Category Archives: Permian Basin

The Biggest Threat To Oil Prices: 2-Mile Long Stretch Of Iraq Oil Tankers Headed For The U.S.

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After some initial excitement, November has seen crude oil prices collapse back towards cycle lows amid demand doubts (e.g. slumping China oil imports, overflowing Chinese oil capacity, plunging China Industrial Production) and supply concerns (e.g. inventories soaring). However, an even bigger problem looms that few are talking about. As Iraq – the fastest-growing member of OPEC – has unleashed a two-mile long, 3 million metric ton barrage of 19 million barrel excess supply directly to US ports in November.

Crude prices are already falling:


But OPEC has another trick up its sleeve to crush US Shale oil producers. As Bloomberg reports,

Iraq, the fastest-growing producer within the 12-nation group, loaded as many as 10 tankers in the past several weeks to deliver crude to U.S. ports in November, ship-tracking and charters compiled by Bloomberg show.


Assuming they arrive as scheduled, the 19 million barrels being hauled would mark the biggest monthly influx from Iraq since June 2012, according to Energy Information Administration figures.

The cargoes show how competition for sales among members of the Organization of Petroleum Exporting Countries is spilling out into global markets, intensifying competition with U.S. producers whose own output has retreated since summer. For tanker owners, it means rates for their ships are headed for the best quarter in seven years, fueled partly by the surge in one of the industry’s longest trade routes.

Worst still, they are slashing prices…

Iraq, pumping the most since at least 1962 amid competition among OPEC nations to find buyers, is discounting prices to woo customers.

The Middle East country sells its crude at premiums or discounts to global benchmarks, competing for buyers with suppliers such as Saudi Arabia, the world’s biggest exporter. Iraq sold its Heavy grade at a discount of $5.85 a barrel to the appropriate benchmark for November, the biggest discount since it split the grade from Iraqi Light in May. Saudi Arabia sold at $1.25 below benchmark for November, cutting by a further 20 cents in December.

“It’s being priced much more aggressively,” said Dominic Haywood, an oil analyst at Energy Aspects Ltd. in London. “It’s being discounted so U.S. Gulf Coast refiners are more incentivized to take it.”

So when does The Obama Administration ban crude imports?

And now, we get more news from Iraq:

  • *IRAQ CUTS DECEMBER CRUDE OIL OSPS TO EUROPE: TRADERS

So taking on the Russians?

*  *  *

Finally, as we noted previously, it appears Iraq (and Russia) are more than happy to compete on price.. and have been successful – for now – at gaining significant market share…

Even as both Iran and Saudi Arabia are losing Asian market share to Russia and Iraq, Tehran is closely allied with Baghdad and Moscow while Riyadh is not. That certainly seems to suggest that in the long run, the Saudis are going to end up with the short end of the stick.

Once again, it’s the intersection of geopolitics and energy, and you’re reminded that at the end of the day, that’s what it usually comes down to.

Source: Zero Hedge


WTI Tumbles To $43 Handle After API Confirms Huge Inventory Build

API reported a huge 6.3 million barrel inventory build (notably larger than expected) extending the series of build to seven weeks. Even more worrying was the massive 2.5 million barrel build at Cushing, even as gasoline inventories fell 3.2mm. WTI immediately dropped 35c, breaking back to a $43 handle after-hours.

A huge build…


But for Cushing it was massive…

The reaction was quick and on heavy volume…

Source: Zero Hedge


Four US Firms With $4.8 Billion In Debt Warned This Week They May Default Any Minute

The last 3 days have seen the biggest surge in US energy credit risk since December 2014, blasting back above 1000bps. This should not be a total surprise since underlying oil prices continue to languish in “not cash-flow positive” territory for many shale producers, but, as Bloomberg reports, the industry is bracing for a wave of failures as investors that were stung by bets on an improving market earlier this year try to stay away from the sector. “It’s been eerily silent,” in energy credit markets, warns one bond manager, “no one is putting up new capital here.”

The market is starting to reprice dramatically for a surge in defaults...

Eleven months of depressed oil prices are threatening to topple more companies in the energy industry. As Bloomberg details,

Four firms owing a combined $4.8 billion warned this week that they may be at the brink, with Penn Virginia Corp., Paragon Offshore Plc, Magnum Hunter Resources Corp. and Emerald Oil Inc. saying their auditors have expressed doubts that they can continue as going concerns. Falling oil prices are squeezing access to credit, they said. And everyone from Morgan Stanley to Goldman Sachs Group Inc. is predicting that energy prices won’t rebound anytime soon.

The industry is bracing for a wave of failures as investors that were stung by bets on an improving market earlier this year try to stay away from the sector. Barclays Plc analysts say that will cause the default rate among speculative-grade companies to double in the next year. Marathon Asset Management is predicting default rates among high-yield energy companies will balloon to as high as 25 percent cumulatively in the next two to three years if oil remains below $60 a barrel.


“No one is putting up new capital here,”
said Bruce Richards, co-founder of Marathon, which manages $12.5 billion of assets. “It’s been eerily silent in the whole high-yield energy sector, including oil, gas, services and coal.”

That’s partly because investors who plowed about $14 billion into high-yield energy bonds sold in the past six months are sitting on about $2 billion of losses, according to data compiled by Bloomberg.

And the energy sector accounts for more than a quarter of high-yield bonds that are trading at distressed levels, according to data compiled by Bloomberg.

