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Goldman Warns "Don't Count On Rig Declines To Balance The Oil Market Just Yet"

Tyler Durden's picture




 

With WTI back under $50 once again (the mainstream media's new Maginot Line for oil complex stability - just like $80, $70, and $60 was), it appears more investors are waking up to the reality of an over-supplied, under-demanded global energy market. The 'squeeze bounce manipulation' that we saw over the last week - very reminiscent of the bounce seen mid-collapse in 2008/9, was predicated on falling rig counts (and capex). However, Goldman pours freezing cold fracking water all over that thesis as they explain that the decline in the US rig count remains well short of the level required to achieve a sufficient slowdown in US oil production growth to balance the global market. Simply put, they conclude, lower oil prices will be required over the coming quarters to see the US production growth slowdown materialize with risk to their already low price forecast to the downside.

 

WTI back under $50...

 

Via Goldman Sachs,

Further rig count declines required to balance market

The US oil rig count has dropped sharply, with the recent acceleration helping trigger a large rally in oil prices. To help quantify the impact, we decompose oil production from the three big shale plays at the county level, separating the contribution of well and rig performance. Our bottom-up analysis suggests that the decline in the US rig count likely remains well short of the level required to slow US shale oil production to levels consistent with a balanced global market, especially if productivity gains and high-grading materialize as expected. Nonetheless, we also find that the rebalancing of the US oil market is closer than would be implied by the US shale gas template of 2012-13.

The past weeks have featured (1) an improvement in oil prices, locked in to some extent by production hedges, (2) an easing in the funding constraint of E&Ps, and (3) an acceleration in both cost deflation and deleveraging through significant rig cuts.

These three shifts and our expectation that the rig count decline is still short of achieving the required slowdown in US production growth suggests that the rebalancing of the oil market is far from achieved. We therefore reiterate our view that lower oil prices will be required over the coming quarters to see the required US production growth slowdown materialize.

The US oil rig count has dropped sharply over the past few months, with the recent acceleration helping trigger a large rally in oil prices. Looking at the county level data across the three major oil shale plays (Bakken, Permian and Eagle Ford), the rig cuts initially tracked expectations:

  • the largest rig cuts came from vertical and directional rigs, although this decline is slowing given the low rig count level reached (Exhibit 1);
  • the decline in horizontal rig counts was largest in the Bakken, where well head prices are the lowest given wide differentials to the Coasts (Exhibit 2).

The breakdown of the most recent rig cuts was more surprising however:

  • the Permian horizontal rig count posted a large decline last week, while the play’s overall rig count had held up remarkably well over the past weeks;
  • the decline in the horizontal rig count has so far shown little relationship to either rig or well efficiency at the county level (Exhibits 3 & 4, see Appendix for rig count decline week-over-week and since peak, by play and by well or rig efficiency).

Productivity growth will help offset the rig count decline

While this estimate assumes stable productivity, it has in fact steadily increased both at the well and rig level over the past couple years as we illustrate with the Mckenzie county of the Bakken play

*  *  *

Our bottom up analysis suggests that the decline in the US rig count remains well short of the level required to achieve a sufficient slowdown in US oil production growth to balance the global market, especially if productivity gains and high-grading materialize, as expected.

The rebalancing of the oil market is far from achieved

The past week has featured (1) an improvement in oil prices, locked in to some extent by production hedges, (2) an easing in the funding constraint of E&Ps, and (3) an acceleration in both cost deflation and deleveraging through significant rig cuts. These three shifts in early February and our expectation that the rig count decline observed so far is still short of achieving the required slowdown in US shale production growth suggest that the rebalancing of the oil market is far from achieved.

Recent comments by E&Ps suggest that the drop is so far for non-contracted rigs with the goal of renegotiating rig rates sharply lower, leaving open the potential for a rebound in the US oil rig count.

The recent rally has offered an opportunity for producers to hedge their remaining 2015 oil price exposure. Specifically, CFTC NYMEX WTI Producer short oil positions have increased sharply year-to-date and especially over the past week (with the latest data point released February 6 reflecting the position as of the February 3 close, Exhibit 22).

Beyond the improvement in 2015 cash flow that the recent hedging/cost reduction has achieved, sentiment towards E&Ps has improved on the financing side as well, with five equity raises announced over the past week. And excluding the most dilutive one, these stock issues have been well received by the market, with stocks showing little underperformance relative to the rest of the sector. This reflects the interest in the sector and significant availability of capital sitting on the sidelines looking to invest in shale.

We therefore reiterate our view that lower oil prices will be required over the coming quarters to see the US production growth slowdown materialize. See Lower for longer to keep capital sidelined (January 11, 2015) for details. Further, we reiterate our view that a slower slowdown in US shale oil production would leave risk to our price forecast skewed to the downside as it increases the risk of running out of crude oil storage capacity, requiring a decline to shutdown economics.

