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Has The E&P Industry Lost Touch With Reality?
Submitted by Arthur Berman via OilPrice.com,
The U.S. rig count increased by 19 this week as oil prices dropped below $48 per barrel – the latest sign that the E&P industry is out of touch with reality.

Getty Images from The New York Times (July 26, 2015)
The last time the rig count increased this much was the week ending August 8, 2014 when WTI was $98 and Brent was $103 per barrel.
What are they thinking?
In fairness, the contracts to add more rigs were probably signed in May and June when WTI prices were around $60 per barrel (Figure 1) and some felt that a bottom had been found, left behind in January through March, and that prices would continue to increase.
Figure 1. Daily WTI crude oil prices, January 2-July 24, 2015. Source: EIA and NYMEX futures prices (July 21-24).
(click image to enlarge)
Even then, however, the fundamentals of supply, demand and inventories pointed toward lower prices–and still, companies decided to add rigs.
In mid-May, I wrote in a post called “Oil Prices Will Fall: A Lesson in Gravity”,
“The data so far says that the problem that moved prices to almost $40 per barrel in January has only gotten worse. That means that recent gains may vanish and old lows might be replaced by lower lows.”
In mid-June, I wrote in a post called “For Oil Price, Bad Is The New Good”,
“Right now, oil prices are profoundly out of balance with fundamentals. Look for a correction.”
Oil prices began falling in early July and fell another 6% last week. Some of that was because of the Iran nuclear deal, the Greek debt crisis and the drop in Chinese stock markets. But everyone knew that the first two were coming, and there were plenty of warnings about the Chinese stock exchanges long before July.
The likelihood of lower oil prices should not have been a surprise to anyone.
Of the 19 rigs added this week, 12 were for horizontal wells (Figure 2) and 7 of those were in the Bakken, Eagle Ford and Permian plays that account for most of the tight oil production in the U.S.

Figure 2. Rig count change table for horizontal wells. Source: Baker-Hughes and Labyrinth Consulting Services, Inc.
Horizontal shale gas plays added 8 rigs. That is as out-of-touch as the tight oil rig additions since gas prices averaged only $2.75 in the second quarter of 2015 (Figure 3) and are almost half of what they were in the first quarter of 2014.
Figure 3. Henry Hub natural gas daily prices and quarterly average prices. Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
The U.S. E&P industry is really good at spending other people’s money to increase production. It doesn’t matter if there is a market for the oil and gas. As long as the capital keeps flowing, they will do what they do best.
Don’t be distracted by the noisy chatter about savings through efficiency or re-fracking. Just look at the income statements and balance sheets from first quarter and it’s pretty clear that most companies are hemorrhaging cash at these prices. Second quarter is likely to be worse and it gets uglier when credit is re-determined in Q3, hedges expire, and reserves are written down after Q4.
This is an industry in crisis despite the talk about showing OPEC a thing or two about American ingenuity. Increasing drilling when you’re losing money and prices are falling doesn’t sound very ingenious to anyone.
Watch for the markets to agree as oil prices fall lower in coming weeks.
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It is advisable to define an abbreviation before engaging in a lengthy discussion about it.
I suppose "E" stands for "Energy" but I'm guessing and I shouldn't have to.
Of course they're drilling more with the price down, this is the new economy.
E &P = Exploration & Production I believe.
Thanks for that.
i have only one thing to say. CRUDEPRICE.com
My first thought: "Extend & Pretend" is an industry now?
As a matter of national defense Energy companies have been enrolled on Obama Care. Let the market Shennaigans begin.
This is a concerted effort to do what? Really, I do not believe in coincidences and even less so when they defy common sense. This is like the coyote grabbing the anvil before dropping from the cliff.
So what reason is behind already stretched necks stretching even further? Is the US thinking there will be limited oil shipping in the near future?
Conspiracies, a beautiful thing.
I'm all for conspiracy theories, but this is just the same old conspiracy between greed and stupidity.
If someone give me money, I'm going to spend it.
The Fed has been cranking out free money for years, and will continue to do so, because it has no choice.
The money goes to banks, who have to buy something with it, anything, as long as it doesn't go into new loans for small people, who won't borrow it anyway, because they are already too endebted.
