Tag Archives: WTI

Crude Oil Market Structure Looks Weak, But It Is Only One Part Of A Complicated Puzzle

Summary

  • Term structure – contango says too much oil around.
  • Brent-WTI says Iran will flood the market.
  • Crack spreads could crack the recent lows for crude.
  • OPEC meeting is the next big event – signals are that these guys cannot agree on anything.
  • Crude oil and a turbulent world.
 

The price of crude oil has not looked this bad since March, when it made lows of $42.03, or on August 24, when it fell to $37.75. On Friday, November 20, active month January NYMEX crude oil settled at $41.90 per barrel. The expiring December contract traded down to lows of $38.99 on the session. There are very few positive things to say about the future prospects for the price of crude oil at this time. The fundamental structural state of the oil market is bearish for price.

Term Structure – contango says too much oil around

Two weeks ago, the IEA told us that the world is awash in crude oil. The international agency told us that worldwide inventories have swelled to 3 billion barrels.

When crude oil was trading over $100 per barrel on the active month NYMEX futures contract during the summer of 2014, the market was in backwardation. Deferred futures prices were lower than nearby prices. This condition tells us that a market is tight, or there is a supply deficit. As the price of oil began to fall, term structure moved from backwardation to contango. This told us that the market moved from deficit to a condition of oversupply. This past week, the contango on the nearby versus one-year oil spread once again validated the glut condition in crude oil.

(click to enlarge)The December 2015 versus December 2016 NYMEX crude oil spread closed last week at over $8.00 per barrel. The contango has increased to 20.46%, the highest level yet for this spread. The January 2016 versus January 2017 NYMEX spread also made a new high and traded above the $7 level.

Brent crude oil futures have rolled from December to January. The January 2016 versus January 2017 Brent crude oil spread was trading around the $7.62 or 17% level last Friday. Market structure is telling us that huge inventories of crude oil will weigh on the price in the weeks ahead. At their current levels, a new low below the current support at $37.75 seems likely. Meanwhile, a location/quality spread in crude oil is also telling us that prospects for the oil price are currently bleak.

Brent-WTI says Iran will flood the market

The benchmark for pricing North American crude is the NYMEX West Texas Intermediate (WTI) price. When it comes to European, African and Middle Eastern crudes, Brent is the benchmark pricing mechanism. For many years, Brent crude traded at a small discount to WTI. That is because WTI is sweeter crude; it has lower sulfur content. This makes WTI more efficient when it comes to processing the oil into the most ubiquitously consumed oil product, gasoline.

That changed in 2010. The Arab Spring caused uncertainty in the Middle East to rise. As the majority of the world’s oil reserves are located in this region, the price of Brent crude rose relative to the price of WTI. Brent crude included a political premium. Additionally, increasing production from the United States, due to the extraction of oil from shale, exacerbated the price differential between the two crudes. In 2011, the price of Brent traded at over a $25 premium to the price of WTI. Recently, the spread between these two crudes has been converging. While the spread on January futures was trading at a premium of $2.40 for the Brent futures as of last Friday, it had moved much lower during the week.

The premium of Brent over WTI has evaporated over the course of 2015. The reason is two-fold. First, the number of operating oil rigs in the United States has fallen dramatically over the past year, indicating that production of the energy commodity will fall. Last Friday, Baker Hughes reported that the total number of oil rigs in operation as of November 20 stands at 564 down from 1,574 at this time last year. While lower U.S. production is one reason for a decline in the spread, increased production of Iranian crude oil has had a more powerful effect on the spread.

The nuclear nonproliferation agreement with Iran means that sanctions will ease and Iran will pump and export more crude oil in the weeks and months ahead. Iran has stated that their production will initially rise by 500,000 barrels per day and it will eventually rise to over one million. These two factors have caused the Brent-WTI spread to converge. The price trend in this spread is a negative for the price of crude at this time.

Crack spreads could crack the recent lows for crude

Recently, we have seen divergence emerging in crude oil processing spreads. Gasoline cracks have been outperforming crude oil, while heating oil crack spreads continue to trade at the weakest level in years.

Last Friday, the NYMEX gasoline crack spread closed at just over $14 per barrel.

The monthly chart of the gasoline crack highlights the recent strong action in this spread. Gasoline is a seasonal product; it tends to trade at the lows during this time of year. In 2014, the high in the gasoline crack at this time of year was $12.36. Therefore, compared to last year, gasoline prices are strong relative to the price of raw crude oil. This could be due to the current low level of gasoline futures – the December NYMEX gasoline futures contract closed last Friday at $1.2866 and the January futures closed at $1.2670 per gallon. The current low level of gasoline prices has increased demand from drivers as refineries work to process heating oil as the winter is only a few weeks ahead. In September U.S. drivers set a record for miles traveled by automobile.

The heating oil processing spread is a very different story. While the gasoline crack is relatively strong, the heating oil crack is very weak.

(click to enlarge)Last Friday, the January heating oil processing spread closed at around the $17.50 per barrel level. Last year at this time, the low in this spread was $22.73. In 2013, the low was $24.53 and in 2012, the low was $37.75 per barrel. The current level of the heating oil crack spread is seasonally the lowest since November 2010 when it traded down to $12.35 per barrel. In November 2010, crude oil was trading above $84 per barrel.

One of the many reasons that the crude oil price is weak these days is that demand for seasonal products, heating oil and diesel fuel, is low and inventories of distillates are high. As you can see, there are very few bullish signs in the fundamental structure for the crude oil market these days. In two weeks, the oil cartel will sit down to decide what to do now that the commodity they seek to “control” is awash in a sea of bearishness.

OPEC meeting is the next big event – Signals are that these guys cannot agree on anything

When OPEC met in November 2014, the price of crude was around the $75 per barrel level. When they met late last spring, the price had recovered to around $60. In both cases, the cartel left production levels unchanged. The stated production ceiling for the members of OPEC is 30 million barrels per day. The member nations are currently producing over 31.5 million barrels per day and increasing Iranian production means that OPEC output will likely rise. As the price of oil falls, the members need to sell more to try to recoup revenue. For the weaker members, the oil revenue is an imperative. Even the stronger members are under pressure. Saudi Arabia recently began selling bonds; they are borrowing money from the markets to replace lost income due to the lower crude oil price.

Meanwhile, OPEC’s current strategy is to continue to produce to flush high cost producers out of the market and build market share for the cartel members. However, OPEC did not count on a global economic slowdown, particularly in China. At the December 4 meeting of oil ministers in Vienna, it is likely that demand for crude oil will be an important consideration.

Dominant members of the cartel remain at odds. Saudi Arabia and Iran are on opposite sides and are involved in a proxy war in Yemen. The weaker members of OPEC want the stronger members to shoulder the burden of production cuts, and that is not likely to happen any time soon. In a hint of the discord between the member nations, on November 17, OPEC’s board of governors was unable to agree on the cartel’s long-term strategy plan and they tabled the issue until 2016. The issues revolve around ceiling output, setting production quotas and methods of maximizing member profits.

This tells us that unless the cartel is planning a giant spoof on the market, there is probably going to be no change in production policy. The current level of cheating or daily sales above the production ceiling may even increase. At this point, I doubt whether OPEC members could agree on whether it is sunny or cloudy outside given vast political, economic and cultural divergences among member nations. This means that selling will continue and even increase over the months ahead.

Crude oil and a turbulent world

All of the news, fundamentals and technicals for crude oil point to new lows and a challenge of the December 2008 lows of $32.48 per barrel. Last week, Goldman Sachs came out with a prediction that oil could fall to $20 per barrel. This is not such a bold call given the current state of the oil market, the strength of the dollar and the overall bear market for raw material prices. Last week, copper put in another multi-year low, iron ore fell to new lows and the Baltic Shipping Index fell to the lowest level since 1985.

However, all of the bad news for crude oil is currently in the price. We have seen this before. In March when crude oil traded to lows, there were calls for crude oil to fall – Dennis Gartman, the respected commodity analyst, went on CNBC and said that crude oil could fall to $10 per barrel as the energy commodity could go the way of “whale oil.” In late August, when oil fell to recent lows at $37.75, there were multiple calls for oil to fall to the low $30s and $20s. In both cases, powerful recovery rallies followed these bearish market calls. Following the March 2015 lows, oil rallied for over two months and gained 48.9%. In August of this year, a seven-week rally took oil 35% higher. The bearish prediction by Goldman Sachs last week could just turn out to be a contrarian’s dream.

There are a number of issues, big issues, going on in the world that can turn crude oil on a dime. First, Brent has fallen relative to WTI and the political premium for oil has evaporated. In 1990, when Saddam Hussein invaded Kuwait, the price of crude oil doubled in a matter of minutes. While the Middle East has always been a turbulent and dangerous part of the world, I would argue that today, it is far more turbulent and far more violent. The odds of attacks against oil fields and refineries in the Middle East have increased exponentially particularly given the recent ISIS attacks in France and around the world. At the same time, all of the bearish fundamental news about crude oil has decreased the political premium, and it is politics and war that could turn out to outweigh all of the current fundamentals.

Moreover, a surprise from outside of the Middle East could foster an increase in the price of oil. The world is now almost counting on Chinese economic weakness. Last week, Jamie Dimon, the Chairman of JPMorgan Chase, said that he is bullish on Chinese growth. If China does begin to show signs of growth, this could turn out to be supportive of crude oil and commodities in general, which remain mired in a bear market. Right now, the price of crude oil looks awful and fundamentals support a new low. However, all of that bearish data is in the price, and any surprise, in a world that always seems be full of surprises, could ignite the price once again. We saw this in March and again in August. As oil makes new lows, keep in mind that crude oil is a complicated puzzle. It is the unknown that will likely dictate the next big price move in oil. I am watching crude oil now and wondering whether Goldman Sachs called the turn in the market with their bearish forecast.

As a bonus, I have prepared a video on my website Commodix that provides a more in-depth and detailed analysis of the current state of the oil market to illustrate the real value implications and opportunities.

By Andrew Hecht in Seeking Alpha

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

GUNDLACH: If oil goes to $40 a barrel something is ‘very, very wrong with the world’

Jeffrey Gundlach

Jeff Gundlach – bond trader

West Texas Intermediate crude oil is at a 6-year low of $43 a barrel. 

And back in December 2014, “Bond King” Jeff Gundlach had a serious warning for the world if oil prices got to $40 a barrel.

“I hope it does not go to $40,” Gundlach said in a presentation, “because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be — to put it bluntly — terrifying.”

Writing in The Telegraph last week, Ambrose Evans-Pritchard noted that with Brent crude oil prices — the international benchmark — below $50 a barrel, only Norway’s government is bringing in enough revenue to balance their budget this year. 

And so in addition to the potential global instability created by low oil prices, Gundlach added that, “If oil falls to around $40 a barrel then I think the yield on ten year Treasury note is going to 1%.” The 10-year note, for its part, closed near 2.14% on Tuesday. 

On December 9, 2014, WTI was trading near $65 a barrel and Gundlach said oil looked like it was going lower, quipping that oil would find a bottom when it starts going up. 

WTI eventually bottomed at $43 in mid-March and spend most all of the spring and early summer trading near $60. 

On Tuesday, WTI hit a fresh 6-year low, plunging more than 4% and trading below $43 a barrel. 

WTI

In the last month, crude and the entire commodity complex have rolled over again as the market battles oversupply and a Chinese economy that is slowing.

And all this as the Federal Reserve makes noise about raising interest rates, having some in the market asking if these external factors — what the Fed would call “exogenous” factors — will stop the Fed from changing its interest rate policy for the first time in over almost 7 years. 

In an afternoon email, Russ Certo, a rate strategist at Brean Capital, highlighted Gundlach’s comments and said that the linkages between the run-up, and now collapse, in commodity prices since the financial crisis have made, quite simply, for an extremely complex market environment right now. 

“There is a global de-leveraging occurring in front of our eyes,” Certo wrote. “And, I suppose, the smart folks will determine the exact causes and translate what that means for FUTURE investment thesis. Today it may not matter other than accurately anticipating a myriad of global price movements in relation to each other.”

CRB commodity price index

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

Volte-Face Investments believes that it is …

https://martinhladyniuk.files.wordpress.com/2015/04/011bb-peak-oil-situation-31-jul-12.jpg

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.

Here’s What Could Point To More Upside For Oil

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Crude oil has already bounced back by 30 percent over the past month. But according to Richard Ross of Evercore ISI, currency market moves are predicting more upside for the battered commodity.

Over the past week, oil-exposed currencies such as the Canadian dollar, the Norwegian krone and the Australian dollar have surged in value against the U.S. dollar. And since these currencies tend to be correlated with crude, Ross extrapolates that oil has more upside.

Crude-exposed currencies “are really firming here, and they have been firming over the past month or so along with crude oil itself, and I think that holds bullish implications,” Ross said.

Looking at the Canadian currency in particular, Ross predicts that “the Canadian dollar continues to firm against the U.S. dollar, and this should be supportive of crude.”

Even the crumbling Russian ruble has had a great run over the past month, Ross points out.

“Earlier this year, the ruble was staring into the abyss,” he said in a Thursday “Trading Nation” segment. “Strength in the Russian ruble, once again, has a positive read-through for crude oil.”

However, not everyone buys the thesis.

Referring to the commodity currencies, Boris Schlossberg of BK Asset Management said that “they’re kind of reactive. It’s hard to make that case completely.”

In other words, crude is driving currencies like the Canadian dollar, and not the other way around.

Cheaper Foreign Oil Caps US Drilling Outlook

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By Chris Tomlinson | Houston Chronicle | MRT.com

The shale oil revolutionaries are retreating in disarray, and cheap foreign oil may banish them to the margins of the market.

As oil and natural gas move into a period of low prices, new data shows that North American drillers may not have the wherewithal to keep producing shale wells, which make up 90 percent of new drilling. In fact, if prices remain low for years to come, which is a real possibility, then investors may never see a return on the money spent to drill shale wells in the first place.

The full cost of producing oil and natural gas at a representative sample of U.S. companies, including capital spent to build the company and buy assets, is about $80 per barrel of oil equivalent, according to a study from the Bureau of Economic Geology’s Center for Energy Economics at the University of Texas.

The analysis of 2014 corporate financial data from 15 of the top publicly traded producers, which I got an exclusive look at before it’s published this week, determined that companies will have a hard time recovering the capital spent that year and maintaining production unless prices rise above $80 a barrel.

The price for West Texas Intermediate has spent most of the year below $50 a barrel.

Low prices, though, won’t mean that producers will shut in existing wells. Many of these same companies can keep pumping to keep cash coming into the company, and they can still collect a 10 percent return above the well’s operating costs at $50 a barrel of oil. They just won’t make enough money to invest in new wells or recover the capital already spent.

This harsh reality of what it will take to keep the shale revolution going shows how vulnerable it is to competition from cheap overseas oil.

“Everyone walks around thinking that they know how much this stuff costs because they see published information on what people spend to just drill wells,” explained Michelle Foss, who leads the Houston-based research center. “That is not what it takes for a company to build these businesses, to recover your capital and to make money.” The bureau was founded in 1909 and functions as the state geological agency.

Low oil prices will also exacerbate the economic impact of low natural gas prices. For years natural gas has kept flowing despite prices below $4 for a million British thermal units because about 50 percent of wells produced both gas and liquids, such as crude oil and condensate.

True natural gas costs

High oil prices have helped companies subsidize natural gas wells, but lower oil prices mean natural gas wells that don’t produce liquids will need to stand on their own economics.

The center’s analysis found that among the sample companies focused primarily on gas, prices will need to top $6 a million BTUs just to cover full costs and rise above $12 a million BTUs to recover the capital expended to develop the wells.

“We have important resources, but people have to be realistic about the challenges of developing them,” Foss told me. “There will have to be higher prices.”

Everyone predicts prices will rise again. The only questions are how quickly and to what price. Some experts predict WTI prices will reach $70 a barrel by the end of 2015, while others see $60. The soonest most expect to see $80 a barrel oil is in 2017. Saudi Arabian officials have said they believe the price has stabilized and don’t see oil returning to $100 a barrel for the next five years.

High prices and shale

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The Saudi opinion is particularly important because that nation can produce oil cheaper than any other country and can produce more oil than any other country. As the informal leader of the Organization of the Petroleum Exporting Countries, Saudi Arabia kept the price of oil inside a band between $80 and $100 a barrel for years. Now, the Saudis appear ready to keep the price low.

That’s because high prices inspired the shale revolution, where American companies figured out how to economically drill horizontally into tight rocks and then hydraulically fracture them to release oil and natural gas. Since OPEC countries rely on high oil prices to finance their governments, everyone assumed OPEC would cut production and keep revenues high.

Arab leaders, though, were more concerned about holding on to market share and allowed prices to fall below levels that make most shale wells economic. Foss, who recently returned from meetings in the United Arab Emirates, said OPEC is unlikely to change course because developing countries are seeking alternatives to oil and reducing demand.

“The Saudis and their partners see pressures on oil use everywhere they look, and what they want is their production, in particular their share of the global supply pie, to be as competitive as it can be to ensure they’ve got revenue coming into the kingdom for future generations,” she said.

OPEC is afraid rich countries like the U.S. are losing their addiction to oil, and by lowering prices hope to keep us hooked. And OPEC has plenty of product.

“There’s 9 million barrels a day in current and potential production capacity in Iraq and Iran that is tied up by political conflicts, and if you sort that out enough, that’s a flood of cheap oil onto the market,” Foss said.

On the losing end

If prices remain low, the big losers will be the bond holders and shareholders of indebted, small and medium-size companies that drill primarily in North America. Since these companies are not getting high enough prices to pay off capital expenditures through higher share prices or interest payments , they are in serious trouble.

The inability of Denver-based Whiting Petroleum to sell itself is an example. The board of the North Dakota-focused company was forced to issue new shares, reducing the company’s value by 20 percent, and take on more expensive debt. Quicksilver Resources, based in Fort Worth, filed for Chapter 11 bankruptcy on March 17 because it couldn’t make the interest payments on its debt and no one was willing to invest more capital.

Until one of these companies is bought, we won’t know the true value of the shale producers at the current oil and natural gas prices.

But as more data reaches the market, there is a real danger that these companies are worth even less than investors fear, even though they may have high-quality assets.

Junk-Rated Oil & Gas Companies in a “Liquidity Death Spiral”

by Wolf Richter

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On the face of it, the oil price appears to be stabilizing. What a precarious balance it is, however.

Behind the facade of stability, the re-balancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations.

So said the International Energy Agency in its Oil Market Report on Friday. West Texas Intermediate plunged over 4% to $45 a barrel.

The boom in US oil production will continue “to defy expectations” and wreak havoc on the price of oil until the power behind the boom dries up: money borrowed from yield-chasing investors driven to near insanity by the Fed’s interest rate repression. But that money isn’t drying up yet – except at the margins.

Companies have raked in 14% more money from high-grade bond sales so far this year than over the same period in 2014, according to LCD. And in 2014 at this time, they were 27% ahead of the same period in 2013. You get the idea.

Even energy companies got to top off their money reservoirs. Among high-grade issuers over just the last few days were BP Capital, Valero Energy, Sempra Energy, Noble, and Helmerich & Payne. They’re all furiously bringing in liquidity before it gets more expensive.

In the junk-bond market, bond-fund managers are chasing yield with gusto. Last week alone, pro-forma junk bond issuance “ballooned to $16.48 billion, the largest weekly tally in two years,” the LCD HY Weekly reported. Year-to-date, $79.2 billion in junk bonds have been sold, 36% more than in the same period last year.

But despite this drunken investor enthusiasm, the bottom of the energy sector – junk-rated smaller companies – is falling out.

Standard & Poor’s rates 170 bond issuers that are engaged in oil and gas exploration & production, oil field services, and contract drilling. Of them, 81% are junk rated – many of them deep junk. The oil bust is now picking off the smaller junk-rated companies, one after the other, three of them so far in March.

On March 3, offshore oil-and-gas contractor CalDive that in 2013 still had 1,550 employees filed for bankruptcy. It’s focused on maintaining offshore production platforms. But some projects were suspended last year, and lenders shut off the spigot.

On March 8, Dune Energy filed for bankruptcy in Austin, TX, after its merger with Eos Petro collapsed. It listed $144 million in debt. Dune said that it received $10 million Debtor in Possession financing, on the condition that the company puts itself up for auction.

On March 9, BPZ Resources traipsed to the courthouse in Houston to file for bankruptcy, four days after I’d written about its travails; it had skipped a $60 million payment to its bondholders [read… “Default Monday”: Oil & Gas Companies Face Their Creditors].

And more companies are “in the pipeline to be restructured,” LCD reported. They all face the same issues: low oil and gas prices, newly skittish bond investors, and banks that have their eyes riveted on the revolving lines of credit with which these companies fund their capital expenditures. Being forever cash-flow negative, these companies periodically issue bonds and use the proceeds to pay down their revolver when it approaches the limit. In many cases, the bank uses the value of the company’s oil and gas reserves to determine that limit.

If the prices of oil and gas are high, those reserves have a high value. It those prices plunge, the borrowing base for their revolving lines of credit plunges. S&P Capital IQ explained it this way in its report, “Waiting for the Spring… Will it Recoil”:

Typically, banks do their credit facility redeterminations in April and November with one random redetermination if needed. With oil prices plummeting, we expect banks to lower their price decks, which will then lead to lower reserves and thus, reduced borrowing-base availability.

April is coming up soon. These companies would then have to issue bonds to pay down their credit lines. But with bond fund managers losing their appetite for junk-rated oil & gas bonds, and with shares nearly worthless, these companies are blocked from the capital markets and can neither pay back the banks nor fund their cash-flow negative operations. For many companies, according to S&P Capital IQ, these redeterminations of their credit facilities could lead to a “liquidity death spiral.”

Alan Holtz, Managing Director in AlixPartners’ Turnaround and Restructuring group told LCD in an interview:

We are already starting to see companies that on the one hand are trying to work out their operational problems and are looking for financing or a way out through the capital markets, while on the other hand are preparing for the events of contingency planning or bankruptcy.

Look at BPZ Resources. It wasn’t able to raise more money and ended up filing for bankruptcy. “I think that is going to be a pattern for many other companies out there as well,” Holtz said.

When it trickled out on Tuesday that Hercules Offshore, which I last wrote about on March 3, had retained Lazard to explore options for its capital structure, its bonds plunged as low as 28 cents on the dollar. By Friday, its stock closed at $0.41 a share.

When Midstates Petroleum announced that it had hired an interim CEO and put a restructuring specialist on its board of directors, its bonds got knocked down, and its shares plummeted 33% during the week, closing at $0.77 a share on Friday.

When news emerged that Walter Energy hired legal counsel Paul Weiss to explore restructuring options, its first-lien notes – whose investors thought they’d see a reasonable recovery in case of bankruptcy – dropped to 64.5 cents on the dollar by Thursday. Its stock plunged 63% during the week to close at $0.33 a share on Friday.

Numerous other oil and gas companies are heading down that path as the oil bust is working its way from smaller more vulnerable companies to larger ones. In the process, stockholders get wiped out. Bondholders get to fight with other creditors over the scraps. But restructuring firms are licking their chops, after a Fed-induced dry spell that had lasted for years.

Investors Crushed as US Natural Gas Drillers Blow Up

by Wolf Richter

The Fed speaks, the dollar crashes. The dollar was ripe. The entire world had been bullish on it. Down nearly 3% against the euro, before recovering some. The biggest drop since March 2009. Everything else jumped. Stocks, Treasuries, gold, even oil.

West Texas Intermediate had been experiencing its biggest weekly plunge since January, trading at just above $42 a barrel, a new low in the current oil bust. When the Fed released its magic words, WTI soared to $45.34 a barrel before re-sagging some. Even natural gas rose 1.8%. Energy related bonds had been drowning in red ink; they too rose when oil roared higher. It was one heck of a party.

But it was too late for some players mired in the oil and gas bust where the series of Chapter 11 bankruptcy filings continues. Next in line was Quicksilver Resources.

It had focused on producing natural gas. Natural gas was where the fracking boom got started. Fracking has a special characteristic. After a well is fracked, it produces a terrific surge of hydrocarbons during first few months, and particularly on the first day. Many drillers used the first-day production numbers, which some of them enhanced in various ways, in their investor materials. Investors drooled and threw more money at these companies that then drilled this money into the ground.

But the impressive initial production soon declines sharply. Two years later, only a fraction is coming out of the ground. So these companies had to drill more just to cover up the decline rates, and in order to drill more, they needed to borrow more money, and it triggered a junk-rated energy boom on Wall Street.

At the time, the price of natural gas was soaring. It hit $13 per million Btu at the Henry Hub in June 2008. About 1,600 rigs were drilling for gas. It was the game in town. And Wall Street firms were greasing it with other people’s money. Production soared. And the US became the largest gas producer in the world.

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But then the price began to plunge. It recovered a little after the Financial Crisis but re-plunged during the gas “glut.” By April 2012, natural gas had crashed 85% from June 2008, to $1.92/mmBtu. With the exception of a few short periods, it has remained below $4/mmBtu – trading at $2.91/mmBtu today.

Throughout, gas drillers had to go back to Wall Street to borrow more money to feed the fracking orgy. They were cash-flow negative. They lost money on wells that produced mostly dry gas. Yet they kept up the charade. They aced investor presentations with fancy charts. They raved about new technologies that were performing miracles and bringing down costs. The theme was that they would make their investors rich at these gas prices.

The saving grace was that oil and natural-gas liquids, which were selling for much higher prices, also occur in many shale plays along with dry gas. So drillers began to emphasize that they were drilling for liquids, not dry gas, and they tried to switch production to liquids-rich plays. In that vein, Quicksilver ventured into the oil-rich Permian Basin in Texas. But it was too little, too late for the amount of borrowed money it had already burned through over the years by fracking for gas below cost.

During the terrible years of 2011 and 2012, drillers began reclassifying gas rigs as rigs drilling for oil. It was a judgement call, since most wells produce both. The gas rig count plummeted further, and the oil rig count skyrocketed by about the same amount. But gas production has continued to rise since, even as the gas rig count has continued to drop. On Friday, the rig count was down to 257 gas rigs, the lowest since March 1993, down 84% from its peak in 2008.

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Quicksilver’s bankruptcy is a consequence of this fracking environment. It listed $2.35 billion in debts. That’s what is left from its borrowing binge that covered its negative cash flows. It listed only $1.21 billion in assets. The rest has gone up in smoke.

Its shares are worthless. Stockholders got wiped out. Creditors get to fight over the scraps.

Its leveraged loan was holding up better: the $625 million covenant-lite second-lien term loan traded at 56 cents on the dollar this morning, according to S&P Capital IQ LCD. But its junk bonds have gotten eviscerated over time. Its 9.125% senior notes due 2019 traded at 17.6 cents on the dollar; its 7.125% subordinated notes due 2016 traded at around 2 cents on the dollar.

Among its creditors, according to the Star Telegram: the Wilmington Trust National Association ($361.6 million), Delaware Trust Co. ($332.6 million), US Bank National Association ($312.7 million), and several pipeline companies, including Oasis Pipeline and Energy Transfer Fuel.

Last year, it hired restructuring advisers. On February 17, it announced that it would not make a $13.6 million interest payment on its senior notes and invoked the possibility of filing for Chapter 11. It said it would use its 30-day grace period to haggle with its creditors over the “company’s options.”

Now, those 30 days are up. But there were no other “viable options,” the company said in the statement. Its Canadian subsidiary was not included in the bankruptcy filing; it reached a forbearance agreement with its first lien secured lenders and has some breathing room until June 16.

Quicksilver isn’t alone in its travails. Samson Resources and other natural gas drillers are stuck neck-deep in the same frack mud.

A group of private equity firms, led by KKR, had acquired Samson in 2011 for $7.2 billion. Since then, Samson has lost $3 billion. It too hired restructuring advisers to deal with its $3.75 billion in debt. On March 2, Moody’s downgraded Samson to Caa3, pointing at “chronically low natural gas prices,” “suddenly weaker crude oil prices,” the “stressed liquidity position,” and delays in asset sales. It invoked the possibility of “a debt restructuring” and “a high risk of default.”

But maybe not just yet. The New York Post reported today that, according to sources, a JPMorgan-led group, which holds a $1 billion revolving line of credit, is granting Samson a waiver for an expected covenant breach. This would avert default for the moment. Under the deal, the group will reduce the size of the revolver. Last year, the same JPMorgan-led group already reduced the credit line from $1.8 billion to $1 billion and waived a covenant breach.

By curtailing access to funding, they’re driving Samson deeper into what S&P Capital IQ called the “liquidity death spiral.” According to the New York Post’s sources, in August the company has to make an interest payment to its more junior creditors, “and may run out of money later this year.”

Industry soothsayers claimed vociferously over the years that natural gas drillers can make money at these prices due to new technologies and efficiencies. They said this to attract more money. But Quicksilver along with Samson Resources and others are proof that these drillers had been drilling below the cost of production for years. And they’d been bleeding every step along the way. A business model that lasts only as long as new investors are willing to bail out old investors.

But it was the crash in the price of “liquids” that made investors finally squeamish, and they began to look beyond the hype. In doing so, they’re triggering the very bloodletting amongst each other that ever more new money had delayed for years. Only now, it’s a lot more expensive for them than it would have been three years ago. While the companies will get through it in restructured form, investors get crushed.


Oil Production Falling In Three Big Shale Plays, EIA Says

HOUSTON – It’s official: The shale oil boom is starting to waver.

And, in a way, it may have souped-up rigs and more efficient drilling technologies to thank for that.

Crude production at three major U.S. shale oil fields is projected to fall this month for the first time in six years, the U.S. Energy Information Administration said Tuesday.

It’s one of the first signs that idling hundreds of drilling rigs and billions of dollars in corporate cutbacks are starting to crimp the nation’s surging oil patch.

But it also shows that drilling technology and techniques have advanced to the point that productivity gains may be negligible in some shale plays where horizontal drilling and hydraulic fracturing have been used together for the past several years.

Because some plays are already full of souped-up horizontal rigs, oil companies don’t have as many options to become more efficient and stem production losses, as they did in the 2008-2009 downturn, the EIA said.

The EIA’s monthly drilling productivity report indicates that rapid production declines from older wells in three shale plays are starting to overtake new output, as oil companies drill fewer wells.

In the recession six years ago, the falling rig count didn’t lead to declining production because new technologies boosted how fast rigs could drill wells.

But now that oil firms have figured out how to drill much more efficiently, “it is not clear that productivity gains will offset rig count declines to the same degree as in 2008-09,” the EIA said.

Energy Information Agency

Overall, U.S. oil production is set to increase slightly from March to April to 5.6 million barrels a day in six major fields, according to the EIA.

But output is falling in the Eagle Ford Shale in South Texas, North Dakota’s Bakken Shale and the Niobrara Shale in Colorado, Wyoming, Nebraska and Kansas.

In those three fields, net production is expected to drop by a combined 24,000 barrels a day.

The losses were masked by production gains in the Permian Basin in West Texas and other regions.

Efficiency improvements are still emerging in the Permian, faster than in other oil fields because the region was largely a vertical-drilling zone as recently as December 2013, the EIA said.

