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The Scariest Chart For America's Shale Industry
Back in early November, when we posted "If WTI Drops To $60, It Will "Trigger A Broader HY Market Default Cycle", it was greeted with the usual allegations of conspiracy theorism, tin-foil hattery and pretty much everything else, except rebutting facts.
Two months later, it was none other than Goldman which threw in the towel on its call from July 28 of 2014 when it said that "the long-awaited global recovery appears to be getting on track, lifting commodity demand" and scrambled to explain overnight that nothing short of a mass default wave within the shale space will end the ongoing collapse in prices, which are driven not by supply/demand fundamentals but by ZIRP, and a generation of junk bond BTFDers, who can't wait to invest in the latest 10%, 15%, 20% or higher "yielding" opportunity (ignoring that the issuer may default before even one coupon is paid). In other words, those bond holders who wish to blame someone for the collapsing prices of junk bonds, feel free to address them to Ben Bernanke and his successor, who have enabled insolvent companies to live long beyond their viable lifecycle thanks to a zero cost of capital and a generation of traders who no longer know risk.
This is how Goldman's Currie tongue-in-cheekly explained this dilemma:
[U]nlike physical stress, how low prices need to go is dependent upon the producer’s view of the future and the persistence of the current low price environment. The lower and more persistent the producer views the future pricing outlook, the quicker the restructuring. Given the optimistic nature of the oil drilling business, producer views are unlikely to change until the environment becomes extremely hostile with prices low enough such that survival becomes questionable.
The endgame according to Goldman:
We believe a new industry will be born out of this environment with lower costs driven not only by cost deflation in other commodities, currencies, rig rates and oil services but also by substantial productivity gains created by engineers facing tighter margins. Although what exactly this new industry will look like is still extremely uncertain, we do know is that cost deflation has already created a 25% reduction in expenses. Accordingly, to reflect cost deflation in the industry and its sustainability through significant efficiency gains, we are reducing our 2016 and long-term price forecasts to $65/bbl and $70/bbl for WTI and Brent from $80/bbl and $90/bb,l respectively.
Of course, the tricky part is how does the US energy industry, and its stakeholders, go from Point A currently to the Point B lower-cost and general utopia. Sadly, the answer is with lots and lots of pain.
Because as Currie also pointed out, what comes next is an absolutely epic bloodbath for the US shale industry, and its most levered companies (a list of which we showed previously).
Case in point: a chart which we affectionately call the scariest chart for the US shale industry - namely the US rig count drop, which as Goldman notes, "is faster and larger than in any other bear market."
That's not why it is scary. The reason why is that the current rate of rig collapse is nowhere near enough. In other words, before the new pricing equilibrium can be established, virtually the entire US energy sector in its current appearance will have to be wiped out!
And yes, Goldman is right that once the new cost-structure is in place, there will be only smooth sailing ahead.
The problem is how we get from just shy of 100% on the red line to a number approaching zero in the next few months without not only a bloodbath across the US energy space, for both bonds and stocks, but also without a revolution in Texas, whose recession is all but assured...
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You canot just say US shale poducers have to take 100% of this pain -- $40 oil is a country killer in a LOT of other places
Oil Is Never Going Back To $100
Prince Alwaleed bin Talal, the eccentric Saudi billionaire once labeled the "Arabian Warren Buffet," says that oil will never again reach $100 a barrel. "The price of oil above $100 is artificial," he said. "It's not correct." That's in an interview with…
latest on OIL & SHALE:
http://tersee.com/#!q=shale&t=text
This decline will hit bottom in 18 months...not only was the ponzi of having to have more wells running tomorrow to offset the high decline rates on the ones already a year old in play here but that probably 30% of the wells were minimally cost effective at $100 means banks will already have shut off the spigot to all but those 3K bbl/day guaranteed new rigs (ie. 5%). Everyone else has no choice but to run their existing wells to try to show banks some cash flow and convince them that oil will be $80 in a month or so...Saudis pretty much are willing to run this game for another year to clear out any oversupply, hammer shale, Iraq and Russia, fledgling non-dollar petrodollar and let the world know the oilbuck stops with them.
its called malinvestment and its coming to a theater near you
It's going to take closed down wells offline for good too. Cement them and then there's no looking back.
Oil was below $40 all the way up until the year 2004.
High oil prices are a country killer.
I noticed this economic shit show happened after 2004, Correlation is not causation, but still, this doom on this price correction on oil is silly.
Really, why would that be? If they put out oil, they will keep it up until they can't No one cements a producing well in unless it's less than a barrel a day and then maybe not.
you can drill out a cement plug and restimulate a well once prices come back up. Cementing a well isn't the end of that well forever.