Barclays said in a Nov. 6 research note that the market is anticipating “a near-term wave of defaults” among energy companies. Those can’t be avoided unless commodity prices make “a very large” and “unexpected” resurgence.

“Everybody’s liquidity is worse than it was at this time last year,” said Jason Mudrick, founder of Mudrick Capital Management. “It’s a much more dire situation than it was 12 months ago.”

Source: Zero Hedge


Something Very Strange Is Taking Place Off The Coast Of Galveston, TX

Having exposed the world yesterday to the 2-mile long line of tankers-full’o’crude heading from Iraq to the US, several weeks after reporting that China has run out of oil storage space we can now confirm that the global crude “in transit” glut is becoming gargantuan and is starting to have adverse consequences on the price of oil.

While the crude oil tanker backlog in Houston reaches an almost unprecedented 39 (with combined capacity of 28.4 million barrels), as The FT reports that from China to the Gulf of Mexico, the growing flotilla of stationary supertankers is evidence that the oil price crash may still have further to run, as more than 100m barrels of crude oil and heavy fuels are being held on ships at sea (as the year-long supply glut fills up available storage on land). The storage problems are so severe in fact, that traders asking ships to go slow, and that is where we see something very strange occurring off the coast near Galveston, TX.


FT reports that “
the amount of oil at sea is at least double the levels of earlier this year and is equivalent to more than a day of global oil supply. The numbers of vessels has been compiled by the Financial Times from satellite tracking data and industry sources.”

The storage glut is unprecedented:
 
 
Off Indonesia, Malaysia and Singapore, Asia’s main oil hub, around 35m barrels of crude and shipping fuel are being stored on 14 VLCCs.
 
“A lot of the storage off Singapore is fuel oil as the contango is stronger,” said Petromatrix analyst Olivier Jakob. Fuel oil is mainly used in shipping and power generation.
 
Off China, which is on course to overtake the US as the world’s largest crude importer, five heavily laden VLCCs — each capable of carrying more than 2m barrels of oil — are parked near the ports of Qingdao, Dalian and Tianjin.
 
In Europe, a number of smaller tankers are facing short-term delays at Rotterdam and in the North Sea, where output is near a two-year high. In the Mediterranean a VLCC has been parked off Malta since September.
 
On the US Gulf Coast, tankers carrying around 20m barrels of oil are waiting to unload, Reuters reported. Crude inventories on the US Gulf Coast are at record levels.
 
A further 8m barrels of oil are being held off the UAE, while Iran — awaiting the end of sanctions to ramp up exports — has almost 40m barrels of fuel on its fleet of supertankers near the Strait of Hormuz. Much of this is believed to be condensate, a type of ultralight oil.
And unlike the last oil price collapse during the financial crisis only half of the oil held on the water has been put there specifically by traders looking to cash in by storing the fuel until prices recover. Instead, sky-high supertanker rates have prevented them from putting more oil into so-called floating storage, shutting off one of the safety valves that could prevent oil prices from falling further.
 
 
A widening oil market structure known as contango — where future prices are higher than spot prices — could make floating storage possible.
 
 
 
The difference between Brent for delivery in six months’ time and now rose to $4.50 last week, up from $1.50 in May. Traders estimate it may need to reach $6 to make sea storage viable.
JBC Energy, a consultancy, said in many regions onshore oil storage is approaching capacity, arguing oil prices may have to fall to allow more to be stored profitably at sea.
 
 
“Onshore storage is not quite full but it is at historically high levels globally,” said David Wech, managing director of JBC Energy.
 
“As we move closer to capacity that is creating more infrastructure hiccups and delays in the oil market, leading to more oil being backed out on to the water.”
 
Patrick Rodgers, the chief executive of Euronav, one of the world’s biggest listed tanker companies, said oil glut was so severe traders were asking ships to go slow to help them manage storage levels.
 
“We are being kept at relatively low speeds. The owners of the oil are not in a hurry to get their cargoes. They are managing their storage capacity by keeping ships at a certain speed.”
As a result of all this, something very unusual going on off the coast of Galveston, where more than 39 crude tankers w/ combined cargo capacity of 28.4 million bbls wait near Galveston (Galveston is area where tankers can anchor before taking cargoes to refineries at Houston and other nearby plants), vessel tracking data compiled by Bloomberg show, which compares w/ 30 vessels, 21 million bbls of capacity in May. Vessels wait avg of 5 days, compared w/ 3 days May.

As AP puts it,a traffic jam of oil tankers is the latest sign of an unyielding global supply glut.”

More than 50 commercial vessels were anchored outside ports in the Houston area at the end of last week, of which 41 were tankers, according to Houston Pilots, an organization that assists in navigation of larger vessels. Normally, there are 30 to 40 vessels, of which two-thirds are tankers, according to the group.
 
Although the channel has been shut intermittently in recent weeks because of fog or flooding, oil traders pointed to everything from capacity constraints to a lack of buyers.
 
“It appears that the glut of supply in the global market is only getting worse,” said Matt Smith, director of commodity research at ClipperData. Several traders said some ships might have arrived without a buyer, which can be hard to find as ample supply and end-of-year taxes push refiners to draw down inventories.
And here, courtesy of MarineTraffic is the interactive snapshot (readers can recreate it here):

All of which explains why this is happening:


Crude Jumps After API Reports Modest Inventory Draw (First In 8 Weeks) Despite Another Big Build At Cushing

11/17/2015: After seven straight weeks of significant inventory builds, API reported a modest 482k draw. That was all the algos needed and WTI immediately ramped back above $41.00. However, what they likely missed was the 2nd weekly (huge) build in Cushing (1.5mm barrels) as we warned earlier on land storage starting to really fill…

Cushing saw another big build…

And crude reacted…

As we noted earlier,

In short: “The US is the last place with significant onshore crude storage space left.”