Net crude output in the Bakken is expected to decline by 8,000 barrels a day from March to April. In the Eagle Ford, it’s slated to fall by 10,000 barrels a day. And in the Niobrara, production will dip by roughly 5,000 barrels a day.

But daily crude output jumped by 21,000 barrels in the Permian and by 3,000 barrels in the Utica Shale in Ohio and Pennsylvania.

Read more at MRT.com

This Chart Shows the True Collapse of Fracking in the US

by Wolf Richter
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Rex Tillerson, Exxon Mobile CEO

“People need to kinda settle in for a while.” That’s what Exxon Mobil CEO Rex Tillerson said about the low price of oil at the company’s investor conference. “I see a lot of supply out there.”

So Exxon is going to do its darnedest to add to this supply: 16 new production projects will start pumping oil and gas through 2017. Production will rise from 4 million barrels per day to 4.3 million. But it will spend less money to get there, largely because suppliers have had to cut their prices.

That’s the global oil story. In the US, a similar scenario is playing out. Drillers are laying some people off, not massive numbers yet. Like Exxon, they’re shoving big price cuts down the throats of their suppliers. They’re cutting back on drilling by idling the least efficient rigs in the least productive plays – and they’re not kidding about that.

In the latest week, they idled a 64 rigs drilling for oil, according to Baker Hughes, which publishes the data every Friday. Only 922 rigs were still active, down 42.7% from October, when they’d peaked. Within 21 weeks, they’ve taken out 687 rigs, the most terrific, vertigo-inducing oil-rig nose dive in the data series, and possibly in history:

US-rig-count_1988_2015-03-06=oilAs Exxon and other drillers are overeager to explain: just because we’re cutting capex, and just because the rig count plunges, doesn’t mean our production is going down. And it may not for a long time. Drillers, loaded up with debt, must have the cash flow from production to survive.

But with demand languishing, US crude oil inventories are building up further. Excluding the Strategic Petroleum Reserve, crude oil stocks rose by another 10.3 million barrels to 444.4 million barrels as of March 4, the highest level in the data series going back to 1982, according to the Energy Information Administration. Crude oil stocks were 22% (80.6 million barrels) higher than at the same time last year.

“When you have that much storage out there, it takes a long time to work that off,” said BP CEO Bob Dudley, possibly with one eye on this chart:

US-crude-oil-stocks-2015-03-04So now there is a lot of discussion when exactly storage facilities will be full, or nearly full, or full in some regions. In theory, once overproduction hits used-up storage capacity, the price of oil will plummet to whatever level short sellers envision in their wildest dreams. Because: what are you going to do with all this oil coming out of the ground with no place to go?

A couple of days ago, the EIA estimated that crude oil stock levels nationwide on February 20 (when they were a lot lower than today) used up 60% of the “working storage capacity,” up from 48% last year at that time. It varied by region:

Capacity is about 67% full in Cushing, Oklahoma (the delivery point for West Texas Intermediate futures contracts), compared with 50% at this point last year. Working capacity in Cushing alone is about 71 million barrels, or … about 14% of the national total.

As of September 2014, storage capacity in the US was 521 million barrels. So if weekly increases amount to an average of 6 million barrels, it would take about 13 weeks to fill the 77 million barrels of remaining capacity. Then all kinds of operational issues would arise. Along with a dizzying plunge in price.

In early 2012, when natural gas hit a decade low of $1.92 per million Btu, they predicted the same: storage would be full, and excess production would have to be flared, that is burned, because there would be no takers, and what else are you going to do with it? So its price would drop to zero.

They actually proffered that, and the media picked it up, and regular folks began shorting natural gas like crazy and got burned themselves, because it didn’t take long for the price to jump 50% and then 100%.

Oil is a different animal. The driving season will start soon. American SUVs and pickups are designed to burn fuel in prodigious quantities. People will be eager to drive them a little more, now that gas is cheaper, and they’ll get busy shortly and fix that inventory problem, at least for this year. But if production continues to rise at this rate, all bets are off for next year.

Natural gas, though it refused to go to zero, nevertheless got re-crushed, and the price remains below the cost of production at most wells. Drilling activity has dwindled. Drillers idled 12 gas rigs in the latest week. Now only 268 rigs are drilling for gas, the lowest since April 1993, and down 83.4% from its peak in 2008! This is what the natural gas fracking boom-and-bust cycle looks like:

US-rig-count_1988_2015-03-06=gasYet production has continued to rise. Over the last 12 months, it soared about 9%, which is why the price got re-crushed.

Producing gas at a loss year after year has consequences. For the longest time, drillers were able to paper over their losses on natural gas wells with a variety of means and go back to the big trough and feed on more money that investors were throwing at them, because money is what fracking drills into the ground.

But that trough is no longer being refilled for some companies. And they’re running out. “Restructuring” and “bankruptcy” are suddenly the operative terms.


“Default Monday”: Oil & Gas Face Their Creditors

by Wolf Richter

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Debt funded the fracking boom. Now oil and gas prices have collapsed, and so has the ability to service that debt. The oil bust of the 1980s took down 700 banks, including 9 of the 10 largest in Texas. But this time, it’s different. This time, bondholders are on the hook.

And these bonds – they’re called “junk bonds” for a reason – are already cracking. Busts start with small companies and proceed to larger ones. “Bankruptcy” and “restructuring” are the terms that wipe out stockholders and leave bondholders and other creditors to tussle over the scraps.

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Early January, WBH Energy, a fracking outfit in Texas, kicked off the series by filing for bankruptcy protection. It listed assets and liabilities of $10 million to $50 million. Small fry.

A week later, GASFRAC filed for bankruptcy in Alberta, where it’s based, and in Texas – under Chapter 15 for cross-border bankruptcies. Not long ago, it was a highly touted IPO, whose “waterless fracking” technology would change a parched world. Instead of water, the system pumps liquid propane gel (similar to Napalm) into the ground; much of it can be recaptured, in theory.

Ironically, it went bankrupt for other reasons: operating losses, “reduced industry activity,” the inability to find a buyer that would have paid enough to bail out its creditors, and “limited access to capital markets.” The endless source of money without which fracking doesn’t work had dried up.

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On February 17, Quicksilver Resources announced that it would not make a $13.6 million interest payment on its senior notes due in 2019. It invoked the possibility of filing for Chapter 11 bankruptcy to “restructure its capital structure.” Stockholders don’t have much to lose; the stock is already worthless. The question is what the creditors will get.

It has hired Houlihan Lokey Capital, Deloitte Transactions and Business Analytics, “and other advisors.” During its 30-day grace period before this turns into an outright default, it will haggle with its creditors over the “company’s options.”

On February 27, Hercules Offshore had its share-price target slashed to zero, from $4 a share, at Deutsche Bank, which finally downgraded the stock to “sell.” If you wait till Deutsche Bank tells you to sell, you’re ruined!

When I wrote about Hercules on October 15, HERO was trading at $1.47 a share, down 81% since July. Those who followed the hype to “buy the most hated stocks” that day lost another 44% by the time I wrote about it on January 16, when HERO was at $0.82 a share. Wednesday, shares closed at $0.60.

Deutsche Bank was right, if late. HERO is headed for zero (what a trip to have a stock symbol that rhymes with zero). It’s going to restructure its junk debt. Stockholders will end up holding the bag.

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On Monday, due to “chronically low natural gas prices exacerbated by suddenly weaker crude oil prices,” Moody’s downgraded gas-driller Samson Resources, to Caa3, invoking “a high risk of default.”

It was the second time in three months that Moody’s downgraded the company. The tempo is picking up. Moody’s:

The company’s stressed liquidity position, delays in reaching agreements on potential asset sales and its retention of restructuring advisors increases the possibility that the company may pursue a debt restructuring that Moody’s would view as a default.

Moody’s was late to the party. On February 26, it was leaked that Samson had hired restructuring advisers Kirkland & Ellis and Blackstone’s restructuring group to figure out how to deal with its $3.75 billion in debt. A group of private equity firms, led by KKR, had acquired Samson in 2011 for $7.2 billion. Since then, Samson has lost $3 billion. KKR has written down its equity investment to 5 cents on the dollar.

This is no longer small fry.

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Also on Monday, oil-and-gas exploration and production company BPZ Resources announced that it would not pay $62 million in principal and interest on convertible notes that were due on March 1. It will use its grace period of 10 days on the principal and of 30 days on the interest to figure out how to approach the rest of its existence. It invoked Chapter 11 bankruptcy as one of the options.

If it fails to make the payments within the grace period, it would also automatically be in default of its 2017 convertible bonds, which would push the default to $229 million.

BPZ tried to refinance the 2015 convertible notes in October and get some extra cash. Fracking devours prodigious amounts of cash. But there’d been no takers for the $150 million offering. Even bond fund managers, driven to sheer madness by the Fed’s policies, had lost their appetite. And its stock is worthless.

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Also on Monday – it was “default Monday” or something – American Eagle Energy announced that it would not make a $9.8 million interest payment on $175 million in bonds due that day. It will use its 30-day grace period to hash out its future with its creditors. And it hired two additional advisory firms.

One thing we know already: after years in the desert, restructuring advisers are licking their chops.

The company has $13.6 million in negative working capital, only $25.9 million in cash, and its $60 million revolving credit line has been maxed out.

But here is the thing: the company sold these bonds last August! And this was supposed to be its first interest payment.

That’s what a real credit bubble looks like. In the Fed’s environment of near-zero yield on reasonable investments, bond fund managers are roving the land chasing whatever yield they can discern. And they’re holding their nose while they pick up this stuff to jam it into bond funds that other folks have in their retirement portfolio.

Not even a single interest payment!

Borrowed money fueled the fracking boom. The old money has been drilled into the ground. The new money is starting to dry up. Fracked wells, due to their horrendous decline rates, produce most of their oil and gas over the first two years. And if prices are low during that time, producers will never recuperate their investment in those wells, even if prices shoot up afterwards. And they’ll never be able to pay off the debt from the cash flow of those wells. A chilling scenario that creditors were blind to before, but are now increasingly forced to contemplate.

Gundlach: If The Fed Raises Rates By Mid-Year “The Sinister Side Of Low Oil may Raise Its Head

jeffrey gundlach

Photo by Reuters | Eduardo Munoz.  Article by by Robert Huebscher in Advisor Perspective

The Fed should reject its inclination to raise rates, according to Jeffrey Gundlach. It’s rare that he agrees with Larry Summers, but in this case the two believe that the fundamentals in the U.S. economy do not justify higher interest rates.

Gundlach, the founder and chief investment officer of Los Angeles-based Doubleline Capital, spoke to investors in a conference call on February 17. The call was focused on the release of the new DoubleLine Long Duration Fund, but Gundlach also discussed a number of developments in the economy and the bond market.

Signals of an impending rate increase have come from comments by Fed governors that the word “patient” should be dropped from the Fed meeting notes, according to Gundlach. That word has taken on special significance, he explained, since Janet Yellen attached a two-month time horizon to it.

“If they drop that word,” Gundlach said, “it would be a strong signal that rates would rise in the following two months.”

The Fed seems “philosophically” inclined to raise rates, Gundlach said, even though the fundamentals do not justify such a move. Strong disinflationary pressure coming from the collapse in oil prices should caution the Fed against raising rates, he said.

Gundlach was asked about comments by Gary Shilling that oil prices might go as low at $10/barrel. “We better all hope we don’t get $10,” he said, “because something very deflationary would be happening in this world.” If that is the case, Gundlach said investors should flock to long-term Treasury bonds.

“I’d like to think that the world is not in that kind of deflationary precipice,” he said.

Oil will break below its previous $44 low, Gundlach said. But he did not put a price target on oil.

Gundlach warned that by mid-year, if the Fed does raise rates, “the sinister side of low oil may raise its head.” At that time, lack of hiring or layoffs in the fracking industry could cripple the economy, according to Gundlach.

In the short term, Gundlach said that the recent rise in interest rates is a signal that the “huge deflationary scare” –which was partly because of Greece – has dissipated. Investors should monitor Spanish and Italian yields, he said. If they remain low, it is a signal that Greece is not leaving the Eurozone or that, if it does, “it is not a big deal.”

http://www.advisorperspectives.com/newsletters15/Gundlach_to_the_Fed.php

OPEC Can’t Kill American Shale

https://i0.wp.com/static3.businessinsider.com/image/542c5b786da8118e288b4570/morgan-stanley-here-are-the-16-best-stocks-for-playing-the-american-shale-boom.jpgby Shareholdersunite

Summary

  • OPEC is supposedly out to beat, or at least curtail the growth of American shale oil production.
  • For a host of reasons, especially the much shorter capex cycle for shale, they will not succeed unless they are willing to accept permanent low oil prices.
  • But, permanent low oil prices will do too much damage to OPEC economies for this to be a credible threat.

We’re sure by now you are familiar with the main narrative behind the oil price crash. First, while oil production outside of North America is basically stagnant since 2005.

The shale revolution has dramatically increased supply in America.

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The resulting oversupply has threatened OPEC and the de-facto leader Saudi Arabia has chosen a confrontational strategy not to make way for the new kid on the block, but instead trying to crush, or at least contain it. Can they achieve this aim, provided it indeed is their aim?

Breakeven price
At first, one is inclined to say yes, for the simple reason that Saudi (and most OPEC) oil is significantly cheaper to get out of the ground.

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This suggests that all OPEC has to do is to keep output high and sooner or later the oversupply will work itself off the market, and expensive oil is more likely to see cutbacks than cheaper oil, although this critically depends on incentives facing individual producers.

Capex decline
It is therefore no wonder that we’ve seen significant declines in rig counts and numerous companies have announced considerable capex declines. While this needs time to work out into supply cutbacks, these will eventually come.

For instance BP (NYSE:BP) cutting capex from $22.9B in 2014 to $20B in 2015, or Conoco (NYSE:COP) reducing expenditures by more than 30% to $11.5B this year on drilling projects from Colorado to Indonesia. There are even companies, like SandRidge (NYSE:SD), that are shutting 75% of their rigs.

Leverage
It is often argued that the significant leverage of many American shale companies could accelerate the decline, although it doesn’t necessarily have to be like that.

While many leveraged companies will make sharp cutbacks in spending, which has a relatively rapid effect on production (see below), others have strong incentives to generate as much income as possible, so they might keep producing.

Even the companies that go belly up under a weight of leverage will be forced to relinquish their licenses or sell them off at pennies to the dollar, significantly lowering the fixed cost for new producers to take their place.

Hedging
Many shale companies have actually hedged much of their production, so they are shielded from much of the downside (at a cost) at least for some time. And they keep doing this:

Rather than wait for their price insurance to run out, many companies are racing to revamp their policies, cashing in well-placed hedges to increase the number of future barrels hedged, according to industry consultants, bankers and analysts familiar with the deals. [Reuters]

Economics
Being expensive is not necessarily a sufficient reason for being first in line for production cuts. For instance, we know that oil from the Canadian tar sands is at the high end of cost, but simple economics can explain why production cuts are unlikely for quite some time to come.

The tar sands involve a much higher fraction as fixed cost:

Oil-sands projects are multibillion-dollar investments made upfront to allow many years of output, unlike competing U.S. shale wells that require constant injections of capital. It’s future expansion that’s at risk. “Once you start a project it’s like a freight train: you can’t stop it,” said Laura Lau, a Toronto-based portfolio manager at Brompton Funds. Current oil prices will have producers considering “whether they want to sanction a new one.” [Worldoil]

So, once these up-front costs are made, these are basically sunk, and production will only decline if price falls below marginal cost. As long as the oil price stays above that, companies can still recoup part of their fixed (sunk) cost and they have no incentive to cut back production.

But, of course, you have tar sand companies that have not yet invested all required up-front capital and new capex expenditures will be discouraged with low oil prices. So, there is still the usual economic upward sloping supply curve operative here.

Swing producer
The funny thing is American shale oil is at the opposite end of this fixed (and sunk) cost universe, apart from acquiring the licenses. As wells have steep decline curves, production needs constant injection of capital for developing new wells.

Production can therefore be wound down pretty quickly should the economics require, and it can also be wound back up relatively quickly, which we think is enough reason why American shale is becoming the new (passive) swing producer. This has very important implications:

  • The relevant oil price to look at isn’t necessarily the spot price, but the 12-24 months future price, the time frame between capex and production.
  • OPEC will not only need to produce a low oil price today, that price needs to be low for a prolonged period of time in order to see cutbacks in production of American shale oil. Basically, OPEC needs the present oil price to continue indefinitely, as soon as it allows the price to rise again, shale oil capex will rebound and production will increase fairly soon afterwards.

So basically, shale is the proverbial toy duck which OPEC needs to submerge in the bathtub, but as soon as it releases the pressure, the duck will emerge again.

Declining cost curves
The shale revolution caught many by surprise, especially the speed of the increase in production. While technology and learning curves are still improving, witness how production cost curves have been pushed out in the last years:

There is little reason this advancement will come to a sudden halt, even if capex is winding down. In fact, some observers are arguing that producers shift production from marginal fields to fields with better production economics, and the relatively steep production decline curves allow them to make this shift pretty rapidly.

Others point out that even the rapid decline in rig count will not have an immediate impact on production, as the proportion of horizontal wells and platforms where multiple wells are drilled from the same location are increasing, all of which is increasing output per rig.

Another shift that is going on is to re-frack existing wells, instead of new wells. The first is significantly cheaper:

Beset by falling prices, the oil industry is looking at about 50,000 existing wells in the U.S. that may be candidates for a second wave of fracking, using techniques that didn’t exist when they were first drilled. New wells can cost as much as $8 million, while re-fracking costs about $2 million, significant savings when the price of crude is hovering close to $50 a barrel, according to Halliburton Co., the world’s biggest provider of hydraulic fracturing services. [Bloomberg]

Production cuts will take time
The hedging and shift to fields with better economics is only a few of the reasons why so far there has been little in the way of actual production cuts in American shale production, the overall oil market still remains close to record oversupply. The International Energy Agency (IEA) argues:

It is not unusual in a market correction for such a gap to emerge between market expectations and current trends. Such is the cyclical nature of the oil market that the full physical impact of demand and supply responses can take months, if not years, to be felt [CNBC].

In fact, the IEA also has explicit expectations for American shale oil itself:

The United States will remain the world’s top source of oil supply growth up to 2020, even after the recent collapse in prices, the International Energy Agency said, defying expectations of a more dramatic slowdown in shale growth [Yahoo].

OPEC vulnerable itself
Basically, the picture we’re painting above is that American shale will be remarkably resilient. Yes, individual companies will struggle, sharp cutbacks in capex are already underway, and some companies will go under, but the basic fact is that as quick as capex and production can fall, they can rise as quickly again when the oil price recovers.

How much of OPEC can the storm of the oil price crash, very much remains to be seen. There is pain all around, which isn’t surprising as one considers that most OPEC countries have budgeted for much higher oil prices for their public finances.

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You’ll notice that these prices are all significantly, sometimes dramatically, higher than what’s needed to balance their budgets. Now, many of these countries also have very generous energy subsidies on domestic oil use, supposedly to share the benefits of their resource wealth (and/or provide industry with a cost advantage).

So, there is a buffer as these subsidies can be wound down relatively painless. Some of these countries also have other buffers, like sovereign wealth funds or foreign currency reserves. And there is often no immediate reason for public budgets to be balanced.

But to suggest, as this article is doing, that OPEC is winning the war is short-sighted.

Conclusion
While doing damage to individual American shale oil producers and limiting its expansion, the simple reality is that for a host of reasons discussed above, OPEC can’t beat American shale oil production unless it is willing to accept $40 oil indefinitely. While some OPEC countries might still produce profitably at these levels, the damage to all OPEC economies will be immense, so, we can’t really see this as a realistic scenario in any way.

Oil Glut Gets Worse – Production, Inventories Soar to Record

https://i1.wp.com/bloximages.newyork1.vip.townnews.com/oaoa.com/content/tncms/assets/v3/editorial/9/14/914424e8-aaf0-11e4-ac1c-b74346c3e35b/54cf9855658eb.image.jpgby Wolf Richter

February 4th, 2015: Crude oil had rallied 20% in three days, with West Texas Intermediate jumping $9 a barrel since Friday morning, from $44.51 a barrel to $53.56 at its peak on Tuesday. “Bull market” was what we read Tuesday night. The trigger had been the Baker Hughes report of active rigs drilling for oil in the US, which had plummeted by the most ever during the latest week. It caused a bout of short covering that accelerated the gains. It was a truly phenomenal rally!

But the weekly rig count hasn’t dropped nearly enough to make a dent into production. It’s down 24% from its peak in October. During the last oil bust, it had dropped 60%. It’s way too soon to tell what impact it will have because for now, production of oil is still rising.

And that phenomenal three-day 20% rally imploded today when it came in contact with another reality: rising production, slack demand, and soaring crude oil inventories in the US.

The Energy Information Administration reported that these inventories (excluding the Strategic Petroleum Reserve) rose by another 6.3 million barrels last week to 413.1 million barrels – the highest level in the weekly data going back to 1982. Note the increasingly scary upward trajectory that is making a mockery of the 5-year range and seasonal fluctuations:

US-crude-oil-stocks-2015-02-04
And there is still no respite in sight.

Oil production in the US is still increasing and now runs at a multi-decade high of 9.2 million barrels a day. But demand for petroleum products, such as gasoline, dropped last week, according to the EIA, and so gasoline inventories jumped by 2.3 million barrels. Disappointed analysts, who’d hoped for a drop of 300,000 barrels, blamed the winter weather in the East that had kept people from driving (though in California, the weather has been gorgeous). And inventories of distillate, such as heating oil and diesel, rose by 1.8 million barrels. Analysts had hoped for a drop of 2.2 million barrels.

In response to this ugly data, WTI plunged $4.50 per barrel, or 8.5%, to $48.54 as I’m writing this. It gave up half of the phenomenal three-day rally in a single day.

Macquarie Research explained it this way:

In our experience, oil markets rarely exhibit V-shaped recoveries and we would be surprised if an oversupply situation as severe as the current one was resolved this soon. In fact, our balances indicate the absolute oversupply is set to become more severe heading into 2Q15.

Those hoping for a quick end to the oil glut in the US, and elsewhere in the world, may be disappointed because there is another principle at work – and that principle has already kicked in.

As the price has crashed, oil companies aren’t going to just exit the industry. Producing oil is what they do, and they’re not going to switch to selling diapers online. They’re going to continue to produce oil, and in order to survive in this brutal pricing environment, they have to adjust in a myriad ways.

“Efficiency and innovation, when price falls, it accelerates, because necessity is the mother of invention,” Michael Masters, CEO of Masters Capital Management, explained to FT Alphaville on Monday, in the middle of the three-day rally. “Even if the investment only spits out quarters, or even nickels, you don’t turn it off.”

Crude has been overvalued for over five years, he said. “Whenever the return on capital is in the high double digits, that’s not sustainable in nature.” And the industry has gotten fat during those years.

Now, the fat is getting trimmed off. To survive, companies are cutting operating costs and capital expenditures, and they’re shifting the remaining funds to the most productive plays, and they’re pushing 20% or even 30% price concessions on their suppliers, and the damage spreads in all directions, but they’ll keep producing oil, maybe more of it than before, but more efficiently.

This is where American firms excel: using ingenuity to survive. The exploration and production sector has been through this before. And those whose debts overwhelm them – and there will be a slew of them – will default and restructure, wiping out stockholders and perhaps junior debt holders, and those who hold the senior debt will own the company, minus much of the debt. The groundwork is already being done, as private equity firms and hedge funds offer credit to teetering oil companies at exorbitant rates, with an eye on the assets in case of default.

And these restructured companies will continue to produce oil, even if the price drops further.

So Masters said that, “in our view, production will not decrease but increase,” and that increased production “will be around a lot longer than people are forecasting right now.”

After the industry goes through its adjustment process, focused on running highly efficient operations, it can still scrape by with oil at $45 a barrel, he estimated, which would keep production flowing and the glut intact. And the market has to appreciate that possibility.


Rigs Down By 21% Since Start Of 2015
Permian Basin loses 37 rigs first week in February

by Trevor Hawes

The number of rigs exploring for oil and natural gas in the Permian Basin fell 37 this week to 417, according to the weekly rotary rig count released Friday by Houston-based oilfield service company Baker Hughes.

This week’s count marked the ninth-consecutive decrease for the Permian Basin. The last time Baker Hughes reported a positive rig-count change was Dec. 5, when 568 rigs were reported. Since then, the Permian Basin has shed 151 rigs, a decrease of 26.58 percent.

For the year, the Permian Basin has shed 113 rigs, or 21.32 percent.

In District 8, which includes Midland and Ector counties, the rig count fell 19 this week to 256. District 8 has shed 58 rigs, 18.47 percent, this year.

Texas lost 41 rigs this week for a statewide total of 654. The Lone Star State has 186 fewer rigs since the beginning of the year, a decrease of 22.14 percent.

In other major Texas basins, there were 168 rigs in the Eagle Ford, down 10; 43 in the Haynesville, unchanged; 39 in the Granite Wash, down one; and 19 in the Barnett, unchanged.

The Haynesville shale is the only major play in Texas to have added rigs this year. The East Texas play started 2015 with 40 rigs.

At this time last year, there were 483 rigs in the Permian Basin and 845 in Texas.

In the U.S., there were 1,456 rigs this week, a decrease of 87. There were 1,140 oil rigs, down 83; 314 natural gas rigs, down five; and two rigs listed as miscellaneous, up one.

By trajectory, there were 233 vertical drilling rigs, down two; 1,088 horizontal drilling rigs, down 80; and 135 directional drilling rigs, down five.

The top five states by rig count this week were Texas; Oklahoma with 176, down seven; North Dakota with 132, down 11; Louisiana with 107, down one; and New Mexico with 78, down nine.

The top five basins were the Permian; the Eagle Ford; the Williston with 137, down 11; the Marcellus with 71, down four; and the Mississippian with 53, down one.

In the U.S., there were 1,397 rigs on land, down 85; nine in inland waters, down three; and 50 offshore, up one. There were 48 rigs in the Gulf of Mexico, up one.

Canada’s rig count fell 13 this week to 381. There were 184 oil rigs, down 16; 197 natural gas rigs, up three; and zero rigs listed as miscellaneous, unchanged. Canada had 621 rigs a year ago this week, a difference of 240 rigs compared to this week’s count.

The number of rigs exploring for oil and natural gas in the North America region, which includes the U.S. and Canada, fell 100 this week to 1,837. There were 2,392 rigs in North America last year.

Rigs worldwide

On Friday, Baker Hughes released its monthly international rig count for January. The worldwide total was 3,309 rigs. The U.S. ended January with 1,683 rigs, just more than half of all rigs worldwide.

The following are January’s rig counts by region, with the top three nations in each region in parentheses:

Africa: 132 (Algeria: 97; Nigeria: 19; Angola: 14)

Asia-Pacific: 232 (India: 108; Indonesia: 36; China offshore: 33)

Europe: 128 (Turkey: 37; United Kingdom offshore: 15; Norway: 13)

Latin America: 351 (Argentina: 106; Mexico: 69; Venezuela: 64)

Middle East: 415 (Saudi Arabia: 119; Oman: 61; Iraq: 60)

Odessa migrant worker 1937

Migrant oil worker and wife near Odessa, Texas 1937

Photographer: Dorothea Lange Created: May 1937 Location: OdessaTexas

Call Number: LC-USF34-016932 Source: MRT.com

Why The Energy Selloff Is So Dangerous To The US Economy

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By Pam and Russ Martens:

Summary:

  • The global economy is producing far to much supply of most things, chasing to-little-demand from cash strapped consumers.
  • Prices of other industrial commodities are in steep decline.
  • Billions of dollars in investment capital are “risk off”.
  • An untold number of jobs spread across America are at risk.

Television pundits and business writers who are relentlessly pounding the table on how cheaper home heating oil and gas at the pump is going to provide a consumer windfall and ramp up economic activity have a simplistic view of how things work.

Oil-related companies in the U.S. now account for between 35 to 40 percent of all capital spending. Announcements of sharp cutbacks in capital spending and job reductions by these companies create big ripples, forcing related companies to trim their own budgets, revenue assumptions, and payrolls accordingly.

The announcements coming out of the oil patch are picking up steam and it’s not a pretty picture. Last week Schlumberger said it would eliminate 9,000 jobs, approximately 7 percent of its workforce, and trim capital spending by about $1 billion. Yesterday, Baker Hughes, the oilfield services company, announced 7,000 in job cuts, roughly 11 percent of its workforce, and expects the cuts to all come in the first quarter. Baker Hughes also announced a 20 percent reduction in capital spending. This morning, the BBC is reporting that BHP Billiton will cut 40 percent of its U.S. shale operations, reducing its number of rigs from 26 to 16 by the end of June.

When Big Oil cuts capital spending, we’re not talking about millions of dollars or even hundreds of millions of dollars; we’re talking billions. Last month, ConocoPhillips announced it had set its capital budget for 2015 at $13.5 billion, a reduction of 20 percent. Smaller players are also announcing serious cutbacks. Yesterday Bonanza Creek Energy said it would cut its capital spending by 36 to 38 percent.

Other big industrial companies in the U.S. are also impacted by the sharp slump in oil, which has shaved almost 60 percent off the price of crude in just six months. As the oil majors scale back, it reduces the need for steel pipes. U.S. Steel has announced that it will lay off approximately 750 workers at two of its pipe plants.

On January 15, the Federal Reserve Bank of Kansas City released a dire survey of what’s ahead in its “Fourth Quarter Energy Survey.” The survey found: “The future capital spending index fell sharply, from 40 to -59, as contacts expected oil prices to keep falling. Access to credit also weakened compared to the third quarter and a year ago.  Credit availability was expected to tighten further in the first half of 2015.” About half of the survey respondents said they were planning to cut spending by more than 20 percent while about one quarter of respondents expect cuts of 10 to 20 percent.

The impact of all of this retrenchment is not going unnoticed by sophisticated stock investors, as reflected in the major U.S. stock indices. On days when there is a notable plunge in the price of crude, the markets are following in lockstep during intraday trading. Yes, the broader stock averages continued to set new highs during the early months of the crude oil price decline in 2014 but that was likely due to the happy talk coming out of the Fed. It is also useful to recall that the Dow Jones Industrial Average traveled from 12,000 to 13,000 between March and May 2008 before entering a plunge that would take it into the 6500 range by March 2009.

Both the Federal Open Market Committee (FOMC) and Fed Chair Janet Yellen have assessed the plunge in oil prices as not of long duration. The December 17, 2014 statement from the FOMC and Yellen in her press conference the same day, characterized the collapse in energy prices as “transitory.” The FOMC statement said: “The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”

If oil were the only industrial commodity collapsing in price, the Fed’s view might be more credible. Iron ore slumped 47 percent in 2014; copper has slumped to prices last seen during the height of the financial crisis in 2009. Other industrial commodities are also in decline.

A slowdown in both U.S. and global economic activity is also consistent with global interest rates on sovereign debt hitting historic lows as deflation takes root in a growing number of our trading partners. Despite the persistent chatter from the Fed that it plans to hike rates at some point this year, the yield on the U.S. 10-year Treasury note, a closely watched indicator of future economic activity, has been falling instead of rising. The 10-year Treasury has moved from a yield of 3 percent in January of last year to a yield of 1.79 percent this morning.