Not unlike your employer paying your salary no doubt. Most jobs are malinvestment.
By the time 18 months has rolled around the HY bond and derivitive sector will have completely collapsed, hopefully taking the mega-banks with them. People don't really understand how delicate the economy is, especially after years of massive rigging and almost nobody is ready for the fallout.
facts? the world was supposed to crash, currencies implode, bank runs, starvation, world apocalypse, gold and silver the only currencies left.... It's now 6 years later and I'm still waiting. There are issues no doubt, another recession easily plausible, total colapse of "mega banks" and HY? no.
total colapse of "mega banks"...? no.
Only because they will now bail-in your deposits to stave off that event, sucker, leaving the banks both "profitable" and in ownership of the rigs.
Junk energy credit is a $200 billion problem at the absolute MOST. Mortgage mess was $1.25 trillion failure, so there is really no comparison. Yes, some regions will get crushed (see Texas circa 1985-1989), but not the systemic killer.
Isn’t that the same guy who bought citygroupstock at the dop just before it crashed and never recovered?
No, he's the guy who went long oil at $60 and didn't have the sense to unwind at $60, then $55, then $50....
He just ranted on forums about how oil is going to $200
yes!!
Is this the same idiot that bought 1 billion in citi bank stock before it crashed?
I think he became the largest shareholder of Citi when it was at $300, now at $50. So you know, he's been wrong before.
The North Sea is going to be dead shortly. They cannot do capex and make money at the present price of Brent. Without capex, you are not going to be pumping for all that long.
Yeah, they have new discoveries but it'll be too expensive to punch holes in deep water, should be a fun little experiment in unintended cosequences.
They were making money with Oil at $40/BBL a decade ago.
There is a very specific reason this oil event was spawned.
There is a definate reason the Arabs decided to not reduce production.
This has more to do with the impact on the US than Russia.
Alow me to expand on part of the article as an example.
In other words, before the Banksters (et al) will be content, virtually the entire US energy sector in its current appearance will have to be wiped out!
What action has Øsurper taken to adjust this situation in a positive way?
None, as it would assist his most hated nation; the US.
Sounds a lot like the "Gambler's Ruin" problem.
I called the oil bear market. Just sayin... http://freegoldobserver.blogspot.ca/
Posted on June 6 2014 on the FOFOA blog. Oil price $102.66
"
I cant help but notice that everyone from Brazil to Russia to Canada to the US thinks that the oil market is immune to over supply. If you watch "The Prize", you will see that there was always an obvious business cycle in the oil market. When prices were up, oil companies would bring more supply to market and new oil companies would sprout up. Then, the market would become over-supplied and prices would would fall.
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.
Doesn't this whole oil price fluctuation put the viability of the petrodollar in question?
Shouldn't the price of the underlying commodity be close to constant in the long term?
It seems something is missing with oil however strategic it is. I wonder what that could be?
Yes quite possibly.
Think of all the excess petrodollars that came into existence because of the high oil price over the last 10 years. These middle east petrodollars were recycled into US debt. A fall in oil of this magnitude reduces the supply of petrodollars. A supply that the US was getting used to.
So now the Fed has to crank up the presses to cover the reduced supply of recycled petrodollars.
Where is the US going to roll over all this debt ? It was sure easy with high oil prices.
Your being a buzzkill. Everybody knows that the economy is doing wonderful, just look at them re-arranging the deck chairs and the bands playing a catchy little number.....
Did you short oil in June?
It's on like Donkey Kong. Freegold bitchez!
If GS were so smart, why did they have a long term price forecast of $90/bbl before? With their all seeing crystal ball, they should have seen this coming, no?
Who is to say that they didn't see this coming? The Squid isn't always honest with its predictions. Maybe they saw it and maybe they didn't, but you can bet that they raped some muppets.
Yes, but remember in 2008 when they "honestly" had to go to Uncle Warren and beg, I mean borrow a few billion to stay in business.
But, but, but US energy independence, and Saudi America, and innovation!
Dammit! They said it was a sure thing on television!
You can absolutely bet that GS was in on this commodity drop (via .gov) and the intent was to deliberately keep the facade in order to allow them to profit fully from the opportunity (US punishes Russia/BRICS and saudis get alot less oil competition for playing ball). Once oil prices hit bottom in 12 to 24 months from now you can bet they will be forecasting lower prices while they once again profit from another spike in the supply/demand curve. Remember just like any good mega bank, they always help themselves to the buffet first before you get any scraps from the table.
GS is the undisputed expert in the RIG business----rigging the price of silver, gold, copper, etc.