Which leads directly to Citi’s conclusion: “‘Sell the rally’ near-term as fundamentals remain very sloppy and inventory constraints are becoming increasingly more binding.”

Source: Zero Hedge

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Is Big Oil In Bed With The Saudis To Destroy The Fracking Industry?

Summary

  • Saudis want Big Oil to win – have predictable working relationship with them.
  • Big Oil is waiting on the sidelines until the price of properties drop.
  • Those with DUC wells and enough reserves will be able to survive the onslaught.
  • U.S. shale oil remains viable, but the players are going to change.

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As the strategy of Saudi Arabia becomes clearer, along with the response of shale producers to low oil prices, the question now has to be asked as to whether or not the big oil companies support the decision by Saudi Arabia to crush frackers until they have to offer their various plays at fire sale prices.

With the emergence of frackers came a significant number of new competitors in the market that didn’t have an interest in playing nice with OPEC and Saudi Arabia, as major oil companies have in the past. This was a real threat as other OPEC members and shale companies started to take share away from Saudi Arabia.

The general consensus is Saudi Arabia isn’t interested in crushing any particular competitor, rather it’ll keep production at high levels until the weakest producers capitulate. I have thought that as well until recently.

What changed my thinking was analyzing who was the biggest threat to OPEC and Saudi Arabia, and in fact it is the shale industry in the U.S. The reason I draw that conclusion is the energy industry had its traditional competitors in place for many years, and other than occasional moves to impact the price of oil using production levels as the weapon, it has been a relatively stable industry. Shale changed all that.

I think what bothered Saudi Arabia in particular was it didn’t have a working relationship with many of these new competitors, who have been very aggressive with expanding production capacity over the last few years. They were in fact real competitors who were working to take market share away from existing players. And with Saudi Arabia being the low-cost producer with the highest reserves in the world, it was without a doubt a direct assault on its authority and leverage it historically has had on the oil market. Its response to frackers is obvious: it isn’t willing to give up share for any reason.

Where the challenge for Saudi Arabia now is it has started to have to draw on its own reserves and issue bonds to make up for budget shortfalls. It has plenty of reserves, but it appears we now have a clear picture on when it would really come under pressure, which is within a four to five year period. That’s the time it has to devastate its shale competitors.

The other problem for the country is it could take down some members of OPEC in the process, where there are already significant problems they’re facing, which could lead to unrest.

From a pure oil perspective, it seems to be an easy read. Saudi Arabia can outlast the small shale producers with no problem. I think that’s its goal. But it is putting enormous pressure on other countries as well, and there will be increasing pressure for them to slow production in order to support oil prices.

This even extends to Russia, which produces more oil than any other country.

My belief is Saudi Arabia is attempting to force consolidation in the shale industry, so it can resume its dealings with big oil players it has worked with for many years. I believe it’s also what big oil players want. All they have to do is sit back and experience some temporary pain and wait for some of the attractive plays to come onto the market at low prices.

So far the price is still high in the U.S., but as time goes on, the smaller companies will be forced to sell, one way or another. That’s the big opportunity for investors. Identifying those companies with the resources and desire to acquire these properties is the key. That and evaluating the plays with the most potential for those buying them up.

At what price can Saudi crush shale oil?

There are analysts predicting oil price levels that are all over the board. I’ve seen those that believe it’s going to shoot up to over $100 per barrel again, and those that have estimated it could fall to as low as $15 per barrel.

The best way to analyze this is to consider what Saudi Arabia can handle over the longest period of time without destroying its own economy and industry, meaning at what price it can remain fairly healthy and outlast its competitors.

Looking at the price movement of oil and the range it’s now settled into, I think it’s close to what the Saudi have been looking for.

Most smaller shale producers will struggle to make it, if the price of oil remains under $60 per barrel, which it will probably do until Saudi Arabia cuts back on production. There will be occasional moves above that, and probably below $50 per barrel again as well, but I think we can now look to somewhere in the $50 per barrel area as the target being sought. We’ll probably see this be the price range oil will move in for the next couple of years, with $50 being the desired low and $60 being the desired high.

I don’t mean by this Saudi Arabia can absolutely control the price of oil, but it can influence the range it operates in, and I think that’s where we are now.

For that reason oil investors should be safe in investing under these assumptions, understanding there will be occasional price moves outside of that range because of usual trading momentum.

Response from shale oil companies

Some may question why the price of oil got slammed not too long ago, falling below $40 per barrel, if the probable price range for oil is about $10 to $20 per barrel higher.

As mentioned above, some of that was simply from trading momentum. It didn’t take long for it to rebound soon afterward.

The other element was the response by shale companies to the new price of oil, which threatened their ability to pay interest on loans that were due.

Frackers weren’t boosting production because they believed they could outlast Saudi Arabia; they kept production levels high because they had to continue to sell even into that low-price environment or default on their payments. This was a major factor in why prices dropped so far over the short term.

With the bulk of the over $5 trillion spent on shale exploration and development coming from companies operating in the U.S., that is also where the bulk of the risk is.

Much of the efficiencies have been wrung out of operations, and moving to higher producing wells that are less costly to operate can only last so long. I believe efficiencies will position some in the industry to survive the current competitive environment, but they will also have to have enough reserves to tap into in order to do so.

