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"Drillers Are In Denial" Brynjolfsson Warns Crude Bounce Is "One More Head-Fake"

Tyler Durden's picture




 

Via Armored Wolf's Jon Brynolfsson,

The last day of January saw a substantial rally in Crude. Ostensibly, the trigger for this was a notable drop in the Baker Hughes rig count.

I don’t buy it. I think Fridays 3% uptick in crude prices will be one more head-fake, a false breakout.

 

 

 

and as we noted earlier, rig count and production are quite different...

 

Keep in mind, oil drilling rigs and oil wells are not the same thing. Drilling rigs are used to increase the number of wells. So with 1243 drilling rigs in operation, and “rightward turning” (which means drilling downward), more wells are coming on line. The old wells will remain in operation, supply will continue to exceed demand (which economist will say is an impossibility, unless one excludes from demand, as I do, inventory builds represented by oil put into storage.)

To be fair, while the old wells will remain in operation, they will suffer from their decline curves, and the decline curves for shale oil wells are VERY steep (estimated to be between 60% and 70% per annum.) Also to be fair, low prices may engender increase demand, demand from vacationers, increased air travel (triggered by lower ticket prices), and perhaps some industrial cross over demand. Eventually, I guarantee it, supply will equal demand, and inventories will stop building.

However, analyst estimate that the reduction in US Energy Capex is insufficient to turn the supply picture around, it will merely DECREASE THE RATE OF GROWTH IN US PRODUCTION. Because globally, supply currently exceeds demand by 1 million barrels a day, and supply is increasing, inventories will continue to build. The supply demand realities, are clearly trumping the geopolitical tensions.

I expect global inventories to continue to build until at least June.

 

They’re already at record levels, most onshore tank farms are filled to capacity, and energy arbitrageurs are already leasing the limited fl eet of crude tankers to use as fl oating storage. Drillers seem to be in denial, they fail to acknowledge that as long as inventories are building toward untenable levels, there will be extreme pressure on spot crude prices.

To give you an idea of the magnitude of this denial, Capex in the energy industry has been $200 billion per annum in recent years, with 80% of that devoted to drilling and well completion. At this point, past investment is a sunk cost, and any new investment, including that represented by the Baker Hughes rig count, is putting good money after bad. Analysts are rapidly reducing their estimates of 2015 capex, from 15% last month, to murmurs of 50% reductions more recently. There is more wood to chop.

Global political tensions are high and will be rising as oil revenues in exporting countries collapse. Analysts speak of a “break even” price for oil across various nations including social costs. What they don’t seem to realize is that absent a universal suppliers’ cartel (which OPEC clearly is not, because its members are autonomous, and many of the largest producers, including Norway, Russia, and US are not even members), high social break even prices incentivize individual producers to pump more, not less, oil at low prices! Frankly, one need not apply any “game theory” or strategic analysis to oil price determination; the massive size, fragmentation, and liquidity of the oil markets makes it a perfect study in competitively determined equilibrium pricing.

 

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Mon, 02/02/2015 - 14:07 | 5735436 trader1
trader1's picture

I heard a rumor that Greenpeace is behind the big oil and gas short....

Mon, 02/02/2015 - 14:07 | 5735439 SickDollar
SickDollar's picture

BIG FUCKING Illusion BITCHEZ

Mon, 02/02/2015 - 14:11 | 5735452 trader1
Mon, 02/02/2015 - 14:12 | 5735454 knukles
knukles's picture

Wouldn't surprise me at this juncture to find out that Greenpeace is funded by Soros, either.
Hell, most folks go to "Snopes" for fact checking.
Guess who's the biggest funder of Snopes?
No, you won't find that out by trying to research it at Snopes, by the way.

Mon, 02/02/2015 - 14:14 | 5735460 trader1
trader1's picture

Soros' left hand tries to correct what the right hand done wrong...

Mon, 02/02/2015 - 15:11 | 5735675 SRSrocco
SRSrocco's picture

JUST THE FACTS:

Half of all Bakken Oil Production 1.1 million barrels per day came in 2014.  If no new wells were drilled in 2014, production would have been 550,000 barrels per day.

Bakken was forecasted to peak in 2015-2016 and the Eagle Ford by 2017 with high oil prices.  What happens with the price of oil 50% lower?

Once U.S. Shale Oil Peaks... IT NEVER COMES BACK.

BLINKING RED LIGHT: Big Trouble Ahead For Bakken Oil Production

 

 

Mon, 02/02/2015 - 16:06 | 5735952 earleflorida
earleflorida's picture

and 'Standard Oil' is now buying up drilling rights in the whole state of Wyoming. Cheney and Halliburton whom hold the original patents for hydro-fracking, etc.,...[?]

what goes around comes around as they buy up all the fracker's[?], and that means the Dakota's when the price is in bankruptcy for pennies.

monopolies seem to beget monopolies in Teddy Rosevelts bygone-years of interstate rules-of-engagement.

what say you obama care?

