2012 May 25

So what is up with the price of oil?

Mark Lewis of Deutsche Bank shares his thoughts on what is happening now. To get a chance to not only hear Mark’s thoughts but also ask him question consider attending the Oil Supply & Demand conference June 19th in New York.

Opec spare capacity lowest since 2008

As Mark mentioned in the video above the oil markets are tight. This is hard for folks in U.S. to understand since North American oil production in places like North Dakota and the Eagle Ford of Texas have resulted in increasing inventories unique to the U.S. But oil is a global commodity so the price is set by global supply & demand relationships in which spare capacity plays a role.

“Spare crude oil production capacity is now less than 3% of total world crude oil consumption—the lowest proportion since the fourth quarter of 2008—based on EIA estimates.”

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One very important point here is that spare capacity only resides in the OPEC producers which essentially means Saudi Arabia. In the non-OPEC countries producers don’t retain spare capacity. When a well is ready to produce it produces so a return on the invested capital can begin. Therefore no one should expect major oil companies to be able to flip a switch and suddenly begin producing new crude from a series of idle wells around the globe.

Understanding how the EIA defines spare capacity is also important. For example the pre-salt deep water fields being developed off the coast of Brazil are not included since these fields don’t meet the EIA’s definition. “EIA defines spare crude oil production capacity as potential oil production that could be brought online within 30 days and sustained for at least 90 days, consistent with sound business practices. This does not include oil production increases that could not be sustained without degrading the future production capacity of a field.”

Shale gas and your home mortgage….Really?

“One fact ought to tell you all you need to know about the risks faced by homeowners signing leases for natural gas drilling on their property: Wells Fargo & Company, both the largest home mortgage lender in the United States and a major lender to the country’s second largest producer of natural gas, Chesapeake Energy Corp., refuses to make home loans for properties encumbered with natural gas drilling leases.

This salient fact comes from an article (PDF) written for the New York State Bar Association Journal by attorney Elisabeth N. Radow. Written in the form of an even-tempered legal brief, Radow relates one astounding finding after another. Perhaps most relevant to homeowners who either have signed drilling leases or who may be asked to sign them in the future is this: “Signing a gas lease without lender consent is likely to constitute a mortgage default.” You read that right. Default.”