Top producing shale wells are at their highest level of productivity in the first 6 months it goes into operation. It gradually fades after that.

Larger players like EOG Resources (NYSE:EOG) have continued to drill, but they are stopping short of production, with approximately 320 DUC wells ready to bring online when the price of oil reaches desired levels. Its smaller competitors don’t have the resources to wait out existing production levels, which is what will again offer the opportunity for patient investors.

In other words, most of what can be done has been or is currently being done, and from now on it’s simply a waiting game to see how long the Saudis are willing to keep the oil flowing.

Most shale producers believed the lowest oil prices would sustainably fall and would be about $70 per barrel. Decisions were made based upon that assumption.

Big oil and Saudi Arabia

Saudi Arabia and big international energy companies have had close relationships a long time via Saudi Aramco, the state-owned firm.

Those relationships, while competitive, still operated within parameters most agreed upon. Shale producers weren’t playing that game, as they invested trillions and aggressively went after market share. If Saudi Arabia wanted to maintain market share, it had to respond.

If the smaller shale producers thought their strategy though, they must have underestimated the will of Saudi Arabia to fight back against them. Either that or they became overly optimistic and started to believe their own press about the shale revolution.

It’s a revolution for sure, but the majority of those that helped launch it won’t be finishing it.

My point is big oil, in my opinion, doesn’t mind quietly standing on the sidelines as their somewhat friendly competitors destroys their competition and prepares the way for them to acquire shale properties at extremely attractive prices.

I’ve said for some time the shale revolution will go on. The oil isn’t going anywhere. What is changing is who the players will end up being, and what properties they’ll end up acquiring.

With EOG, the strongest shale player, it said the prices of those plays now for sale are still too high; that means the smaller players still think they have some leverage.

My only thought is they are hoping for the large players to enter a bidding war and they can at least recoup some of their capital. I think they’re going to wait until they’re desperate and have no more options.

Sure, some big players may lose out on a desirable property or two, but everyone will get a piece of the action. It appears once the prices move down to levels they’re looking for, at that time they’ll swoop in and make their bids. At that time it’s going to be a buyer’s market.

Big oil companies are the preferable players Saudi Arabia wants to do business with and compete against. They will play the game with them, and there won’t be a lot of surprises.

Some of the companies to watch

Some of the larger companies that have already filed for bankruptcy this year include Hercules Offshore (NASDAQ:HERO), Sabine Oil & Gas (SOGC) and Quicksilver Resources (OTCPK:KWKAQ).

Companies known to have hired advisers for that purpose are Swift Energy (NYSE:SFY) and Energy XXI Ltd. (NASDAQ:EXXI).

Some under heavy pressure include Halcón Resources Corporation (NYSE:HK), SandRidge Energy, Inc. (NYSE:SD) and Rex Energy Corporation (NASDAQ:REXX).

There are more in each category, but I included only those that had at least a decent market cap, with the exception of those that already declared bankruptcy.

Here are a couple of other companies to look at going forward, which can be used for the purpose of analyzing ongoing low prices.

Stone Energy’s credit facility of $500 million is reaffirmed, but may not be liquid enough to endure the next couple of years, even though in the short term it does have decent liquidity. If Saudi Arabia keeps up the pressure, it’s doubtful it will be able to survive on its own. There are quite a few companies falling under these parameters, including Laredo (NYSE:LPI). The basic practice of all of them was to limit the amount of leverage they have in place in order not to have paying off interest as the priority use of their capital, while maintaining a strong credit facility.

I’m not saying these companies will survive, but they will survive if the price of oil stays low, but it will take a lot more to root them up than their highly leveraged peers.

Clayton Williams (NYSE:CWEI) recently put itself up for sale because it can’t afford to continue operating at these prices. It has approximately 340,000 acres under its control, and two of the most productive shale basins in the U.S.

Once it announced it was open to selling, the share price skyrocketed, but since it’s struggling to afford extracting the oil, it’s puzzling as to why some believe it’s going to attract a premium price. It’s possible because of the quality of assets, but it would make more sense for larger companies to wait.

This will be a good test on how big oil companies are going to respond. It’s possible they may be willing to pay for the higher quality shale plays, but under these conditions shareholders would resist paying a significant premium.

If Clayton Williams does go for a premium, it doesn’t in any way mean that’s how it’ll work out for most of the shale companies.

There would have to be a significant reason they would pay such a high price. In the case of CWEI, the catalyst would be high production.

Conclusion

All of this sounds neatly packaged, and if all things proceed as planned, this is how it will play out.

Where there could be some risk is if the Middle East explodes and oil production is interrupted. That would change this entire scenario, and if it were to happen soon, shale companies still in operation would not only survive, but thrive.

Barring that level of disruption, which would have to be something huge, this is how it will play out. After all, with everything going on there now, it hasn’t done anything to disrupt Middle East oil. It would take a big event or a series of events to bring it about. That’s definitely a possibility, but it’s one that is unlikely.

Once all of this plays out, there is no doubt in my mind the bigger oil companies will be much stronger and able to produce a lot more oil.

What we’ll probably see happen is for them to cut back on production to levels where everyone is happy, including the Saudi.

That’s what this war is all about, because shale oil deposits remain in the ground. While some companies can quickly resume production because of the nature of shale oil, which can ramp up production fast, it depends on the will and determination of Saudi Arabia and whether or not the geopolitical situation remains under control.

