would have needed to sit by the PC all day and I just can’t do that - even though I did invest in a saddle chair!

So I spent the day playing with the charts and did some retro stuff playing with some old setups that I used to use…and I was surprised how nicely they seem to fit the Crude Oil price action.

For example, this chart is a 1H and is based on a yellow band and a blue “pipeline” ribbon. The green band is actually an approximation of the equivalent same yellow band on the 4H chart and thereby gives a kind of multiple timeframe picture “all-in-one” on the same 1H chart.

The basic idea is to watch for a cross of the blue ribbon and a close through the bands - preferably also with a “showing” of the yellow band through the green, but that sometimes follows on the next bar or two if the market is very fast due to the inevitable lagging

I like this because the green band kind of adds a “floor/ceiling” and helps one to (a) stay with the trade whilst the yellow band remains still above/below the green, and (b) add to, or re-enter, a position following a compression of price/yellow band into the green band and subsequently exits with a confirmation from the blue ribbon.

The blue ribbon is really the key to timing here and, for example, it has not crossed upwards all day today and thereby suggested (correctly) that there was no strong momentum present and no point in looking for a strong continuation. This situation may well change after the API release later…

The chart below shows the hourly movements since the current “High-5” trade started on 29.3. and the red circles indicate the series of stages during the upmove. There were also a couple of down moves that could also have been traded, but the basic concept here is to trade only in the direction of the current “High-5” method.

[anon46773462]

We saw yet another high close on Crude last night with a boost coming from reports that Saudi Arabia has told OPEC officials it wants to continue output cuts for an additional six months.

A further boost came later when the API released its data showing U.S. crude inventories falling by nearly 1.3 mill barrels compared with expectations of an increase for the week.

Today’s EIA reports may well provide a similar boost if their release shows a similar change. But I am a bit concerned with the reliability of these releases after last week’s contradictions, and with the degree of variation from the industry’s own expectations. Is it that these reports are substantially different in what they actually report or is it that the data collection is either unreliable or erratic in its availability? But, I guess, the key issue from a trader’s perspective is not whether they are accurate or inaccurate, but whether, and by how much, the results differ from the expectations!

There are also a number of so-called geopolitical situations developing concerning Syria and North Korea and how the US, Russia and China are separately responding to them.

Seems to me that in a short week before the Easter break, markets may be thin, affected by profit-taking rather than new position-taking and therefore vulnerable to sharp, over-reactive spikes in response to any events or comments.

The hourly chart gave another signal later in the day which produced a modest profit overnight. The blue pipeline ribbon crossed with a close through the bands, together with a show of the yellow band above the green:

Yesterday’s move gave yet another boost to the 5-Day trade which, at the close yesterday (53.38), now carries an open profit of +493 pips. The 5-day low has now moved up to 50.72 (from 5.4.)

[anon46773462]

The daily chart is approaching the base of a solid area of resistance that has built up ever since the start of the OPEC cuts last Dec. This band is highlighted as the blue box on this chart and contains a lot of interesting wicks above the candle bodies. The band covers an area approx 53.75 to 54.50 (WTI).

I am probably premature, but I have now cut my longs here at 53.70, prior to the EIA release today. It’s like, when all the news is bullish, and only bullish, and there isn’t anything else, then…

But I do still believe there is a longer term strong potential on the upside, but I’d really like to see a decent retracement before re-entering…

[anon46773462]

Well, it seems we closed those longs at the right time…

Which is surprising considering that the Crude stock releases, OPEC, and the international situation all seem to be underpinning the market right now…

• Yesterday, the American Petroleum Institute reported a decline in U.S. crude oil inventories by 1.3 mill barrels, now the EIA reports a draw of 2.2-mill-barrels…the industry experts had expected a build of 125,000 barrels.

• OPEC reports compliance with the production cuts even exceeding 100%, as well as optimism that the agreement will be extended further.

• A tense geopolitical situation in the Middle East and souring relations between the US and Russia, as well tensions from the US-China-North Korea.

