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This Is Just the Beginning of the Great American Oil Bust
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
“This is going to be a painful period of time,” explained Texas Governor Rick Perry. The oil price plunge is going to make things “very uncomfortable” in the oil patch of Texas. There would be “a bit of belt-tightening in places,” and some areas would “have to make some changes,” he said.
His speech to a conservative forum on Friday in Austin made one thing clear: for Texas, the largest oil-producing state in the nation, the oil bust won’t be easy, even if seen from the perennially optimistic point of view of a politician.
It won’t be easy for any oil-producing state – or the country.
A few days ago, Helmerich & Payne, announced that it would idle 50 more drilling rigs in February, after having already idled 11 rigs. Each rig accounts for about 100 jobs. This will cut its shale drilling activities by 20%. The other two large drillers, Nabors Industries and Patterson-UTI Energy are on a similar program. All three combined are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ,” said Oilpro Managing Director Joseph Triepke.
“They all know they’re staring down a cliff, they just don’t know how far it goes yet,” said Dave Anderson, an oilfield service and equipment analyst at Barclays on Friday, according to FuelFix. This year, spending on oil and gas drilling could plunge by $58 billion – or 30% – from last year’s $196 billion, based on a survey of 225 companies in the sector. But it could get even worse: Barclays conducted the survey over the past four weeks, and the price of oil has continued to drop since, and companies will adjust to the new realities.
Small to midsized drillers are making even deeper cuts in drilling to stem the cash outflow. For example, Houston-based Halcón Resources cut its 2015 budget to a range of $375 million to $425 million, down 55% to 60% from its 2014 budget of $950 million. These companies are just trying to hang on. Shares closed at $1.59 on Friday, down 87% from their $12 peak in February 2012, and down 79% from June 2014.
Houston-based Sanchez Energy cut its 2015 drilling and completion budget to a rage of $600 to $650 million, from the $1.15 billion it had first projected last year. But the budget assumed that West Texas Intermediate will average $60 per barrel in 2015 and natural gas $3.75 per million Btu. However, WTI last traded at $46.31 and natural gas at $2.88. Sanchez went public with all kinds of hoopla at the end of 2011. On Friday, its shares closed at $8.88, down 77% since June.
The peak in the number of rigs drilling for oil, according to Baker Hughes’ data series going back to 1987, occurred in the second week of October last year, with 1,609 active rigs. At the time, it was already clear that the oil price plunge wasn’t just a temporary blip. But rigs are contracted for well in advance, and breaking contracts isn’t easy, and changing capital-expenditure plans takes time.
Then late last year, the rig count began to edge down. But on Friday, Baker Hughes reported that oil rigs dropped by 61 to 1,421 rigs. It was the largest week-to-week drop in the data series. In percentage terms (-4.12%), it was the largest drop since the Financial Crisis. When the rig count started plunging like this in December 2008, the stock market was crashing.
And yet, it’s just the beginning
Texas got hit the hardest. Week-to-week, rigs dropped by 29 to 810. The count is now down 95 rigs, or 10.5%, from the peak of 905 rigs on November 21.
North Dakota, the second largest oil-producing state, lost 7 rigs last week. Its 162 rigs are also down 10.5% from its peak in mid-November.
Estimates vary widely as to how far the rig cutting will go. Barclays’ analyst Anderson estimated that at least 500 rigs could be idled in the American oil patch by the end of the year. Raymond James analyst Praveen Narra said that his firm estimated that up to 850 rigs could be idled this year. If 60% are idled, as was the case during the Financial Crisis, it would mean that 965 rigs would be taken out of service. Over the last 10 years, the oil and gas business in the US has become huge, and the unwind will be huge as well.
Yet, even as capital expenditures are getting slashed brutally, companies have not lowered their production forecasts.
And they won’t, at least not for a while; they’ll keep pumping at the maximum rate possible, especially now that revenues from unhedged production are plunging – while the costs of servicing their mountains of debt have remained the same, and rolling over that debt or borrowing even more money has become a lot more expensive. Cutting back on exploration, drilling, and completion stems the cash outflow, but it doesn’t cut production, not until the decline rates of existing shale wells start making a visible dent into it.
So investors see blood in the streets. And it’s the signal. The four largest exchange-traded oil-related funds – including the largest oil fund, USO – had inflows of $1.23 billion in December, the most since May 2010, and $110 million during the first few days of January, Bloomberg reported. These investors are betting on a quick rebound of the price of oil. A sign that there isn’t nearly enough blood in the streets yet.
These folks are looking at what happened during the financial crisis, when the price of oil plunged 75% in half a year, but after the Fed started its QE program, oil bounced off its low (along with stocks and nearly everything else) and formed a miraculous V-shaped recovery [read…. Oil Price Crash Triggered by the Fed? Amazing Chart].