All of these indicators point to a global economy with far too much supply and too little demand from cash-strapped consumers. These are conditions completely consistent with a report out this week from Oxfam, which found the following:

“In 2014, the richest 1% of people in the world owned 48% of global wealth, leaving just 52% to be shared between the other 99% of adults on the planet. Almost all of that 52% is owned by those included in the richest 20%, leaving just 5.5% for the remaining 80% of people in the world. If this trend continues of an increasing wealth share to the richest, the top 1% will have more wealth than the remaining 99% of people in just two years.”

Crude Oil (WTI) Trading Versus the Dow Jones Industrial Average, December 1, 2014 Through January 12, 2015

Oil Doomsayers Were Wrong In 2009: 4 Reasons Why They’re Wrong Now

https://i0.wp.com/img0.etsystatic.com/000/0/6787557/il_340x270.350576144.jpgSource: Hawkinvest

Summary

  • Oil is extremely oversold and due for a rebound.
  • Oil consumption remains strong and is likely to increase thanks to cheaper prices.
  • Historically oil rebounds quite quickly, especially when the U.S. and global economy are growing.
  • Investors are overly negative on oil ever since the OPEC meeting, but production cuts could still be on the way.

Ever since the November 27th OPEC meeting the price of oil has plunged by about 20% and many stocks are off by much, much more. The doomsayers and shorts are out in force now, emboldened by the weakness in this sector. There is a tremendous amount of negative sentiment towards oil now. But this extreme level of negativity appears to be very overdone. It also seems to be based on psychology, forced margin call selling, panic selling and tax-loss selling. With all these factors, it’s been a perfect storm that has brought some small-cap oil stocks back to levels not seen since the depths of the financial crisis. Back in 2009, oil plunged to the $40 range, but the U.S. and the global economy were in free fall and oil consumption was also falling. The factors that drove oil to collapse in 2009 like bank failures, financial system imploding, home prices collapsing, massive layoffs, and other negatives that just do not exist today. That is why it does not make sense to be expecting oil to plunge back towards the lows seen in 2009. Furthermore, it is really important to realize that even when oil plunged in 2009, it rebounded very, very quickly (in spite of all the doomsayers back then). That is another big factor to consider because since the global economy is significantly stronger now, it could rebound sooner than most investors realize. Here are a few more reasons why this is a buying opportunity as oil is not likely to go down much more and why it is not likely to stay down for very long:

Reason #1: Energy company insiders are calling the recent plunge in stocks a “fire sale” and they are buying at a pace that has not been seen in years. Oil industry insiders have seen the ups and downs in oil prices and have experienced market pullbacks before. If oil company insiders are buying en masse now, there is a good chance that they see bargains and a strong future for oil. This supports the idea that there is a disconnect between the current market price of many oil stocks and the longer-term fundamentals of this industry. Citigroup (NYSE:C) recently made a strong case that indicates there is a disconnect between asset prices in the oil industry and the fundamentals. A Bloomberg article details some of the recent insider activity, it states:

“This is an absolute fire sale,” he said. “It’s an overreaction and the result is it’s oversold.” With valuations at a decade low, oil executives such as Rochford and Chesapeake Energy Corp.’s (NYSE:CHK) Archie Dunham are driving the biggest wave of insider buying since 2012, data compiled by the Washington Service and Bloomberg show. They’re snapping up stocks after more than $300 billion was erased from share values as crude slipped below $70 for the first time since 2010.”

Reason #2: Just because OPEC did not act at the November 27th meeting, it does not mean they won’t act. OPEC is scheduled to meet again in 2015, but there is always the possibility for an emergency meeting at any time. Even a statement from OPEC discussing the willingness to cut production or to address “cheating” by some members who are producing more than their quota allows could cause a significant short-covering rebound in the oil sector. A CNBC article points out that some industry watchers believe OPEC could act soon with an extraordinary or “emergency” meeting, it states:

“We see the possibility they call an extraordinary meeting sometime next year,” said Dominic Haywood, crude and products analyst with Energy Aspects. “We think they’re going to address countries not living within their quota.” OPEC has a quota of 30 million barrels a day, but it has been producing more.

On December 2, a Saudi Prince stated that his country would cut production if other countries would also participate. This seems the first “olive branch” since the OPEC meeting and it appears to be in response to the slide in oil since that meeting took place.

Reason #3: The perceived “glut” of oil is much smaller than most people realize. Furthermore, that excess supply could be taken out rather rapidly because cheaper oil is likely to lead to more demand and consumption. Toyota (NYSE:TM) just reported that sales of its 4Runner sport utility vehicle just jumped by 53% in November and sales of the Prius fell by 14% in the same period. This is just one example of how quickly demand for oil can rise and if you multiply even slight increases in global oil consumption because of much lower prices the numbers get quite large. Urban Carmel (a former McKinsey consultant and President of UBS Securities in Asia) believes that oil is going back to $80 per barrel and a recent article he wrote explains why the perceived glut is not going to last long, he states:

“Excess oil supply (over demand) is presently about 1 mbd. That would be a problem for oil prices except for one thing: existing fields lose about 6% of their production capacity each year, equal to about 5.5 mbd. That means that even if demand is flat, at least 4.5 mbd in new production is needed. Opec has spare capacity of only about 3 mbd. The remainder must come from new investment. New deep water and oil sand projects have a breakeven cost of about $80-90. There will be little incentive to make these investments unless the price of oil is at least $80. If the price stays lower than $80, supply will be insufficient for demand. It’s exactly under those circumstances that spikes higher in oil prices have occurred in the past.”

Reason #4: Oil can be very volatile, but it historically rebounds very quickly because it is used in very large quantities every day. The chart below shows that oil has reached a level that is giving investors a buy signal. Also, it is worth noting that prior oil price slides typically lasted about 20 weeks and the current slide is on week 25 which is another sign a rebound is way overdue. Oil and most oil stocks are extremely oversold now and that means a powerful relief and short covering rally could be coming soon. Some “smart money” investors are recognizing the buying opportunity at hand. Hedge funds are starting to position for a rebound in oil as there is a growing belief that the oil slide has run its course and is now due for a rally.

Oil is already down by about 40%, and the global economy is not in a current state that would support drastically lower prices as some are predicting. It is worth noting that most analysts and economists have a terrible track record when it comes to forecasting oil prices. If you had told anyone that oil was going to surge to over $100 within a couple years of the financial crisis you would have been ridiculed. I believe that the inaction at the OPEC meeting triggered margin call selling, and as we know, selling begets selling especially at this time of year when tax-loss selling fuels even more downside pressure. Some investors are making too much of the oil price decline by trying to connect the dots which should not be connected. I don’t believe that oil’s decline is a major sign of global economic weakness, I believe it is partially because supplies are temporarily a bit higher than needed, the dollar has been strong, and because too many speculators held futures contracts that were suddenly liquidated after the OPEC meeting sparked a sell-off. This has created bargains, especially in small-cap oil stocks. I have been primarily focusing my buying on companies that have no direct exposure to the price of oil and significant contract backlogs. This has led me to buy stocks like McDermott International (NYSE:MDR) which is now incredibly cheap at less than $3 per share. This company is an engineering and construction firm that specializes in the energy industry. It has a $4 billion contract backlog and it has about $900 million in cash and (incredibly) a market cap of just $584 million. That means that this company could buy all the outstanding shares and still have over $300 million left in cash on the balance sheet. McDermott shares are also trading for less than half of the stated book value which is $6.30 per share. On November 14, David Trice (a director) bought 20,000 shares at $4.16, which was about $83,000 worth of stock. But, due to immensely negative sentiment in the oil sector, panic selling, margin call selling, and tax-loss selling, this stock is down by about 40% just from when this insider bought, even though this company has no direct exposure to oil prices and enough business (with the $4 billion+ contract backlog) to keep it busy for the next two years. It also does projects for the natural gas industry and investors seem to have overlooked that natural gas prices have remained solid.

I also see opportunity in Willbros Group (NYSE:WG) which trades for just over $4 now (down from a high of about $13 this year). It specializes in pipeline projects for the energy industry which includes oil and gas, petrochemicals, refining as well as electric power. This stock took a hit several weeks ago when the company announced it would restate earnings due to a charge on a pipeline project that was estimated to reverse about $8 million in previously reported pre-tax income. This caused the company to be delayed in filing the latest financial report and the market overreacted by knocking off about $160 million in market cap in just a few days after the restatement issue was announced. Willbros Group has a strong balance sheet and a $1.7 billion backlog which absolutely dwarfs the restatement numbers and the market cap of just about $215 million. It also recently announced plans for an asset sale that is estimated to generate up to $125 million. For more details, read my recent article on Willbros Group.

I expect that small cap stocks like McDermott and Willbros will rebound as tax-loss selling should fade by December 19th which is the Friday before the holiday season. This causes most traders and investors to have completed their tax planning issues before taking off for the holidays and that often leads to a significant “Santa Claus” and “January Effect” rally in beaten-down small caps.

Keep An Eye On Futures

https://i0.wp.com/www.jamierood.com/art/var/resizes/Oilfield/PumpJacks/PumpjackAtSnowySunset.jpg

Oil Futures Structure Seen as Encouraging Traders to Store Crude. 

By Mohammed Aly Sergie

Brent oil in a contango will encourage traders to take delivery of crude and wait for higher prices, according to U.S. economist Dennis Gartman.

Brent for February delivery is $6.10 a barrel cheaper than the February 2016 contract. February Oman oil traded on the Dubai Mercantile Exchange is $8.30 cheaper than the year later contract after being $6 more expensive about six months ago.

“Not enough people pay attention to the importance of term structure,” Dennis Gartman, author of the Suffolk, Virginia-based Gartman Letter, said yesterday in a phone interview. “The market is saying it will pay traders to go into storage.”

Gartman said contango arbitrage is easier to trade on the broader benchmarks than the Oman contract because banks prefer to provide financing for markets that are more heavily traded. Investors can earn a “nearly riskless return” of 8 percent by selling crude futures and storing oil at current prices, Gartman said.

The cost of warehousing and lending has hindered popularity of the trade, Gartman said. Shipbroker Charles R. Weber said this month that oil tanker rates are too high to spur floating storage. There are 28.8 million barrels of oil being stored at Cushing, Oklahoma, about three million barrels above the 2014 average.

20 Stunning Facts About Energy Jobs In The US

https://i2.wp.com/www.paradinerecruiting.com/wp-content/uploads/2014/07/oil-jobs.jpgby Tyler Durden

For all those who think the upcoming carnage to the shale industry will be “contained” we refer to the following research report from the Manhattan Institute for Policy Research:

  • The United States is now the world’s largest and fastest-growing producer of hydrocarbons. It has surpassed Saudi Arabia in combined oil and natural gas liquids output and has now surpassed Russia, formerly the top producer, in natural gas. [ZH: that’s about to change]
  • The increased production of domestic hydrocarbons not only employs people directly but also radically reduces the drag on growth and job formation associated with America’s trade deficit.
  • As the White House Council of Economic Advisers noted this past summer: “Every barrel of oil or cubic foot of gas that we produce at home instead of importing abroad means more jobs, faster growth, and a lower trade deficit.” [the focus now is not on the oil produced at home, which is set to plunge, but the consumer “tax cut” from plunging oil prices]
  • Since 2003, more than 400,000 jobs have been created in the direct production of oil & gas and some 2 million more in indirect employment in industries such as transportation, construction, and information services associated with finding, transporting, and storing fuels from the new shale bounty.
  • All told, about 10 million Americans are employed directly and indirectly in a broad range of businesses associated with hydrocarbons.
  • There are 16 states with more than 150,000 people employed in hydrocarbon-related activities. Even New York, which continues to ban the production of shale oil & gas, is seeing job benefits in a range of support and service industries associated with shale development in adjacent Pennsylvania.

  • Direct employment in the oil & gas industry had been declining for 30 years but has recently reversed course, with the availability of new technologies to develop shale fields. Nearly 300,000 direct oil & gas jobs have been created following the 2003 nadir in that sector’s direct employment.
  • The five super-major oil companies—Exxon, BP, Chevron, Shell, Conoco—that operate in the U.S. account for only 10 percent of Americans working directly in the oil & gas business.
  • Meanwhile, more than 20,000 other firms are directly involved in the oil & gas industry, and they produce over 75 percent of America’s oil & gas output. The median independent oil & gas firm has fewer than 15 employees. (Note that these data exclude gasoline stations, which employ nearly 1 million people and are overwhelmingly owned by individuals or small businesses.)
  • As in the oil & gas industry, most Americans are employed by firms with fewer than 500 employees. Small businesses not only employ half of all American workers but also generate nearly half the nation’s economic output. Young firms tend to be small firms; and young firms tend to emerge disproportionately in areas of rapid growth or new opportunities—such as in and around America’s shale fields.

  • A broad array of small and midsize oil & gas companies are propelling record economic and jobs gains—not just in the oil fields but across the economy. The enormous expansion in employment, exports, and tax revenues from the domestic oil & gas revolution is largely attributable to a core and defining feature of America: small businesses.
  • The oil & gas sector boom creates “induced” and energy-related jobs. For every direct job, there are, on average, three jobs created in industries such as housing, retail, education, health care, food services, manufacturing, and construction.
  • In the 10 states at the epicenter of oil & gas growth, overall statewide employment gains have greatly outpaced the national average. There we see the ripple-out effect on overall (not just oil & gas) employment. The shale boom’s broad jobs benefits are most visible in North Dakota and Texas, of course, where overall state employment growth in all sectors has vastly outpaced U.S. job recovery. Similarly, in the other states that have experienced recent growth in hydrocarbon production—notably, Pennsylvania, Colorado, Louisiana, Oklahoma, Wyoming—statewide overall (again, not just oil & gas) employment growth has also outpaced the U.S. recovery.
  • In addition to the direct and induced jobs, America is beginning to see the economic and jobs impact of a renaissance in energy-intensive parts of the manufacturing sector, from plastics and chemicals to fertilizers. Examples include an Egyptian firm planning a $1 billion fertilizer plant in Iowa and a South Korean tire company with an $800 million plan for a Tennessee plant. Germany’s BASF recently announced expansion of its American investments, including production and research. BASF calculated that its German operations’ energy bill would be $700 million a year lower if it could pay American prices for energy
  • The Marcellus shale fields in Pennsylvania were responsible for enabling statewide double-digit job growth in 2010 and 2011 and now account for more than one-fifth of that state’s manufacturing jobs. For every $1 that the Marcellus industry spends in the state, $1.90 of total economic output is generated.
  • The typical wage effect of the oil & gas revolution is most clearly visible in Texas. In the 23 counties atop the Eagle Ford shale, average wages for all citizens have grown by 14.6 percent annually since 2005, compared with the 6.8 and 6.3 percent average for Texas and the U.S., respectively, over the same period. The top five counties in the Eagle Ford shale have experienced an average 63 percent annual rate of wage growth. These are the kinds of wage effects sought in every state and by every worker.

  • Given the persistent, slow job recovery from the Great Recession, there could not be a more important time in modern history to find ways to foster more small businesses of all kinds, given that they are not only the core engine for growth but also frequently grow rapidly.

Punchline #1:

  • The $300–$400 billion overall annual economic gain from the oil & gas boom has been greater than the average annual GDP growth of $200–$300 billion in recent years—in other words, the economy would have continued in recession if it were not for the unplanned expansion of the oil & gas sector.

Punchline #2:

  • Hydrocarbon jobs have provided a greater single boost to the U.S. economy than any other sector, without requiring any special taxpayer subsidies—instead generating tax receipts from individual incomes and business growth.

And the final punchline:

  • The National Association of Manufacturers estimated that the shale revolution will lead to 1 million manufacturing jobs over the coming decade. Manufacturing jobs pay nearly 30 percent more than the industrial average and generate $1.48 of economic activity for every $1 spent, making manufacturing the highest economic multiplier of all industrial sectors.

Sorry, not anymore.

Now, thanks to John Kerry’s “secret pact“, and America’s close “ally” in the middle-east, Saudi Arabia whose “mission” it no longer to bankrupt Russia but to crush America’s shale industry, the only question surround the only bright spot for America’s economy over the past 6 years is how long before most of the marginal producers file Chapter 11, or 7.

Texas: Recession In 2015?

https://i2.wp.com/i.imwx.com/web/news/2012/january/snow-txdrillrig-iwit-mlallison-440x297-010911.jpgby Josh Young

Summary

  • Texas is by far the largest producer of oil in the US.
  • Oil production represents a disproportionate portion of Texas’s economy.
  • With oil prices down 45%, oil’s share of Texas GDP may fall 50% or more.
  • Unlike Russia and other countries, Texas cannot depreciate its own currency, magnifying the economic effect.

Texas is the largest oil producer in the US. And oil prices are down almost 50% in the past 4 months. Yet nowhere in the news do we hear about the risk of Texas entering a recession. The facts and figures below should concern investors in securities with economic exposure to the Texas economy. The risk is real.

As seen in the below chart by the EIA, Texas is the largest oil producing state in the US, producing 3x as much oil as the next largest producing state.

In September, Texas produced 3.23 million barrels of oil per day. This compares to 1.1 million barrels of oil per day produced in the second largest oil producing state, North Dakota, and much smaller quantities by other traditional oil producing states such as Alaska, California, and Oklahoma. And by comparison, Russia produces 10.9 million barrels per day.

Quantifying the value of this production, at $100 oil, that would be $323 million worth of oil produced per day, or $118 billion of oil produced per year. With the current price of oil hovering around $55 per barrel, that same oil production is only worth $178 million per day, or $65 billion. This is a loss of $53 billion of oil sales revenue just in the state of Texas.

This $53 billion in lost revenues compares to Texas’s GDP of $1.4 trillion in 2013 – it would be 3.8% of the State’s GDP, which is now “missing” due to oil prices having fallen. This is only the direct loss to the state – the indirect loss is likely several times as much. Direct oilfield activity is slowing down dramatically, as oil producing companies cut their capital expenditure budgets for 2015. Oilfield services stocks (NYSEARCA:OIH) are already down 37% from their peak earlier this year in anticipation of an activity slowdown. And for every job lost on a rig or in an oil company’s office, there are several additional jobs that may be lost, from the gas station manager to the sales clerk at a store to the front desk worker at a hotel.

The oil industry is unusual in that both the upstream independent producers and the service companies tend to outspend their cash flow, typically on local (to Texas) goods and services, on everything from drill pipe to rig manufacturing to catering. This means that for every dollar of lost oil sales from the lower oil price, there may be several dollars less spent across the Texas economy. This could be devastating for the Texas economy, and has not yet been widely discussed in the financial media.

To see an extreme example of the impact of lower oil prices on an economy tied to oil production, we can look at Russia (NYSEARCA:RSX). The Russian economy is more oil dependent than Texas’s. Russia’s GDP was $2.1 trillion in 2013. This compares to Texas’s GDP of $1.4 trillion. So Russia produces 3.3x as much oil as Texas, but only has 1.5x the GDP. So on a direct basis, assuming “ceteris paribus” conditions, a $1 decline in the price of oil would have 2.2x the impact to the economy of Russia as to the economy of Texas.

So what is happening in Russia? Already, the ruble has dropped in value by 50% in the past year. And numerous sources are calling for a severe recession in 2015. This would be expected, considering the high portion of the GDP that is attributable to oil production.

However, Russia has an advantage that Texas does not have. It has its own currency. While a 50% drop in a currency may not sound great if you’re looking to spend that currency elsewhere, it is crucial if you are an exporter and your primary export just dropped in price by 45%. The ruble denominated impact of the drop in the price of oil is a mere 10%. Unfortunately, for Texas, the dollar denominated drop in oil is 45%. So despite the lower economic exposure to oil, Texas does not have the benefit of a falling currency to buffer the blow of lower oil prices.

It may get even worse. With less drilling activity, oil production growth in Texas may slow, and eventually may decline. Depending on the speed of this slowdown, Texas could even see production decline by the end of 2015. This is because most of the new production has been coming from fracking unconventional wells, which can decline in production by as much as 80% in the first year. Production growth has required an increasing number of wells drilled, and has been funded with 100% of oil company cash flow along with hundreds of billions of dollars of equity and debt over the past few years. With the recent crash in oil stock prices (NYSEARCA: XOP) and in oil company bonds (NYSEARCA: JNK), oil drillers may be forced to spend within cash flow, and that cash flow will be down at least 45% in 2015 if the oil price stays on the path projected in the futures market.

All of this means that in 2015, Texas oil wells could be producing less than the 3.23 million barrels of oil per day it was producing in September 2014, and their owners could be receiving 45% less revenue per barrel produced. Again applying an economic multiplier, the results could be devastating. And without the cushion of a weak currency that benefits countries like Russia, it is hard to see how Texas could avoid a recession in 2015 if the price of oil stays near its current low levels.

“Houston, You Have A Problem” – Texas Is Headed For A Recession Due To Oil Crash, JPM Warns

https://i1.wp.com/i.qkme.me/3rq0zl.jpg
by
Tyler Durden

It was back in August 2013, when there was nothing but clear skies ahead of the US shale industry that we asked “How Much Is Oil Supporting U.S. Employment Gains?” The answer we gave:

The American Petroleum Institute said last week the U.S. oil and natural gas sector was an engine driving job growth. Eight percent of the U.S. economy is supported by the energy sector, the industry’s lobbying group said, up from the 7.7 percent recorded the last time the API examined the issue. The employment assessment came as the Energy Department said oil and gas production continued to make gains across the board. With the right energy policies in place, API said the economy could grow even more. But with oil and gas production already at record levels, the narrative over the jobs prospects may be failing on its own accord…. The API’s report said each of the direct jobs in the oil and natural gas industry translated to 2.8 jobs in other sectors of the U.S. economy. That in turn translates to a total impact on U.S. gross domestic product of $1.2 trillion, the study found.

Two weeks ago we followed up with an article looking at “Jobs: Shale States vs Non-Shale States” in which we showed the following chart:

And added the following:

According to a new study, investments in oil and gas exploration and production generate substantial economic gains, as well as other benefits such as increased energy independence.  The Perryman Group estimates that the industry as a whole generates an economic stimulus of almost $1.2 trillion in gross product each year, as well as more than 9.3 million permanent jobs across the nation. 

The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

 

Another way of visualizing the impact of the shale industry on the US economy comes courtesy of this chart from the Manhattan Institute which really needs no commentary:

The Institute had this commentary to add:

The jobs recovery since the 2008 recession has been the slowest of any post recession recovery in the U.S. since World War II. The number of people employed has yet to return to the 2007 level. The country has suffered a deeper and longer-lasting period of job loss than has followed any of the ten other recessions since 1945.

There has, however, been one employment bright spot: jobs in America’s oil & gas sector and related industries. Since 2003, more than 400,000 jobs have been created in the direct production of oil & gas and some 2 million more in indirect employment in industries such as transportation, construction, and information services associated with finding, transporting, and storing fuels from the new shale bounty.

In addition, America is seeing revitalized growth and jobs in previously stagnant sectors of the economy, from chemicals production and manufacturing to steel and even textiles because of access to lower cost and reliable energy.

The surge in American oil & gas production has become reasonably well-known; far less appreciated are two key features, which are the focus of this paper: the widespread geographic dispersion of the jobs created; and the fact that the majority of the jobs have been created not in the ranks of the Big Oil companies but in small businesses, even more widely dispersed.

Fast forward to today when we are about to learn that Newton’s third law of Keynesian economics states that every boom, has an equal and opposite bust.

Which brings us to Texas, the one state that more than any other, has benefited over the past 5 years from the Shale miracle. And now with crude sinking by the day, it is time to unwind all those gains, and give back all those jobs. Did we mention: highly compensated, very well-paying jobs, not the restaurant, clerical, waiter, retail, part-time minimum-wage jobs the “recovery” has been flooded with.

Here is JPM’s Michael Feroli explaining why Houston suddenly has a very big problem.

  • In less than five years Texas’ share of US oil production has gone from around 25% to over 40%
  • By some measures, the oil intensity of the Texas economy looks similar to what it was in the mid-1980s
  • The 1986 collapse in oil prices led to a painful regional recession in Texas
  • While the rest of the country looks to benefit from cheap oil, Texas could be headed for recession

The collapse in oil prices will create winners and losers, both globally and here in the US. While we expect the country, overall, will be a net beneficiary from falling oil prices, two states look like they will bear the brunt of the pain: North Dakota and Texas. Given its much larger size, the prospect of a recession in Texas could have some broader reverberations. 

By now, most people are familiar with the growth of the fossil fuel industry in places like Pennsylvania and Ohio. However, that has primarily been a natural gas story. The renaissance of US crude oil production has been much more concentrated: over 90% of the growth in the past five years has been in North Dakota and Texas; with Texas alone accounting for 67% of the increase in the nation’s crude output over that period.

In the first half of 1986, crude oil prices fell just over 50%. At the end of 1985, the unemployment rate in Texas was equal to that in the nation as a whole; at the end of 1986 it was 2.6%- points higher than the national rate. There are some reasons to think that it may not be as bad this time around, but there are even better reasons not to be complacent about the risk of a regional recession in Texas.

Geography of a boom

The well-known energy renaissance in the US has occurred in both the oil and natural gas sectors. Some states that are huge natural gas producers have limited oil production: Pennsylvania is the second largest gas producing state but 19th largest oil producer. The converse is also true: North Dakota is the second largest crude producer but 14th largest gas producer. However, most of the economic data as it relates to the energy sector, employment, GDP, etc, often lump together the oil and gas extraction industries. Yet oil prices have collapsed while natural gas prices have held fairly steady. To understand who is vulnerable to the decline in oil prices  specifically we turn to the EIA’s state-level crude oil production data.

The first point, mentioned at the outset, is that Texas, already a giant, has become a behemoth crude producer in the past few years, and now accounts for over 40% of US production. However, there are a few states for which oil is a relatively larger sector (as measured by crude production relative to Gross State Product): North Dakota, Alaska, Wyoming, and New Mexico. For two other states, Oklahoma and Montana, crude production is important, though somewhat less so than for Texas. Note, however, that these are all pretty small states: the four states where oil is more important to the local economy than Texas have a combined GSP that is only 16% of the Texas GSP. Finally, there is one large oil producer, California, which is dwarfed by such a huge economy that its oil intensity is actually below the national average, and we would expect it, like the country as a whole, to benefit from lower oil prices.

Texas-sized challenges

As discussed above, Texas is unique in the country as a huge economy and a huge oil producer. When thinking about the challenges facing the Texas economy in 2015 it may be useful, as a starting point, to begin with the oil price collapse of 1986. Then, like now, crude oil prices collapsed around 50% in the space of a few short months. As noted in the introduction, the labor market response was severe and swift, with the Texas unemployment rate rising 2.0%-points in the first three months of 1986 alone. Following the hit to the labor market, the real estate market suffered a longer, slower, burn, and by the end of 1988 Texas house prices were down over 14% from their peak in early 1986 (over the same period national house prices were up just over 14%). The last act of this tragedy was a banking crisis, as several hundred Texas banks failed, with peak failures occurring in 1988 and 1989.

How appropriate is it to compare the challenges Texas faces today to the ones they faced in 1986? The natural place to begin is by getting a sense of the relative energy industry intensity of Texas today versus 1986. Unfortunately, the GSP-by-industry data have a definitional break in 1997, but splicing the data would suggest a similar share of the oil and gas sector in Texas GSP now and in 1985: around 11%. Employment in the mining and logging sector (which, in Texas, is overwhelmingly dominated by the oil and gas sector) was around 3.7% in 1985 and is 2.7% now. This is consistent with a point we have been making in the national context: the oil and gas sector is very capital-intensive, and increasingly so. Even so, as the 1986 episode demonstrated, there do seem to be sizable multiplier effects on non-energy employment. Finally, there does not exist capital spending by state data, but at the national level we can see the flip side of the increasing capital intensive nature of energy: oil and gas related cap-ex was 0.58% of GDP in 4Q85, and is 0.98% of GDP now.

Given this, what is the case for arguing that this time is different, and the impact will be smaller than in 1986? One is that now, unlike in 1986, natural gas prices haven’t moved down in sympathy with crude oil prices, and the Texas recession in 1986 may have owed in part also to the decline in gas prices. Another is that, as noted above, the employment share is somewhat lower, and thus the income hit will be felt more by capital-holders – i.e. investors around the country and the world. Finally, unlike 1986, the energy industry is experiencing rapid technological gains, pushing down the energy extraction cost curve.

While these are all valid, they are not so strong as to signal smooth sailing for the Texas economy. Financially, oil is a fair bit more important than gas for Texas, both now and in 1986, with a dollar value two to three times as large. Moreover, while energy employment may be somewhat smaller now, we are not talking about night and day. The current share is about 3/4ths what it was in 1986. (Given the higher capital intensity, there are some reasons to think employment may be greater now in sectors outside the traditional oil and gas sectors, such as pipeline and heavy engineering construction).

As we weigh the evidence, we think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession. Such an outcome could bring with it the usual collateral damage that occurs in a slowdown. Housing markets have been hot in Texas. Although affordability in Texas looks good compared to the national average, it always does; compared to its own history, housing in some major Texas metro areas looks quite dear, suggesting a risk of a pull-back in the real estate market.

The national economy performed quite well in 1986, in spite of the Texas recession. We expect the US economy will perform well next year too , though some  regions – most notably Texas – could significantly under perform the national average.

* * *
So perhaps it is finally time to add that footnote to the “unambiguously good” qualified when pundits describe the oil crash: it may be good for everyone… except Texas which is about to enter a recession. And then Pennsylvania. And then North Dakota. And then Colorado. And then West Virginia. And then Alaska. And then Wyoming. And then Oklahoma. And then Montana, and so on, until finally we find just where the new equilibrium is following the exodus of hundreds of thousands of the best-paying jobs created during the “recovery” offset by minimum-wage waiters, bartenders, retail workers and temps.

BofA Analyst Credits Falling Oil Prices for Lower Mortgage Rates

https://i2.wp.com/www.syntheticoilchangeprice.com/wp-content/gallery/cheap-oil-change/cheap_oil_change_hero.jpgby Phil Hall

The precipitous drop in global oil prices has created a domino effect that led to a new decline in lower mortgage rates, according to a report by Chris Flanagan, a mortgage rate specialist at Bank of America Merrill Lynch.

“The oil collapse of 2014 appears to have been a key driver [in declining mortgage rates],” stated Flanagan in his report, which was obtained by CBS Moneywatch. “Further oil price declines could lead the way to sub-3.5 percent mortgage rates.”

Flanagan applauded this development, noting that the reversal of mortgage rates might propel housing to a stronger recovery.

“We have maintained the view that 4 percent mortgage rates are too high to allow for sustainable recovery in housing,” he wrote. Flanagan also theorized that if rates fell into 3.25 percent to 3.5 percent range, it would boost “supply from both refinancing and purchase mortgage channels.”

Flanagan’s report echoes the sentiments expressed by Frank Nothaft, Freddie Mac’s chief economist, who earlier this week identified the link between oil prices and housing.