I don’t care too much about the number of rig counts in shale plays because production can be resumed or initiated quick. The risk is how leveraged the shale companies are, and whether or not they have to continue production at a loss in order to pay off their interest on loans in hopes the price of oil will rise.

What I’m looking for with existing plays is for companies like EOG Resources, which continues to develop wells, but does so without the idea of completing them and bringing them into production until the price of oil rebounds.

Shale oil in the U.S. is alive and well, but those companies overextended and few resources are going to be forced to sell at bargain prices. That will produce a lot of added value to the big oil companies waiting on the sidelines watching it all unfold.

Read more by Gary Bourgeault on Seeking Alpha

How Banks Funded the U.S. Oil Boom and (So Far) Escaped the Bust

“Everyone in the [shale] chain was making money in the short term.”

by Asjylyn Loder from Bloomberg Business

When Whiting Petroleum needed cash earlier this year as oil prices plummeted, JPMorgan Chase, its lead lender, found investors willing to step in. The bank helped Whiting sell $3.1 billion in stocks and bonds in March. Whiting used almost all the money to repay the $2.9 billion it owed JPMorgan and its 25 other lenders. The proceeds also covered the $45 million in fees Whiting paid to get the deal done, regulatory filings show.

Analysts expect Whiting, one of the largest producers in North Dakota’s Bakken shale basin, to spend almost $1 billion more than it earns from oil and gas this year. The company has sold $300 million in assets, reduced the number of rigs drilling for oil to eight from a high of 24, and announced plans to cut spending by $1 billion next year. Eric Hagen, a Whiting spokesman, says the company has “demonstrated that it is taking appropriate steps to manage within the current oil price environment.” Whiting has said it will be in a position next year to have its capital spending of $1 billion equal its cash flows with an oil price of $50 a barrel.

As for Whiting’s investors, the stock is down 36 percent, as of Oct. 14, since the March issue, and the new bonds are trading at 94¢ on the dollar. More than 73 percent of the stocks and bonds issued this year by oil and gas producers are worth less today than when they were sold, data compiled by Bloomberg show.

Banks’ sell-the-risk strategy underpins the shale oil boom. Lenders extended low interest credit to wildcatters desperate for cash, then—perhaps remembering the 1980s oil bust—wheeled the debt off their books by selling new stocks and bonds to investors, earning sizable fees along the way. “Everyone in the chain was making money in the short term,” says Louis Meyer, a special situations analyst at Oscar Gruss & Son. “And no one was thinking long term about what they’re going to do if prices fall.”

North American oil and gas producers have sold $61.5 billion in equity and debt since January, paying more than $700 million in fees, according to data compiled by Bloomberg. Half the money was raised to repay loans or restructure debt, the data show. “Being there for our clients in all market environments, particularly the tough ones, is something we feel very strongly about,” says Brian Marchiony, a JPMorgan spokesman. “During challenging periods, companies typically look to strengthen their balance sheets and increase liquidity, and we have helped many do just that.”

Lenders have been setting aside cash to cover potential energy losses. JPMorgan bolstered its reserves by $160 million in the third quarter. Bank of America’s at-risk loans increased 15 percent from a year ago as a result of the deteriorating finances of some of its oil and gas borrowers. Still, the oil bust has left banks relatively unscathed. Asked why lenders weren’t seeing more losses from energy defaults, BofA Chief Executive Officer Brian Moynihan said in a conference call, “A lot of that risk is distributed out to investors.”

Citigroup, Bank of America, and JPMorgan were among the banks that courted fast-growing shale drillers in the hope that an initial loan would lead to investment banking business. Citigroup’s energy portfolio, including loans and unfunded commitments, swelled to $59.7 billion as of June 30, Bank of America’s to $47.3 billion, and JPMorgan’s to $43.6 billion, according to company filings. “They loan money at cheap rates, and the banks get the fees from the bond and share sales,” says Jason Wangler, an analyst with Wunderlich Securities. “When things are going well, it’s mutually beneficial. Now it’s a different conversation.”

When crude prices plummeted in the early 1980s, hundreds of banks failed across such oil-rich states as Louisiana, Oklahoma, and Texas. This time around, banks were keen to limit their exposure to a boom-and-bust industry. Every year since 2009, about half the debt and equity sold by North American exploration and production companies was intended, at least in part, to restructure debt or repay loans, data compiled by Bloomberg show. Often the banks selling the securities were the ones getting repaid. “The bankers have gone through this before,” says Oscar Gruss’s Meyer. “They know how it works out in the end, and it’s not pretty. Most of the lenders have been more on top of things this time. They are not going to get caught short in the ways they got caught short before.”

The bottom line: Oil companies have sold $61.5 billion in stocks and bonds since January as oil prices have tumbled.

U.S. Housing Sector Shifts to Buyers Markets in September

U.S. Housing Sector Shifts to Buyers Markets in September

by Miho Favela in The World Property Journal

According to Realtor.com’s ‘Advance Read of September Trends‘, with month-over-month declining prices and increased time on market, the September 2015 housing market has transitioned into a buyer’s market. This means that it is now easier for buyers to purchase a home than it has been any time so far this year.

“The spring and summer home-buying seasons were especially tough on potential buyers this year with increasing prices and limited supply,” said Jonathan Smoke, chief economist for Realtor.com. “Buyers who are open to a fall or winter purchase should find some relief with lower prices and less competition from other buyers. However, year-over-year comparisons show that fall buyers will have it tougher than last year as the housing market continues to show improvement.”

