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This Is What Needs To Happen For Oil Prices To Stabilize
Submitted by Dan Doyle via OilPrice.com,
On September 10th the EIA reported a production decline in the Lower 48 - essentially shale production - of 208,000 BOPD. That is a staggeringly enormous number, approximately 10 percent of the estimated global over-supply. Additionally, it was a week-over-week number which makes it all the more impressive. Yet it received little attention through the week. Rather, Goldman Sachs was grabbing all the headlines with its $20 call on oil.
This week, I was looking for a possible correction in that number with a zero decline or possibly even a gain (remember, the EIA numbers are estimates). But instead we got another decline of 35,000 BOPD.
Back in June I wrote about the coming decline. Shale oil wells lose a lot of production up front, maybe 70 percent in the first year before tapering off at a 5 to 10 percent annual decline over the next few years until leveling off for the life of the well - maybe 20 years or so out. You can think of it as a slope. Once you crest it, the drop is precipitous and picks up speed before finding a bottom. We are undoubtedly now racing down that slope.
To date, we have lost about 500,000 BOPD in the Lower 48. We will lose that again before the year is out. Pundits will claim otherwise, suggesting that oil in the 50’s or 60‘s will spur activity. But if that activity is in drilling, we won’t see any effect for a half a year or so. If it is in fracking drilled but uncompleted wells (“DUC’s”), that won’t mean much either over time. DUC’s have been the story of 2015 though they have had little effect on stopping the declines being put in.
Back when the onslaught began, which I mark as Thanksgiving Day 2014—when OPEC declined to cut—Wall Street began talking of shale as being a switch; as in you can turn it on and off. Well, in the perspective of a remote offshore project and the 10 years that it takes to bear fruit, then the answer is yes. But shale is not a switch when it comes to controlling commodity prices, which are much more impatient. It took a full 6 to 7 months for the falling rig count to cast a shadow over production declines. And even then the initial declines were shallow, more of a cresting action really. So, going forward, we may have a new metric. That is, a sudden decline in rigs will take 6 to 9 months to show up in production in any meaningful way.
We also still have a somewhat uneducated media that continues to shrug off its homework. We’re about a year into this bear market and oil has been covered to death on the financial news but it is still being misreported. As I mentioned above, the thought that $60 causes a switch to be thrown is wrong.
Operators are battered and bruised. Sensible ones like EOG are holding onto their money. Others like Pioneer are thumping their chests claiming they can drill anywhere any time on their better prospects (but what company is going to claim holding mediocre acreage?). Full disclosure: I own stock in both, but should I stumble upon a few bucks (I run a frack company so these days I’m not counting on it) it would go to EOG.
But, for the most part, very few operators are going to run headlong into a drilling program on a modest recovery. There is also the matter of their banks. They won’t let them. The shine is officially off shale in the debt markets. There are the private equity folks and other bottom feeders that are finding their way into the market but for the most part they are spending money on distressed assets, not new oil and gas wells.
Then there are the service companies. If you imagine your worst enemy, someone that you wanted to see suffer some punishment, then let them run a service company right now.
When the work stops so does the income. All of it. That puts you in the position of watching receivables, which you begin staring at very, very closely, waiting for the cracks to develop. Back in the good old days—2012 or so—a single stage on a shale job was being priced at $125,000 or more. The money being made was giddy. In 2014, that same stage was running around $75,000+ because of heightened competition. As of September 2015, that same stage is now down into the $30,000’s. That’s underwater. Smaller pressure pumper’s are quietly accusing the goliaths of dumping. Wall Street pundits would have you believe that there are new efficiencies being uncovered, but the fact is that those who can are jostling for (a) market share and (b) are using their weight to crush and snuff out the newbies that have come on in recent years with all that private equity money.
When prices come back and operators are chomping at the bit to get back to work, idled service equipment will have to be brought back on-line, which is costly and time consuming. You can’t just turn a key to restart a mothballed blender or frac pump. Idled time always translates into repairs. This is when all the weak points in your equipment are suddenly and unexpectedly exposed. New crews will have to be hired and retrained because the old crews have either moved onto other industries under mass layoffs or will move on once their 6 months of unemployment benefits run out. It is time consuming to hire and re-train. And these are only some of the challenges, the biggest being the cost of ramping up without cash flow to rely on.
Consolidations in service providers are now well underway. We’ve seen Halliburton and Baker Hughes but that was pre-downturn. There’s a few other M&A deals but for the most part it has been a story of closings and consolidations. North American frack camps are being closed at an alarming rate. Equipment that could only be bought new last year is now plentiful at Richie Brother’s auctions. Frack sand trailers are parked in front yards and lots all across American’s oil and gas plays. Service yards that are normally empty in good times are stuffed right up to the chain link fence with trucks, trailers, pickups and assorted equipment.