…can’t imagine this sell-off will extend too far or for too long, but it is beginning to feel that it might be prudent to shut shop already for the Easter break and look at some related learning matters in the meantime…it’s been a good April …so far!

[anon46773462]

Interesting article about the Pioneering Spirit - which at 382 metres long and wider than three football pitches, and costing £2.4bn, is apparently the largest ship in the world!

The ship is soon going to be used to move an entire North Sea oil rig. It will lift Shell’s Brent Delta oil rig off its concrete legs and take it to Teeside for scrapping. The Brent Delta rig will be positioned in the space in the middle of the ship and the rig’s eighteen metre concrete legs will then be severed and a hydraulics system, powered with compressed air, will then act as a jack and remove the topside from the concrete legs it was standing on. The ‘topside’ of the rig, including oil processing equipment and living quarters, weighs 24,500 tonnes!

The Brent Delta rig is one of more than a hundred North Sea oil rigs to be decommissioned in the coming decade. The Brent field was one of the most productive for the North Sea oil industry but extraction is no longer economically viable.

From article by the Independent newspaper

[anon46773462]

Overnight price action showed a light recovery from yesterday’s sell-off lows, but has not indicated a further trend one way or the other. Not surprisingly, on the daily chart the price ran out of fresh buying “steam” below that blue band of resistance and fell back despite some bullish data that could have fueled further rises if the interest had been there. On the Daily we are well and truly back into the range between the upper blue band and the lower red band.

We have had a lot of specific oil data over the last two days with the API and EIA weekly reports and the OPEC monthly report and I suspect today will be quiet in the absence of fresh inputs. Of course, on the geopolitical front things are so intense at the moment that surprises could occur any time, which would almost certainly create price rises rather than the opposite! With the markets closed tomorrow for Good Friday, I would certainly not think of keeping a short position open right now. The 4H chart is showing a compression stage where the price is simply stalling for a while and consolidating whilst awaiting new impetus - but the underlying trend is still clearly up.

The hourly chart at present is pretty much saying the same story. The blue pipeline ribbon has turned up, signifying that the current down move is (at least temporarily) over, but the yellow/green bands are still indicating that this is a flattening out rather than a turn upwards. This is also indicated by the fact that we are still under the daily pivot line.

If we see an hourly close above the pivot then we may well see a strong finish today, but failing that, then I suspect maybe we’ll see a further drift back down to that red band of support and maybe an insignificant change on the day. But, hey, this is the oil market, and the situation might well be totally different in an hour’s time!

Having gone flat last night before the drop, I am reluctant to get sucked into anything today as any move may well be short-lived. So attention is now diverted to planning the Easter holidays instead. But I am interested to see where we finish today…

[anon46773462]

Quick update on the above. Price did try an early dip but it was short-lived. And since then the hourly has been sandwiched all morning between the rising blue pipeline below and capped by the daily pivot above.

We will inevitably see a break of one or the other during the NY session, but right now it is sit and wait…and, from a day-trader’s perspective, when it does break, how far will it be able to go today without a push from some new input factor?

[anon46773462]

Well, as expected, it was a quiet day going nowhere. Price tried a bit on the downside, then on the upside, and now in the middle.

If we look at the day on the 15m chart then it shows clearer the lack of significant day-trade opportunity. We may well still see some action in the closing moments as positions are adjusted ahead of the Easter break…

I’ve got some oil-related stuff to add here over the weekend, but we return to trading on Monday, when the USOil CFD’s are again open. In the meantime, have a great Easter weekend and drive carefully…

[anon46773462]

If no one nowadays actually buys a barrel of oil and it is usually transported via tankers or pipelines, why do we then talk about oil in terms of barrels? And what, exactly is a barrel of crude?

The origins of the oil barrel go back to the 1860’s and the start of the oil boom in Pennsylvania USA. In those days, oil from the fields was moved by men, wagons and horses to the rail stations and docks, and any liquid products requiring a leak-proof container were stored in wooden barrels.