So, they buy junk bonds, speifically energy HY, because risk is no problem when you're using someone else's money. Oh, yeah, and the HY bond sector is so bloated and unstable it, like so many other distended and unbalanced sectors of our economy, can alone take everything else down with it if it collapses.
So, if there is any conspiracy, it is a conspiracy to keep the charade going (by propping up the shale sector with junk bonds in a falling oil price regime) just a little longer- why? Because there are no other options.
What choice do they have but to pump more oil? They are all billions in debt. Pump oil and go bankrupt later or stop pumping oil and go bankrupt now.
BandGap - This is a concerted effort to do what?
Good question. Imo, to cushion the ponzi collapse and a tsunami of $s coming home, they want a temporary fire sale on oil. They did this the last time with the North Slope and the North Sea oil arriving jit. Same reason they just did the deal with Iran. If you are driving the bus, its easy to make money because you know where its going.
When the system seizes up, the Steve Liesmans of the world will be saying 'See, there's no inflation. See, you can still drive your car around'. Its all about Central Planning to maintain dollar confidence.
In a financial system crash, the misallocation to oil is likely to stop due to problems like massive margin calls. If there is a recovery, oil is likely to shoot back up because the new production will not be there.
Of the infinite number of mal-investments made .... when you deviate from strict adherence to Capitalist orthodoxy .... this is one of millions .... so what .... everything becomes skewed under socialism ?
Hamm handed E& P.
Mike Milken and Drexel Lambert made the fortunes of those early riders of energy games : Carl Icahn, T bone Pickens.
Name me and industry where technology hasn't driven down costs! Basic Supply and Demand economics works well. When you add the government to healthcare and finance is when it goes VERY WRONG. The criminal bankers should have had their ivory tower destroyed. Instead the peasanta were gutted on alter of cronyism. Alas....the final act of the crony bankers has yet to play. Banking and investing is not social losses and private profit! Oil should have been $30-$35 Barrel all along! Anything above that was crooked bankers corning the commodities market
I upvoted you .... but, let's go to the banker's bosses .... the elected marxist statist filth ! When people complain of the Joos and the bankers .... and the statist filth doesn't even get mentioned .... I hear an apology for the statist filth ?
to your point technology has driven down the price of gold and silver.
I got an image in mind of the Aztec priests doing their duty of human sacrifice. The worse it got, the more the blood ran down the pyramids. I guess the history lesson is that when most don't know what to do, more and more of the same behavior is to be expected...until...
I see your point venturen but this meme about the "new technology" of restimulating wells that the industry is touting is a big joke. If oil should have been 30-35 all along where are all of these shale companies profits? Even at 100 a barrel the industry was at least 80 billion in debt and now it sits at somewhere over 200 billion. We are 8 years into this and with the decline rates it is a front loaded investment, where are the profits? I have a feeling we are going to pay dearly for $35 oil.
Lol ... it is pump or die. Ask the Saudis.
True. And some of those wells are economical at much lower prices than today's. ZH would do better to identify which companies are adding rigs. Not all are encumbered by huge debt.
http://www.zerohedge.com/news/2015-07-27/who-blame-global-oil-supply-glut-charts-hint-not-iran
US oil companies are caught in the cross fire between the US and Russia. The US's arab friends are pumping the $hit out of their fields...trying to bankrupt Russia.
Can't we all just get along?
They don't have to pay taxes, and they can carry the losses so its all good... ;)
They got some sweet accounting loopholes.
Just imagine if this money was spent on infrastructure instead of this ponzi. Even with all of the explanations for this on this thread there is still something wrong about the whole shale boom, and why is SA signing hundreds of millions in deals with Russia and then continuing to drown the market? Why are Iraq and SA the ones to sink the shale ponzi (or potentially)? Low oil prices are not going to hurt Russia much because the situation will inevitably reverse itself and possibly quite severely. Nothing makes sense.
its got nothing to do with oil prices at this point-and everything to do with the crisis of "collateral shortage" affecting the credit markets.
Each barrel of oil output represents collateral-which by the way -the BANKS will value as they see fit relative to their derivative collateral needs.
As the remainder of good qaulity economic output is declining annually worldwide, oil and gas output will be ratcheted up to fill the gap.
Cheap credit has screwed the world up royally. Banks should have little to no say in these matters.