Housing demand is in its seasonally weaker period and as a result, median list prices are continuing to decline from July’s peak. Likewise, inventory has also peaked for 2015, so buyers will see fewer choices through the end of the year. Top line findings of the monthly report that draws on residential inventory and demand trends over the first three weeks of the month include:

  • National median list price is $230,000 down decreased 1 percent over August and up 6 percent year-over-year.
  • Median age of inventory is now 80 days, up 6.7 percent from August, but down 5 percent year-over-year, reflecting the seasonal trend for fall listings to stay longer on the market as the day becomes shorter.
  • Listings inventory will likely end the month down 0.5 percent from August.

Realtor.com September 2015 Market Hotness Data

The 20 hottest markets in the country, ranked by number of views per listing on Realtor.com and the median age of inventory in each market, in September 2015 are:

WPJ News | Top 20 hottest real estate markets in the U.S.
Key takeaway from Realtor.com September Hotness Index:

  • California maintains 11 cities on the Hotness Index due to continued tight supply and turbo charged economy. Markets in the state have been characterized as having extremely tight supply all year, so frustrated buyers who have not been able to find a home so far remain active, supporting continued strength in sales across much of Northern and Southern California.
  • Texas and Michigan also continue to feature multiple markets also driven by job growth, but compared especially to the California markets have more affordable inventory attracting a broader base of potential buyers.
  • Fort Wayne, Ind., and Modesto, Calif., both entered the top 20 list in September having just missed in August. Both markets benefit from strong housing affordability for their regions.

“The hottest markets are little changed in September as supply remains tight and demand remains strong,” Smoke commented. “Sellers across all these markets continue to see listings move much more quickly than the rest of the country in September, and the seasonal slow-down is not as strong in these markets.”

Energy Companies Face “Come-To-Jesus” Point As Bankruptcies Loom

Last week, amid a renewed bout of crude carnage, Morgan Stanley made a rather disconcerting call on oil. 

“On current trajectory, this downturn could become worse than 1986: An additional +1.5 mb/d [of OPEC supply] is roughly one year of oil demand growth. If sustained, this could delay the rebalancing of oil markets by a year as well. The forward curve has started to price this in: as the chart shows, the forward curve currently points towards a recovery in prices that is far worse than in 1986. This means the industrial downturn could also be worse. In that case, there would be little in analysable history that could be a guide to this cycle,” the bank wrote, presaging even tougher times ahead for the O&G space.

If Morgan Stanley is correct, we’re likely to see tremendous pressure on the sector’s highly indebted names, many of whom have been kept afloat thus far by easy access to capital markets courtesy of ZIRP.

With a rate hike cycle on the horizon, with hedges set to roll off, and with investors less willing to throw good money after bad on secondaries and new HY issuance, banks are likely to rein in credit lines in October when the next assessment is due. At that point, it will be game over in the absence of a sharp recovery in crude prices. 

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Against this challenging backdrop, we bring you the following commentary from Emanuel Grillo, partner at Baker Botts’s bankruptcy and restructuring practice who spoke to Bloomberg Brief last week.  

*  *  *

Via Bloomberg Brief

How does the second half of this year look when it comes to energy bankruptcies?

A: People are coming to realize that the market is not likely to improve. At the end of September, companies will know about their bank loan redeterminations and you’ll see a bunch of restructurings. And, as the last of the hedges start to burn off and you can’t buy them for $80 a barrel any longer, then you’re in a tough place.

The bottom line is that if oil prices don’t increase, it could very well be that the next six months to nine months will be worse than the last six months. Some had an ability to borrow, and you saw other people go out and restructure. But the options are going to become fewer and smaller the longer you wait.

Are there good deals on the horizon for distressed investors?

A: The markets are awash in capital, but you still have a disconnect between buyers and sellers. Sellers, the guys who operate these companies, are hoping they can hang on. Buyers want to pay bargain-basement prices. There’s not enough pressure on the sellers yet. But I think that’s coming. 

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Banks will be redetermining their borrowing bases again in October. Will they be as lenient this time around as they were in April?

A: I don’t know if you’ll get the same slack in October as in April, absent a turnaround in the market price for oil. It’s going to be that ‘come-to-Jesus’ point in time where it’s about how much longer can they let it play. If the banks get too aggressive, they’re going to hurt the value for themselves and their ability to exit. So they’re playing a balancing act.

They know what pressure they’re facing from a regulatory perspective. At the same time, if they push too far in that direction, toward complying with the regulatory side and getting out, then they’re going to hurt themselves in terms of what their own recovery is going to be. All of the banks have these loans under very close scrutiny right now. They’d all get out tomorrow if they could. That’s the sense they’re giving off to the marketplace, because the numbers are just not supporting what they need to have from a regulatory perspective.

Source: Zero Hedge

Is $50 “Hard Floor” Oil Price Already In?

Volte-Face Investments believes that it is …

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The Last Two Oil Crashes Show Peak Oil Is Real

Summary

  • Recent oil crashes show you the hard floor for gauging value oil company equities.
  • Properly understood, the crashes lend an insight into the concept of Peak Oil.
  • All oil equity investors should understand the overarching upward trend on display here.
 

Note: ALL prices used in this article are using current 2015 dollars, inflation adjusted using the
US BLS inflation calculator.