The bet is that this may happen again. The Fed may start QE-4. Who knows to what lengths it will go in its efforts to inflate asset prices and transfer wealth! But if this oil bust is anything like classic oil busts, and the Fed sits on its hands, it may take years before this is worked out. Look at the price of natural gas: it has been below the cost of production at most wells for years – and production is still soaring! And that soaring production represses the price further.
In the end, oil goes from boom to bust to boom to bust, creating a lot of enthusiasm, hype, endless possibilities, and wealth for some on the way up, and leaving a lot of debris and anguish in its wake on the way down. The last time, the Fed stepped in. This time, it may not. Instead, the classic oil bust may play out in its drawn-out brutal manner.
And so, in the American Oil Patch and beyond, all heck is breaking loose as the “most reliable profit driver” has “abruptly turned sour.” Read… Oil-Bust Bloodletting: Projects Cancelled, Layoffs Ripple to Other Areas, Default Hits Private-Equity and Pension Funds
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I lived through 1986 and saw the banks doing energy loan workouts and the foreclosed homes and GE repossessing rigs and unemployed on street corners but then Boone Pickens and Carl Icahn were taking out the oil companies too like Phillips in OK and Union
I wonder where he heard that. He sure as hell didn't Think of it all by his own self. What's going on with the criminal charges he's facing ? Did they just "good 'ol boy" disappear ?
Nada
BTFD. Plenty more FRAUD out there.
The conundrum is that high oil cripples industry and the end consumer.
Low oil prices stops exploration which eventually lead to higher prices because of supply shortages.
In turn that should lead to renewed exploration but those who got burned last time around won't be too quick to pour more money down the rabbit hole.
This is Peak Oil. The oil Is there but there is no financial benefit in getting it out of ground. As risks increase and financing dries up. The consumer cannot afford it even if he needs it so why drill for it?
It is nothing like Peak Oil.
The shale reserves for both oil and gas are massive and waiting to be developed. Many countries have these reserves. In addition, there are several large conventional fields discovered but not developed.
What we have now, for the first time since the arabs were allowed to steal the developed oil reserves, is producer competition. That change has lead to short term but large price declines. It make take longer than expected but prices will return to the $60 - $70 levels representing the cost of producing the last barrell of required supply.
Can we get rid of this fucking ethanol now?
I am so fucking sick to death of getting hosed when I fill up here in corn central. Just this noon I filled up and paid 30 cents more per gallon for plain 87. I refuse to put more fucking money in the state of IA's coffers, fuck em. I will keep burning the non ethanol real gas until it either is gone or it's over a buck a gallon more, until then they can KMA. Funny thing is there are a lot of folks like myself that feel the same way in this area.
Funny. I dId the same thing with top of the line non-ethanol 93!
Funny how diesel cars get 30% better mileage than gasoline and diesel fuel just happens to cost 30% more than gas.
2013 VW Jetta diesel Average MPG 34
2013 VW Jetta Gasoline Average MPG 25
1/5/15 avergae gasoline price $2.20
1/5/15 average diesel price $3.14
I hear ya "Who was that...". GMO corn isn't even fit for cars.
Anyway, I have heard for decades that the U. S economy burgeoned because of cheap energy and freedom. Well, freedom is gone, so maybe we will have cheap energy again for just a while longer.
Those that say that cheap oil is bad for our economy are buffoons and likely tied to the oil patch.
Tuco
Let's see how you feel about the buffoons in a year.
I'm sure your job will be completely immune from the crash in oil prices.
Import substitution is a reasonable policy choice. But it always needs to be subsidized. And if we're going to get into the game of subsidizing things, why constrain ourselves to looking only at subsidizing oil? Let's open up the playing field and look at what else might be worth subsidizing. After all, they'll all produce jobs. Some of them might make better investments than oil; especially if oil trends to historical pricing regardless.
get harder and harder to find 87 octane clear gas
No. The farm lobby has too many congress pricks on their payroll.
this is the jump start the printers fuelled, opps the thing is slowing down.
more keynsian stimulas to spur that growth to spur tax revenues to pay for all that growth pulled fwd by zirp? how the fuck is that working fed governors? you dumb mother fucking idiots! you are impacting real peoples lives. you are causing great grief to people to dumb to understand. u know that, but were entrusted to do the right thing- you say what? off to the gallows...
Exciting!
I called the oil bear market. Not pumping my own tires. Just sayin...
This was a comment I made on the FOFOA blog on June 6 2014 when oil was $102 a barrel:
Everywhere you look, there is countries and companies discovering new oil and using capital intensive means to get at it. Everyone is becoming oil rich. Russia turned itself back into an empire overnight because of oil.
Everyone seems oblivious to the fact that oil is a commodity market like anything else and if it gets over-supplied, the price will have to come down. It always does. But ever since 2000, there hasn't been a state of over-supply in the market. I think we are way overdue for one. Who knows what form this oil bear market will take, with all the inflation in the world....Who knows how badly the inflation is screwing up the oil market.