“The recent drop in oil prices has been an unexpected boon for consumers’ pocketbooks and most businesses,” Nothaft stated. “Economic growth has picked up over the final nine months of 2014 and lower energy costs are expected to support growth of about 3 percent for the U.S. in 2015. Therefore we expect the housing market to continue to strengthen with home sales rising to their best sales pace in eight years, national house price indexes up, and rental markets continuing to display low vacancy rates and the highest level of new apartment completions in 25 years.”

But not everyone is expected to benefit from this development. A report issued last week by the Houston Association of Realtors forecast a 10 percent to 12 percent drop in home sales over the next year, owing to a potential slowdown in job growth for the Houston market’s energy industry if oil prices continue to plummet.

Why Cheap Oil May Be Here To Stay

https://i1.wp.com/m.wsj.net/video/20141212/121214table3/121214table3_1280x720.jpg
By
Kyle Spencer

Summary

  • Many investors are still skeptical that Saudi Arabia will hold firm on oil production.
  • Increased global consumption due to falling prices is unlikely to offset North American production.
  • US consumption is in a secular, structural decline due to increased efficiency and demographic changes. That’s unlikely to change any time soon.
  • The floor may not be where the Saudis think it is.

Investors are slowly waking up to the fact that Saudi Arabia is willing to take OPEC hostage to defend its market share, with Oil Minister Ali Al-Naimi declaring that –

In a situation like this, it is difficult, if not impossible, that the kingdom or OPEC would carry out any action that may result in a reduction of its share in market and an increase of others’ shares.

Alas, rather than embrace the cheap petroleum paradigm that has dominated most of the 20th century, many investors continue to cling to old shibboleths. Case in point: Brian Hicks, a portfolio manager at US Global Investors, recently noted that

The theme going into 2015 is mean reversion. Oil prices are below where they should be (emphasis mine), and hopefully they will start gravitating back to the equilibrium price of between $US80 and $US85 a barrel.

I emphasize the words “below where they should be” because the notion that oil (NYSEARCA:USO) prices belong somewhere – and it’s always higher, somehow – is the linchpin of the bullish thesis. But the question of why a high price regime should prevail over a low price regime is never satisfactorily explained.

Higher extraction costs? A sizable chunk of those costs are sunk costs that can simply be ignored in production decisions and lowering the effective breakeven price. A tighter focus on already drilled wells in areas with mature infrastructure could lower costs even further. Moreover, service sector costs fall as rigs are idled. Depleted reserves? Most resource-producing basins are experiencing an increasing yield over time despite the rapid depletion of individual wells. A lot of that is due to extraction efficiency, which is increasing at a phenomenal rate; in fact, one rig today brings on four times the amount of gas in the Barnett Shale than it did in 2006. Drill times in the Bakken are also falling, while new well production per rig is steadily rising since 2011.

Drill Times (Spud to Rig) 2004-2013

(SOURCE: ITG Research)

Technically oversold? Good luck catching that knife. Traders have been pounding the table on “oversold conditions” since $80. Proponents of the Oversold Hypothesis who like to point historical examples of oil’s extreme short-term volatility for validation are conveniently ignoring the vast number of counter-examples like this TIME Magazine headline from June, 1981, which almost reads as if it could have been written yesterday:

(Source: TIME Archives)

1981 is an intriguing date for another reason: It marked the first time in over a decade that Non-OPEC nations countries outproduced OPEC. Despite repeated cuts by OPEC, it took five years for capitulation to set in. Nor are lower prices guaranteed to lead to cuts. Indeed, when oil prices plummeted from $4/bbl to 35 cents in 1862, the Cleveland wildcatters didn’t idle their pumps; they pumped faster to pay the interest on their debt.

Don’t Iran and Venezuela require higher oil prices in order to balance their budgets and head off domestic upheaval? Please. The Saudis don’t care about Iran’s budget problems. Venezuela is a non-entity despite it’s immense reserves. In fact, Venezuela’s hell-in-a-handbasket status was one of the major reasons for Cuba’s recent defection to the US.

Asian stimulus? The only reason that Japanese consumers know that oil prices are lower is from Western news headlines. The share of a day’s wages to buy a single gallon of gas in Japan is 5.59% vs. 2.45% in the US. Nevertheless, the Japanese are riding high compared to the BRICS: In Brazil, it’s 17.62%; in Russia, 7.95%; in India it’s 114.92%; in China it’s 23.54%. Not the most fertile ground for a demand-side revolution; especially since oil is priced in dollars rather than yen, reals, rubles, or rupees.

What about the US? Won’t lower prices lead to higher consumption? Despite what you read about our “insatiable thirst” for oil, Americans don’t actually drink the stuff. Our machines do, and those machines are becoming more and more efficient due to CAFE standards and new transportation technologies, especially NGVs. Demographic changes are also leading a secular decline in consumption. Fig. 2 below highlights the steady march down for miles traveled per capita as the Baby Boomers retire to slower paced lives.

(Source: Citigroup, Census, CIRA)

The reality is that there’s little that an uptick in demand can do to offset oil’s continuing price collapse if the Saudis aren’t prepared to cut to the bone. The wildcatters certainly aren’t going to; on the contrary, they have every incentive (and no real alternative at this point) to pump like crazy to pay down debt and break OPEC’s back. Most doom and gloom prognostications for North American shale use full-cycle breakeven estimates like the ones presented in Figure 2.

Full-Cycle Breakeven Costs by Resource (Assuming Zero Efficiency Gains)

Unfortunately for the bulls, all-in sustaining cost (full-cycle capex) is a totally irrelevant metric for establishing a floor on commodity prices. Commodities prices are based on the marginal cost of production of the most prolific producers, not the full-cycle costs of marginal, high cost producers lopped in with the market leaders. As Seth Kleinman’s group at Citi has pointed out

…what counts at this stage is half-cycle costs, which are in the significantly lower band of $37 to $45 a barrel. This means that the floor is falling and may not be nearly as firm as the Saudi view assume(s).

Oil Bust Contagion Hits Wall Street, Banks Sit on Losses

https://i1.wp.com/www.bloomberg.com/image/iptmX9f9f1vc.jpgby Wolf Richter

Oil swooned again on Wednesday, with the benchmark West Texas Intermediate closing at $60.94. And on Thursday, WTI dropped below $60, currently trading at $59.18. It’s down 43% since June.

Yesterday, OPEC forecast that demand for its oil would further decline to 28.9 million barrels a day next year, after having decided over Thanksgiving to stick to its 30 million barrel a day production ceiling, rather than cutting it. It thus forecast that there would be on OPEC’s side alone 1.1 million barrels a day in excess supply.

Hours later, the US Energy Information Administration reported that oil inventories in the US had risen by 1.5 million barrels in the latest week, while analysts had expected a decline of about 3 million barrels.

So the bloodletting continues: the Energy Select Sector ETF (XLE) is down 26% since June; S&P International Energy Sector ETF (IPW) is down 34% since July; and the Oil & Gas Equipment & Services ETF (XES) is down 46% since July.

Goodrich Petroleum, in its desperation, announced it is exploring strategic options for its Eagle Ford Shale assets in the first half next year. It would also slash capital expenditures to less than $200 million for 2015, from $375 million for 2014. Liquidity for Goodrich is drying up. Its stock is down 88% since June.

They all got hit. And in the junk-bond market, investors are grappling with the real meaning of “junk.”

Sabine Oil & Gas’ $350 million in junk bonds still traded above par in September before going into an epic collapse starting on November 25 that culminated on Wednesday, when they lost nearly a third of their remaining value to land at 49 cents on the dollar.

In early May, when the price of oil could still only rise, Sabine agreed to acquire troubled Forest Oil Corporation, now a penny stock. The deal is expected to close in December. But just before Thanksgiving, when no one in the US was supposed to pay attention, Sabine’s bonds began to collapse as it seeped out that Wells Fargo and Barclays could lose a big chunk of money on a $850-million “bridge loan” they’d issued to Sabine to help fund the merger.

A bridge loan to nowhere: investors interested in buying it have evaporated. The banks are either stuck with this thing, or they’ll have to take a huge loss selling it. Bankers have told the Financial Times that the loan might sell for 60 cents on the dollar. But that was back in November before the bottom fell out entirely.

As so many times in these deals, there is a private equity angle to the story: PE firm First Reserve owns nearly all of Sabine and leveraged it up to the hilt.

The same week, a $220-million bridge loan, put together by UBS and Goldman Sachs for PE firm Apollo Group’s acquisition of oilfield-services provider Express Energy, was supposed to be sold. But investors balked. As of December 2, the loan was still being marketed, “according to two people with knowledge of the deal,” Bloomberg reported. If it can be sold at all, it appears UBS and Goldman will end up with a loss.

And so energy-related leveraged loans are tanking. These ugly sisters of junk bonds are issued by junk-rated corporations, and they have everyone worried [Treasury Warns Congress (and Investors): This Financial Creature Could Sink the System]. Their yields have shot up from 5.1% in August to 7.4% in the latest week, and to nearly 8% for those of offshore drillers [“Yes, it Was a Brutal Week for the Oil & Gas Loan Sector”].

Six years of the Fed’s easy money policies purposefully forced even conservative investors to either lose money to inflation or venture way out on the risk curve. So they ventured out, many of them without knowing it because it happened out of view inside their bond funds. And they funded the fracking boom and the offshore drilling boom, and the entire oil revolution in America, no questions asked.

Energy junk bonds now account for a phenomenal 15.7% of the $1.3 trillion junk-bond market. Alas, last week, JPMorgan warned that up to 40% of them could default over the next few years if oil stays below $65 a barrel. Bond expert Marty Fridson, CIO at LLF Advisors, figured that of the 180 “distressed” bonds in the BofA Merrill Lynch high-yield index, 52 were issued by energy companies. And Bloomberg reported that the yield spread between energy junk bonds and Treasuries has more than doubled since September to 942 basis points (9.42 percentage points).

The toxicity of energy junk bonds is spreading to the broader junk-bond market. The iShares iBoxx High Yield Corporate Bond ETF fell 1.2% to $88.43 on Thursday, the lowest since June 2012. And at the riskiest end of the junk-bond market, it’s getting ugly: the effective yield index for bonds rated CCC or lower jumped from 7.9% in late June to 11.4% on Wednesday.

After not finding any visible yield in the classic spots, thanks to the Fed’s policies, institutional investors – the folks that run your mutual fund or pension fund – took big risks just to get a tiny bit of extra yield. And to grab a yield of 5% in June, they bought energy junk debt so risky that it now has lost a painfully large part of its value, and some of it might default.

Oil and gas are inseparable from Wall Street. Over the years, as companies took advantage of the Fed’s policies and issued this enormous amount of risky debt at a super-low cost, and as they raised money by spinning off subsidiaries into over-priced IPOs that flew off the shelf in one of the most inflated markets in history, and as they spun off other assets into white-hot MLPs, and as banks put now iffy bridge loans together, and as mergers and acquisitions were funded, at each step along the way, Wall Street extracted its fees.

Now the boom is turning into a bust, and the contagion is spreading from the oil patch to Wall Street. Energy companies are cutting back. BP, Chevron, Goodrich…. They’re not cutting back production by turning a valve. They’ll keep the oil and gas flowing to generate cash to stay alive, and it will contribute to the glut.

Instead, they’re cutting back on exploration and drilling projects. It will hit local economies in the oil patch and ripple beyond them. As energy companies slash their capex and their stock buybacks, they’ll borrow less, those that can still borrow at all, and there won’t be many energy IPOs, and there may not be a lot of spinoffs into MLPs or any of the other financial maneuvers that Wall Street got so fat on during the fracking and offshore drilling boom. The fees will dry up. And some of the losses will come home to roost on bank balance sheets.

The contagion is already visible on Wall Street. Susquehanna Financial Group downgraded Goldman Sachs to neutral on Wednesday, citing the mayhem in the oil markets and the impact it has on junk bonds and leveraged loans and the other financial mechanism by which Goldman’s investment and lending divisions sucked fees out of the oil patch and its investors. And this is just the beginning.

Oil Markets: Sentiment And Lame Thinking Are Currently In The Driver’s Seat

Summary

  • The oil markets have hit multi-year lows on unsubstantiated theories about a supply glut and fears of cooling demand.
  • Meanwhile, the geopolitical risks around the world have oddly disappeared in H2 2015.
  • Nevertheless, the facts prove that the real thing is way too far from evaporating geopolitical risks or a material deterioration of the global supply-demand fundamentals that can justify a slump.
  • The unprecedented downward pressure on oil prices is a headline-driven and sentiment-driven event.
  • The oil price will definitely rise significantly in 2015.

Introduction

The stock market will always give the investors a chance to make a blunder, especially for those who allow emotions to overrule facts and factual thinking. The emotional blunders are part of the game in the stock market. And if you run your portfolio based on lame-thinking and emotion, you will most likely follow the herd mentality and sell at the wrong time, because lame-thinking and emotion will always cloud your judgment.

Things get worse for your portfolio when you allow the analysts and the opinion makers who show up daily on CNBC and Bloomberg, to tell you what is really going on with a sector. To me, many of these guys are not just incompetent. To me, they are dangerous because their advice can ruin your wealth in a record time. It is easy to throw out statements without backing them up with any math, and it is easy to make overly simplistic interpretations of the global supply/demand dynamics. “So easy even a caveman can do it,” as GEICO’s commercial states.

And as clearly illustrated by the following charts, insanity and panic are currently hovering over the oil markets, due to the fact that many incompetent oil prognosticators have flooded the media with their lame opinions over the last months. For instance, the charts for the bullish ETFs (NYSEARCA:USO), (NYSEARCA:DBO) and (NYSEARCA:OIL) that track WTI are below:

(click to enlarge)

and below:

(click to enlarge)

and below:

(click to enlarge)

This is the chart for the bullish ETF (NYSEARCA:BNO) that tracks Brent:

(click to enlarge)

And the charts for the leveraged bullish ETFs (NYSEARCA:UCO) and (NYSEARCA:UWTI) are below:

(click to enlarge)

and below:

(click to enlarge)

All these bullish ETFs have returned back to their 2010 levels amid irrational fears for oversupply. But, these fears are completely unsubstantiated and they do not justify at all the sentiment-driven slump in the oil price over the last 4 months.

Andre Kostolany and The Oil Price

Obviously, all these sellers ignore Andre Kostolany who has said that:

“Imagine a man walking, one step at a time, on a country lane for a mile or so. He is accompanied by his dog, which follows the man like a dog follows his master: one step forward, one step backward. While the man is walking slowly, his dog is jumping around back and forth. There will be times when the man is ahead; he will wait for the dog and then there will be times when the dog is ahead and the dog will wait. In this example, the man represents the economy, and the dog the stock market.”

And for those who do not know Andre Kostolany, Kostolany is a stock market legend. Kostolany’s great quote describes what is going on with the oil price these days. The dog (oil price) currently is behind the man (oil supply/demand dynamics) and will catch him sooner rather than later.

In other words, I am a strong believer that Brent is not going to stay below $75/barrel for long, and the dubious Thomas are welcome to read the facts that will propel Brent higher than its current levels by early 2015.

What They Were Telling You In 2013 And H1 2014

Back in 2013 and H1 2014, when Brent was trading around $110/bbl, the analysts and several other opinion makers were calling for oil to hit $150 per barrel. Let’s see some more details and the reasons behind these calls:

1) In H1 2013, the U.S. Department of Energy reported that China overtook the U.S. as the world’s largest net oil importer. That was the time when a report from the Paris-based OECD (Organization for Economic Co-Operation and Development) came out and noted:

“Based on plausible demand and supply equations, there is a risk that prices could go up to anywhere between $150 and $270 per barrel in real terms by 2020, depending on the responsiveness of oil demand and supply and on the size of the temporary risk premium embedded in current prices due to fears about future supply shortages.”

OECD also noted in that report:

“There is a strong price increase needed despite this new oil production coming on stream.”

2) In H1 2013, Energy Aspects, an energy research consultancy, noted as linked above “All estimates point to Asian demand propelling growth.” It also said that the implications of the U.S. shale-oil boom could be overstated for the rest of the world if demand from Asia keeps up.

3) In H1 2013, some analysts from Goldman Sachs wrote that Brent crude oil prices could rise to $150 per barrel in H2 2013 because:

“Despite the boom in U.S. shale gas, the oil price remains high, which he attributed primarily to sanction-related supply disruptions in Iran. Trying to compensate for this, Saudi Arabia has already increased its oil production to a 30-year high this year.”

Mr. Currie added that:

“While global oil demand has increased at a slower pace, it is still higher than the production increases in non-OPEC countries. Upside risks for oil prices include low inventory levels, limited OPEC spare capacity, and geopolitical risks which are likely near an all-time high with production in a very large number of countries at risk, including Egypt, Iran, Iraq, Libya, Nigeria, Sudan, Syria and Venezuela. Europe still faces economic and policy headwinds, China just experienced a significant food inflation surprise (and the livestock impacts from last year’s agriculture price spike will only be felt this year) and the US still faces risks from the debt ceiling debate, the automatic spending cuts (or “sequestration”) and impending tax increases.”

4) In H2 2013, when Brent was still around $115/bbl, the French bank Societe Generale said:

“Brent crude is likely to rise towards $125 a barrel if the West launches airstrikes against Syria, and could go even higher if the conflict spills over into the rest of the Middle East.”

5) As linked above, another report from JBC Energy in Vienna said in H2 2013:

“Current developments such as low spare capacity in Saudi Arabia, stockpiles falling in the U.S., disappointing supply developments around the world and signs of an improving global economy are pointing to tighter markets.”

6) In late 2013, the analysts at the National Bank of Abu Dhabi in UAE noted:

“Average oil price was $112 per barrel in 2012. The average price of crude oil is forecast at $105 per barrel in 2013, $101 per barrel in 2014 and $100 per barrel in 2015. The base case is for oil prices to soften mildly, but remain close to $100 per barrel through 2018. Thereafter, prices rise by a few dollars each year in this scenario.”

7) Even a few months ago in June 2014, the analysts were telling you:

A) This is from Nordea Bank (OTCPK:NRBAY):

“If Iraq, accounting for 3.7% of the world’s total oil production, suffers a serious disruption to its oil supplies, we will see a sharp upswing in oil prices as the OPEC effective spare capacity buffer is low, making the global oil market highly sensitive to further supply disturbances. If Iraqi oil production would fall back to the low levels seen during the invasion of Iraq in 2003, oil prices could easily rise by up to $30 a barrel as this would push the global spare capacity back to the lows when oil prices reached $150 a barrel in July 2008. High oil prices would put the world economic recovery at risk.”

B) This is from PVM Oil Associates:

“The deteriorating situation in Iraq could be the source of an oil price and therefore a financial shock should be sending economic-growth forecasters back to the drawing board. There can be no doubt that if Iraq’s southern oil operations are impacted Brent could reach $125 a barrel and beyond. Saudi Arabia may have 2 million barrels a day of capacity it can turn on reasonably quickly but that leaves no spare capacity margin.”

C) This is from Commerzbank (OTCPK:CRZBY):

“It is hard to imagine that the oil production in northern Iraq will return to the market in the foreseeable future. So far, oil production in the south of Iraq, which accounts for 90% of Iraq’s oil exports, has been unaffected by the fighting in the north and center of the country. However, the sharp price rise in the last two days shows that this oil supply is no longer viewed as secure, either. Without the oil production from the south of Iraq, the market would be stripped of an estimated 2.5 million barrels per day.”

D) This is from the research consultancy Energy Aspects:

“Look at any forecast, they are calling for Iraqi production to be around 7-8 million barrels a day by 2018/2020 for oil prices to not rise substantially. And I think that’s the key, because that’s not going to happen. If this is contained within Iraq that’s one thing, but there’s a very different implication if it becomes a bigger regional conflict. That’s the biggest problem. Iraq’s at the heart of this big oil-producing region.”

What They Are Telling You In H2 2014

Let’s see now what the analysts and several other oil experts have been telling you lately:

1) In October 2014, Goldman Sachs slashed its 2015 oil price forecast. Goldman sees Q1 2015 WTI crude at $75/bbl versus $90/bbl previously and Q1 2015 Brent at $85/bbl versus $100/bbl previously. The U.S. investment bank said rising production will outstrip demand, joining other oil analysts who predict consumption will be dented by slower global economic growth and lead to a supply glut.

2) Other analysts who joined the bearish party lately, predict that the bear market in crude will continue with prices falling as low as $50 a barrel, in part because the global economy is slowing, pushing supply levels higher.

3) In late October 2014, fellow newsletter editor Dennis Gartman showed up and implied that oil could go to $40-$50 per barrel because among others, Lockheed Martin (NYSE:LMT) was working on a compact fusion reactor that could be ready within 10 years. He said:

“Fusion is going to be the great nuclear power of the next 150 years. And finally, we are driving less and less. We are using so much less gasoline than we ever have, in global terms, in national terms, in per capital terms. All of those things, I think, are going to be weighing heavily on crude oil. And where could it go? A lot lower, a lot lower.”

So within ten years from now, we will fit a nuclear fusion reactor on the back of our cars dumping our gas tanks. Let Star Trek come to life! Obviously, Gartman’s thesis also implies that Star Trek’s high-tech, innovative and game-changing tools will be on clearance, so all the people from China and India to Africa and America will not afford to overlook this irrationally cheap nuclear fusion reactor. I don’t even understand why an investor can take Gartman’s approach on oil seriously.

4) The technical traders also showed up a few weeks ago calling for $40/bbl, based on the following chart:

(click to enlarge)

2013/H1 2014 vs. H2 2014: No Major Fundamental Change While Geopolitical Risks Deteriorate

According to Forbes, these are the world’s biggest oil consumers today:

1) United States.

2) China.

3) Japan.

4) India.

5) Euro area.

As also shown in the previous paragraph, the calls in 2013 and H1 2014 for $150/bbl were based on the geopolitical tensions in the Middle East and the expectations about global growth with a focus on demand from the growing Asian markets, which are high in the list with the world’s biggest oil consumers.

And the facts below prove that nothing has changed over the last six months to justify a drop of 35% in the oil price that has occurred lately. In contrast, the geopolitical risks in the Middle East have deteriorated, and the security situation both in Iraq and in Libya has worsened recently. Even International Monetary Fund [IMF] admits that the geopolitical risks have worsened since H1 2014, according to its latest report.

Also, the world’s biggest oil consumers are growing at rates that either are in line with 2013 rates or exceed expectations. There is nothing to indicate that global supply and demand imbalance has fundamentally changed in the past six months. There is just too much speculation, emotion, panic and short-term lame thinking that have been used to determine the value of the oil price lately, and this slump in oil prices is clearly a result of sentiment and emotion.

Let’s proceed now with the facts:

1) Geopolitical risks deteriorate primarily due to ISIS, Iran and Libya: The extremist Islamic State of Iraq and Syria (ISIS) is still there, and the U.S. military and its allies hit ISIS forces with 15 air strikes in Iraq and Syria during a three-day period, The U.S. Central Command revealed a couple of days ago. Thirteen attacks were carried out in Iraq since last Wednesday and two more targeted Islamic State in Syria.

Meanwhile, ISIS keeps advancing in Iraq and Syria, after seizing Iraq’s second largest city Mosul on June 10th. The attacks have been escalating since 2013 and H1 2014, while American, British and Syrian soldiers were beheaded in October 2014 and November 2014, which is confirmed by Obama Administration. Apparently, there is no improvement compared to the situation in 2013 or H1 2014.

Furthermore, world powers failed to reach a nuclear agreement with Iran last week and extended talks for seven months. This means that the Western economic sanctions are not going to be lifted anytime soon, freezing the ability of Iranian banks to conduct international transactions while Iran’s daily oil export restrictions will remain too. This also means that Iran will continue working on its nuclear program by the summer of 2015, impacting negatively the destabilization risk in the region. And there is obviously no improvement compared to the situation in 2013 or H1 2014.

Also, there is no risk improvement in Libya compared to the situation in 2013 or H1 2014. In late August 2014, Libya’s ambassador to the United Nations warned of “full-blown civil war,” if the chaos and division in the North African country continue.

Libya currently has two competing parliaments and governments. The first government and elected House of Representatives relocated to Tobruk a few months ago after an armed group from the western city of Misrata seized the capital Tripoli and most government institutions, as well as the eastern city of Benghazi. The rival previous parliament remains in Tripoli and is backed by militias.

And just a couple of weeks ago, Libya’s political strife intensified as the rival government that has seized the capital took control of Libya’s largest oilfield (El Sharara), according to Reuters. Libya’s oil production rose above 900,000 bopd in September 2014, sharply above lows of 100,000 bopd in June 2014, but it has already fallen to around 500,000 bopd at most, as a recovery in Libya has faltered so far, according to Reuters. This translates into a material drop of approximately 400,000 bopd from Libya only.

2) GDP Growth Rates: Let’s take a look now at the GDP growth rates of the world’s biggest oil consumers:

A) United States: According to the latest news of September 2014, the U.S. economy grew 4.6% in Q2 2014, exceeding earlier estimates. And according to the latest news of November 2014, the U.S. economy grew 3.9% in Q3 2014, exceeding once again the consensus estimate of 3.3%, as illustrated below:

(click to enlarge)

B) China: China grew 7.6% in 2013 and grows 7.4% (on average) to date, as shown below:

(click to enlarge)

Also, China’s GDP per capita continues growing in 2014 at the same pace it has been growing over the last couple of years, as illustrated below:

(click to enlarge)

On top of that, the Chinese central bank initiated an easing cycle just a few weeks ago. How can a serious investor ignore this initiative that will have material effects on China’s future growth and China’s oil consumption of course?

C) Japan: The Japanese economy grew in Q1 2014 and contracted in Q2 and Q3 2014, as illustrated below:

(click to enlarge)

But on average, Japan grew 1.52% in 2013 and grew 0.89% in 2014 too, based on the three quarterly GDP figures to date.

Additionally, Japan’s GDP per capita continues growing in 2014 compared to 2013, as illustrated below:

(click to enlarge)

D) India: As shown below, the Indian economy grew 4.5% in 2013:

(click to enlarge)

That was the time when the analysts were saying that these GDP numbers were below their expectations. Please see some analysts’ and officials’ statements about India’s GDP growth from late 2013:

i) “There is no light at the end of the tunnel visible in India’s GDP release.”

ii) “It was slightly below expectations but I feel the overall growth rate of 4.9% would be achieved this year (2014)” said C. Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council.

iii) “These numbers clearly show that attaining a growth rate of 4.9% in 2014 is not possible.”

That was also the time when Brent was around $110/bbl and all the oil prognosticators were projecting $150/bbl, as shown in the previous paragraph.

However, the Indian economy picked up steam and rebounded to a 5.7% rate in Q2 2014 from 4.6% in Q1 2014, led by a sharp recovery in industrial growth and gradual improvement in services.

And under the Modi government and thanks to a series of fundamental economic reforms, the Indian economy continued its growth and grew 5.3% in Q3 2014, as illustrated below:

(click to enlarge)

Needless to mention that these GDP rates in Q2 2014 and Q3 2014 were well above the analysts’ expectations.

Additionally, India’s GDP per capita continues rising in 2014 compared to 2013, as illustrated below:

(click to enlarge)

And according to yesterday’s news from Reuters, Indian factory activity expanded at its fastest pace in nearly two years in November 2014. The HSBC Manufacturing Purchasing Managers’ Index (PMI) rose to 53.3 in November 2014 from 51.6 in October 2014, its highest since February 2013, and the thirteenth consecutive month of expansion in activity. The analysts had expected manufacturing activity to lose some steam and predicted the index would fall to 51.2.

On top of that, India overtook Japan as the world’s third-biggest crude oil importer in 2013 and the U.S. Energy Information Administration [EIA] projects that India will become the world’s largest oil importer by 2020.

E) Europe: Europe continues growing in 2014 albeit in a slow rate, as illustrated below:

(click to enlarge)

But the current slow growth in Europe was there in 2013 too. In fact, Europe has been limping forward for years and this is nothing new, as clearly illustrated at the previous chart.

The Half-Truths And The Peak Oil

Given the fact that neither the geopolitical risks have declined since H1 2014 nor the average GDP growth rates in the world’s biggest oil consumers have dropped compared to 2013, the oil bears had to discover something else to strengthen their lame approach to oil and the supposedly supply glut.

Therefore, it does not surprise me the fact that I have seen the chart below more than 20 times in numerous online articles over the last weeks, given also that there are always willing authors who behave like parrots repeating what they hear:

The thing is that this chart itself tells you half-truths for the following three reasons that you will not find all together in any of the recent bearish articles about oil:

1) This chart above compares apple to oranges. It compares Saudi’s conventional production with U.S. oil production which is primarily a result of drilling unconventional shale wells that peter out quickly. The gap between the extraction cost in Saudi Arabia and the U.S. is approximately $60/bbl. Extracting oil from shale costs $60 to $100 a barrel, compared with $25 a barrel on average for conventional supplies from the Middle East, according to the International Energy Agency [IEA].

In other words, new oil is not cheap and the rising oil production in the U.S. over the last couple of years has been conditional upon the high oil price. Most of the wave of the U.S. production is currently unprofitable and the current low oil price discourages new drilling.

2) The U.S. shale players are on a steep rate treadmill because of the high decline rates of the unconventional wells, and an investor must be in denial to not see it.

3) The sweet spots and the spots with high productivity in the main oil basins in the U.S. (Williston, EF, Permian) cover a finite amount of land and eventually the number of the wells at the sweet spots is not infinite. The shale producers say that they have reserves [RLI] for approximately 10 years but this does not mean that their drilling locations are sweet spots.

The shale producers have already drilled in many of the best areas, or sweet spots. Once those areas have been drilled out completely, operators will have to move to more-marginal locations and well productivity will fall precipitously. Meanwhile, the advances in technology cannot make wonders to boost the recovery rates overnight.

As such, it is imperative to keep in mind that the peak oil in the U.S. is not a myth. At the current oil price, the supply of the unconventional oil production in the U.S. will quickly prove self-correcting. Both the oil production and the crude inventories in the U.S. will stall soon and will go into a permanent decline effective H1 2015 as a result of the ongoing reduction in drilling activity, the high depletion rates of the unconventional wells and the finite number of the sweet spots.

In fact, the rapid decline has already started. First, the Energy Information Administration said yesterday U.S. crude-oil supplies declined 3.7 million barrels on the week ended Nov. 28. Analysts surveyed by Platts had expected crude inventories to increase by 380,000 barrels on the week.

According also to today’s news from Seeking Alpha, new permits, which outline what drilling rigs will be doing 60-90 days in the future, showed heavy declines for the first time this year across the top three U.S. onshore fields: the Permian Basin, Eagle Ford and Bakken shale. Specifically, there is an almost 40% decline in new well permits issued across the U.S. in November 2014, with only 4,520 new well permits approved last month, down from 7,227 in October 2014.

These numbers indicate a sizable dent in U.S. production in the not too distant future. Most of that dent will come from the highly leverage players holding lower quality land.