 

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Wed, 02/11/2015 - 19:04 | 5773522 Hohum
Hohum's picture

Can demand decline faster than the decline in supply?  Stay tuned.  Same Bat Time, Same Bat Channel!

Wed, 02/11/2015 - 19:16 | 5773567 kaiserhoff
kaiserhoff's picture

The Tylers are finally getting this right. 

The March 2016 future is still over $60.00 and the contract is only 1,000 British barrels so anyone can play.  Those smart enough to open a commodity account should feel minimal stress so far.

Wed, 02/11/2015 - 19:22 | 5773583 Motorhead
Motorhead's picture

Say, didn't Goldman Sachs advise the Greeks a few years ago?

Wed, 02/11/2015 - 19:38 | 5773637 Greenskeeper_Carl
Greenskeeper_Carl's picture

They did indeed. And they will continue to lie. Oil is dropping since we are in a global depression. Even if the rig count goes down, others will still pump as much as they can to make up for the lower price with volume, exacerbating the situation. As long as the Baltic dry index keeps going down, there will be a lower price in oil, no matter what.

Wed, 02/11/2015 - 19:54 | 5773729 new game
new game's picture

a perfect storm highlighting the failed keynsian policies.

luckily no ships will be sailing...

Wed, 02/11/2015 - 20:41 | 5773900 Carl Spackler
Carl Spackler's picture

It is simpler...

The market has not cleared yet because supply still outpaces demand.
Until equilibrium is reached, however that may be, the pricing trend will not change.

Check to the Saudis...it's your move.

Thu, 02/12/2015 - 06:16 | 5774909 supercelld
supercelld's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Wed, 02/11/2015 - 19:05 | 5773531 Eternal Complainer
Eternal Complainer's picture

So Goldman wants us all short?

Wed, 02/11/2015 - 20:12 | 5773806 Burls
Burls's picture

No, GS wants us to think that their deliberately manipulating the price of WTI down to sub-$40.

is really just the natural forces of the market at work.

Wed, 02/11/2015 - 19:05 | 5773534 Rainman
Rainman's picture

Energy stocks getting over crowded with hedgie shorts , most since 2008. Something will get ugly

Wed, 02/11/2015 - 19:07 | 5773543 Stoploss
Stoploss's picture

Will selling gold help out any?

Wed, 02/11/2015 - 19:37 | 5773632 kaiserhoff
kaiserhoff's picture

It would help Jamie and the Lloyd.

Wed, 02/11/2015 - 19:08 | 5773544 yrad
yrad's picture

At what ppg would the oil gods like us to pay? What is "fair?"

Wed, 02/11/2015 - 19:12 | 5773558 HonkyShogun
HonkyShogun's picture

Under normal circumstances or when they're trying to punish Russia?

Wed, 02/11/2015 - 19:39 | 5773642 Hohum
Hohum's picture

Yrad,

I'd say a price that at least covers marginal costs for the drillers.  Sound fair?

Wed, 02/11/2015 - 19:10 | 5773548 JoeySandwiches
JoeySandwiches's picture

This is gonna go on for a while... Rig counts declining causing prices to spike, then oversupply/under demand causes prices to go back down, rig counts drop again, price goes up, oversupply/underdemand again, prices down, etc, etc.

Wed, 02/11/2015 - 19:12 | 5773557 techstrategy
techstrategy's picture

Tyler:  Are you trying to help TBTJ bankrupt shale and other REAL ECONOMY ENERGY PRODUCERS?  Seriously.  Because recycling their stuff without framing the medium and long term supply dynamics is doing just that... aiding and abetting TBTJ linked PE funds using 0% money to take major slices of the value from those who've busted their ass and uprooted their families.  It increasingly seems that ZH itself is focused on the narrative that the world is ending that it is foregoing the intellectual honesty that made it great.  Long term, oil prices will gain with respect to virtually every other asset.  Period.  End of story.  All based upon very fundamental supply and demand econonmics.  All you are doing is helping TBTJ in its quest to get momentum/technical traders to drive down oil prices and create distrees for those with real assets and real options...

Wed, 02/11/2015 - 19:23 | 5773584 JoeySandwiches
JoeySandwiches's picture

But the Too Big To Trust shitheads and the central bankers are the one that forced oil prices up to 100 dollars a barrel through their easy money policies that spurred massive malinvestiment around the world.  I think the story Tyler is trying to get across is that this shit is finally going down, with commodities like copper and oil going south, probably to a level they should have been at without all the meddling.

 

Wed, 02/11/2015 - 19:39 | 5773644 techstrategy
techstrategy's picture

Yet financial assets remain at all time highs, both debt and equity...  The issue is the disconnect between the real economy and financial economy.  All these stories do is let TBTJ use fraudulent financial assets to buy real assets at a discount.  Amazing that the Tyler's don't see it...  TBTJ front runs boom/bust cycles that it engineers via control of the effective money supply.  And all you who fail to question the disconnect while cheer leading the oil takedown that is statistically as big as the great recession are only helping to create self reinforcing momentum to serve the TBTJ bidding.  

