Tags: China | crude | oil | production

Energy Producers Compete Hard for Chinese Buyers

By    |   Wednesday, 29 October 2014 08:46 AM

Do you remember the last time crude oil was in a buyer's market? I don't either. We're getting a reminder right now — and it isn't good news for some in the energy business.

The world's three largest oil consumers are the U.S., China and Japan. All three depended heavily on Middle East imports until the last few years. OPEC occupied the driver's seat, particularly Saudi Arabia.

The Saudis had oil. The U.S., China and Japan needed oil. Lacking easily available substitutes, we ended up paying what OPEC demanded. We had few other choices.

The person who taught me most of what I know about commodities used to say, "The solution to high prices is high prices." He was right. When a commodity's price is far above the cost of production, other producers step up their game. This increases supply and eventually pushes prices lower.

These cycles can take years to play out because it takes years to develop oil fields, dig gold mines or build new agriculture areas. I think we're seeing one such cycle right now in crude oil.

Crude oil prices broke to new highs about a decade ago, driven by fast-growing Chinese demand. Around the same time, geologists began discovering major shale oil and gas deposits in the U.S.

The shale resources, while abundant, would still lie undeveloped if the price of crude oil hadn't moved above $60. High production costs meant they weren't cost effective — but at $100 oil, the math looks entirely different. Shale fields are nicely profitable at that price.

The resulting surge in domestic production caused the U.S. to buy less oil from OPEC and elsewhere. This freed up non-OPEC supply for Chinese buyers, who wasted no time taking advantage.

According to customs data analyzed by Bloomberg, Chinese oil imports from Saudi Arabia dropped 11 percent in the last year while imports from Colombia grew more than 100 percent.

Colombia can't produce enough oil to replace Saudi Arabia, but the Saudis see where this is going. China has other choices — and price is the deciding factor.

Riyadh appears to have made the only decision it can: drop prices to maintain market share. Other oil exporters will have to make the same choice.

Can prices go back up? Sure . . . but only if we see some combination of reduced global supply and/or increased global demand. All the scenarios for such a change are remote, in my view. That means crude oil will probably remain a buyer's market for several years. It will be great for consumers — and not so great for high-cost or inefficient energy producers.

That last category includes Iran, Iraq, Venezuela, Nigeria, Libya, Russia and even some U.S. shale companies. All will need to get more flexible or lose market share. They aren't in the driver's seat anymore.

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Do you remember the last time crude oil was in a buyer's market? I don't either. We're getting a reminder right now — and it isn't good news for some in the energy business.
China, crude, oil, production
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2014-46-29
Wednesday, 29 October 2014 08:46 AM
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