The Oil Sector In 2015 And The Real Estate Analog

The ETFs (NYSEARCA:IYR) and (NYSEARCA:VNQ) measure the performance of the real estate sector of the U.S. equity market and include large-, mid- or small-capitalization companies known as real estate investment trusts (“REITs”). Their charts over the last couple of years are illustrated below:

(click to enlarge)

and below:

(click to enlarge)

All the investors know the fundamental problems behind the slump of the real estate sector in the U.S. a few years ago. Given that no fundamental improvement can take place overnight, it took the real estate sector in the U.S. a few years to recover from its lows in 2009.

I am sure now that many readers wonder why I talk about the real estate sector in an oil-related article. What is the relation between the real estate sector and the oil markets?

I mention this example because I strongly believe that the oil price will recover like the real estate sector has recovered from its bottom over the last three years. But, there is also a big difference here. The recovery of the oil price will be much quicker than the recovery of the real estate sector, given that this slump of the oil price has been driven by lame thinking, arbitrary speculation and sentiment, while having nothing to do with evaporating geopolitical risks around the world or a material deterioration of the global supply-demand fundamentals.

On top of that, there are some additional geopolitical clouds on the horizon that can make oil jump by H1 2015. For instance, the current low oil price has brought many OPEC members to their knees, while the holders of those countries’ sovereign debt are toast as long as oil stays at the current levels. Iran, Iraq, Libya, Algeria and Venezuela are not prepared to withstand low oil prices for long and they are now in serious danger of political upheaval at current prices. According to yesterday’s news from CNBC, the first signs of an escalating social unrest in Venezuela are already there, and things will definitely get worse over the next weeks.

Furthermore, Russia and Saudi Arabia will be anxiously watching the rapid depletion of their sovereign wealth funds, which will make the political situation in these two countries dicey over the next months.

In other words, I obviously agree with Andrew John Hall, who is known as the God of Crude Oil Trading. Although many investors and readers do not know this oil legend, Hall is secure in his view that the price of oil is destined to rise sooner rather than later, mocking those who are convinced that a U.S. shale boom will mean long-term cheap, abundant energy.

My Takeaway

Fellow investors, please educate yourselves for your own benefit. Everyone talks about buying low and selling high, but he often does the opposite. The typical investor often buys high because he feels good. And he sells low because of panic and lame thinking.

Therefore, this is the essence of my investment thesis. This oil price fall is a sentiment-driven slump. This is short term and sentiment-driven noise in the big picture story. Right now, oil has come to the point where it is unloved, which is exactly when you have to expose yourself to the sector. This oil downturn cannot last long and oil will bounce back by early 2015.

On the supply side, there are not any “elephant” conventional discoveries over the last years, and this is why the conventional oil production from the U.S., the North Sea, Mexico, North Africa and the Middle East has been falling over the last years. Cheap and easy oil is gone forever, and the global marginal barrel currently is in the $80 to $90 range.

Due to the current low oil price, oil supplies will become critically tight by early 2015, largely because production leader Saudi Arabia is not able to pump as much extra oil as many people believe. In fact, Saudi oil production has peaked at approximately 10 million bopd over the last years, as illustrated below:

On the demand side, the investors must not ignore that world population keep growing at a satisfactory rate in an energy intensive world, as witnessed by the GDP growth rates and the GDP per capita for the world’s biggest oil consumers mentioned above. As a result, global oil demand continues growing unabated at average of 1 million barrels per year.

Meanwhile, the geopolitical tensions are escalating and the crude oil price is best proxy for geopolitical risk.

After all, how can the investors weather this temporary storm and benefit from this oil price shock? Well, big fortunes will be made to those with the patience and foresight to pick right and hold tight. Just pick quality oil stocks with low key metrics (i.e. EV/EBITDA, EV/Production, EV/Reserves), sit tight, and you are going to do very well given that the strong players will remain and the weak ones will vanish.

For instance, stay far from the heavily indebted companies with a high Net Debt to EBITDA ratio, because many highly leveraged U.S. shale producers will go broke over the next couple of years. The rising tide will not lift all boats. Even if WTI jumps at $85/bbl tomorrow, several U.S. shale oil producers will not avoid bankruptcy while others will be sold for pennies on the dollar. Beggars cannot be choosers.

And now you know why I sent out last Thursday a Market Update to the subscribers of “Nathan’s Bulletin,” urging them to load specific quality picks. And when Brent crests that $90 mark again, they will be glad they did.

https://i2.wp.com/static.seekingalpha.com/uploads/2009/11/11/saupload_world_20in_20oil_lr_shutterstock_4174132.jpg
Comments (149)
 
 
 
  • mike904

    Comments (741) | Send Message

     

    I would be obvious to a garden gnome that any rise in the price of Brendt crude above $115 causes a recession. This has been true ever since 2007. The US cannot afford $4 gasoline.

     

    The reason oil stayed as high as it did was the fact that India and China subsidized it. The fact that China passed the US in imports misses the point. China uses 36mm boe in coal every year. They manufacture 700 million tons of steel versus 40 in the US. This is due largely to $5 trillion in QE. In the process of this absurd borrowing, they have wiped out most of their neighbors.

     

    Earnest and Young estimates that there is 300 million tons of excess steel capacity in the world and China is STILL building new capacity. That 300 million tons is assuming China continues to use 640 million tons internally. Once countries start to protect their steel producers, China is going to collapse. Steel requires 11 BOE of energy per ton. 300 million tons is the equivalent of 10 million BOE of energy per day. If there’s a recession, you could see total energy use drop by 15-20 million BOE per day.

     

    Demand isn’t what people want, demand is what they can pay for. Once the wold starts defaulting on this junk corporate debt, petroleum demand is going to collapse. The last time we went through a shock like this was 1982 and 6 million BPD of demand came of the market. This one is going to be far far worse. You could easily see oil go to $50 and stay there for a decade. According to Evans-Ambrose Prichard, Jim Chanos and Kyle Bass, China is going to collapse.

    4 Dec, 07:50 AMReplyLike7
     
  • Global Investor

    Comments (309) | Send Message

     

    Excellent write up, as usual! Your excerpt below says it all:

     

    ” The recovery of the oil price will be much quicker than the recovery of the real estate sector, given that this slump of the oil price has been driven by lame thinking, arbitrary speculation and sentiment, while having nothing to do with evaporating geopolitical risks around the world or a material deterioration of the global supply-demand fundamentals”.

     

    and this one:

     

    ” In fact, the rapid decline has already started. First, the Energy Information Administration said yesterday U.S. crude-oil supplies declined 3.7 million barrels on the week ended Nov. 28. Analysts surveyed by Platts had expected crude inventories to increase by 380,000 barrels on the week.

     

    According also to today’s news from Seeking Alpha, new permits, which outline what drilling rigs will be doing 60-90 days in the future, showed heavy declines for the first time this year across the top three U.S. onshore fields: the Permian Basin, Eagle Ford and Bakken shale. Specifically, there is an almost 40% decline in new well permits issued across the U.S. in November 2014, with only 4,520 new well permits approved last month, down from 7,227 in October 2014. “

     

    I did not actually expect such big declines so soon. Both declines really surprised me. How long can an investor remain in denial?

    4 Dec, 10:54 AMReplyLike9
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    mike

     

    “China is going to collapse.”

     

    People have been saying that for around, well, forever.

    4 Dec, 11:27 AMReplyLike17
     
  • IncomeYield

    Comments (1847) | Send Message

     

    The opposite could happen.

     

    How many people world-wide have been sitting on the proverbial sidelines at $100+ oil? Waiting to start or expand a biz. Waiting to buy a car?

     

    All of a sudden, poof, 40% off on the COGS!
    Possibly a big demand shock coming.

    4 Dec, 12:34 PMReplyLike5
     
  • bettheranch

    Comments (19) | Send Message

     

    “How many people world-wide have been sitting on the proverbial sidelines at $100+ oil? Waiting to start or expand a biz. Waiting to buy a car?”

     

    Answer: None.

    4 Dec, 12:42 PMReplyLike5
     
  • IncomeYield

    Comments (1847) | Send Message

     

    Exactly, “None”, or did you mean “Zero”?

    4 Dec, 12:55 PMReplyLike0
     
  • Josh Young

    , contributor
    Comments (704) | Send Message

     

    Great article. I like that you incorporated the drilling permit drop, seen here: http://seekingalpha.co…

    4 Dec, 02:41 PMReplyLike1
     
  • bettheranch

    Comments (19) | Send Message

     

    Zero. Zip. Nada.

     

    Most people (Americans) can’t even tell you who Ben Franklin was, much less tell you the price of oil.

     

    They can’t even remember how much their last tattoo cost them, or their boyfriend.

    4 Dec, 06:08 PMReplyLike12
     
  • trader57

    Comments (253) | Send Message

     

    GI, if those numbers for well permits are not seasonally adjusted, then it’s possible that a big part of that drop is caused by seasonal factors related to weather. It could be that many drillers do not start new wells after November in places like the Bakken play and the DJ Basin, and thus the latest month that they get permits could be October. So those permit number have to be seasonally adjusted to be meaningful.

     

    Nonetheless, I don’t buy some of the talk I’m reading on the internet that “the US shale drillers will keep right on going with oil at $65”. That idea is just totally ridiculous. The operating cash flow generated by US shale producers will decline dramatically if oil stays below $80 and they won’t be able to raise nearly as much capital because of lower stock prices and substantially higher yields required to sell bonds. So US shale drillers will be forced to cut back on drilling activity because of a simple lack of capital and cash flow to pay for horizontal drilling, which is expensive. This big drop in drilling activity, which will happen for sure if oil stays below $80, should cause US oil production growth to drop sharply in the first half of next year and that drop will probably cause the oil market to correct back up into the 80s by the second half of next year.

     

    I’ve been surprised that the Saudis have been willing to let oil prices fall all the way below $70. I’m starting to wonder if anyone really knows what oil price they need to balance their national budget. Same thing with the Russians–it’s difficult to get good credible information from the Middle East, South America, and Russia about national budgets and other subjects like what kind of oil production technology they’re using today and what their marginal cost of production is today. Do Wall Street analysts and those sleepy international agencies in Europe really know what’s going on in the Middle East and Russia? I’m starting to wonder.

    4 Dec, 08:41 PMReplyLike5
     
  • jj1937

    Comments (1455) | Send Message

     

    Dow 18,000 by XMAS. It’ll probably happen by Monday.

    4 Dec, 10:59 PMReplyLike0
     
  • Skaterdude

    Comments (698) | Send Message

     

    Oil and coal are not fungible and they are not used primarily for the same purposes. BOE is nice if you’re assessing overall energy consumption, but it’s not a good way to think about consumption across all energy sources. If steel production drops, how will that affect the people driving vehicles in Beijing or other metropolitan areas? If coal producers in the US close mines, how will that affect oil prices and consumption? Not as much as you might propose just by looking at BOE. People don’t fuel cars with coal, and power companies are building NG fueled power plants because NG is cheaper and cleaner. So if coal production drops in the US, it’s not going to directly cause gasoline prices to rise. My point in these examples is not to argue whether oil or NG prices will rise or fall, but simply to illustrate the lack of connection between markets and demand.

    4 Dec, 11:44 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3663) | Send Message

     

    Author’s reply » Global Investor,

     

    Thank you for your compliments. The huge divergence between the reality and the market perception is more than apparent in the oil markets now.

     

    The geopolitical risks have worsened compared to 2013 and H1 2014, the GDP growth rates in 2014 are at or above expectations in the world’s largest oil consumers compared to 2013, while the crude inventories and the new permits have already started to drop rapidly. We talk for a 40% decline here.

     

    To me, this is the definition of: THEATER OF THE ABSURD.

     

    Let’s see how long this THEATER OF THE ABSURD will go on.

     

    Regards,
    VD

    5 Dec, 06:08 AMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3663) | Send Message

     

    Author’s reply » Josh,

     

    Thank you for your compliments. As mentioned above, what is going on now in the oil markets is the definition of the: THEATER OF THE ABSURD.

     

    Let’s see how long the oil bears will keep behaving in this irrational manner trying to make money at the bottom although the facts are not there.

     

    Regards,
    VD

    5 Dec, 06:12 AMReplyLike3
     
  • TraderFool

    Comments (504) | Send Message

     

    Hello trader57,

     

    Re: “I don’t buy some of the talk I’m reading on the internet that “the US shale drillers will keep right on going with oil at $65″. That idea is just totally ridiculous. The operating cash flow generated by US shale producers will decline dramatically if oil stays below $80 and they won’t be able to raise nearly as much capital because of lower stock prices and substantially higher yields required to sell bonds”

     

    If oil price keeps going down, and I’m a shale driller with sunk cost already, wouldn’t I want to try to keep pumping MUCH, MUCH more first to try to keep my fixed costs even lower, to try my best to survive, before the inevitable happens? In other words, I think we might just be seeing the beginning of the price fall … sure, 6-12 months down the road, we’ll see some real bust happening (not all producers have enough liquidity to last 6-12 months), but the time from today to the next 3-6 months could be really painful for longs … before they cut production, I think, they’ll try to produce a heck of a lot more to try to survive, before the financial constraints starts to work – remember, financials have many avenues, some will still pump more, borrow from banks to suvive, etc. i.e. we could be looking at 6-12 months pain before recovery, before the banks finally say enough is enough, before capital markets starts to rate the bonds as junk, etc. These process could last a long time, and until then, we might be seeing continued increased weekly production which will keep depressing crude oil prices …

     

    Originally, I plan to go long on crude oil stocks, but I’m now thinking of holding back my longs until I see a real bottom in prices. I like to see US production slows down for 2 to 3 weeks in a row, and right now, we are just not seeing this happening at all – US producers keep producing more oil every week, and with Saudis not cutting down, the supply of oil on a weekly basis keeps going up, and prices inevitably must come down … I have a feeling, $65 will not be the immediate bottom yet … but let’s see …

    5 Dec, 08:44 AMReplyLike6
     
  • trader57

    Comments (253) | Send Message

     

    It will take a few months for drilling activity to decline. The OPEC meeting was only a week ago. Oil producers are not going to stop drilling any wells that they’ve already started, and I would think they have some contracts for a few months that can only be canceled in extreme dire situations. By March 2015 we should start seeing a substantial decline in oil rig counts. Production growth will then start declining quickly and US production could even start dropping by mid-summer.

    5 Dec, 11:32 AMReplyLike4
     
  • Holthusen

    Comments (638) | Send Message

     

    Very funny! Yet sadly correct, and getting worse. We are raising a generation of Electronic Gamers. They live in another world instead of the real world.

    5 Dec, 11:36 AMReplyLike4
     
  • blondguysc2001

    Comments (55) | Send Message

     

    Interesting article…lots of good data points, particularly how well you call out the “analysts” and hold them accountable for their calls. These people truly are nothing but weathervanes….at least the vast majority of them.

     

    I do think there is a temporary glut of supply that triggered the decline, coupled with the obligatory unwinding of long positions…crude prices may capitulate further, but they won’t stay down for long. The tricky part is staying patient and waiting for a tradeable bottom, and separating the long term winners from the ones with excess leverage and poor fundamentals. We know the hedge funds are herd animals so expect more piling on of short positions to drive crude lower.

    4 Dec, 07:54 AMReplyLike17
     
  • Value Digger

    , contributor
    Comments (3663) | Send Message

     

    Author’s reply » blondguysc2001,

     

    I am getting sick when I see how quickly all these highly paid “gurus” change their mind depending on which way the wind blows, while ignoring the facts. And they behave like parrots repeating the words and imitating the actions of another.

     

    This is why, I felt the need to write this factual article that clearly demonstrates what these “gurus” were telling us in 2013 and H1 2014, and what could drive prices at $150/bbl.

     

    Also, separating the wheat from the chaff is something that ALL the investors must do now. They must NOT make the mistake to load the heavily indebted energy companies because it will be a “dead cat bounce”, if these companies ever bounce back.

     

    Regards,
    VD

    5 Dec, 06:23 AMReplyLike5
     
  • Duago

    Comments (70) | Send Message

     

    Value Digger,
    I greatly value your research, time and effort put into you articles.
    However, timing is everything. This piece feels desperate. I have read a lot of details on the subject of late and there were many signs of this slump in prices coming that were not accounted for by those who only see oil prices as going up.
    Prices go up and they go down. I don’t see the compelling evidence that it will suddenly go up soon.

    4 Dec, 08:11 AMReplyLike9
     
  • TraderFool

    Comments (504) | Send Message

     

    Duago,
    Just pull up the price charts of crude oil over the past 20 years.
    You’ll see this current price drop is the 2nd longest drop over that period.
    The only time when crude had a bigger drop was back in 2008, from a peak of $147, down to a low of $33, near the 200 month MA. Today, we are near the 200 month MA as well which is currently around $60-$65 … we can’t time it precisely, but over the next few months, I feel we are close to the current bottom, and it makes sense to pick good quality issues relating to crude oil, and slowly work your way inside. Never go on margin, this is really Value Investing at its finest, and if you are not scared, you are not doing Value Investing properly – I won’t bat an eyelid if the purchases made this week drops by 50% more at the bottom, because history has shown that they will rise much, much more. I’m looking at +100% gains over the next 1-3 years at the least …

    4 Dec, 04:13 PMReplyLike13
     
 
  • Dan Teodor

    , contributor
    Comments (110) | Send Message

     

    Duago,

     

    Demand for oil in the six segments that simply cannot stop are impervious to economic slowdown (plastics, oceangoing freight, train freight, fertilizer, aviation, modern armies). Regardless of consumer slowdowns, these six segments represent 80% of oil and net gas consumed around the world. When economies slow down, the food, freight, aviation and military segments do not, they continue on. A recession in Europe or China would only slow the rise in demand, not reverse it. Look at the demand trend of the past year and understand that even if demand only rises at one half the slope is has followed from 2004 until now, it will still outstrip current expected global production for Q1 2015. Oil price strip is highly elastic to tiny percentage changes in the supply-demand balance. Current situation is creating the coiled spring and that coiled spring WILL unwind before the end of 2015.

     

    We just hope it is a measured controlled unwind throughout the year, otherwise we will have the $140 spike we saw in 2008 for a month or two before settling down to something in the $90 – $100 brent range.

     

    Set your DCF and NAV models for $90 brent / $85 WTI. This is going to get ugly before the weather gets cold again in 2015. I’m willing to go out on a limb and say you can quote me on this one.

     

    Here is the reality when Brent is $70/bbl for more than one or two months…

     

    1. Venezuela is cash flow negative and cannot make coupon payments on its foreign debt. Venezuela WILL default on its debt before end of 2015 in this price regime.

     

    2. Iran cannot feed its army at this price. The mullahs depend on the support of their army to maintain power. Kicking this leg out from under the government stool makes their continued existence precarious. Martial law kind of precarious.

     

    3. The government in Tripoli cannot feed their guard at these prices. If the government in Tripoli cannot do this, they cannot protect the pipes that carry crude to their northern port. When that happens the other government in the west breaks through and shuts the pipe down to prevent revenue from reaching the Tripoli government and thereby trying to strangle it. 800,000 bbl/day go off stream.

     

    4. Saudi Arabia is burning $2b/month from their sovereign wealth fund. At that burn rate, the ENTIRE sovereign wealth fund runs dry in 60 months. They need to turn the boat around long before that happens because if they burn through more than about 25% of it, angry men with beards and automatic rifles start to hang around the palace gates. Not a stable internal situation. Riyadh has made major financial promises to its citizens in return for peace and their support. And in Saudi Arabia, the citizens do not have peaceful protest marches when they are aggrieved.

     

    5. Russia is burning $2.5b/month form their sovereign wealth fund. At that burn rate, the ENTIRE sovereign wealth fund runs dry in 48 months. They will tighten their belts, suffer, freeze, grit their teeth and tough it out. BUT! (and this is a big one) understand that at the back of the mind of every strategist in the Kremlin is the nagging thought that all they have to do to cause a global geopolitical crisis and force the price of energy to whipsaw back up to $100/bbl in the course of a week is to kick the hornets nest: Roll the tanks into Donetsk and Lukhansk. Overnight crisis and EU buckles because it is now winter and Germany will freeze without the Ukrainian transit gas (Nordstream can only supply about one third of what Europe needs to stay warm).

     

    6. I can’t even begin to fathom what the dynamics going on in Syria / Iraq are right now, but it can’t be good. I’m sure Baghdad had to guarantee Kurdistan a minimum cut in the negotiation to let them export. Well, either Baghdad or Kurdistan is not going to get that minimum cut agreed in that negotiation. How do you think things are panning out in their relations now?

     

    This situation has the makings of a new Arab Spring / Cold War settling in… and it cannot remain in equilibrium for a whole 12 months.

    4 Dec, 07:12 PMReplyLike23
     
  • rjj1960

    Comments (1370) | Send Message

     

    Value Digger,one of 3 people on SA with brains. Good job , appreciate the effort.

    4 Dec, 08:29 PMReplyLike10
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Duago,

     

    Thank you for your comment. But, my article is full of facts as always. If you disagree with the facts, it is your choice.

     

    Regards,
    VD

    5 Dec, 06:26 AMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » rjj1960,

     

    Thank you for your compliments. Good luck with your investments.

     

    Regards,
    VD

    5 Dec, 06:29 AMReplyLike1
     
  • ainjibi

    Comments (13) | Send Message

     

    Who are the other 2 with brain on SA ? Would appreciate the info. !

    5 Dec, 02:57 PMReplyLike2
     
  • rjj1960

    Comments (1370) | Send Message

     

    Filloon and Fitzsimmons.

    5 Dec, 05:50 PMReplyLike2
     
  • ainjibi

    Comments (13) | Send Message

     

    Thanks !

    5 Dec, 06:01 PMReplyLike0
     
  • ggig2000

    Comments (10) | Send Message

     

    who are the other two? ; )

    6 Dec, 10:36 AMReplyLike0
     
  • mikenh

    Comments (223) | Send Message

     

    The change in commodity prices, oil included, was triggered by a change in financing attitudes of some buyers. Changing Fed policy added uncertainty to a sure bet. Same thing happened on a smaller scale when Bernancke hinted that bond buying might stop someday.

    4 Dec, 08:26 AMReplyLike2
     
  • themacguy521

    Comments (26) | Send Message

     

    VD. Thanks and could not agree more.

     

    Oil Bears and Analysts are driving the oil price down with their unrealistic attitude towards:

     

    a) Negative growth;
    b) India’s energy appetite; and
    c) The fallacy of Nirvana in the Middle East.

     

    Not to mention that Pick-Ups and large SUVs are back in vogue in North America…

     

    I also believe that Putin will rattle his sabre and agitate conflict somewhere, to raise uncertainty and thus prices – if the drought in Oil prices remains lower much longer. After all, the fall in the price of crude in the mid 80’s (and Reagan) brought the USSR to its knees. He will not repeat that. Guaranteed.

     

    Waiting for a firm bottom – then backing up the truck for more PTA.

    4 Dec, 08:34 AMReplyLike9
     
  • Old Rick

    Comments (512) | Send Message

     

    Please let us all know when there is a firm bottom so we can all benefit from your insight.

    4 Dec, 03:34 PMReplyLike7
     
  • TraderFool

    Comments (504) | Send Message

     

    Old Rick,

     

    No one will know the absolute bottom, at the “Hard Right Edge” of the charts. Bottoms are only know once some time are passed, and by then, you won’t be able to buy at the bottom price. That’s the reality of prices. The key is Money Management – always make sure to have enough cash to buy at lower prices when bargains avails themselves. For highly cyclical stocks, a rough yardstick is 75% fall in prices from the peak for decent names. E.g. SDRL is one that I think could be interesting – peak price was $48 in 2013, and is now trading near $12, or 75% fall. I would allocate around 4% of my portfolio to this, to be split into 4 bullets, and have actually deployed first bullet at $13.50. I’ll be looking for a final buy price of around $7 (approximately 50% fall from my first entry), and these types of buys are just put into the drawer and forget. When the drawer is opened in 1-3 year’s time, you will most likely earn anywhere from 50% to 100% gains or more.

     

    Meanwhile, have the stomach to see the value of what you bought dropped by 50% from what you purchased. Don’t ever think about selling then, because the Reward to Risk of holding is much, much better.

     

    And diversify into 3 issues at the very least, so that total exposure to crude oil is no more than say 12% trading capital. I am just very cautious, but of course, at the very bottom, for the 4th buy, you could double or triple the buy size and raise the 12% up to say 15%-20% capital … but these type of substantial increase must show capitulation, i.e. big price drops with big volumes …. (SDRL has shown the first capitulation last week and this week, and usually, there’s more than 1 capitulation). And if you are a nimble trader, you would also consider adding on the way up, e.g. when Weekly RSI(14) crossed above 20 and Daily RSI(14) dropped back down to around 30-40 or so ie. dipping on the way up, if you are worried that you only have 3% capital in this during the bottom.

     

    PS. SDRL falls into my screen, because at $13.50, it is trading at NAV, and well below Replacement Cost. So, if it falls to $7, that would be trading at 50% NAV approximately, and is good enough for me.

    4 Dec, 04:21 PMReplyLike9
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » themacguy521,

     

    Thank you for your compliments. Also, good luck with PTA (Petroamerica Oil) which is debt free with a pristine balance sheet, as shown in my previous articles.

     

    Regards,
    VD

    5 Dec, 06:29 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Old Rick,

     

    Warren Buffett has said more than once that he has NEVER managed to buy at the bottom and sell at the top. Nevertheless, he is a billionaire.

     

    Regards,
    VD

    5 Dec, 06:31 AMReplyLike5
     
  • les2005

    Comments (15) | Send Message

     

    excellent article. While I’m hesitant to predict WHEN oil prices will go back up, it’s obvious that they will. Outside the middle east, most resources cannot be economically accessed at a price below $70, so while the market price may go below, the pendulum invariably will swing back because
    – more and more suppliers will go out of business or reduce supply
    – consumption and hence demand will rise if oil is that cheap.
    There are a lot of factors at play as you well demonstrated – geopolitical, GDP growth, but also competing energy sources (and I’m not talking nuclear fission, but renewables). But the overriding factors appear to be speculation and herd behaviour. And we all know they can only go for so long into one direction.

    4 Dec, 08:37 AMReplyLike8
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » les2005,

     

    Thank you for your compliments.

     

    Regards,
    VD

    5 Dec, 06:32 AMReplyLike0
     
  • Mark_Stphens

    Comments (13) | Send Message

     

    I’ve been keeping an eye on all of the airlines. Since gas prices are so low right now, almost ALL of them have had large gains the past month.

    4 Dec, 08:45 AMReplyLike2
     
  • Family Investor

    Comments (558) | Send Message

     

    Great article, appreciate you sharing your research.

    4 Dec, 09:01 AMReplyLike5
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Family Investor, Thank you for your compliments. Regards, VD

    5 Dec, 06:32 AMReplyLike0
     
  • Old Mule

    Comments (25) | Send Message

     

    The article makes some very sound points. I must disagree with the view that the shale plays are going to “play out” in the near future. If anything, we have continually underestimated what innovation and knowledge are achieving in exploring and producing from tight formations. Lower prices will slow the growth in shale exploration and production, but the quantity of resource present in shale plays is enormous and not fully understood.

    4 Dec, 09:04 AMReplyLike5
     
 
  • bettheranch

    Comments (19) | Send Message

     

    Old Mule, you are correct. We have, indeed, continually underestimated what innovation and knowledge are achieving.

     

    Also, not all shale formations are so thin as to horizontally support only single laterals. Some, like the Wolfcamp, are very thick, and the first wells drilled are really only the first of many stacked laterals.

     

    Back to innovation and knowledge, that is not limited to shale plays, either. Not all of the new oil production is shale production. At least some if not much of it is from new horizontal development of non-shale assets. For example, look at the Spraberry in W TX.

     

    Also, the shale wells that are drilled and produced typically hold under the leases of unsophisticated lessors other zones that have not yet been tapped.

     

    There is more to be squeezed out of these formations than most people realize, and with advances in cost savings along the way, there still remains quite a bit of money to be made.

    4 Dec, 11:07 AMReplyLike2
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    Old

     

    If it is “not fully understood” then you cannot say anything about future shale production. Currently, the author is correct. Until production is realized, such as current retrievable shale oil, for investment purposes, it doesn’t exist.

    4 Dec, 11:30 AMReplyLike3
     
  • bettheranch

    Comments (19) | Send Message

     

    To the contrary, even though it is not fully understood, we know for sure that we are not getting all out of it, and there has to be a way to get more out of it as technology and knowledge improve and as economic opportunities arise.

     

    What it is going to take to send men to Mars is not fully understood, either. But that does not mean that we cannot say anything about sending men to Mars at some point in the future.

    4 Dec, 11:46 AMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Old Mule,

     

    Thank you for your kind words.

     

    In terms of the shale oil and the technology, I believe that the technology cannot make wonders overnight. And more importantly, the current technology cannot get a lot better overnight, given that it took us (George Mitchell) many years to improve this shale process and bring it to the point where we are now.

     

    If the oil price remains at the current levels for long, the peak oil event will occur in 2015, in my view.

     

    Regards,
    VD

    5 Dec, 06:39 AMReplyLike1
     
  • Dr. Z.

    Comments (93) | Send Message

     

    Breaking News: Publisher of oil newsletter bullish on oil.

    4 Dec, 09:11 AMReplyLike11
     
  • Jion

    Comments (528) | Send Message

     

    An oil newsletter that contains short ideas too.

    4 Dec, 09:38 AMReplyLike9
     
  • samberpax

    Comments (115) | Send Message

     

    Dr. Z.:Breaking News: Publisher of oil newsletter bullish on oil.

     

    ———————-…

     

    Please let me know when the majority of oil newsletter writers turn bearish, that is when I’ll be a buyer.

     

    best,
    -samberpax

    4 Dec, 09:47 PMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Dr. Z.,

     

    You are NOT a subscriber of my newsletter that was out just 3 months ago, in September 2014, when the oil price was already falling.

     

    If you were a subscriber, you could check my picks and the recommended entry prices.

     

    And please let me know and I will gladly send you the returns from my picks in H1 2015, based on the recommended entry prices.

     

    Regards,
    VD

    5 Dec, 06:48 AMReplyLike1
     
  • Emmanuel Daugeras

    , contributor
    Comments (44) | Send Message

     

    Good article. I like the attitude to keep one’s head cool and act on facts, not emotions.
    I buy the long case for Oil, long term. But the question is that of how long it will take to come back.
    The political unrest in the middle east ist not necessarily a cause for less supplies: the ISIS for instance uses Oil to finance their war. The anarchy actually can dislocate the production discipline and lead to lower prices. But agreed with you, anarchy is not sustainable and Oil prices will eventually move up again.

    4 Dec, 09:20 AMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Emmanuel, Thank you for the kind words. The political unrest in the Middle East often leads to production disruptions, statistically speaking. And things in the Middle East are not better now than in H1 2014. In contrast, things now are much worse.

     

    Rgeards,
    VD

    5 Dec, 06:53 AMReplyLike1
     
  • Timothy Coates

    Comments (9) | Send Message

     

    Wow!! Talk about talking up your book! There are so many things wrong with this article it makes it hard to even take it seriously. I’m wondering if this is Dan Dicker writing under a different name with his whole “Barrels at risk” theory that artificially buoyed prices for the 5 years between 2009 and now.