Wed, 02/11/2015 - 20:48 | 5773925 Omen IV
Omen IV's picture

"aiding and abetting TBTJ linked PE funds using 0% money to take major slices of the value from those who've busted their ass and uprooted their families"

So true - i went thru this shit in the 80's - 1986 June $9.62 Bbl. - built for six years - two hundred employees - BK Jul 6th 1986  - RIP!      lost it all

no PE then for these kind of oil plays -  leverage was a bitch but the downdraft was so long you couldnt survive even with 100% equity balance sheet - prices for steel went to nothing - rigs stacked near Cushing, Ok seemed like forever

I'm convinced that those who go the route of hard capital asset plays  as apposed to financial assets have such a long time to get up and running and then get paid off that the cycle bites you in the ass sooner or later

financial assets you are out fairly quickly or can hedge

country has real issues taking risk when the management in washington can make macro calls - take down russia for example -  that can destroy an industry as collateral damage 

 

 

 

 

 

 

 

Wed, 02/11/2015 - 19:49 | 5773692 new game
new game's picture

a few economists call this deflation, resulting from the over stimulation you correctly mention. now they need a daily double dose to get the patient normalized. qe 4 by summer or sell off city, folks. JMFO

Wed, 02/11/2015 - 19:29 | 5773587 zeropain
zeropain's picture

Does oil price go up during a depression.  america needs a wake up call,  we are at peek corruption and consumption.  Reality is we have to much.

people are tired of working just to consume.  we need to reflect on a new path.

Wed, 02/11/2015 - 19:30 | 5773609 Robinhood
Robinhood's picture

Don't expect true price discovery with zionist central bank cartel price manipulation!

Thu, 02/12/2015 - 04:48 | 5773811 Anasteus
Anasteus's picture

"Don't Count On Rig Declines To Balance The Oil Market Just Yet"

"But We Stand Ready To Rig Markets To Balance Our Losses"

Wed, 02/11/2015 - 19:42 | 5773652 kowalli
kowalli's picture

rig count will go to 0 as a usa oil output...

Wed, 02/11/2015 - 19:42 | 5773653 Crocodile
Crocodile's picture

The prices will mysteriously find their way up before Summer.Perhaps an infrastructure accident from the boys at Langley or perhaps the refinery strike or perhaps all of the above.  I smell ISIS (AKA: Al-CIAda to the oil rescue).  If you can't get demand, then kill supply. 

 

I wonder how many oil tankers are just dumping their loads into the ocean when no one is looking.

Wed, 02/11/2015 - 20:33 | 5773863 papaswamp
papaswamp's picture

The shale/frack crowd is highly leveraged. The high producing wells will keep producing for the simple fact the producers have to pay their loans. At some point, if the price doesnt rise enough, defaults will become a huge issue. If we arent in the $60 range by April/May.... There will be a flurry of defaults. Some smaller operations before that.

Wed, 02/11/2015 - 21:30 | 5774033 KansasCrude
KansasCrude's picture

In Wichita Eagle today Sandridge Energy the largest driller in Kansas will reduce the number of rigs working in KS. from 28 to 7 effective March 1st.  Eat Me Goldman ***** you rotten SOB's looks like over a 75% reduction at the end of the month.  The production drop will rock our world by end of Q3 in production and lost jobs.  The further down the rabbit hole we go the bigger their lies.

Wed, 02/11/2015 - 22:48 | 5774259 Serfs Up
Serfs Up's picture

Oh, let me see if I have this right.

First, the shale producers can make money at $80, no $70(!), no $50(!!), no we meant $40(!!)  Did we say $40?  We meant $35!

Second, the amount of oil production increase we had from 1,600 rigs will be pretty much the same as at 1,300 rigs.  No we meant 1,200(!).  Did we say 1,200?  We meant 1,000(!!).  

/Wash, rinse, repeat.

//Logic need not apply.

Wed, 02/11/2015 - 23:38 | 5774406 sun tzu
sun tzu's picture

Sandridge is a pimple in the oil producing world's ass. US oil production is up 450,000 bpd since last September according to EIA

Thu, 02/12/2015 - 00:17 | 5774511 exelwood
exelwood's picture

Do as our masters do when they crush a market, buy it. If we could only get them to tell us when they are going short. Fuck Russia, Greece, Iran and China it's about the money, it is always about the money.

Don't get caught up in the 'market' bullshit, when our masters have bought up as much of the plunder they have forced the shoe clerks to sell as they can the 'market' will rebound, rinse repeat. They must feel like the owners of thiose glass ant farms.

Thu, 02/12/2015 - 01:15 | 5774614 NoWayJose
NoWayJose's picture

You always have to read the whole statement from Goldman - the key is not the headline - but rather the trailer. In this case the headline is 'Rig declines not balancing the market' -- but the more important trailer is 'just yet'. So the headline should actually be 'Goldman sees rig declines balancing the market, just not yet."

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