The guy who delivered some firewood to me last Friday told me that one of the men helping him cut and split wood at his yard came back from the Alberta oil patch due to layoff. I said "that happened fast" and he replied "oh yea and he's been back for nearly two months."
Long Texas pawn shops and substance abuse counselor referral fees.
Long Vicodin and pot dispensaries.
Paging Dubaibanker - could a new energy technology be about to make an appearance? This was highlighted on Deninger's blog a few days ago, and this thread seems a propos to ask.
http://www.forbes.com/sites/jamesconca/2015/01/07/nuclear-power-turns-to...
http://market-ticker.org/akcs-www?post=229716
Thorium nuclear energy to empower the 21st century? Could Dubaibanker be onto something, when he speculated that the drop in oil could be due in part to the recognition of a new energy technology?
Any thoughts from the physicists out there?
I have yet to see a single such reactor that is fully functional or competitive with existing energy sources or energy capturing technology. As a younger man I had access to numerous facilities such as Los Alamos....
never listen to the hucksters. When a credible, and normally cynical scientist gets excited, then we might be getting close.
Not to mention that you would then have to build up the technology and infrastructure to replace the liquid fuels that come from oil. Not all energy is easially fungible. That's not to say that its technically impossible to do, but a nuclear power plant by itself is incapable of ensuring that the truck that brought the food to the supermarket near you has diesel in it. People can talk about electric cars and hydrogen cars and whatnot, but liquid fuels are far more convenient (that's very important for mobility) and we don't have the infrastructure in place to run those kinds of economies and we aren't installing it except for in a few places that amount to nothing more than a tolken gesture.
Even if we figure out how to restart industrial society, we are going to feel a lot of pain first.
Thank you for 2 intelligent responses. I asked for replies from people familiar with the energy scene, and that's what I got, without distracting from the thread topic. This why I remain a faithful Hedge commenter.
Thanks, guys.
Not to mention that you would then have to build up the technology and infrastructure to replace the liquid fuels that come from oil.
Thats sounds suspiciously like a bunch of decent jorbs and progress.
That's not to say that its technically impossible to do, but a nuclear power plant by itself is incapable of ensuring that the truck that brought the food to the supermarket near you has diesel in it
As painful as it sounds and as much as it makes me sound like a broken record. Check out Purdue Universities paper on Hemp used as Bio Diesel. We would only need to use %10 of our current agricultural land for hemp production to fuel every truck, train and personal vehicle. I can cite the research paper if you would like.
People can talk about electric cars and hydrogen cars and whatnot, but liquid fuels are far more convenient (that's very important for mobility) and we don't have the infrastructure in place to run those kinds of economies and we aren't installing it except for in a few places that amount to nothing more than a tolken gesture.
Hemp based super capacitors are a giant step in the right directions in these regards. They are viable, efficient and cost pennis on the pound to produce. The switch to the Graphene and Hemp Oil industry would create millions of jobs, would reduce the footprint of humans on planet Earth and at no real cost to quality of life! In fact quality of life would stay the same or increase an many instances! No war for resources, jobs in a future high tech industry as well as jobs in low to medium skilled labor market with the introduction of more viable agriculture and manufacturing opportunities across the world.
/rant
I can provide sources for all these things I say. But will these things ever be done?
I'm not a physicist but no this is not the reason for anything related to oil pricing.
Fair enough. Personally, I think 90% of the oil price dive has to do with the USD dying. This is the theory I understand best, and to me the one that explains what I see in the big international currency war picture.
However, I try to keep an open mind to other possibilities as well, to consider them when I hear of them. (Even if investigating those reinforces my original opinion! Which in this case, as it turns out, it does - back to my original, consistent, USD death theory!)
We need more oil for our economy, yet nobody can afford to pay for the increase in production. If oil producers could provide the US with 25 million barrels per day at $30/bbl, we wouldn't notice the corruption on Wall Street right now and our economy would be humming along. The debt that was incurred when oil was much higher than it currently is tells you something about the costs of keeping production levels where they currently are. There is a growing gap between what people can afford and the costs to produce. This is going to break things and expose a lot of corrupt pyramid schemes. Ponzinomics is a fitting description.
I have listened to three seperate reports today, all bemoaning the drop in the price of oil. How bad it is for the industry, investors and of course Wall$treet.
Not one single word about the positive at the consumers end.
As for Texas, they have been through booms and busts before and will survive.
I'd love to see $20.00 a barrel!
Well yes, it is positive, but we are not driving more, taking more vacations and running to Kohl's to buy more Chinese crap. We are paying down debt, saving a bit, even though we get 0 interest and just being careful. Even the sheeples are starting to understand what is going down. Going to take a long time before most are on board, but the tide is turning, albeit slowly.