Mon, 02/02/2015 - 14:25 | 5735495 Cheduba
Cheduba's picture

Expansion projects take months and years to bring online in the boom and bust fiat cycle, just look at the massive wave of new iron ore production now ramping up at the worst possible time.

I tried to warn Freeport McMoRan several years ago about the coming sh*tstorm when I worked there,  but they didn't listen and just finished construction on expanded capacity in Morenci.  Oops.

Well, if mega corporations are so ecstatic to dig their own graves, so be it, but how about this time no bailouts, huh?  We're already up to having to work millions of years at the average salary to pay off all this debt, so let's try not to ramp that figure up into the billions of work years.

Unless they want to try using the dark arts to reanimate millions of lifeless discarded husks left in their wake in order to get more debt slaves, I have to hope we are nearing peak debt.

Mon, 02/02/2015 - 14:25 | 5735499 Yao
Yao's picture

Hey it's free money, go ahead and pick some up.

Mon, 02/02/2015 - 16:11 | 5735968 DankVader
DankVader's picture

Could someone please explain to me why the term "BITCHEZ" appears so frequently on ZH comments? 

Mon, 02/02/2015 - 18:34 | 5736683 Abbie Normal
Abbie Normal's picture

Ever watch the movie The Social Network?  It's on Zuckerberg's business card.

Mon, 02/02/2015 - 14:18 | 5735469 drivenZ
drivenZ's picture

sarcasm? sounds highly counterintuitive to me.

Mon, 02/02/2015 - 14:30 | 5735523 trader1
trader1's picture

we're beyond sarcasm now....

;-)

Mon, 02/02/2015 - 14:12 | 5735453 LawsofPhysics
LawsofPhysics's picture

Wow, when did oil become to easy to extract?   This cannot be good news for my friends over at LS9 INC.

Mon, 02/02/2015 - 14:13 | 5735458 knukles
knukles's picture

About the same time as all the electric cars were the reason for the decreases in both miles driven and gas consumption.
Or some such pablum

Mon, 02/02/2015 - 14:14 | 5735459 Winston Churchill
Winston Churchill's picture

Maff, like the derivative time bomb, will not be denied.

Tick tock.

Mon, 02/02/2015 - 14:20 | 5735480 LawsofPhysics
LawsofPhysics's picture

your optimism is appreciated.  Unfortunately, as far as I can tell, the people who have most to gain from the CDS "market" are the same ones that would have to declare a CDS event in order for it to blow up.

Sorry, but I don't see these fuckers indicting themselves any time soon.

Mon, 02/02/2015 - 14:25 | 5735493 Winston Churchill
Winston Churchill's picture

With depositors and taxpayers now on the  hook, they will be laughing on their private

islands.They alredy have theirs.

Mon, 02/02/2015 - 16:36 | 5736098 Panem et Circus
Panem et Circus's picture

It's all just one big casino.

Mon, 02/02/2015 - 14:21 | 5735479 Rainman
Rainman's picture

Thought for the day : Oil pricing is not the result of free-market dynamics ....  and it hasn't been for a very, very long time.

Mon, 02/02/2015 - 14:22 | 5735485 LawsofPhysics
LawsofPhysics's picture

thought for the day : ______________ pricing is not the result of free-market dynamics and it hasn't been since the earth adopted mark to FANTASY accounting and fiat money.

 

Yes, you are correct.

Mon, 02/02/2015 - 14:25 | 5735500 lbrecken
lbrecken's picture

Dope Tyler is short oil it seems for sure...cause he does get price strip does not support addtl production yet he spews his propaganda like the media he criticizes.....completely discrediting his site...i have lost complete faith from info here as its as biased as corrupt outlets like Bloomberg

Mon, 02/02/2015 - 14:31 | 5735529 SmallerGovNow2
SmallerGovNow2's picture

C ya!  don't let the door hit you in the ass on the way out...

Mon, 02/02/2015 - 15:03 | 5735621 Pareto
Pareto's picture

My sentiments exactly.  hard to take a guy seriously who is asking me to to take face value what the media says is some how true and in my best interests - when nothing the media says is true or in my best interests.  Hey lbrecken - whichever way the wind is blowing - kindly fuck off with it.

Mon, 02/02/2015 - 14:47 | 5735568 Slowdrip
Slowdrip's picture

Hey douchtard, they are calling for you over at CNBC....

Mon, 02/02/2015 - 14:51 | 5735573 Burls
Burls's picture

My CRAMER senses are tingling. ...

Mon, 02/02/2015 - 15:04 | 5735630 NOTW777
NOTW777's picture

look at the top of the article

 

Via Armored Wolf's Jon Brynolfsson,

Mon, 02/02/2015 - 14:34 | 5735536 LawsofPhysics
LawsofPhysics's picture

Strange, something else "jumped up" during the "fracking boom"...

