5 million barrels makes all the difference in the world

With all this talk of oil prices, I thought I'd have a look at the consumption and pricing graphs. All the press is reporting about volatility, pump prices and the re-entry of Iran to the marketplace,

I created the above slightly hand drawn graphs by comparing the barrel price with global output statements and an estimate of world demand. Notably the Nynex forward pricing appears completely bonkers with a barrel price swing of between $20 to $90 through to the end of 2017.

It looks as if no-one has a clue.

I was more intrigued to look at the sensitivity of the price around the break-even production point. It makes for interesting reading. Excuse my rough numbers, but they are close enough to illustrate the point.

The world consumes about 94.5 million barrels per day. When it produced less than this amount the (say 92 million barrels per day), the price was around $100 per barrel. On track where production equals demand it is around an America-friendly $65. Now the world is producing 97 million barrels per day, the price has dropped to $30 per barrel. That includes the Americans adding in shale oil, plus the Saudis increasing their output to hold market share and Iran coming back into the market after sanctions were lifted.

Those factors appear to affect the last 5 million barrels of production and crazily create the $70 swing in price.

Break even points are very different based upon which country is producing the stuff. Poke a stick in the ground in Iran and it will come out black from oil.

By comparison, the Americans in self-named Boomtown, USA (also known as Williston, North Dakota) are having to run high pressure fracking systems whose economically sound point is around double the current oil price.

Meanwhile tankers sit moored around the seven seas, each containing 2 million barrels of oil, today worth $60 million but possibly worth north of $100 million if sold at the right time.

This whole demand curve is strikingly non-linear, through a mix of politics and the sort of non climate friendly pricing algorithms that only machines can understand. Presumably there will be more roller coaster upsets through the rest of 2016 as the era of fossil fuels gets restructured.