     

    The author seeks to discount the additional 3.5 million barrels the US produces that were not available 5 years ago by saying the wells dry up fast and the production cost are too high. That is the true “lame thinking” here. I heard estimates that some production cost in the Bakken are as low as $29 dollars and that $70 is actually on the high end. His cost estimates are from years ago. Good ole American ingenuity drives down the cost of recovering this oil daily.

     

    The author doesn’t deal with the death spiral that OPEC currently finds itself in. The more profligate members need a high oil price in order to maintain their spending. If I can’t make my revenue with a high oil price what is my alternative? That’s right pump more. Their state goal at this last meeting was to keep the production quotas in place. What was unsaid and the real reason oil took another dive is cheating on production quotas will reach an all time high over the coming months as these governments seek to shore up their finances.

     

    Finally, the author displays several charts but proceeds to ignore what the charts say. We have firmly broken all uptrends and any recovery will be very difficult. I would further break his argument down but that would just give more credence to yesterday’s theory about the state of energy supplies in the world.

    4 Dec, 09:28 AMReplyLike13
     
  • Short&Stocky

    Comments (40) | Send Message

     

    Comments like this are what give me confidence that oil bulls will make money

    4 Dec, 11:33 AMReplyLike13
     
  • thkalinke

    Comments (134) | Send Message

     

    The OPEC death-spiral, with poorer members exceeding quotas, has been going on for at least a couple of decades, nothing new there. As far as a Bakken play that can produce for $29 and keep it there – if you find one, please share.

    4 Dec, 11:37 AMReplyLike8
     
  • Timothy Coates

    Comments (9) | Send Message

     

    I picked up the $29 number from a Market Watch article written by Tim Mullaney entitled “Opec is wrong to think it can outlast U.S. on oil prices”. If that number is incorrect it’s not because I made it up. I agree that cheating has been going on since OPEC’s inception but never before have the weaker members of OPEC been in such tenuous positions with their populace which I believe will spur further more pronounced cheating.

    4 Dec, 01:30 PMReplyLike2
     
  • Class VI

    Comments (3) | Send Message

     

    The author argues that saudi has already reached or near’d max capacity pumping…

     

    So whats the max production capacity for the rest of OPEC for them to keep ‘pumping more’ to make budgets meet?

    4 Dec, 01:52 PMReplyLike2
     
  • quantcoyote

    Comments (66) | Send Message

     

    TC: I don’t necessarily disagree with your scepticism, but apart from Saudi Arabia there is very little spare capacity in OPEC (Libya’s may be higher than the rest, but even that’s not so high and Libya is likely to have real problems for a while). So the capacity to cheat is limited, even if the will to do so may not be. I’m beginning to wonder if SA gives a toss about OPEC at all. They can’t get the other members to cut (because they will cheat), and they need not be concerned about them increasing output.

    4 Dec, 02:33 PMReplyLike1
     
  • Timothy Coates

    Comments (9) | Send Message

     

    quant: you could be very well right about their lack of capacity. I have read though in the last couple days about another 300k barrels coming online from a Kurdish/Iraqi government agreement as well. My point was simply that US shale drilling cost are only dropping so that isn’t supportive of higher prices and OPEC isn’t cutting or even holding to the quotas they agree on.

    4 Dec, 03:17 PMReplyLike2
     
  • Noah Research Partners

    Comments (6) | Send Message

     

    While you are not wrong, I have a hard time understanding why this wasn’t presented or “paraded” 6 and 12 months ago.. Surely this has not been an overnight occurrence.

     

    Secondly, just like in October when everybody “woke up!!” and sent the market down 10%, because NOW the world is going into recession, good call btw. I highly doubt you bears are any more correct on your reactionary projections after crude fell from $90, you must be rich predicting this stuff.

     

    As an aside Gartman has been one of the best contrarian indicators of the past 2 years.

     

    And just to put my money where it counts, not that seeking alpha isn’t awesome.I recently sold multiple strike puts on EOG, NOV, PXD, XOM, CLR. Implied volatility is ridiculously high, and if history is any indicator its a very high probability trade.

    4 Dec, 06:07 PMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Excellent said, Short&Stocky.

    5 Dec, 08:01 AMReplyLike1
     
  • Jion

    Comments (528) | Send Message

     

    It’s the “follow the trend” guys. Until its end….but usually they realize the end too late.

    6 Dec, 07:10 AMReplyLike0
     
 
  • Edmund Shing

    , contributor
    Comments (31) | Send Message

     

    Good, detailed piece, even if I am running the risk of confirmation bias (I am long oil stocks). But one thing. Nuclear fusion reactor on the back of a car – that is Back to the Future, rather than Star Trek!
    Edmund

    4 Dec, 09:29 AMReplyLike8
     
  • MAYHAWK

    Comments (528) | Send Message

     

    Edmund,

     

    Yes, that would be Dennis “Marty McFly” Gartman. To be honest, I would rather have the sports almanac than my oil stocks right now.

    4 Dec, 03:21 PMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Edmund,

     

    Thank you for the compliments. And when it comes to the nuclear fusion reactor, I do not disagree with you. We can definitely see it both ways.

     

    Regards,
    VD

    5 Dec, 06:56 AMReplyLike1
     
  • contrarianadvisor

    Comments (997) | Send Message

     

    A few months ago with oil above $100, I was a lonely bear calling for sub $50 oil. Now that oil has fallen $35, I have lots of company in the bear camp. Still there are lots of analysts and investors trying to call a bottom in oil prices here so i would say that sentiment is somewhat equally divided between bulls and bears here. I think we have a ways to go before oil bottoms. First, we just had a major trend break and those don’t turn around quickly. Second, most of the recent decline was in reaction to OPEc deciding not to cut output. In other words, the focus has been on supply while I think what drives oil below $40 in 2015 will be much weaker demand than is currently being assumed, fueled by a global contraction.

     

    Both oil and oil stocks have a lot further to fall in upcoming months. There will be a far better entry point for both later in 2015. Investors would be wise to exercise some patience here and let things play out for a while. Buying the first sharp break is rarely a good idea, particularly not when there are so many signals indicating that the global economy is losing momentum.

    4 Dec, 09:33 AMReplyLike8
     
  • blittrell

    Comments (8) | Send Message

     

    Ironic that an analyst writes an article encouraging investors to ignore the analysts.

     

    Oil prices will ultimately come back, until then focus on the myriad of economic sectors that benefit from cheaper energy. It should also present a great buying opportunity for a whole host of energy stocks.

     

    This piece has too much emotion embedded in it for my liking.

    4 Dec, 09:40 AMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » blittrell,

     

    I am not a professional analyst who is living from this analysis.
    I am an investor instead.

     

    Regards,
    VD

    5 Dec, 06:58 AMReplyLike4
     
  • 745

    Comments (211) | Send Message

     

    Good article Digger. Whether people agree with your points or not, I don’t see how any investor could disagree with the first two paragraphs of the article. You nailed it spot on. One question though, would you care to share any specific names of shale producers that You feel will be extinct within a few years?

    4 Dec, 09:48 AMReplyLike8
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » 745,

     

    Thank you for your compliments.

     

    Please see my previous articles and comments to find my bearish calls on several energy stocks over the last months i.e. Halcon Resources (HK), Goodrich Petroleum (GDP), Cobalt International (CIE), GMX Resources (GMXRQ), ATP Oil and Gas (ATPGQ), CAMAC Energy (CAK), Pinecrest Energy (PRY.V), Midstates Petroleum (MPO) etc.

     

    Regards,
    VD

    5 Dec, 07:05 AMReplyLike1
     
  • Trade In Mexico

    , contributor
    Comments (598) | Send Message

     

    Absolutely brilliant title and analysis!!!!

     

    The title really sums up how stupid investors are being now. The current daily correlation between a 50 cent or $1 move in oil taking down oil stocks by a few percent is ridiculous. Dennis Gartman has no credibility, I don’t understand why CNBC has him on regularly.

     

    Thanks again for the article!

    4 Dec, 10:09 AMReplyLike6
     
  • contrarianadvisor

    Comments (997) | Send Message

     

    “Dennis Gartman has no credibility, I don’t understand why CNBC has him on regularly.”

     

    They have Jim Cramer on, so why not Dennis Gartman? They both change their minds on a daily basis and do it with conviction.

    4 Dec, 10:39 AMReplyLike7
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    Cramer needs to take my friends 100 level college logic class. The first thing my friend tells his students, on the first day is, “Getting louder doesn’t make your argument better.”

    4 Dec, 11:34 AMReplyLike5
     
  • Trade In Mexico

    , contributor
    Comments (598) | Send Message

     

    Contrarian, That is true about Cramer but the difference is that CNBC could eject Gartman with ease, while getting rid of Cramer would mean getting new anchors and having to replace his show.

     

    Right now, small cap oil stocks should be bought for a year end rally, stocks like MDR, WG, etc could see huge gains from current levels.

    4 Dec, 07:00 PMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Trade In Mexico,

     

    Thank you for your compliments.

     

    Regards,
    VD

    5 Dec, 07:06 AMReplyLike0
     
  • CSilver

    Comments (16) | Send Message

     

    Oil prices are bound to rise again… Just wait. Everoyne is getting excited over low gas prices but we all know it’s a cycle. If we’re at the bottom, you know the peak is on the way

    4 Dec, 10:14 AMReplyLike3
     
  • moatfrog

    Comments (749) | Send Message

     

    Everyone seems to have an opinion on oil pricing and what will happen to stocks. Up – down talk gets to be nauseating. Some articles are short winded while others (this one) are long winded. One equals the other. Forgetting all of that, I thoroughly know is that I filled up my car yesterday smiling at my lower fuel bill. I also realize, OPEC be damned, oil prices present a buying opportunity both at the pump and with the cheaper share prices of the big producers. Observing more cars on our roads and those in China and elsewhere just adds frosting to the cake. What are you doing? Are you immersing yourselves in the noise presented by this article and others of its ilk, or are you adding some oil shares to your portfolio?

    4 Dec, 10:40 AMReplyLike1
     
  • Noah Research Partners

    Comments (6) | Send Message

     

    Couldn’t agree more, everyone in the world is now an oil analyst. Specifically, since oil has dropped considerably, they project more declines..what are the odds?!!

     

    I think investors need to pull the trigger on stocks they wanted lower instead of watching tv for a buying signal.

    4 Dec, 06:07 PMReplyLike3
     
  • Realtoi

    Comments (318) | Send Message

     

    Buy quality that has paid uninterrupted dividends for decades, despite what happened with oil prices. That way you’ve got whatever situation we’re in now covered. You get paid for waiting..

    4 Dec, 07:32 PMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Noah Research Partners,

     

    What you describe is the definition of “HERD MENTALITY” that has brought the oil price at the current ridiculously low levels.

     

    But Einstein has said: “Two things are infinite: the Universe and human stupidity. And I am not sure about the Universe.”

     

    Regards,
    VD

    5 Dec, 07:10 AMReplyLike1
     
  • irishmaninbelgium

    Comments (49) | Send Message

     

    I agree that the ‘glut’ in supply is a bit of a nonsense and I’ve read a few articles recently lending weight to this argument.

     

    However, the claim that $80-$100 is the breakeven for shale seems unfounded – I think it was the IEA that said that only 4% of production uneconomic under $70?

     

    I also read a very interesting article today, I think on CNBC (apologies for the lack of sources), that discussed how transportation costs have plummeted in the past years.
    It mentioned that in 2011, companies were paying up to $28 a barrel in transport costs. It is now $1-$3 because of pipeline construction.
    If that is indeed the case, it is clear that a lot of shale is economic way below $70.

     

    Gartman and his nuclear fusion. What a tool. I made the exact same point elsewhere that unless engines are replaced with fusion reactors and someone discovers how to make plastic from ‘fusion’ we will be using oil for some time to come…

     

    I think the plummeting oil prices are the result of speculation more than any other factor but, as always, the market can remain irrational for longer than most of us can remain solvent.

     

    GL

    4 Dec, 10:56 AMReplyLike4
     
  • Vincent1966

    Comments (329) | Send Message

     

    I hope he’s right…that we’re not going to see a “new normal” in oil prices, but it’s too early to tell. Don’t underestimate the impact of overhead supply in oil stocks. A whole lot of damage has been done here and if we don’t see a rapid reversal, it’s going to be a long and painful thing to watch as holders bail out on any rally attempt.

    4 Dec, 11:00 AMReplyLike3
     
 
  • meridian6

    Comments (339) | Send Message

     

    It’s simple. Saudi Arabia is the only low cost producer in the world, but the rest of OPEC has costs similar to the US.

     

    Saudi only produces 10M bbl out of 30M bbl. I predict NOCs can only withstand the pain for 6 months. after that, they can elect to exit OPEC, and form a non-Saudi cartel to sell at $80-$90 band. Saudi can sell their 10M bbl cheap if they elect to, but that’s not enough to meet global demand, so buyers will have to pay non-Saudi price.

     

    4 Dec, 11:01 AMReplyLike5
     
  • bettheranch

    Comments (19) | Send Message

     

    Value Digger I do not think that Seeking Alpha is including your articles in their daily email of “Today’s articles on Energy Investing.” Or at least I have not been seeing them there.

    4 Dec, 11:10 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » bettheranch, I do not have any idea about it. Thank you for the heads-up.
    Regards, VD

    5 Dec, 07:11 AMReplyLike0
     
  • irishmaninbelgium

    Comments (49) | Send Message

     

    Also: Andrew John Hall has been dead wrong for the past few years.

     

    He is betting that the price of oil will increase. He is correct in this assertion. Everyone knows the price of oil is going to go up, eventually.

     

    ““When you believe something, facts become inconvenient obstacles,” Hall wrote in April, taking issue with an analyst who predicted a shale renaissance could result in $75-a-barrel oil over the next five years.”

     

    He should listen to his own advice, it seems.

    4 Dec, 11:11 AMReplyLike2
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    Fusion Reactors, indeed. Right around the corner.

     

    Here is one article where the “5 year” buzz line comes from:
    http://bit.ly/1viOe43

     

    “The team acknowledges that the project is in its earliest stages, and many key challenges remain before a viable prototype can be built. However, McGuire expects swift progress. The Skunk Works mind-set and “the pace that people work at here is ridiculously fast,” he says. “We would like to get to a prototype in five generations. If we can meet our plan of doing a design-build-test generation every year, that will put us at about five years, and we’ve already shown we can do that in the lab” . . . . An initial production version could follow five years after that.”

     

    And then ramping up commercialization of fusion power, another decade? we’re looking at 15-20 years best case scenario before fusion has any affect on fossil fuel prices. This just goes to support the author’s conclusion that oil prices are low due to “lame thinking.”

    4 Dec, 11:49 AMReplyLike2
     
  • Vijoda

    Comments (69) | Send Message

     

    Growing up, my neighbor Roy had the coolest mom. She let him put up a poster in his room of an eagle swooping down on a little mouse that had a single finger extended in the air. That visual flashed in my mind as I read this.

     

    No chart of the relationship between the strength of the dollar and the price of oil. Is it relevant?

     

    Good luck with your picks.

    4 Dec, 11:57 AMReplyLike3
     
  • ant21b

    Comments (539) | Send Message

     

    Oil will stay low for at least a few years the world economy is contracting not expanding and the U.S will enter a recession in about 2.5 years or so tops as part of the business cycle. Look at how oil stayed low in the 80s and 90s after being high in the 70s it was not a short term phenomena.

    4 Dec, 12:02 PMReplyLike0
     
  • billcharlesdixon

    Comments (1705) | Send Message

     

    I agree with you; oil should rise in 2015 if not this month. I don’t see much if any downside: we all knew that opec would probably not cut production; yet when they ratified that fact, oil prices went down another 10%. The whole thing is overdone, and what went down (in this case) must go up again.

    4 Dec, 12:03 PMReplyLike1
     
  • Flash Crash Gordon

    Comments (403) | Send Message

     

    Lot of knives likely left to be caught in this paradigm shifting move…not saying don’t dollar average, but be wary more pain likely lies ahead.

    4 Dec, 12:29 PMReplyLike3
     
  • Ruben12345

    Comments (418) | Send Message

     

    It would have been helpful to foresee this decline in oil was coming but no one did. .. To now claim we know what happens next seems not credible (again)

    4 Dec, 12:39 PMReplyLike4
     
  • IncomeYield

    Comments (1847) | Send Message

     

    Seems that some did. Some fairly large oil related positions and assets were sold over the past year or so.

    4 Dec, 01:01 PMReplyLike0
     
  • john001

    Comments (671) | Send Message

     

    Value Digger….another informative article. Thanks

     

    To all those investors who believe operators in the unconventional reservoirs can keep producing while oil prices are dropping, check out their H1 budget forecasts for negative changes in CAPEX. That will remove much of the guess work and hand waving on how profitable they expect their operations to be. They know better than the analysts and economists on when to turn the taps off.

    4 Dec, 01:03 PMReplyLike3
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » john001, Thank you for the compliments. Regards, VD

    5 Dec, 07:14 AMReplyLike0
     
  • juscallmej

    Comments (38) | Send Message

     

    good article.. totally agree.
    gartman is the worst of the worst in my opinion. he really is clueless. I dont know why they keep having him on every other day on fast money and the like.
    Its funny how media affect sentiment changes on a dime that makes everyone forget the bigger picture as you referenced above.
    remember ebola and the airline stocks in october? ignore the noise.

    4 Dec, 01:47 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » juscallmej, Thank you for the compliments. Truth is that some people had better not speak publicly so often because they shoot themselves in the foot.
    Regards,
    VD

    5 Dec, 07:16 AMReplyLike1
     
  • Freddyfred

    Comments (4) | Send Message

     

    That was NOT a LAME article ! Great Job! You covered a lot of material.

     

    I think at some point sooner than the media and herd thinks that oil will bounce hard upward. OPEC made a good move to instigate a needed correction and put the industry in check. Now I think (in the short term) we will see a scary drop lower fueled by more moves by OPEC such as todays move to cut prices from SA to Asia/India and USA. SA sees India as growing and needs to subdue the fact that demand is growing. I would not be surprised if massive amounts of capital is also used to force the commodity down further to keep the herd moving ion that direction. OPEC knows that they can turn it around very quickly (just tell the world they are cutting production and the herd reverses quickly) when they need to so they are in the drivers seat for sure.

    4 Dec, 02:00 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Freddyfred,

     

    Thank you for the compliments.

     

    A LOT of people and greedy oil speculators will be burned by shorting at the current levels. They have to pay for their mistakes and their greed, as always.

     

    Regards,
    VD

    5 Dec, 07:18 AMReplyLike0
     
  • nino91007

    Comments (226) | Send Message

     

    Oil fluctuates….down, then up. The question is how much MORE down it will go before it goes up…..yes $100+ is real but when? 2015 or 2018.

    4 Dec, 02:20 PMReplyLike1
     
  • goldenretiree

    Comments (932) | Send Message

     

    Lot of chutzpah here. You denigrate those with opposite viewpoints, then present everything you say as “facts.” When the fact of the matter is, nobody has a perfect crystal ball. Yes, oil will go back up. Question right now is “when.” The other question, how far does it fall from here? When you can definitively answer those questions, you can invest with confidence. Let us know when that occurs. Lot of good research here if you tone down the ego.

    4 Dec, 02:34 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » goldentree,

     

    There is nothing about ego here. You misunderstood it. I have a clear opinion that I support it with facts and links. If you have a different opinion, you are welcome to present it coupled with facts in another article. If you present speculation only, it will not help, I think.

     

    Regards,
    VD

    5 Dec, 07:21 AMReplyLike3
     
 
  • charles hinton

    Comments (2798) | Send Message

     

    value ,i agree with golden…there is too much ego.

     

    when you started quoting your” gods ” and casting scorn on any who disagree i lost interest.

     

    ps mr market is always right no matter how much fundamentalist cry.

    5 Dec, 11:11 AMReplyLike2
     
  • Dirk43

    Comments (17) | Send Message

     

    Gartman is surely way to optimistic with his fusion forecast but a better and more immediate alternative is already here, Hydrogen powered cars. With new technical breakthroughs coming rapidly such as graphene membranes, Hydrogen will replace electric cars this decade and will start to make a serious dent in gasoline as well.
    Another paradigm changing event already mentioned is China. The enormous real estate debt bubble and steel production bubble also fueled by debt has to come to a head soon. Yes, the collapse of China has been forecasted “forever” but so was the 2007 US recession which also was belittled for years right up to the edge. So was the collapse of the Soviet Union. The Chinese Govmnt has been able to keep the ball in the air because they control most of the economy but the Piper stands at the door. A Chinese economic collapse which WILL come will also collapse the oil price. Maybe it will recover some first but no energy investor can afford to ignore this.
    Caveat Emptor!

    4 Dec, 02:52 PMReplyLike0
     
  • firstinsnow

    Comments (509) | Send Message

     

    I don’t know, I’m not sure of any of this, and I’m standing by my
    position, firmly. [until I change it]
    What I am sure of, is that this situation will change, and that change
    is inevitable.
    NO, I am not an analyst.

    4 Dec, 03:30 PMReplyLike3
     
  • D. Rockefeller

    Comments (135) | Send Message

     

    I don’t know what the price of oil will be, just look at the charts and they are still going down. China is buying up a lot of excess oil and sticking it in tankers etc.
    What I want to know is a chart from the EIA on Zero Hedge showing retail gasoline sales in the USA have declined almost 75%!!!! since 2004. Then Bloomberg showed a photo of the first gas station in America selling gas for below $ 2.00. Weird that below the gas price it showed Diesel selling for $3.39 plus! The EIA does not explain that stuff well why diesel is much more expensive than gasoline.(a six cents higher tax from the Feds. low suphur costs and “demand” globally????) Then the EIA shows gasoline production in the USA has risen!!! OK that tells me big oil is exporting refined petroleum products to other countries to make tons of money off us. Killing diesel over environmental EPA type stuff for political reasons because gasoline costs more to make than Diesel even with the other factors and six cent tax, and Exxon is back in Green River developing their shale oil in situ electro-fracking method for the largest oil play on earth-TRILLIONS of BARRELS in AMERICA. All comes down to costs, the big boys games, and ignorance of the average US citizen willing to be played and fleeced.
    Yes overall your article was good but there’s a lot more going on the secret weird world of big oil than any of us will understand like how in the 70’s the US “government” supposedly allowed Saudi Arabia to shut down our nation in the WINTER and I froze waiting in gas lines? The USA??? Biggest army on earth plus Standard Oil of California developed the Saudi oil???? Or that their lawyer, John J. McCloy told at least seven US “presidents” what to do and say through Reagan and HW Bush? Heck he even ran the Warren Commission with Dulles and World War 11. Harold Hamm says he can drill existing wells in the “Scoop” at 99 cents a barrel and tried to sue OPEC. He is not going to shut down next year and plans on ramping up oil production big no matter what the price is. He wants to ream OPEC and make them blink unlike the 1986 oil bust when we went broke.
    All highly interesting and I am watching and going to buy back when I think oil has hit the low-could be next year though?

    4 Dec, 04:43 PMReplyLike1
     
  • justforfun777

    Comments (16) | Send Message

     

    too much time spent making fun of the analysts.

     

    why are you looking at GDP growth rates when talking about oil demand when oil demand figures for those same countries are available?

     

    I dislike articles that spend their time making fun of other oracles and then turn around and make their own guesses of what the future holds. It’s an emotional argument.

    4 Dec, 05:15 PMReplyLike1
     
  • TraderFool

    Comments (504) | Send Message

     

    Re: “too much time spent making fun of the analysts.”

     

    Actually, I like that part – in my nearly 2 decade experience, I’ve seen far too many investors put too much faith on analysts and it’s important to show actual real life examples where analysts are fallible also.

     

    For example, take a look at SDRL. When SDRL was above $40, there were not many analysts telling investors to sell, the prevailing tone was “crude oil is going up, up, up, and buy, buy, buy”.. But when SDRL cuts dividends to zero at $15-$20, they are now downgrading SDRL. Buy at $40, sell at $20? I think you can go to the poorhouse very fast following these “anal-ysts”.

     

    SDRL is not an isolated example. Today, after massive price falls, I see Zacks now telling investors to sell their energy mutual funds after these funds have massive falls …

     

    As for the future, no one knows what is going to happen, you have to follow your own investing/trading thesis. For me, I think SDRL has fallen 75% from peak, cut dividends to zero, so, I am slowly starting to accumulate SDRL, looking to spend up to 4% capital when it finally gets down to say $7. Yes, no guarantee it will fall down that far when today is only $12, but I like the fact that it has fallen from a peak of $48 down to $12 … that’s my unsubstantiated opinion also, and probably emotional as well 🙂 And yes, I’m starting to think of accumulating when analysts consensus is to sell … it worked very well for me over the past decade ….

    4 Dec, 05:36 PMReplyLike3
     
  • samberpax

    Comments (115) | Send Message

     

    justforfun777: I dislike articles that spend their time making fun of other oracles and then turn around and make their own guesses of what the future holds.

     

    ———————-…

     

    Exactly so! I am elevating my standard by lowering theirs. Sad, very sad indeed.

     

    Best,
    -samberpax

    4 Dec, 10:26 PMReplyLike0
     
  • stockdunn

    Comments (245) | Send Message

     

    XOM is my largest holding; also have PBA, SE, and LNCO (oops). However, this Bloomberg article has some “paradigm shift” ideas that should be entered into the conversation. Oil is no longer the only game in town, and that has to be considered. Also, just because our politicians refuse to take climate change seriously, doesn’t mean the rest of the world isn’t taking notice and preparing to do something about it:

     

    http://bloom.bg/12CBfjp

     

    Here is the link to Lockheed-Martin’s compact fusion announcement. These researchers/engineers are the best of the best, I would think, so if they’re making an announcement, they must have something legitimate up their sleeve, I would think:

     

    http://lmt.co/1yJEu5x

    4 Dec, 05:41 PMReplyLike2
     
  • TraderFool

    Comments (504) | Send Message

     

    Hello stockdunn,

     

    Interesting article on Fusion, nice read.
    However, the recent crude oil price fall down to $66 is most likely unrelated to Lockheed-Martin’s fusion piece, as that piece seems more about promoting Lockheed-Martin in research and what they think they could achieve in 5 years time, and still not yet confirmed …. but good to cast a quick glance from time to time on these sort of things ….

     

    If Lockheed-Martin managed to bring this to commercial production at small enough sizes at reasonable prices (that’s a BIG IF), then, I think we first see Lockheed-Martin’s stock price zooms up first a lot more than what we’ve seen so far, before we see global crude oil prices comes down significantly … that’s just my gut feel …

    4 Dec, 05:54 PMReplyLike2
     
  • TraderFool

    Comments (504) | Send Message

     

    PS. Regarding “paradigm shifts”, I would treat that with a huge grain of salt. In 2008, crude oil fell from $147 down to $33, and a lot of articles came out with “paradigm shifts”. If you had invested in crude oil counters then, you would be laughing with +100%-+400% gains when crude makes its way back up to $110 in just 2-3 years …

     

    There is no guarantee we’ve seen bottom in crude yet, but I feel we are now entering a period where Value Investors should start to feel excited on some of the high quality issues that are beaten up hugely, to trade below NAV and trade well below Replacement Costs …

     

    Cheers,
    TF

    4 Dec, 07:17 PMReplyLike1
     
  • stockdunn

    Comments (245) | Send Message

     

    TF: Thanks for your response. I agree, the LMT fusion concept probably has nothing to do with the drop we’ve seen, and any shift would be sometime down the road. Yet, these things sometimes land on your lap before you realized they would.

     

    I haven’t sold any of my oil stocks, but I haven’t added yet, either. Would love to buy some LNCO to bring down my cost basis, but I’m concerned they’ll have to cut, or pull a Seadrill and eliminate, their dividend.

    4 Dec, 11:13 PMReplyLike1
     
  • CheeseLover

    Comments (2) | Send Message

     

    After I read your article http://bit.ly/1thepsy, I was quite impressed with your reasoning and knowledge.
    I have been waiting for a follow-up and this seems to be the one.
    Again I am impressed by your knowledge and your reasoning but I’m a bit disappointed too. Especially by not addressing points 3 and 4 of these 8 major reasons.

    4 Dec, 06:04 PMReplyLike1
     
  • samberpax

    Comments (115) | Send Message

     

    CheeseLover: Again I am impressed by your knowledge and your reasoning but I’m a bit disappointed too. Especially by not addressing points 3 and 4 of these 8 major reasons.

     

    ———————-

     

    Just to refresh, points 3 and 4 of these 8 major reasons:

     

    3) The weakening of the U.S. dollar.
    4) OPEC’s decision to cut supply in November 2014.

     

    Best,
    -samberpax

    4 Dec, 10:41 PMReplyLike0
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Cheeselover, this is the follow up article as you guessed correctly. And you need to give it some time, as I also note.

     

    Please bear in mind that the HERD MENTALITY is like the TITANIC cruise ship. The big ships need a couple of miles to turn….

     

    Regards,
    VD

    5 Dec, 07:28 AMReplyLike1
     
  • TraderFool

    Comments (504) | Send Message

     

    VD,

     

    Agree this is very much a TITANIC cruise ship that will take a few miles to turn … apparently, the weekly US Oil production figure need to show 2 to 3 consecutive week of decline at the very least first. Until then, odds are crude oil will keep falling (short term momentum). I now feel we may be close to bottom, but we are not confirmed there yet, and I won’t be surprised if crude makes $30 very briefly, before a strong and fast recovery once a few of these marginal producers are out of the picture …

     

    Just as Saudis and US are stubborn right now to curtail production, in a year’s time when a few of the US producers goes bust, the Saudis will have achieved their objective and cut production, and just as quick, I see crude oil could rise back to $100 very fast … the US production numbers are always a surprise to markets, I expect the Saudi’s response to also be a surprise to the market when they cut back production in 6-12 months time – those looking for signs will not find it, I believe it will be a surprise to the market when it happen anytime within the next 12 months …

    5 Dec, 09:11 AMReplyLike0
     
  • Go Lakers

    Comments (1377) | Send Message

     

    “Also, the world’s biggest oil consumers are growing at rates that either are in line with 2013 rates or exceed expectations. There is nothing to indicate that global supply and demand imbalance has fundamentally changed in the past six months.”

     

    Whilst I agree with your base thesis and believe that the price of oil is going back up to what are more “normal” levels, some of the biggest consumers of oil on the planet are likely going to use less-and-less of it as time goes on. For example, there are pretty strict rules in place for future vehicle mileage requirements in the US, the EU has been clamping down hard on emissions for a pretty long time and lots of companies are now involved in the business of making energy efficient equipment and machinery. The list is long – GE, Siemens, Caterpillar, Deere, Hitachi, Volvo, Komatsu…..and so on.

     

    The historical environment for oil consumption is becoming more-and-more dated when compared to what the oil consumption environment will look like going forward. It’s hard if not impossible to use the past as an accurate guide to the future.

     

    The future oil consumption environment in two words – different and lower.

    4 Dec, 06:16 PMReplyLike1
     
  • rajprasad

    Comments (450) | Send Message

     

    every article on oil price that I read these days are bullish on oil price. May be one should take opposite view and stay short

    4 Dec, 06:56 PMReplyLike1
     
  • TraderFool

    Comments (504) | Send Message

     

    raj,
    If you are short on crude oil, I don’t see a reason why you need to close your shorts now as crude keeps falling. You should only close it when you see a confirmed uptrend, at least, that’s my view.