 

http://research.stlouisfed.org/fred2/series/WALCL

 

Mon, 02/02/2015 - 14:48 | 5735549 Burls
Burls's picture

Let's see what happens when the EIA releases the inventory numbers on Wednesday. ...

Mon, 02/02/2015 - 14:43 | 5735555 RabbitChow
RabbitChow's picture

So what does rig count have anything to do with the price of oil?  the number one competitor (and price setter) for the world is Saudi Arabia.  The real secret to KSA oil availability is probably the biggest oil field located in the middle of Saudi.  And it isn't pumping any oil right now.  Crude oil could be brought way below 40 if they ever wanted to.  Just remember, they are putting the screws to everyone and making most of the crude in other parts of the world inefficient or uneconomical to pump out of the ground. 

Mon, 02/02/2015 - 15:01 | 5735615 Abitdodgie
Abitdodgie's picture

Saudi Arabia have just increased production today so that has to be good news for someone , not for American rig's , but there again all this is just done to put American fracking out of action .

Mon, 02/02/2015 - 14:51 | 5735571 The_Peeper
The_Peeper's picture

Armored Wolf, eh?

Mon, 02/02/2015 - 14:59 | 5735610 assistedliving
assistedliving's picture

An old time Driller always writes "F'n the dog" on the books whenever they're on down time.

The Tool Pusher tells him they have a new secretary in the office and she's real religious so don't be writing that anymore.

The Driller starts writing "Chasing the dog" instead. This goes on for awhile. One day after being down for awhile he's in a hurry and forgets. He writes "F'n the dog".

A few days later the Push brings out the pay checks. The drill opens his and inside is a note from the secretary. It reads " I see you finally caught that dog"


we're all that dog bout now...

Mon, 02/02/2015 - 15:00 | 5735614 Mike Honcho
Mike Honcho's picture

increased air travel (triggered by lower ticket prices)(also triggered by spineless, pro-sexual assault via TSA, citizens)

As Joe got intimately violated (for his safety) by Chuck, a 300lb high school middle achiever, he softly whinced in his best approach to emulating William Wallace, ffffrrrreeeduuummm.

Mon, 02/02/2015 - 15:07 | 5735647 TuPhat
TuPhat's picture

Come on ZH, try to word your headlines so they are based on the Article.

Mon, 02/02/2015 - 15:09 | 5735663 Hohum
Hohum's picture

Monthly production in the USA will be down year over year by the end of 2015.  And if not?  It will happen soon enough.

Mon, 02/02/2015 - 15:26 | 5735739 Bangalore Torpedo
Bangalore Torpedo's picture

Arthur Berman has a somewhat more tempered approach to this same question.  With shale, this time its different...

 

http://petroleumtruthreport.blogspot.com/2015/01/tight-oil-production-wi...

 

 

Mon, 02/02/2015 - 16:04 | 5735933 NoWayJose
NoWayJose's picture

Oil prices have not been about supply and demand since maybe the 1970s.  Instead the price of oil has been determined by the amount of calls, puts, and futures that the TBTF banks have on oil and oil-related stocks. 

Can anyone seriously think Goldman is going to let the US middle class off the hook this summer with $2.00 gasoline?  The TBTF banks love to make money on oil prices (either up or down) and will certainly try to add $1.00 a gallon "TBTF tax" on gasoline by controlling the price this summer.

Mon, 02/02/2015 - 16:17 | 5735988 Bangalore Torpedo
Bangalore Torpedo's picture

I believe that the gold and silver markets...being miniscule compared to petroleum, can indeed be influenced or "manipulated" by the paper markets.

I'm not buying that that is possible for petroleum.  Sure, paper futures can always be used to manipulate, but not in a market where even smallish imbalances of supply and demand have a massive effect.

Mon, 02/02/2015 - 17:14 | 5736312 bid the soldier...
bid the soldiers shoot's picture

Everyone's in denial.

The capitalist economy of the 20th century is transitioning into a neo feudalism one.

At the end of the last century TPTB determined that, going out a few decades, there was not enough oil for both the Military and the economy.

So the economy was thrown under the bus.

Terrorism and the American National Debt grew like some hideous twins in Greek mythology.  Then Greenspan delivered the coup de grace and the subprime housing bubble exploded in everyone's face.

99% of world's economy is confronting a spreading demand problem. Spreading from the bottom up.  They'd like you to believe that the low price of crude now is a result of oversupply, when it's really a dearth of demand.

The terrorism that we are confronting everywhere is only the excuse for the authorities to look everywhere for terrorists today. And malcontents of our economic situation tomorrow.

Yes, in the last stages, shale oil AND oil shale will be drilled and retorted and used by the military police to keep order in New Oceania.

Mon, 02/02/2015 - 17:58 | 5736510 Wild Theories
Wild Theories's picture

yes it's a head-fake, of course it's a head fake.

but it's a profitable head-fake to all the BTFDers who are now ready to STFR, no?

Do NOT follow this link or you will be banned from the site!