As the oil industry was booming, the volume of oil being produced from the new wells was so great that early producers were using any watertight containers they could get their hands on, whatever the size. In fact, one of the most common sources came from the whisky industry, which was already transporting whisky in wooden barrels with a standard size of 40 gallons.

But since the variety of different container sizes was misleading and was causing disputes between buyers and sellers, the early oil producers in Pennsylvania decided they, too, needed a standard unit of measure. So they also adopted the idea of the 40 gallon barrel for themselves, but added an extra 2 gallons to cover spillages on route to their destinations and thereby settled on the standard wine tierce which was two gallons larger than the standard whisky barrel.

Barrel makers (coopers) had already been producing watertight 42-gallon wooden barrels since the time of Richard III, who set the size of a tierce of wine at 42 gallons in 1483-1484. A 42-gallon tierce weighed more than 300 pounds when filled with crude oil– which was about as much as a man could reasonably handle. Also twenty barrels fitted on a typical barge or railroad flatcar. Bigger casks were unmanageable and anything smaller was less profitable.

The barrel, or “tierce” was therefore officially adopted by the oil industry in 1866 when a handful of America’s earliest independent oil producers met in Titusville, Pennsylvania, and agreed that henceforth, 42 gallons would constitute a barrel of oil, and released the following circular:"

“Whereas, It is conceded by all producers of crude petroleum on Oil Creek that the present system of selling crude oil by the barrel, without regard to the size, is injurious to the oil trade, alike to the buyer and seller, as buyers, with an ordinary sized barrel cannot compete with those with large ones. We, therefore, mutually agree and bind ourselves that from this date we will sell no crude by the barrel or package, but by the gallon only. An allowance of two gallons will be made on the gauge of each and every 40 gallons in favor of the buyer.”

Henceforth purchasers of oil would know exactly how much they were buying at one time and thereby King Richard III’s English wine tierce became the American standard oil barrel.

A few years later, in 1872, 42 gallons became the standard for the Petroleum Producers Association, and in 1882, the U.S.G.S. and the U.S. Bureau of Mines adopted the standard as well.

Nowadays, however, pumping crude into 42 gallon vessels would not be efficient or economical so it’s generally pumped straight into tankers or cargo ships, but the concept of the barrel has stuck.

As a result, the 42-gallon oil barrel has become the unit of measure rather than the actual physical container.

[anon46773462]

Maybe the first thing that comes to mind when we think of crude oil is gasoline and engine oil. But crude oil provides an amazing range of products, many of which we use every day without even thinking of their origin. For example, shampoos and lotions, food preservatives, fertilizers, plastics and packaging.

Each barrel of crude oil produces about:

• 20 gallons of gasoline
• 12 gallons of distillate fuel oil (diesel fuel and heating oil)
• 4 gallons of jet fuel

From the residue, the refineries also produce over a dozen other petroleum products such as gas, asphalt, lubricants, as well as various components used by the petrochemical industry to make a wide variety of chemicals and plastics, which appear in a huge range of end-products.

Here is a partial list of products containing by-products from petroleum refining, found on one website:

[anon88459104]

This brings back the old chemistry lessons at school around fractional distillation

[anon46773462]

This brings back the old chemistry lessons at school around fractional distillation

Yes, me too!
I guess oil is just about the most versatile raw material on earth. I often wonder what the history books will write about the era of hydrocarbons, which will probably be no more than about 300 years of our entire history - but what an impact!

[anon46773462]

I just read that China is theatening to suspend supplies of crude oil to North Korea if they go ahead with a sixth nuclear test.

Apparently, China supplies North Korea with 90% of its oil requirements and such a move would paralyze the entire country in a very short time.

A very disturbing build-up of tensions going on in that region…

[anon46773462]

…and yet still, I read in another article that China is now the No.1 [I]buyer [/I]of US crude…??

In February, China overtook Canada as the top destination of US crude exports.

So China [I]buys [/I]crude from the US…and North Korea [I]buys [/I]crude from China?

And in the meantime, the US sends the USS Carl Vinson+entourage to the Korean peninsular…

To be sure, this is a strange world!