     

    Value Investors though are a different breed – they ease their way in specific value stocks, and now, many oil related stocks are trading at below NAV and well below Replacement Costs with strong cashflows during the last oil crisis … these stocks could still fall by another 25%-50% or close to bottom, no one really knows and so, they start to accumulate a little bit at a time … history has shown that crude oil will eventually recover, and they could be looking at +100% returns in 1-3 years time … the Value approach does not require market timing, and crude oil being highly cyclical in nature means we will definitely see $80-$100 crude oil again eventually over the next 1-3 years, we just don’t know exactly when. If it goes back to $100, you can be sure many of these crude related counters will go back up to their former levels, potentially 100%-300% gains …

     

    Mr Market has presented a compelling opportunity, the key is Money Management, accumulate a few high quality counters, and once bought, lock them up in a drawer and don’t worry about the daily price volatilities. In 1-3 years time, the gains of +100%-300% can be had … know the strategies in advance, never allocate more than 15%-20% portfolio to oil related counters at the bottom, and certainly, never go on margins. I have been staying cash majority of my portfolio, I just recently allocate 2% capital on oil counters, and plan to slowly work my way to 15%-20% assuming these stocks could fall up to 50% from current levels … This is a no-brainer approach, I just don’t care about the daily price volatilities.

     

    Cheers,
    TF.

    4 Dec, 07:12 PMReplyLike1
     
  • rajprasad

    Comments (450) | Send Message

     

    TF

     

    i am heavily long on oil and hurting badly but i keep buying as price drops. i am in your camp

    4 Dec, 07:29 PMReplyLike0
     
  • TraderFool

    Comments (504) | Send Message

     

    raj,

     

    Oil futures, stocks or options? I hope it is not leveraged instruments? The trend is still down …

    4 Dec, 07:45 PMReplyLike0
     
 
  • rajprasad

    Comments (450) | Send Message

     

    stocks with covered calls, naked puts no leverage – i can sustain the loss for a long time

    4 Dec, 07:52 PMReplyLike1
     
  • stockdunn

    Comments (245) | Send Message

     

    TF: Care to share what you’re buying?

    4 Dec, 11:17 PMReplyLike0
     
  • rajprasad

    Comments (450) | Send Message

     

    i bought ect voc per eroc and several others

    5 Dec, 12:22 AMReplyLike0
     
  • TraderFool

    Comments (504) | Send Message

     

    stockdunn,

     

    I’m eyeing SDRL – originally, I plan to go in with 4 bullets, at $13.50 (already done), $11, $9 and $7 very roughly speaking, but now, I will most likely try to take advantage of the short term down momentum (I am a trader) to cut loss some and take wait to pick it up at lower prices, and wait for a better technical signal. Allocating just 4% capital for SDRL.

     

    The other 2 counters are HP (this is a Dividend Aristocrat that keeps paying higher dividends every year for over 25 years) and NE (this is a nice Value play), but I haven’t triggered any buys in either yet as Crude keeps falling and the counters keep falling … Again, 4 bullets each, total 12% capital when I’m done all the 3 buys at the bottom.

     

    Originally, I plan to make a “simple” buy approach of just buying at set levels, but the more I study the crude markets fundamentally, the more I realize that I can fine-tune my entry better, so, let’s see if this is successful or not …

     

    How about you? What counters are you looking at?

    5 Dec, 09:23 AMReplyLike0
     
  • TraderFool

    Comments (504) | Send Message

     

    Hello raj,

     

    Glad you didn’t go for futures / options with time expiries – I just don’t know how long these crude oil price can fall – it can keep falling and falling, and the bottom and recovery I believe will be a huge surprise to me.

     

    Personally, I prefer safer, large caps, very liquid stocks that institutional buys with average daily volume greater than 500k to 1000k shares, and try to buy using a combination of writing puts and directly, and sell covered calls also.

     

    Whilst my current list is SDRL, HP and NE, if I find something else better, I’ll most likely drop one for that …

     

    Good luck.

     

    Cheers,
    TF

    5 Dec, 09:29 AMReplyLike0
     
  • rajprasad

    Comments (450) | Send Message

     

    TF

     

    Oil company stock valuation is based on EV/B/D; EV/EBITDA and EV/Reserve; It does not matter whether large cap or debt; In case of low rev they can always curtail drilling and be very liquid to pay down debt. Worse come worse they will sell their reserves for better price than current valuation. We just bid on various leases offered by Chevron and we did not get it as there are numerous buyers willing to pay higher price.

     

    raj

    5 Dec, 06:41 PMReplyLike0
     
  • Carlos San

    Comments (22) | Send Message

     

    This is an awful lot of cut and paste combined with high handed comments intimating the writer is a genius who knows more than everyone else. It is not original analysis. The fact that so many comments suggest this ois “excellent analysis” goes a long way toward explaining the somewhat sad state of oil and gas investment. I’m not hating, but re-read this article. It is just not analysis. Period.

    4 Dec, 07:24 PMReplyLike1
     
  • seanthome

    Comments (49) | Send Message

     

    But how much cheaper will oil go to before it starts to bounce back up?

    4 Dec, 08:07 PMReplyLike2
     
  • noobie107

    Comments (117) | Send Message

     

    That’s impossible to call.
    One could make educated guesses based on the geopolitical actions/goals of the major oil producing countries, changes in demand, etc.
    I’d rather see oil stay around these levels for a while as I accumulate.

    4 Dec, 08:11 PMReplyLike1
     
  • blahblahblahblahblar

    Comments (34) | Send Message

     

    What’s interested me is the issue of sovereign debt and reliance on oil revenues for certain countries.

     

    Looking at Venezuela and Iran for example – the oil price before the crash, at it’s peak…was nowhere near the quoted figures given for these countries to approach break even; so who goes broke first…small shale producers in the USA or the countries that need $150 oil to just break even, or do they just continue to go broke forever?

     

    I don’t think the OPEC decision is targeted solely at US shale plays…there’s others that are in far more pain over this, the rest of the global economy benefits while oil producers suffer a small but probably needed shakeout: I’ve got investments in oil but it’s ok to lose paper money on one part of the portfolio if another part benefits… I think sovereign default would be a lot worse for everyone involved. Oil will go back up in price eventually, and the median price will rise over time as the asset depletes. When is actually not that important unless you need your money tomorrow.

    4 Dec, 08:32 PMReplyLike3
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » blahblahblah,

     

    Please see the excerpt below:

     

    ” On top of that, there are some additional geopolitical clouds on the horizon that can make oil jump by H1 2015. For instance, the current low oil price has brought many OPEC members to their knees, while the holders of those countries’ sovereign debt are toast as long as oil stays at the current levels. Iran, Iraq, Libya, Algeria and Venezuela are not prepared to withstand low oil prices for long and they are now in serious danger of political upheaval at current prices.

     

    According to yesterday’s news from CNBC, the first signs of an escalating social unrest in Venezuela are already there, and things will definitely get worse over the next weeks.

     

    Furthermore, Russia and Saudi Arabia will be anxiously watching the rapid depletion of their sovereign wealth funds, which will make the political situation in these two countries dicey over the next months. “

     

    Regards,
    VD

    5 Dec, 08:05 AMReplyLike1
     
  • rrb1981

    Comments (11) | Send Message

     

    What will be quite interesting to see is if all of the pundits are correct regarding shale production being a “Ponzi scheme” etc.

     

    The sharp increase in production in the US over the past 5 years is simply amazing, however, it would be interesting to see what the overall average decline rate is for the US over the same time period.

     

    I’m inclined to believe that the decline rate is substantially higher in part due to the tremendous number of unconventional wells that have been drilled in the past few years and the fact that they are in the steep part of the decline curve. So, while production has been climbing, it seems that the Saudi’s are hoping to curb drilling and therefore let the decline curve catch up with the industry. With a sustained drop in prices, eventually borrowing base redeterminations will result in at least a moderate decrease in drilling, perhaps even drilling within cash flow!

     

    Also, while my opinions mean very little, I think it is important to point out somewhat misleading comments about certain plays being profitable at $40 or whatever they want to insert. Yes, if lease operating expenses and field level costs, transportation, ad valorem etc are $25-$40 per barrel, then those wells will be cash flow positive as long as pricing remains above that price.

     

    However $25-$40 oil will not provide a decent IRR for new wells. Remember most of these shale wells exhibit very high initial production and have sharp hyperbolic type declines. Producers need to get full payout in the first 12-24 months. Wells might decline 60-70% within the first 24 months. Look at the NPV of many of the Bakken wells at $60/bbl. Not nearly as attractive as when they were $100.

     

    I don’t know what oil pricing will do in the next few months, nor do I know what OPEC and the Saudi’s will do in 6 months. I do however believe that US oil producers will eventually have to reign in drilling budgets as cash flow wanes. I don’t know if that will mean production growth will taper, if production will hold steady with new production offsetting natural decline or if total US production will slowly decrease. I do know that it will be interesting to see it unfold.

     

    And while my opinion isn’t worth much, I believe that we will eventually find some happy medium where US producers can achieve decent IRRs and production can grow modestly. My guess is $75-$80 bbl.

    4 Dec, 08:49 PMReplyLike4
     
  • samiam911

    Comments (13) | Send Message

     

    I thoroughly enjoy VD’s articles, despite the fact that now all 4 of my positions initiated based on his recommendations are down from 30-60%. I still value them because their fundamental analysis, as outlined by VD, shows that they are still good investments; I will hold onto them for the long term.

     

    While VD is great at pointing out value, guessing what will happen to the price of oil will always be speculation. I like the argument given here, but the truth is that no one really knows.

     

    Investors in oil-producing companies should do so because they believe that their fundamentals will allow them to be successful and profitable in any environment of oil pricing.

    4 Dec, 10:45 PMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Samiam, thank you for your comments but I believe you have to keep in mind two things:

     

    – The recommended entry price for my picks, given that timing matters when it comes to investing. Buying a good company is not enough.

     

    – The investment horizon, given that I am not a day trader.

     

    Regards,
    VD

    5 Dec, 07:32 AMReplyLike1
     
  • samiam911

    Comments (13) | Send Message

     

    VD,

     

    Thanks for your reply. One of the things I appreciate about your articles is always standing by your track record. Given that, here are some of your picks from this year:

     

    CAZFF Recommended 5/15/14 – market price $0.30, currently at $0.14.

     

    PTAXF Recommended 8/26/14 – Market price $0.38, currently at $0.14

     

    LNREF Recommended 6/7/14 – Market price $0.35, currently at $0.19

     

    They have all experienced significant losses (on average 52%). However, I agree that I am not a day trader so if I liked these companies enough to buy them, I would still hold on as long as the fundamentals have not changed. As Buffet said, if you aren’t willing to lose half of your investment in the market, you shouldn’t be there.

     

    I remain long, but the simple fact is that there have been some significant losses in the short term.

    6 Dec, 08:58 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » samiam,

     

    I was wondering why you did not mention:

     

    AEI.T recommended at C$4.95, now at C$6.85, up 40% despite the slump of the energy stocks.

     

    CKE.T recommended at C$0.82, now at C$1.25, up 50% despite the slump of the energy stocks.

     

    CAZ.T was recommended at C$0.24 in May 2014.

     

    LNR was recommended at $0.32 in June 2014.

     

    PTA.V was recommended at C$0.39 AND C$0.25 in October 2014:

     

    http://seekingalpha.co…

     

    and for reference, Oasis (OAS) has dropped from $55 to $14,

     

    Sandridge (SD) from $7 to $2.4

     

    Magnum (MHR) from $8.6 to $3.9

     

    Penn Virginia (PVA) from $17 to $4.8

     

    Quicksilver (KWK) from $3 to $0.40

     

    and many many other producers have returned back to their 2010 levels. I can continue if you want. This might help you see the big picture.

     

    Regards,
    VD

    6 Dec, 10:38 AMReplyLike0
     
  • CAPTAIN SIR

    Comments (7) | Send Message

     

    HEY VD U B DA MAN KEEP NSIPPN DAT 1 BUCK CHAMPAIGN ON yr boat/and kickn ass-ITS A BOAT TIME U CORRALATED GEOPOLY WIT/REALITY==keep dign bro.

    4 Dec, 10:50 PMReplyLike2
     
  • Kevin Hess

    , contributor
    Comments (153) | Send Message

     

    Best comment in this article.

    5 Dec, 09:05 AMReplyLike0
     
  • CAPTAIN SIR

    Comments (7) | Send Message

     

    good advice-keep guzzlin bro/try puttn more geo poly wit/da articles like this-thanks.

    4 Dec, 11:21 PMReplyLike0
     
  • 8596381

    Comments (7) | Send Message

     

    Rrb1981, agree $40/bbl would probably cover variable cost and thus existing producing tight oil wells would not be shut in. But you are right that much higher price needed for new wells to be economic. From what I Recall best locations in Baaken formation could probably be economic for new wells at $65, maybe a little lower. Eagle Ford would be something like $55, believe Niobrara in between. But, many wells have been drilled in less productive parts of these formations and those need much higher oil price to be economic. Again, these are rough, directional estimates. In reality production techniques keep improving, and some companies are will better, or have better locations, than others.

     

    My view is some new tight oil wells would still be drilled if oil stayed below $70, but likely not enough to overcome the rapid depletion from existing wells. I believe we will start to see US production drop sometime in H2 2015, but until then US production keeps going up. Think it will take maybe 6 months for wells already committed to be drilled and completed. After that market should at some point get back to $80-$85, maybe 12 months. But likely to be a volatile ride along the way. I personally think we have not seen bottom yet. Too much downward momentum, global oil production likely to keep increasing for the near term.

     

    Best to prepare for the volatility and try to recognize the opportunities as they play out, IMO. So many things could intervene ( geopolitics, global economic activity, China credit, etc)!

     

    Take care

    4 Dec, 11:22 PMReplyLike1
     
 
  • Nawar Alsaadi

    , contributor
    Comments (432) | Send Message

     

    Excellent article Value Digger, I share your outlook on oil as well. I would strongly advice reading this article as well in regards to the significant risks of $150B in cancelled oil capex in 2015 and a subsequent supply crunch later in the decade. At current prices up to 12.2m barrels in new supply are at risk between today and 2025:

     

    http://bit.ly/12EquNo

     

    Regards,
    Nawar

    5 Dec, 12:03 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Nawar,

     

    Thank you for your compliments and your insightful comment. Yes, the news you mention is another very strong bullish indicator.

     

    Regards,
    VD

    5 Dec, 08:08 AMReplyLike0
     
  • rv3lynn

    Comments (438) | Send Message

     

    The one and singular reason that world oil prices have collapsed is that U.S. shale production has gone from zero to 5 million BOEPD in 5 years.

     

    If this 5 million BOEPD were not on the world market today, where would we be?

     

    We would be short on oil.

     

    Instead, we are long on barrels because every dumba** American oilman that drills a good well immediately turns around and puts all of the cash flow from his good well into ANOTHER well. Plus he borrows a few million bucks to drill a few more wells.

     

    How else can you explain the unprecedented exponential oil production growth in this country?

     

    I wish these geniuses would spend their profits on wine, women, song, jet airplanes, country houses or something, besides plowing every single dollar of profit back into the ground.

    5 Dec, 01:20 AMReplyLike1
     
  • Dr. Z.

    Comments (93) | Send Message

     

    Excellent suggestion for the next shareholders meeting. What were they thinking…

    5 Dec, 02:49 AMReplyLike2
     
  • Goldens

    Comment (1) | Send Message

     

    This is all about the Ukraine. Saudi is the US’s bitch and driving down the price of oil is simply to put the hurt on Russia. Price of oil will bounce back once Russia gets the hell out of the Ukraine. As far as the laws of supply and demand all you need to do is take a look at copper. The LME is sitting at a 5+ year low and the price is below $3. Don’t make the mistake of thinking the markets make any sense. Listen to technicals.

    5 Dec, 09:06 AMReplyLike2
     
  • IOROUSSO

    Comments (19) | Send Message

     

    Good article. This market is not for traders, but for real investors. When you are a true investor you must be cool, sober, analytical but especially well informed. This is exactly what Value Digger is doing. I think his analysis is excellent and his <<cool blood>> will win in the end. Do you really believe that the oil sector will be destroyed? I don’t. But careful don’t spent your OWN money at once, keep them for worst times. There is no other way to make money in these markets. Value Digger you have my respect.

    5 Dec, 09:48 AMReplyLike2
     
  • Holthusen

    Comments (638) | Send Message

     

    Value Digger, thank you for another informative article of Petroleum production, pricing and demand. The amount of comments is indicative of your timely in depth analysis.

     

    You make a statement in your piece that sums up your whole thesis: “new oil is not cheap.”

     

    Any way we look at the supply situation, most new production will continue to come from expensive unconventional means such as shale or tar sands. Surely there are new conventional pockets of crude to be found, but they won’t be Elephants and will probably be expensive “deep water” reservoirs.
    Petroleum remains a key product for Global Energy & Industrial production and current low prices will NOT allow future demand to be satisfied.

    5 Dec, 04:32 PMReplyLike2
     
  • charles hinton

    Comments (2798) | Send Message

     

    pumping oil back into ground makes up alot of demand
    Us reserves….
    http://bit.ly/1vYF4uf

     

    china oil reserves
    http://bit.ly/1vYF4ug

    5 Dec, 05:25 PMReplyLike2
     
  • Brett Fromme

    Comments (6) | Send Message

     

    Value Digger,

     

    I agree with much of what you wrote.

     

    In a recent interview with Jim Cramer, Boone Pickens stated that the Saudis will eventually have to cut production. (my comments: OPEC will not survive if the Saudis let Venezuela, Iran, Algeria, Nigeria, Libya, as well as Russia descend into chaos. Not to mention destabilizing an already fragile world economic situation. When the Saudis cut, oil will soar.) B.P. also stated that the producers will be forced to cut CapEx. As they do US production will come down. Based on this, B.P. thought oil would rebound to $100 by mid-2015. Most people will dismiss Boone Picken’s comments. But when a wise old billionaire oilman speaks, I pay attention.

     

    I think most oil services companies will have a rough 2015 (buying opportunity for HAL, SLB). Also, highly leveraged small producers may be forced into bankruptcy, but stronger producers will benefit by picking up their producing acreage and reserves for pennies on the dollar.

    5 Dec, 11:36 PMReplyLike2
     
  • Holthusen

    Comments (638) | Send Message

     

    Brett, I watched the same interview and although his projects over the past several years have not really been home runs, this slump in pricing is certainly not his first rodeo! As you aptly stated “when a wise old billionaire oilman speaks, I pay attention.”

    6 Dec, 09:23 AMReplyLike0
     
  • Watermellon56

    Comments (451) | Send Message

     

    Thanks for the food for thought.
    Regarding Syria, it seems clear the US has opted to fight a war of attrition in northern Iraq rather than cut the head off the snake in Syria. This approach takes care of a number of problems (high casualties on both sides) and is training a whole new generation of US pilots and drone operators.
    I take your comments regarding portable fusion to be light hearted because the neutron flux off such reactors would kill everyone in the car.
    The greatest proof against Fleischmann–Pons knuckleheaded claims of nuclear fusion at room temperature was that they were alive at the announcement. The thought that Fleischmann & Pons conducted such an experiment in an occupied building should have been grounds for dismissal or incarceration.
    LMT is relying on plasma (not room temperature). This compounds the problems with having some random drunk driving around with a nuclear fusion device. Perhaps LMT can make electricity that is too cheap to meter, which would be big, but it is just speculation and not 5 years away.
    In the end, the House of Saud is still in control of the price of oil. Thank God the Iranians are not in that seat.
    By the way, in 1938, the US producers predicted the US has a 10 year supply of oil. I think producers can only see ten years ahead.

    6 Dec, 09:56 AMReplyLike0
     
  • KiteFlyer

    Comments (36) | Send Message

     

    Value Digger,

     

    Thanks for your article!

     

    It confirms what I have been thinking, although without the sources that you cite!

     

    Geo-politically, the world is a much more uncertain place at present! As for the pace of economic activity in the U. S. and elsewhere, the numbers are always after the fact! Can’t measure what hasn’t happened yet! Prognostication is fine for what it is, but it is just that- a guess, however educated!

     

    Oil prices may have further to decline, I don’t know, but the value of some of the oil stocks, I find compelling at these levels.

    6 Dec, 10:42 AMReplyLike0

The Real Reason Saudis Didn’t Cut Oil Production

https://i1.wp.com/www.touristmaker.com/images/saudi-arabia/medina-saudi-arabia.jpgby Martin Vleck

Summary

  • There have been plenty of explanations why OPEC didn’t cut production quotas.
  • Most of them make sense. But they fail to explain the whole strategic long-term picture.
  • There is a rarely mentioned strategic reason why – counter intuitively – oil prices falling and staying low in 2015 is in the best long-term interest of most oil exporters.
  • Moreover, the current status threatens OPEC’s influence over oil prices. OPEC will need to reform and include virtually all major oil producers in quota negotiations. Otherwise, OPEC will become irrelevant.
  • There is also an unexpected historical parallel for the current oil slump.

The conventional explanations for OPEC not cutting the production

The OPEC leaving production quotas unchanged has naturally been the top news last week and most investors have spent at least some time over the weekend to reflect on the implications of the move on their portfolios. There have been several theories and explanations as to why the OPEC didn’t cut. The obvious reasons stretch from the lack of agreement between OPEC members on whether to cut, by how, and most importantly, how much production each country sacrifices. Other explanations include the strategy of the dominant OPEC member, Saudi Arabia, to let the prices fall in order to squeeze out high-cost oil producers, such as Canadian oil sands and U.S. shale oil. The explanations or speculations also include some supposed secret deal between the U.S. and Saudi Arabia to damage Russia, Iran, ISIS and other “rogue” regimes or interest groups around the world. There are certainly many more theories for why OPEC didn’t cut.

Saudis are most probably thinking long term, so any explanation needs to include a combination of short term and long-term strategic goals. And the question also lingers whether OPEC still has enough power over oil prices.

Is this the real reason why Saudis didn’t cut?

There have been plenty of explanations why the OPEC didn’t cut production quotas. But there is one very long-term strategic reason why the price fall may be welcome by OPEC. This explanation has not been discussed too much, at least I haven’t seen it mentioned. Yet over the very long, very strategic time horizon, this would be the most probable explanation for letting the price of oil to fall now.

Who is the biggest competitor for the Saudis, or OPEC countries? Is it Canada? Is it the U.S.? Russia? Offshore Africa? The answer is no. Let me give you a hint. What is the biggest threat to not just Saudi Arabia, or OPEC, but to all oil producers? The answer is simple:

The biggest threat to all oil producers of the world is the high oil price. (No, that’s not a typo).

Alternative energy sources are the true competitor of all participants in the oil and gas industry.

High price of oil spurs faster development and implementation of alternative energy technologies. It is just a matter of time before solar, wind and other alternative sources of energy will become competitive or cheaper than oil and gas in many applications. In some places they already are. Sometimes even without any subsidies and including the benefits that oil and gas industry receives in the form of free negative externalities, such as the damage to the water and environment in general. To be fair, the negative environmental impact of the solar panel production and disposition is rarely mentioned.

Moreover, the cost of generating alternative energy has been falling and there is no reason why the cost should stop falling as the technological process keeps leaping ahead. It will probably take centuries before the world runs out of good sunny or windy spots (Sahara, Saudi desert – interestingly, Southern U.S. for solar and plenty of shores for wind are just some examples), so the costs to extract additional alternative energy megawatts will not rise. Plus, the sun rises every day, so the source of this energy is almost infinite and doesn’t deplete or deteriorate. It is like a fixed cost which will never rise over time.

On the other hand, the reserves of oil and gas are finite and the cost of extracting an additional barrel of oil has been rising – and will most probably keep rising – due to cheap sources of oil being always extracted first as well as due to generally rising overall costs associated with oil production.

Alternative energy space is rapidly developing

The recent technical development in the area of electricity storage (batteries, etc.) and alternative energy is surprisingly fast. Panasonic, Tesla and many others are investing in cheaper and more efficient large-scale batteries for economically viable electricity storage. The sales of electric cars, while still tiny, grow at rapid annual rates globally. Hydrogen fuel cell powered cars are emerging (Honda, Hyundai and Toyota already sold/leased some hydrogen models to the public, Audi has a fully functional prototype, many other brands are at similar stages but the technology is evolving rapidly). Ironically, hydrogen is usually produced from natural gas or methane. However, the efficiency is roughly 80%, which is extremely high, much higher than conventional combustion engines. Natural gas also has a much lower value for the oil and gas producers than the oil (lots of it is still just burnt on the spot). So the overall revenue for the oil and gas industry will be significantly lower from a hydrogen-powered car than from a conventional gasoline car. The same holds true for electric cars of course. The hydrogen fueling stations infrastructure is in its infancy, and only a true fan would buy/rent a hydrogen car now, but judging from the hydrogen car mileage and activities of car manufacturers, fuel cell infrastructure may be just 2-3 years behind the electric vehicle infrastructure. If some favorable legislation chips in, the gap could actually close very soon.

But cars are just one of many examples of how alternative energy sources threaten to replace significant volumes of oil in the future. On the other end of the spectrum are speculative developments, such as the fusion power which has been a fata-morgana for many decades. Even a working solution now would probably take five to ten years to make it commercially available. However, Lockheed Martin now claims to have made a breakthrough in fusion technology, offering no details though. So their claim may easily be just part of a creative PR campaign. (I am not suggesting they are lying, but I have to discount the information because there is no way to prove it)

Oil is here to stay for decades

Of course lots of oil will still need to be consumed, for many decades to come. But the market will be shrinking or stagnant in dollar terms. Actual physical volumes may moderately rise. The improvements in power consumption efficiencies are not exactly going to help the price and volume. On the other hand, growing global population and rising buying power of a global consumer is a major positive factor. All in all, I believe the current oil price weakness will continue only in the short run. The prices of WTI crude should stabilize in the medium term of several months or quarters at the level of $60-$80 per barrel.

http://allsortsofposts.files.wordpress.com/2013/02/riyadh-saudi-arabia.jpg

The only way many oil and gas exporting countries can survive in the long run

Oil and gas revenues are often a dominant source of income for the producing countries. To say many are very dependent on oil and gas revenues is a gross understatement. Preserving at least some oil and gas revenue is a matter of life and death for these countries. Therefore, the only way to survive the next few decades for most oil and gas producing countries is to cut the price of oil drastically NOW. That is their only chance to at least slow down the development and implementation of alternative energy sources into widespread usage, before it is too late from their point of view. If they fail, the price of oil will get stuck at much lower levels almost permanently.

OPEC will lose relevance if it doesn’t manage to reform and include virtually all major oil producers in quota negotiations

Higher-cost producers are planning to increase their oil/oil products exports to global markets. For example, Canada prepares to sign a free trade agreement with South Korea “in the coming months” which will cut crude oil and LNG duties by 3% and by 8% on refined products virtually immediately upon signing the deal, and this deal would serve as a “gateway to the wider Asia-Pacific region”). Similarly, the U.S. has been warming up to the idea of looser oil export policies and discussing a free trade deal with the EU. The fact that Saudi Arabia recently cut price for its Asian customers while raising them for the U.S. would give some more support the theory that the North American market and its producers are the prime target of its strategy. And this is probably the medium-term goal of the Saudis, according to my opinion.

The fact that oil prices topped in the middle of June, almost exactly on the date when the message about the planned free trade agreement with South Korea was officially released (June 16, 2014), is certainly an interesting coincidence. Or is it? Additionally, it is likely that the Saudis see the waning pricing power of OPEC due to flexible production from the U.S. shale oil fields which can be quickly boosted or cut in order to influence the total world production. This ability takes away the power over oil from the Saudis which have possessed this power to adjust production until recently. Therefore, the Saudis probably try to reign in all OPEC members and force them to respect the set quotas and share any potential cuts among all members, without the Saudis bearing most of the quota cut. But the falling oil price has an interesting historical parallel and implications.

Lower price of oil serves as an inverse oil price shock (the opposite of the 70’s)

Besides the conventional explanations for the current oil price slump, there is a surprising inverse historical parallel – the first and second oil price shock in the 70’s (1973 and 1979). Back then, prices of oil spiked rapidly and remained high and the time was generally characterized by booming population growth, young population, rapid inflation, high interest rates which subsequently caused a supply-side shock and a recession. But this period also spurred unprecedented innovation around the world with advances in robotics, miniaturization, semiconductors, and other fields which radically improved efficiencies which decreased energy and material intensity of production, especially in Japan.

The current situation is almost exactly the opposite. The price of oil is not rising but falling rapidly. Inflation is extremely low (parts of the world already experience deflation), aggregate demand is sluggish amid falling real income, almost non-existent population growth and aging population (in the U.S. and other developed countries). All this discourages investments in energy innovation and energy efficiency (low interest rates help a lot, though).

Existing alternative energy solutions are becoming more and more uneconomical compared to falling price of oil and gas, and the opportunity cost of using subsidized “green” energy is rising relative to cheaper oil. Existing subsidies suddenly may not be high enough to cover the costs to install further alternative energy capacities. Investments into further alternative energy R&D will be hard to obtain due to low potential ROI of the innovations if the future price of oil is expected to remain low. This will help conserve the status quo or at least slow down alternative energy advances. For the current oil producers – from all around the world, not only for Saudi Arabia or OPEC – lower prices are great news in the long run, even though they are painful now.

My oil price outlook

In the short run (several months and quarters), I am very bearish on oil prices because the oil producers have motivation to keep the price low until the highly leveraged, high-cost oil producers go out of business or are bought for pennies by their stronger competitors. Also, oil producing countries would need to maintain at least several quarters of weak oil to discourage long-term investments into alternative energy innovation, possibly until the current round of alternative energy R&D companies and some solar energy companies go out of business or consolidate.

However, over the medium to long term (years and decades), I am neutral to moderately bullish on oil prices as I believe the markets and industry will find a decent equilibrium around $60-80 per barrel. However, I don’t expect long-lasting spikes above $90-100 per barrel (barring the global security situation getting out of hand) because the flexible U.S. shale producers currently hold a permanent “call option” on the oil market. Every time the price spikes, they will quickly add more production, balancing the market. It is quite similar to the Bernanke put option, just working the opposite way and in oil.

Investment implication

I opened a long position in United States Oil ETF (NYSEARCA:USO) (selling covered calls to help mitigate contango issues) and Seadrill (NYSE:SDRL) late last week. I am also considering establishing a long position in British Petroleum (NYSE:BP). Furthermore, for long-term investors with high risk tolerance, I recommend smaller positions in more speculative and risky oil and gas services small-cap stocks which I analyzed in the past few weeks. These include Tidewater (NYSE:TDW), TGC Industries (NASDAQ:TGE), Dawson Geophysical (NASDAQ:DWSN), GulfMark Offshore (NYSE:GLF), Ion Geophysical (NYSE:IO) and CGG Industries (NYSE:CGG). I don’t hold any positions in any of these due to my preference for a highly concentrated portfolio but may decide to open long positions depending on future situation.