I called this oil bear market on June 5, 2014 when oil was $102.50 a barrel. I said "giving more money to rich people who have more money than they can possibly spend will create an oversupply of stupid investments like in oil."
Would you fucking stop it?
Good call. Pretty much everyone everywhere was bullish.
It's worse than they think. Look at this copper MONTHLY chart and see if you see anything between today's price and the support line now at 1.60:
http://www.investing.com/commodities/copper-advanced-chart
The shale business cannot survive without ZIRP, $6 per mmbtu gas and $120 per barrel oil. Unless the Fed rides to the rescue or OPEC raises prices soon, the shale industry will be dead by the end of 2017 IMHO.
Wallstreet begging fed not to raise rates so those of us who dont have stocks can keep getting fucked on zero interest but you know every dog has thier day
u r predicting out 2 yrs-holy fuck, i can't figure out the next 2 weeks,ha...
Would bet Obama is already putting together Cash for Carbons program...handouts for unemployed oil bankers/drillers...
"Going to be a painful period of time" . . . didn't Vladimir just make a similiar announcement?
The Sanctions are Working!!
yup-the masters of the universe have control for now...
Not to mention all the ancillary related jobs this will affect. Oil is just one of the cogs.
"The last time, the Fed stepped in. This time, it may not. Instead, the classic oil bust may play out in its drawn-out brutal manner."
The shortness of memory never ceases to amaze... If the knock-on effects of this train wreck playing out in real-time begin to produce spikes in ~any~ of the key metrics/areas that the Fed 'focuses' on, what does the author think is going to happen...? While memories of the 'knock-on' effects from the housing bust may have had a temporary lapse on the cheerleading contingent, they are front & center at the Eccles building - and Congress.
Who needs oil?
Massage oil. Don't start without it.
Usually see these blood in the streets articles predicting more gloom when prices are near the bottom...
Wait for the liberal academia to get on the bandwagon. That's when you have to get worried.
One thing I hear from my friends in the oil patch regarding their jobs 'they say we're hedged for the next couple of quarters and will be ok for now, after that...'.
I'm curious who is holding the other side of those hedges. That's got to be a pretty painful trade for somebody.
LOL a few quarters. Look at oil prices in the 80s, the last time saudi decided to cripple high cost competitors. Prices stayed low for a decade. Don't be too quick to find a job somewhere else, and don't be too quick to pick up oil stocks on the cheap.
That's right sports fans, for those of you with knowlege of history this has happened before.
It happened before WiTH a much higher consumption rate per population and car, house, etc. And that was in terms of 1980s dollars which were worth more than the devalued dollars of today! I thnk it will last longer.
Maybe they mean financial reserves? Hopefully, it works out for them somehow. But don't expect the help to come from the golf course.
This morning I was looking into some means of taking advantage of the current slump to lock in fixed fuel costs for my employer and myself. Doing so I ran across the info for USO and UHN ETF's. Their asset displayed shows they both hold February contracts for oil and heating oil, close to 50% of their assets. It seems to me they will just get shellaced on that trade, how do they survive that???
Most of the activity in the "market" these days is just glorified theft. The last written about is ETF stuffing abdominal gutting. I'm going to look into what you've posted here. Would be part for the course to completely gut a retail ETF before the big ascent (and yes, fundamentals dictate a big ascent in coming years).
Hedge a hedge. By put options.
If banks on on the other side of those hedges, it won't be long before the Fed comes to the rescue.
" “This is going to be a painful period of time,” explained Texas Governor Rick Perry. "
Perry just realized that he isn't going to the Republican Primaries this time around...
Lets hope he goes. Need him gone from TX.
Meh. It's different this time.
The great Governor Perry has been travelling the nation telling everyone how HIS policies have created so many new jobs, why doesn't he just create more jobs?
And your great mind assumes he controls what the Saudi's do?
There is a reason we see so many fucking license plates on cars from libtard states on the highways in Texas. How business friendly is your state compared to Texas?
Not trying to throw rocks, but I am curious.
Amen brutha, its beyond rediculous, the carpetbagging.
Dallas unemployment rate 4.5%. There is no oil drilling in the Dallas area, just natgas.
Los Angeles unemployment 7.3%
Who else will get hit hard? Illinois, with Catapillar. Most of the heavy equipment comes from them. All State just completed their new HQ building in North Texas. They just moved from Illinois. Toyota is moving its US HQ from LA to Dallas too.
I'm sure your boy obama can create more green shovel ready jobs with another $1 trillion stimulus to go to his cronies
If you want to have a job-creation-off between 2 totally corrupt politicians I'm up for it. I'd say Obama is far ahead of Perry in phoney job creation pissing contest.
And since you assume Obama is my boy just because I think your boy is yet another Texas Governor blowhard - then you are STILL clueless as to the right vs left divide-and-conquer strategy the corporatocracy uses against you, even after so many ZeroHedge articles clearly describe it. It's pathetic. Until you realize we're all Americans with differing opinions but the same goals, consider yourself hopelessly conquered.