PUTIN/IRAN/ISIS vs. US fracking
your call
Oh please!! Do you guys really believe on this BS. Nobody apart from a small select group knows for real what is the real production cost of shale, oil and gold. Every time I see on the news some "expert" saying that oil, shale and gold are below cost I go read something else. I used to like fairy tales when I was a small boy, now its kind of boring !!
now that we can't invest in oil and gas and other than the stock market, were can we put our money?
In your sock drawer.
........to get a good idea of how the oil service companies are fairing, take a look at Nuverra Environmental Services, NES, whose main base of operations is the Bakken.
The first thing the oil companies do if they are squeezed is cut spending on things like environmental safety and health........
NES is down 30% today.
" Back in early November, when we posted "If WTI Drops To $60, It Will "Trigger A Broader HY Market Default Cycle", it was greeted with the usual allegations of conspiracy theorism, tin-foil hattery and pretty much everything else, except rebutting facts."
Indeed! I read the attacks on your articles. I posted myself the vulnerable nature of shale oil, in many long posts. I got pissed on by a few other posters for my ignorance. I maintain that ZH was totally right all along, and events will now prove it, and we will hear no more from those who "junked" the very idea the shale miracle was nothing of the sort. Shale was oil on the margine, it was the most marginal producer, the first to go under if and when prices fell.
Those who "junked" the idea totally fail to undestand markets, and how they work. Oil is a real market, one that responds with lightning speed to tightening supply, or over supply, with rapid price swings. The first tank load of crude that went "un-bid for" immediately began the price collapse. Supply needs immediate demand, or prices fall till somebody does bid! Just because someone loves the idea of American shale oil and the miracle of energy independence , does not negate MARKET forces!
God help the Junk bond holdes! God help the Hedges who bet the wrong way!
" nothing short of a mass default wave within the shale space will end the ongoing collapse in prices, which are driven not by supply/demand fundamentals but by ZIRP, and a generation of junk bond BTFDers, who can't wait to invest in the latest 10%, 15%, 20% or higher "yielding" opportunity (ignoring that the issuer may default before even one coupon is paid)"
SO TRUE! These are the markets, baby. They can kill you if you lose perspective chasing yield. Sombody will feel the pain coming!
The 'Scariest chart'? Did the Tyler's just hire Eric King????
Wonder what it costs to put it back into the ground....
Shale drilling, before this downturn in price, was clearly in ponzi territory. Looking at finance leverage, and drilling rates designed to maintain a certain prodcutin level in the fields where a well rapidy lost output, needed more investment in new wells to keep production up, and new money poured into recent wells to get them flowing again. I fail to see any miracle in all this. When Saudi could pump oil at 20% or less cost than the cheapest fracking wellhead price.
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Oil Boom/Earn Income (some ponzi scheme for morons)
Funny....
Scariest? I doubt it. I'll bet you could graph individual balance sheets and find plenty to be more scared about. Liabilities vs negative profits, for instance.. A chart of gross CDS on "shale loans" might shock a few as well.
Check out this long term commodities chart.
http://finance.yahoo.com/blogs/talking-numbers/commodities-will-see-more...
Goldman: Clearly the bottom.
I say good riddance.
We don't need this polluting uneconomical shale stuff. I hope they all go bankrupt, rapers of the planet.
Rumors have it that maybe at the real bottom, Warren Buffet will buy all of the drillers.
"The Scariest Chart For America's Shale Industry"
The ownership will simply transfer from Weak Hands to Strong Hands, i.e. from Entrepreneurs to Club Members. For pennies on the dollar. Like always.
This is not news or unexpected, even though Libertarians almost always seem surprised when it happens, given how they 'talked Big' during the Boom phase. Soon "they'll have no cattle, just the hat".
The sky is falling ... as well as oil
If SA controls the biggest spigot and US marginal producers begin to drop off, at what point will SA deem it advantageous to reduce the flow, hold it steady or increase the flow ? Assuming demand will hold steady due to lack of world growth and consumer weakness, a lot will have to do with the value of currency they are accepting as payment for oil. While the US $ is currently strong, only 15 % of SA oil is imported into US, which means most of the other currencies are relatively weak. SA is probably trying to re-enter US market but finding it difficult, so they are purposefully undermining marginal fracking producers and also attempting to increase consumer gas usage somewhat. The threat to the financial sector, and value of dollar, so far is not serious compared to 2008 financial collapse. But if it does threaten financial markets, SA will back off not to kill the golden goose which is the value of a recirculatable dollar.
Whats the short play here? FRAK?
Yes, the carpetbaggers are licking their chops and getting ready to buy out the little guys.