OPEC Refuses to Cut Production, Oil Plunges off the Chart

https://martinhladyniuk.files.wordpress.com/2014/11/a4b67-a2boil2bworker2bin2bnorth2bdakota.jpg

   Oil rig in North Dakota. Increased US drilling is a factor in the current decline in prices.  This article by Wolf Richter

The global oil glut, as some call it, is caused by the toxic mix of soaring production in the US and lackluster demand from struggling economies around the world. Since June, crude oil prices have plunged 30%. It drove oil producers in the US into bouts of hand wringing behind the scenes, though they desperately tried to maintain brittle smiles and optimistic verbiage in public.

But everyone in the industry – particularly junk bondholders that have funded the shale revolution in the US – were hoping that OPEC, and not the US, would come to its senses and cut production.

So the oil ministers from OPEC members just got through with what must have been a tempestuous five-hour meeting in Vienna, and it was not pretty for high-cost US producers: the oil production target would remain unchanged at 30 million barrels per day.

“It was a great decision,” Saudi Oil Minister Ali al-Naimi said with a big smile after the meeting.

Saudi Arabia and other Gulf states were thus overriding the concerns from struggling countries such as Venezuela which, at these prices – and they’re plunging as I’m writing this – will head straight into default, or get bailed out by China, at a price, whatever the case may be.

Venezuelan Foreign Minister Rafael Ramirez emerged from the meeting, visibly steaming, and refused to comment.

The US benchmark crude oil grade, West Texas Intermediate, plunged instantly. Even before the decision, it was down 30% from its recent high in June. As I’m writing this, it crashed through the $70-mark without even hesitating. It currently trades for $68.51. Chopped down by a full third from the peak in June.

This is what that Thanksgiving plunge looks like:

US-WTI_2014-11-27

Nigerian Oil Minister said OPEC and Non-OPEC producers should share responsibility to stabilize the markets. I don’t know what he was thinking; maybe some intervention by central banks around the world, such as the coordinated announcement of “QE crude infinity” perhaps?

Ecuadorian Oil Minister called the decision a rollover. However, the Iranian Oil Minister, whose country must have a higher price, kept a positive face, saying, “I’m not angry.”

The next OPEC meeting will be held in June, 2015. So this is going to last a while. And there is no deus ex machina on the horizon.

It seems OPEC, or rather Saudi Arabia and some of the Gulf States, decided for now to live with the circumstances, to let the markets sort it out. High-cost producers around the world will spill red ink. Governments might topple. Junk bondholders and shareholders of oil-and-gas IPOs that have blindly funded the miraculous shale revolution in the US, lured by ever increasing hype, will watch more of their money go up in thick smoke.

And the bloodletting in the US fracking revolution will go on until the money finally dries up.

OPEC’s Prisoner’s Dilemma Unfolding

https://i0.wp.com/www.econlife.com/wp-content/uploads/imported/16422_8.26_000005651286XSmall.jpg
by Marc Chandler

Summary

  • OPEC faces internal and external challenges.
  • A large cut in output is unlikely.
  • Prices may have to fall by another $10 a barrel or so to begin having impact on production.

Prisoner’s Dilemma Unfolding. The oil producing cartel will be 55 years old next year. It is not clear, but it may be experiencing an existential crisis. It’s share of the world oil production has fallen with the rise of non-OPEC sources, like Russia, Norway, the UK, Canada, and significantly in recent years, increasingly the US.

In addition to the external threat, OPEC faces internal challenges, There is a divergence of perceptions of national interest by the political elite. Indeed, Middle East politics is arguably incomprehensible without appreciating the tension between Saudi Arabia and Iran.

Generally speaking, OPEC countries have tended to fall into one of two groups. The first has greater oil reserves relative to population. Saudi Arabia and Kuwait are the obvious examples. The second have relatively less oil and more people. Iran and Iraq are examples. This has often created conflicting strategies. The former wants to protect the value of their reserves by discouraging alternatives, which means relatively low prices. The latter want to maximize their current value.

OPEC, like all cartels, have governance or enforcement challenges. It long faced difficulty ensuring that the production agreements and quotas are respected. By OPEC’s own reckoning, there is often production in excess of the prevailing agreement. Last month, while oil prices were falling, OPEC says that it produced 30.25 mln barrels a day, which is 250k barrels a day over the production agreement. This may under-estimate OPEC’s production. Iran, for example, appears to be selling greater amounts of (condensate) oil than the sanctions allow.

The prisoner’s dilemma is both within OPEC and without. For the Saudis to continue to act as the swing producer, it would mean the surrender of revenue and market share to its rival Iran. Iran would very likely use the proceeds for purposes that would frustrate Saudi Arabia’s strategic interest. In a similar vein, a substantial cut in OPEC output, even if it could be agreed up, would benefit non-OPEC producers and only encourage the expansion of US shale development.

https://i2.wp.com/static2.businessinsider.com/image/54748126ecad04c815222db7/russia-doesnt-have-a-great-reputation-with-opec.jpg

Putin with Igor Sechin (right)

Contrary to the some conspiracy theorists who claim Saudi Arabia is doing US bidding by allowing the price of oil to fall to squeeze Russia, it has its own reasons not to want do Russia favors. Putin’s support for Assad in Syria and the Iranian regime puts Russia in opposition to Saudi Arabia. If the Saudis pick up the mantle again as the swing producer, Russia would a beneficiary. A recovery in oil prices would allow Putin to replenish his coffers, which would make its foreign assistance program even more challenging.

Moreover, and this is a key point, given OPEC’s reduced leverage in the oil market, a large cut in the Middle East production of mostly heavy sour crude might not be sufficient to support prices. It could lead to a loss of both revenue and market share. It could also lead to new widening of the spread between Brent, the international benchmark, and WTI, the US benchmark.

The significant drop in oil prices over the last several months has not deterred the expansion of US output. In the week ending November 7, the US produced nine mln barrels a day, which was the most in more than two decades. Output slipped in the week through November 14 by less than 60k barrels a day, but we would not read much into that.

Industry estimates suggest that more than three-quarters of the new light oil production next year is expected to be profitable between $50 and $69 a barrel. The press reports that rather than be deterred by the decline in prices, some companies, like Encana (NYSE:ECA) plan to dramatically increase the number of wells in the US Permian Basin (Texas) next year.

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Reports do suggest that parts of nearly 20 fields are no longer profitable at $75 a barrel. There has been a very modest reduction of oil rigs. However, this has been largely offset by the rise in productivity of the existing wells. For example, in the North Dakota Bakken area, the output per well has risen to a record. In addition, industry reports suggest that the costs of shale and horizontal drilling is falling.

Although the price of oil has fallen below budget levels for many oil producing countries, the situation is not particularly urgent. Seasonally this is a high demand period. Most countries have ample reserves to cover the shortfall in the coming months. Around March, the seasonal factors shift and demand typically eases. That is when some key decisions will have to be made. It may not sound like a significant tell, but when the next OPEC meeting is scheduled may be indicative of a sense of urgency. A meeting in the February-March period may indicate higher anxiety than say a meeting in the middle of next year.

One study by Bloomberg found that only two OPEC quota cuts have been for less than one million barrels. A Bloomberg’s survey found that the respondents were evenly split between expecting a cut and not, few seem to be actually anticipating a significant cut. This suggests the scope for disappointment may be limited. That said, there is gap risk on the US oil futures contract come Friday, when they re-open after Thursday’s holiday.

As a consequence of lower oil prices, some oil producers may have to draw down their financial reserves to close the funding gap. Some will assume this will translate into liquidation of US Treasuries. However, it is not as easy as that. According to US Treasury data, in the first nine months of this year, OPEC increased its holdings of US Treasuries by $41 bln. In some period last year, it had sold about $17 bln of Treasuries. Could OPEC countries also be unwinding the diversification of reserves into euros, with yields so low and officials explicitly seeking devaluation (something not seen in the US since Robert Rubin first articulated a “strong dollar” policy almost two decades ago).

There may be political fallout from a continued decline in oil prices. An agreement between Baghdad and Kurds may be more difficult. Pressure in Libya and Nigeria is bound to increase, for example.

Back in 2009 when some observers began warning that higher food prices were the result of the extremely easy and unorthodox monetary policy. We argued that the shock was more on the supply side than the demand side and that commercial farmers would respond to the price signal by boosting output. Oil is similar but opposite. Oil prices will bottom after producers respond to the price signal by cutting production because they have to, not because they want to. Fear not greed will be the driver. It does not look like this can happen until Brent falls below $70 a barrel and WTI is nearer $60-$65.

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Oil & Gas Stocks: ‘Stability At The Bottom’ May Be A Positive Sign

https://i0.wp.com/www.avidtrader.com/wordpress/wp-content/uploads/2012/10/oil_and_gas.jpgby Richard Zeits

Summary:

  • The article provides “correction scorecards” by stock and by group versus commodities.
  • In the past two weeks, oil & gas stocks firmed up, despite the continued slide in the price of oil.
  • Small- and mid-capitalization oil-focused E&Ps were the strongest winners.
  • Emerging markets Oil Majors and Upstream MLPs were the worst performers.

During the two weeks since my previous update, stocks in the Oil & Gas sector demonstrated what an optimist might interpret as “stability at the bottom.” The net effect of another sequence of high-amplitude intraday moves was a slight recovery from the two weeks ago levels across the vast majority of segments and stock groups, as shown on the chart below. It should be no surprise that those groups that had declined the most were also the biggest gainers in the past two weeks.

Most notable is the fact that the descend trend in the Oil & Gas stocks was interrupted (and even marginally reversed) in spite of the new lows posted by the price of oil. One could try to interpret this performance as an indication that the current price levels already discount the market’s fear that the oil price paradigm has shifted. This stability may also indicate that the wave of forced liquidations by hedge funds and in individual margin accounts has run its course and the worst part of this correction may be already behind us.

Even though this recent stock price “stability” is a welcome development, it provides little consolation to investors in the Oil & Gas sector who still see their positions trading far below the peak levels achieved last summer. The correction scorecard graph below summarizes average “peak-to-current” performance by individual stocks that are grouped together by sector and size. Individual stock performance is provided in full detail in the spreadsheets at the end of this note.

Mid- and small-capitalization stocks, in both Upstream and Oil Service segments, remain the worst performing groups, now trading at an average discount to each individual stock’s recent peak price of over 40%, a staggering decline. Large-capitalization E&P independents and large-capitalization oil service stocks are trading at a 20%-24% average discount.

Emerging Markets Oil Majors Post A Strong Decline:

Emerging markets Oil Majors were one of the worst performing categories during the past two weeks:

Petrobras (NYSE:PBR) continued to slide down, moving 12% down since my previous update. Petrobras stands out as one of the most disappointing Oil Majors in terms of stock performance in the past five years, having lost a staggering three-quarters of its value during that period. The company’s market capitalization currently stands at only $62 billion.

· Lukoil (OTCPK:LUKOY) and Petrochina (NYSE:PTR) are other examples of strong declines in the past two weeks, with the stocks losing 8% and 7%, respectively. Lukoil’s performance may in fact be interpreted as “solid,” given the continued deterioration of Russia’s political and credit risk.

A strong contrast is the performance of the three oil super-majors – Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Shell (NYSE:RDS.A) – that gained ~2% during the past two weeks and remain the best performing group in the Oil & Gas sector. I have argued in my earlier notes that, given the combined $0.9 trillion market capitalization of these three stocks, the resilient performance by the Super-majors has effectively isolated the correction in the Oil & Gas sector from the broader markets. From a fundamental perspective, the Super-majors are characterized by very low financial leverage, high proportion of counter-cyclical production sharing contracts (“PSAs”) and the effective hedge from downstream assets, which limits their exposure to the oil price decline.

Small-Capitalization E&P Stocks Bounce Back:

After a dramatic underperformance, small- and mid-capitalization E&P stocks posted meaningful gains in the past two weeks. However, in most cases the recovery is “a drop in the bucket,” given that high-percentage moves are measured off price levels that sometimes are a fraction of recent peak prices. The sector remains a menu of bargains for those investors who believe in a recovery in oil prices.

  • Enerplus (NYSE:ERF): +20%
  • Northern Oil & Gas (NYSEMKT:NOG): +17%
  • Concho Resources (NYSE:CXO): +15%
  • Approach Resources (NASDAQ:AREX): +48%
  • Goodrich Petroleum (NYSE:GDP): +24%
  • Synergy Resources (NYSEMKT:SYRG): +15%
  • Penn Virginia (NYSE:PVA): +17%
  • Comstock Resources (NYSE:CRK): +25%

E&P MLPs Retreat:

Upstream MLPs were one of the exceptions in the E&P sector, declining by an average of 4% in the past two weeks. The largest Upstream MLP, Linn Energy (NASDAQ:LINE) and its sister entity LinnCo(NASDAQ:LNCO), are again trading close to their lows, after having enjoyed a strong bounce a month ago. The previously very wide gap in relative performance between Upstream MLPs and other Upstream equities has contracted substantially which, arguably, makes sense given that both categories of companies participate in the same business, irrespective of the corporate envelope.

Oil & Gas Sector Correction Scorecards:




How Low Can the Price of Oil Plunge?

https://i0.wp.com/www.gulf-times.com/NewsImages/2014/10/27/30d677e0-63da-4004-ac67-2ce174ec36a9.jpgby Wolf Richter

It is possible that a miracle intervenes and that the price of oil bounces off and zooms skyward. We’ve seen stocks perform these sorts of miracles on a routine basis, but when it comes to oil, miracles have become rare. As I’m writing this, US light sweet crude trades at $76.90 a barrel, down 26% from June, a price last seen in the summer of 2010.

But this price isn’t what drillers get paid at the wellhead. Grades of oil vary. In the Bakken, the shale-oil paradise in North Dakota, wellhead prices are significantly lower not only because the Bakken blend isn’t as valuable to refiners as the benchmark West Texas Intermediate, but also because take-away capacity by pipeline is limited. Crude-by-rail has become the dominant – but more costly – way to get the oil from the Northern Rockies to refineries on the Gulf Coast or the East Coast.

These additional transportation costs come out of the wellhead price. So for a particular well, a driller might get less than $60/bbl – and not the $76.90/bbl that WTI traded for at the New York Mercantile Exchange.

Fracking is expensive, capital intensive, and characterized by steep decline rates. Much of the production occurs over the first two years – and much of the cash flow. If prices are low during those two years, the well might never be profitable.

Meanwhile, North Sea Brent has dropped to $79.85 a barrel, last seen in September 2010.

So the US Energy Information Administration, in its monthly short-term energy outlook a week ago, chopped down its forecast of the average price in 2015: WTI from $94.58/bbl to $77.55/bbl and Brent from $101.67/bbl to $83.24/bbl.

Independent exploration and production companies have gotten mauled. For example, Goodrich Petroleum plunged 71% and Comstock Resources 58% from their 52-week highs in June while Rex Energy plunged 65% and Stone Energy 54% from their highs in April.

Integrated oil majors have fared better, so far. Exxon Mobil is down “only” 9% from its July high. On a broader scale, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is down 28% from June – even as the S&P 500 set a new record.

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So how low can oil drop, and how long can this go on?

The theory is being propagated that the price won’t drop much below the breakeven point in higher-cost areas, such as the tar sands in Canada or the Bakken in the US. At that price, rather than lose money, drillers would stop fracking and tar-sands operators would shut down their tar pits. And soon, supplies would tighten up, inventories would be drawn down, and prices would jump.

But that’s not what happened in natural gas. US drillers didn’t stop fracking when the price of natural gas plunged below the cost of production and kept plunging for years. In April 2012, it reached not a four-year low but a decade-low of about $1.90 per million Btu at the Henry hub. At the time, shorts were vociferously proclaiming that gas storage would be full by fall, that the remaining gas would have to be flared, and that the price would then drop to zero.

But drillers were still drilling, and production continues to rise to this day, though the low price also caused an uptick in consumption that coincided with a harsh winter, leaving storage levels below the five-year minimum for this time of the year.

The gas glut has disappeared. The price at the Henry hub has since more than doubled, but it remains below breakeven for many wells. And when natural gas was selling for $4/MM Btu at the Henry hub, it was selling for $2/MM Btu at the Appalachian hubs, where the wondrous production from the Marcellus shale comes to market. No one can make money at that price.

And they’re still drilling in the Marcellus.

Natural gas drillers had a cover: a well that also produced a lot of oil and natural gas liquids was profitable because they fetched a much higher price. But this too has been obviated by events: on top of the rout in oil, the inevitable glut in natural gas liquids has caused their prices to swoon too (chart).

Yet, they’re still drilling, and production is still rising. And they will continue to drill as long as they can get the moolah to do so. They might pick and choose where they drill, and they might back off a smidgen, but as long as they get the money, they’ll drill.

Money has been flowing into the oil and gas business like a tsunami unleashed by yield-desperate investors who, driven to near insanity by the Fed’s policies, do what the Fed has been telling them to do: close their eyes and hold their noses and disregard risk and hand over their money, and borrow money for nearly free and hand over that money too.

Oil and gas companies have issued record amounts of junk bonds. They’ve raised record amounts of money via a record number of IPOs. They’ve raised money by spinning off assets into publicly traded MLPs. They’ve borrowed from banks that then packaged these loans into securities that were then sold. The industry has taken this cheap money and has drilled it into the ground.

This is one of the consequences of the Fed’s decision to flood the land with free liquidity. When the cost of capital is near zero, and when returns on low-risk investments are near zero as well, or even below zero, investors go into a sort of coma. But when they come out of it and realize that “sunk capital” has taken on a literal meaning, they’ll shut off the spigot.

Only then will drilling and production decline. As with natural gas, it can take years. And as with natural gas, the price might plunge through a four-year low and hit a decade low – which would be near $40/bbl, a price last seen in 2009. The bloodletting would be epic. To see where this is going, watch the money.

https://i2.wp.com/www.independent.co.uk/incoming/article9783416.ece/alternates/w620/pg-58-oil-getty.jpg

OPEC Forecasts $110 Nominal Price Through End Of This Decade:

OPEC’s World Oil Outlook And Pivot To Asia

https://i0.wp.com/www.sweetcrudereports.com/wp-content/uploads/2013/06/OPEC-conference.jpgby Jennifer Warren

Summary

  • OPEC published its recent global oil market outlook, which offers a slightly different and instructional viewpoint.
  • OPEC sees its share of crude oil/liquids production reducing in light of increases in U.S. and Canada production.
  • OPEC also indicates a pivot toward Asia, where it sees the greatest demand for its primary exports in the future.

In perusing through OPEC’s recently released “World Oil Outlook,” several viewpoints are noteworthy. According to OPEC, demand grows mainly from developing countries and U.S. supply slows its run up after 2019. After 2019, OPEC begins to pick up the slack, supplying its products more readily. In OPEC’s view, Asia becomes a center of gravity given global population growth, up nearly 2 billion by 2040, and economic prosperity. The world economy grows by 260% versus that of 2013 on a purchasing power parity basis.

During the period 2013-2040, OPEC says oil demand is expected to increase by just over 21 million barrels per day (mb/d), reaching 111.1 mb/d by 2040. Developing countries alone will account for growth of 28 mb/d and demand in the OECD will fall by over 7 mb/d (p.1). On the supply side, “in the long-term, OPEC will supply the majority of the additional required barrels, with the OPEC liquids supply forecast increasing by over 13 mb/d in the Reference Case from 2020-2040,” they offer (p.1). OPEC shaved off 0.5 million barrels from their last year’s forecast to 2035. Asian oil demand accounts for 71% of the growth of oil demand.

Morgan Stanley pulled out the following items:

The oil cartel released its World Oil Outlook last week, showing OPEC crude production falling to 29.5 million barrels per day in 2015 and 28.5 million barrels per day in 2016. This year’s average of 30 million barrels per day has helped flood the market and push oil prices to multi-year lows.

In the period to 2019, this chart illustrates where the barrels will flow:

Prices

With regard to price, OPEC acknowledges that the marginal cost to supply barrels continues to be a factor in expectations in the medium and long term. This sentiment has been echoed by other E&P CEOs in various communiques this year. OPEC forecasts a nominal price of $110 to the end of this decade:

On this evidence, a similar price assumption is made for the OPEC Reference Basket (ORB) price in the Reference Case compared to that presented in the WOO 2013: a constant nominal price of $110/b is assumed for the rest of the decade, corresponding to a small decline in real values.

Real values are assumed to approach $100/b in 2013 prices by 2035, with a slight further increase to $102/b by 2040. Nominal prices reach $124/b by 2025 and $177/b by 2040. These values are not to be taken as targets, according to OPEC. They acknowledge the challenge of predicting the world economy as well as non-OPEC supply. The Energy Information Administration (EIA) forecast a price for Brent averaging over $101 in 2015 and West Texas Intermediate (WTI) of over $94 as of their October 7th forecast. (This will have likely changed as of November 12th after the steep declines of October are weighed into their equations.) WTI averaged around the $97 range for 2013 and 2014. Importantly, U.S. supply may ratchet down slightly (green broken line) in response to price declines, if they continue.

It’s also the cars, globally

In 2013, OPEC says gasoline and diesel engines comprised 97% of the passenger cars total in 2013, and will hold 92% of the road in 2040. The diesel share for autos rises from 14% in 2013 to 21% in 2040. Basically, the number of cars buzzing on roads doubles from now to 2040. And 68% of the increase in cars comes from developing countries. China comprises the lion’s share of car volume growing by more than 470 million between 2011-2040, followed by India, then OPEC members will attribute 110 million new cars on the road. These increases assume levels similar to advanced economy (OECD) car volumes of the 1990s. In spite of efficiency and fuel economy, oil use per vehicle is expected to decline by 2.2%.

Commercial vehicles gain 300 million by 2040 from about 200 million in 2011. There are now more commercial vehicles in developing countries than developed.

U.S. Supply and OPEC

According to OPEC, U.S. and Canada supply increases through the period to 2019, the medium term. After 2017, they believe U.S. supply tempers from 1.2 million barrels of tight oil increases between 2013 and 2014 to 0.4 million in 2015, and less incremental increases thereafter. This acknowledges shale oil’s contribution to supply, with other supply sources declining, i.e., conventional and offshore.

OPEC Suggests:

The amount of OPEC crude required will fall from just over 30 mb/d in 2013 to 28.2 mb/d in 2017, and will start to rise again in 2018. By 2019, OPEC crude supply, at 28.7 mb/d, is still lower than in 2013.

However, the OPEC requirements are expected to ramp back up after 2019. By 2040, they expect to be supplying the world with 39 mb/d, a 9 million barrel/d increase from 2013. OPEC’s global share of crude oil supply is then 36%, above 2013 levels of about 30%. A select few firms like Pioneer Natural Resources (NYSE:PXD), Occidental Petroleum (NYSE:OXY), Chevron (NYSE:CVX) and even small-cap RSP Permian (NYSE:RSPP) are staying the course on shale oil production in the Permian for the present. After the first of the year, they will evaluate the price environment.

How does this outlook by OPEC inform the future? From the appearances in its forecasts, OPEC has slightly lower production in the medium term (to 2019), a decline of 1.3 million b/d in 2019 from the 2014 production of 30 million b/d. Thus, the main lever for an increase in prices for oil markets is for OPEC to restrict production, or encourage other members to keep to the current quota of 30 million b/d. Better economic indicators also could help. However, Saudi Arabia, the swing producer, has shown interest in maintaining its market share vis-à-vis the price cuts it has offered China, first, and then the U.S. more recently.

The global state of crude oil and liquids and prices has fundamentally changed with the addition of tight oil or shale oil, particularly from the U.S. While demand particulars have dominated the price regime recently, the upcoming decisions by OPEC at the late November meeting will have an influence on price expectations. In an environment of softer perceived demand now because of global economics and in the future because of non-OPEC supply, it would seem rational for OPEC to indicate some type of discipline among members’ production.

Source: OPEC “2014 World Oil Outlook,” mainly from the executive summary.

Don’t Count On A Major Slowdown In U.S. Oil Production Growth

https://i1.wp.com/upachaya.com/wp-content/uploads/2014/05/fracking.jpgby Richard Zeits

Summary

  • The presumption that North American shale oil production is the “swing” component of global supply may be incorrect.
  • Supply cutbacks from other sources may come first.
  • Growth momentum in North American unconventional oil production will likely carry on into 2015, with little impact from lower oil prices on the next two quarters’ volumes.
  • The current oil price does not represent a structural “economic floor” for North American unconventional oil production.

The recent pull back in crude oil prices is often portrayed as being a consequence of the rapid growth of North American shale oil production.

The thesis is often further extrapolated to suggest that a major slowdown in North American unconventional oil production growth, induced by the oil price decline, will be the corrective mechanism that will bring oil supply and demand back in equilibrium (given that OPEC’s cost to produce is low).

Both views would be, in my opinion, overly simplistic interpretations of the global supply/demand dynamics and are not supported by historical statistical data.

Oil Price – The Economic Signal Is Both Loud and Clear

The current oil price correction is, arguably, the most pronounced since the global financial crisis of 2008-2009. The following chart illustrates very vividly that the price of the OPEC Basket (which represents waterborne grades of oil) has moved far outside the “stability band” that seems to have worked well for both consumers and producers over the past four years. (It is important, in my opinion, to measure historical prices in “today’s dollars.”)

(Source: Zeits Energy Analytics, November 2014)

Given the sheer magnitude of the recent oil price move, the economic signal to the world’s largest oil suppliers is, arguably, quite powerful already. A case can be made that it goes beyond what could be interpreted as “ordinary volatility,” giving the hope that the current price level may be sufficient to induce some supply response from the largest producers – in the event a supply cut back is indeed needed to eliminate a transitory supply/demand imbalance.

Are The U.S. Oil Shales The Culprit?

It is debatable, in my opinion, if the continued growth of the U.S. onshore oil production can be identified as the primary cause of the current correction in the oil price. Most likely, North American shale oil is just one of several powerful factors, on both supply and demand sides, that came together to cause the price decline.

The history of oil production increases from North America in the past three years shows that the OPEC Basket price remained within the fairly tight band, as highlighted on the graph above, during 2012-2013, the period when such increases were the largest. Global oil prices “broke down” in September of 2014, when North American oil production was growing at a lower rate than in 2012-2013.

(Source: OPEC, October 2014)

If the supply growth from North America was indeed the primary “disruptive” factor causing the imbalance, one would expect the impact on oil prices to become visible at the time when incremental volumes from North America were the highest, i.e., in 2012-2013.

Should One Expect A Strong Slowdown in North American Oil Production Growth?

There is no question that the sharp pullback in the price of oil will impact operating margins and cash flows of North American shale oil producers. However, a major slowdown in North American unconventional oil production growth is a lot less obvious.

First, the oil price correction being seen by North American shale oil producers is less pronounced than the oil price correction experienced by OPEC exporters. It is sufficient to look at the WTI historical price graph below (which is also presented in “today’s dollars”) to realize that the current WTI price decline is not dissimilar to those seen in 2012 and 2013 and therefore represents a signal of lesser magnitude than the one sent to international exporters (the OPEC Basket price).

(Source: Zeits Energy Analytics, November 2014)

Furthermore, among all the sources of global oil supply, North American oil shales are the least established category. Their cost structure is evolving rapidly. Given the strong productivity gains in North American shale oil plays, what was a below-breakeven price just two-three years ago, may have become a price stimulating growth going into 2015.

Therefore, the signal sent by the recent oil price decline may not be punitive enough for North American shale oil producers and may not be able to starve the industry of external capital.

Most importantly, review of historical operating statistics provides an indication that the previous similar WTI price corrections – seen in 2012 and 2013 – did not result in meaningful slowdowns in the North American shale oil production.

The following graph shows the trajectory of oil production in the Bakken play. From this graph, it is difficult to discern any significant impact from the 2012 and 2013 WTI price corrections on the play’s aggregate production volumes. While a positive correlation between these two price corrections and the pace of production growth in the Bakken exists, there are other factors – such as takeaway capacity availability and local differentials – that appear to have played a greater role. I should also note that the impact of the lower oil prices on production volumes was not visible in the production growth rate for more than half a year after the onset of the correction.

(Source: Zeits Energy Analytics, November 2014)

Leading U.S. Independents Will Likely Continue to Grow Production At A Rapid Pace

Production growth track record by several leading shale oil players suggests that U.S. shale oil production will likely remain strong even in the $80 per barrel WTI price environment. Several examples provide an illustration.

Continental Resources (NYSE:CLR) grew its Bakken production volumes at a 58% CAGR over the past three years (slide below). By looking at the company’s historical production, it would be difficult to identify any impact from the 2012 and 2013 oil price corrections on the company’s production growth rate. Continental just announced a reduction to its capital budget in 2015 in response to lower oil prices, to $4.6 billion from $5.2 billion planned initially. The company still expects to grow its total production in 2015 by 23%-29% year-on-year.

(Source: Continental Resources, October 2014)

EOG Resources (NYSE:EOG) expects that its largest core plays (Eagle Ford, Bakken and Delaware Basin) will generate after-tax rates of return in excess of 100% in 2015 at $80 per barrel wellhead price. EOG went further to suggest that these plays may remain economically viable (10% well-level returns) at oil prices as low as $40 per barrel. The company expects to continue to grow its oil production at a double-digit rate in 2015 while spending within its cash flow. EOG achieved ~40% oil production growth in 2012-2013 and expects 31% growth for 2014. While a slowdown is visible, it is important to take into consideration that EOG’s oil production base has increased dramatically in the past three years and requires significant capital just to be maintained flat. Again, one would not notice much impact from prior years’ oil price corrections on EOG’s production growth trajectory.

(Source: EOG Resources, November 2014)

Anadarko Petroleum’s (NYSE:APC) U.S. onshore oil production growth story is similar. Anadarko increased its U.S. crude oil and NLS production from 100,000 barrels per day in 2010 to close to almost 300,000 barrels per day expected in Q4 2014. Anadarko has not yet provided growth guidance for 2015, but indicated that the company’s exploration and development strategies remain intact. While recognizing a very steep decline in the oil price, Anadarko stated that it wants “to watch this environment a little longer” before reaching conclusions with regard to the impact on its future spending plans.

(Source: Anadarko Petroleum, October 2014)

Devon Energy (NYSE:DVN) posted company-wide oil production of 216,000 barrels per day in Q3 2014. While Devon will provide detailed production and capital guidance at a later date, the company has indicated that it sees 20% to 25% oil production growth and mid‐single digit top‐line growth “on a retained‐property basis” (pro forma for divestitures) in 2015.

The list can continue on.

In Conclusion…

Based on preliminary 2015 growth indications from large shale oil operators, North American oil production growth in 2015 will likely remain strong, barring further strong decline in the price of oil.

No slowdown effect from lower oil prices will be seen for at least six months from the time operators received the “price signal” (August-September 2014).

Given the effects of the technical learning curve in oil shales and continuously improving drilling economics, the current ~$77 per barrel WTI price is unlikely to be sufficient to eliminate North American unconventional production growth.

North American shale oil production remains a very small and highly fragmented component of the global oil supply.

The global oil “central bank” (Saudi Arabia and its close allies in OPEC) remain best positioned to quickly re-instate stability of oil price in the event further significant decline occurred.