Generally, when I invest, I try to keep my thesis very simple. Find good companies, with good balance sheets and some kind of specific catalytic event on the horizon. But when one starts to concentrate their holdings in a sector, as I have recently in energy (see my recent articles on RMP Energy (OTCPK:OEXFF) and DeeThree Energy (OTCQX:DTHRF), you need to also get a good handle on the particular tail or headwinds that are affecting it. Sometimes a sector like oil (NYSEARCA:USO) can be subjected to such forces, like the recent oil price crash, where almost no company specific data mattered.

One of the biggest arguments, normally used by proponents of owning oil stocks as core holdings, in the energy sector is “Peak Oil.” For the unfamiliar, it is a theory forwarded first by M. King Hubbert in the 1950s regarding U.S. oil production. Essentially, the theory stated that the U.S. would reach a point where the oil reserves would become so depleted that it would be impossible to increase oil production further, or even maintain it at a given level, regardless of effort. This would inevitably lead to oil price rises of extreme magnitudes.

Since those early beginnings, the details have been argued over in an ever-evolving fashion. The argument has shifted with global events, technological developments, and grown to encompass nearly every basin in the world (even best-selling books have been written about peak oil like Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy by Matt Simmons about a decade ago) consuming endless bytes of the Internet in every kind of investment forum and medium of exchange.

In general, I believe that the term “peak oil” is a highly flawed one. Some picture peak oil in a Mad Max fashion, with oil supplies running out like a science fiction disaster movie. Others simply dismiss peak oil as having failed to predict these so-called peaks repeatedly (the world is producing a record amount of oil right now, so all previous absolute “Peak Oil” calls below these amounts are obviously wrong). But what people should be stating when they use these terms is a Peak Oil Price.

Using my own thinking and phrasing, I believe civilization has probably passed $25 Peak Oil. This means that if you set the oil price to $25 a barrel, there is no method available to humanity to provide enough oil to meet demand over any period of time that’s really relevant. I also believe we are in the middle of proving that we have also passed $50 Peak Oil. My final conjecture here is that we will prove in the near-term future to have reached $75 Peak Oil. I don’t believe we are quite at $100 Peak Oil.

Notice that in my formulation the term Peak Oil is always stated as a peak price. Oil is not consumed in a vacuum. The price affects the demand the world has for the product and simultaneously changes the ability of all sorts of entities (businesses and governments) to retrieve deposits of it. This is what I hope to prove in this article.

So what data could I bring to this crowded table?

Well we have one thing we now have that previous entrants into the Peak Oil melee didn’t, which is the recent price crash in oil. Peak oil is often falsely portrayed as a failed idea since it hasn’t resulted in a super squeeze to ultra high prices. These spike prices are viewed as the really critical element by energy investors since they are trying to find the best case. After all, who doesn’t want to own an oil producer if they can identify a spot in which oil prices will rise to some enormous number.

But that is the wrong way to go about it for your oil investments over the long haul. Because what $50 Peak Oil really provides is a floor. In a world where we have passed $25 Peak Oil, it should be impossible, without exogenous events of enormous magnitude (world war, etc.), to press the price of the product below that price. If you could do so, you would immediately disprove the thesis. You would then know the floor provided by whichever peak oil price level you selected was wrong. The same idea seems to hold true for $50 Peak Oil now.

To prove this “floor” we need to choose times of extreme stress in the oil markets, and look at those oil prices and see what the bottoms were. For these examples, let’s select WTI oil, whose weekly average prices are reported all the way back to 1986 by the EIA.

Let’s take the three big crashes in the oil markets. I will use a full year’s average to try to smooth out the various difficulties presented by weather, seasonal effects, or various one-off events (outages, etc.). The first crash I will use as a benchmark is The 1986 Oil Crash. The 1986 breakdown was a supply crash, caused by supply swamping demand. How big a disaster was it for the oil industry?

In 1986, the Saudis opened the spigot and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

This was quite a crash obviously. Triggering a 25 year decline? Not going to find a lot worse than this. So in inflation adjusted dollars what was WTI oil at for the year of 1986? It sold for around $32 a barrel. Now let’s note that at this time WTI crude was actually at a higher price vs. Brent and other world prices. On a Brent basis, crude would have been just around $25 for the year. This will prove to be an important point in a short while.

The next crash we will use to benchmark was the 2008 Financial Crisis. On this website, I should hope that this world crisis will need no introduction and little explanation. This crash in oil prices (and just about every other thing priced by human beings) was a demand crash. The financial disintegration across the world led to massive drops in demand, as jobs were lost across the world by the millions. So with this demand crash what was the average price of WTI crude in the year 2009? It sold in that year for a little over $60.

The last crash I will add is the current drop, starting sometime around October by my reckoning. I would find it hard to imagine any reader of this article is unfamiliar with the current situation in North America or the world regarding oil, at least in a headline sense. This seems to be a supply crash again, where North American-led tight oil drillers have caused an increase in production that the world’s demand couldn’t handle at the $100 price level. Since then, prices have dropped down to a level that suppresses the production of oil and enhances demand.

In the first four months of 2015, the North American oil rig count has already dropped by more than 50% as compared to last year and the demand for oil has begun to increase according to EIA statistics. The current price of WTI oil has been just over $49 as an average for the year 2015. However, let us note that WTI oil now sells for a large discount to world prices, and during the previous two crashes, WTI sold for a premium.

Now we have three data points. Each one is a fairly long period of time, not just a single week. We know that the world in 1986 nearly ended for the oil industry, yet in current dollars, WTI oil was unable to trade for a year below $30 a barrel. Then we had in 2008 and 2009 an economic crisis which was widely described as being the most dire financial disaster since WWII. In 2009, WTI oil still ended up trading well over the 1986 low. In fact it was nearly double that price. This shows just how hard it can be using almost any technique to push oil prices below a true peak number.

Now we have another supply led crunch. One that is widely described as the worst oil crash since 1986, a nearly 30 year time gap. We are attacking the oil price from the supply side instead of 2008’s demand side. Yet thus far, in 2015, oil is still trading more than 50% higher than the 1986 year average, inflation adjusted. In fact, WTI, when adjusted for its current discount to world prices, is trading close to its 2009 average price. Again, nearly double the price of the 1986 crash.

What does this all mean for investing? It means to me that $25 Peak Oil is behind us. You couldn’t really hit and maintain that number in the 1986 crash when many more virgin conventional reservoirs of oil were available. Despite the last three oil crises, not one of them could get WTI oil to $25 and keep it there. Now, using much more expensive oil resources (shale fracing, deep water drilling, arctic development, etc.), it doesn’t seem like the last two disasters have been able to press WTI oil much below $50 for a material length of time. In this recent crash, the $50 floor was able to be reached only with several years of hyper-investment made possible by the twin forces of sustained high prices and access to ultra-cheap capital. Both of these forces are no longer present in the oil markets.

Therefore, I think using a $50 Peak Oil number is a very reasonable hard floor to use when stress testing your oil stocks. It means that when I am choosing a stock that produces oil, it can survive both from supply and the demand led crashes using the worst the world can throw at it.

Some will say this reasoning is simplistic. One could claim any number of variables in the future (technology, peace in the Middle East, etc.) could change all the points I am relying on here. But we have thrown everything at the oil complex between 2008 and now; both from the supply side and the demand sides; breakdowns of the whole world economy, wars, sanctions, natural disasters, hugely stupid governmental policies, OPEC’s seeming fade to irrelevance, biofuels, periods of ultra-high prices, technological progress, electric cars, etc. Yet, here we stand with these numbers staring us in the face.

In conclusion, I feel these price points prove the reality of $50 Peak Oil (WTI). If WTI oil averages more than $50 in 2015 (which I strongly feel the data shows will happen), then it will confirm my thesis that no matter what happens in the world, human beings cannot seem to produce the amount of oil they require for less than that number. Therefore, one will know what the hard floor for petroleum is provided by the hugely complex interplay of geology, politics, economics, and technology by simply measuring those effects on one easy-to-measure point of data, namely price. This version of peak oil also means I have a minimum to test my selections on. I can buy companies that can at least deal with that floor, then make large profits as the prices rise from that hard floor. All oil fields deplete, and for the past twenty years, the solution has universally been to add more expensive technological solutions, exploit smaller or more physically difficult deposits, or use more expensive alternatives. The oil market does not have the same options available to it like it did 1986. Large, cheap conventional oil deposits are no longer available in sufficient supply, which is likely what the oil price is telling us by having higher Peak Floors during crashes. Without the magic of sustained ultra high prices, the investment levels that made this run at the $50 Peak Oil level will not exist going into the future. This means that the Peak Oil floor price should be creeping higher as a sector tailwind, giving a patient and selective investor a tremendous advantage for themselves.

Read more: Volte-Face Investments: The Last Two Oil Crashes Show Peak Oil Is Real

US Oil Rig Count Decline Quickened This Week

Idle rigs in Helmerich & Payne International Drilling Co.'s yard in Ector County, Texas. North Dakota has also been hit hard, forcing gains in technology.

Source: Rigzone

The fall in U.S. rigs drilling for oil quickened a bit this week, data showed on Friday, suggesting a recent slowdown in the decline in drilling was temporary, after slumping oil prices caused energy companies to idle half the country’s rigs since October.

Drillers idled 31 oil rigs this week, leaving 703 rigs active, after taking 26 and 42 rigs out of service in the previous two weeks, oil services firm Baker Hughes Inc said in its closely watched report.

With the oil rig decline this week, the number of active rigs has fallen for a record 20 weeks in a row to the lowest since 2010, according to Baker Hughes data going back to 1987.
Since the number of oil rigs peaked at 1,609 in October, energy producers have responded quickly to the steep 60 percent drop in oil prices since last summer by cutting spending, eliminating jobs and idling rigs.

After its precipitous drop since October, the U.S. oil rig count is nearing a pivotal level that experts say could dent production, bolster prices and even coax oil companies back to the well pad in the coming months.

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Pioneer Natural Resources Co, a top oil producer in the Permian Basin of West Texas, said this week it will start adding rigs in June as long as market conditions are favorable. U.S. crude futures this week climbed to over $58 a barrel, the highest level this year, as a Saudi-led coalition continued bombings in Yemen.

That was up 38 percent from a six-year low near $42 set in mid March on oversupply concerns and lackluster demand, in part on expectations the lower rig count will start reducing U.S. oil output.

After rising mostly steadily since 2009, U.S. oil production has stalled near 9.4 million barrels a day since early March, the highest level since the early 1970s, according to government data.

The Permian Basin in West Texas and eastern New Mexico, the nation’s biggest and fastest-growing shale oil basin, lost the most oil rigs, down 13 to 242, the lowest on record, according to data going back to 2011.

Texas was the state with the biggest rig decline, down 19 to 392, the least since 2009.
In Canada, active oil rigs fell by four to 16, the lowest since 2009. U.S. natural gas rigs, meanwhile, climbed by eight to 225, the same as two weeks ago.