So much has been made of new efficiencies in the media but there really aren’t any “new” efficiencies other than changes in frack designs, which continue to call for more sand per stage, closer spacing’s between stages (meaning more fracks per well), and some changes in additive chemistry. Sand pricing has come way down as have chemicals, but labor remains where it was. You still need the same number of crew on a well site. No one has come up with robotics to set trucks and hammer in the iron and hoses that connect them. Health insurance is going up. Vehicle, inland marine and general liability insurance are range-bound to up. Taxes don’t go away and then there’s debt. And that’s plentiful and likely increasing. There are some economies these days but the efficiency story should be ignored for the most part.
That’s just the United States. Then there’s the rest of the world. Truthfully, I don’t know what the hell is going on in the Saudi oilfields, but I’m assuming Ed Morse at Citibank does. Morse was the analyst who called the top. A few weeks ago he stated that Saudi production could go no higher. That was big and in my mind it likely also marked the bottom. The Saudis chose not to cut last November, restated their 30mm BOPD OPEC objective, then began pumping like hell. They did announce that a 200,000 BOPD increase would be coming and maybe it has, but if they can go no higher, then global production has plateaued. Factor in the States, and other areas in decline, and I can’t see many traders and speculators lining up on the short side when the IEA is seeing oil demand going above 96 MBPD next year and the EIA is throwing out staggering week-over-week declines.
But I’ve been wrong on this count before. I didn’t see the second leg down this summer and Goldman did. But this $20 bearish position is over-baked. It’s also too reliant on inventory numbers.
Inventories will remain high in some parts of the world and will be drawn down in others. But overall, rising global demand and shrinking U.S. production (and other areas as well) will begin to eat away at inventory. It just requires some patience. And markets won’t wait to adjust pricing until we hit a balance. There will be some foreshadowing in oil prices here.
Each of the 3 stages needed to move to a sustainable price have to be given time to play out. The rig count story has been told with a brutally fast 60 percent drop. Meaningful production declines are on. Next will be inventory draw downs; in that order. As to the latter, we’re just beginning to see the effects of the rig count. Cushing was down 2 million bbls this week, so no tank topping there. And non-strategic U.S. storage is off 30 million bbls from its high. That’s not even 10 percent but just wait. Large drawdowns will be here sooner than predicted.
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Another 3.0 earthquake under Cushing today. Drawdown might happen faster than people think.
Oil prices are where they are because it's part of the greater plan. ISIS is selling oil at $20 a barrel to Europe, which you can find written about in the MSM. Nobody talks about this, as if it has nothing to do with low prices. ISIS can do this forever, since they didn't have to invest in those wells, they took them by force.
So forget about higher oil prices, it's not the plan, at least not for a LONG time.
Maybe the Saudi's (and Iran?) just want to sell as much oil as possible in the near future because it's going to become nearly worthless for anything but chemical mfg. feedstock in the not too distant future?
NASA knew within one year that Pons and Flieschman were onto to something big, but kept that knowledge a secret for more than 15 years according to many sources (even as P&F were being ridiculed and drumed out of academia). What else is being hidden from the public 20+ years on?
It could be that today. Rossi is just the tip of the LENR iceberg. If this new energy source (formerly referred to as "Cold Fusion") develops rapidly enough, it could spell the end of the "oil age" and drive a world economic recovery in the process.
Further, large scale transmutation of elements via CANR (LENR) ...fulfilling a dream of alchemists... could cause Gold and/or Silver to be as common as base metals.
So, what is the real reason oil is being dumped? Why do gold and silver keep getting dumped on the PM markets? Is there an alternate explaination?
Does this mean Texas and Oklahoma start convulsing?
https://www.youtube.com/watch?v=ZvuzNBS2C50
I have no problem with the petro dollar disappearing. Price oil in all currencies and gold. Bring it on, let's go.
every week I re-up my short put positions
GS 20$ call on oil = Goldman Sachs will buy all of your oil for 45$.
Nope. GS isn't that short term minded. They will call for $20 and let the dumb money come in until it gets down to around $30 - $35. Then they will buy all of your oil while harping on how "right they were" on their $20 call. Short until then.
When the bankers start calling for $20 oil, then it's time to close the shorts, just like last March when WTI was $43 and they called for $20. WTI ended up at $60. When everyone shut their mouths, WTI dropped back to $37.
Or ... a recession (see also China) could see demand actually dropping, and it requiring even a bigger supply drop to impact prices.
Michael Ruppert's documentary COLLAPSE is well worth watching if you haven't already.
The barrel oil could reach $10 or $20 even if all the fracking collapses causing epidemic of apoplexy amongst empty talking heads. For one good reason namely that very few acknowledge the true reason for the oil price collapse. I mean the true reason, which was repeatedly stated by Saudis, Russians and Chinese.
All of them say this is the demand collapse stupid. And the demand collapses because of rampant inequality in societies throughout the world since people are loosing income, paying off the ever-increasing debt and cut the investments and expenses to the bone or desperately engage in gambling on stocks and loose big time. That’s a secular trend that is increasing difficult to hide under financial shenanigans.
That's why Saudis are trying to suppress fracking and tar sands not to completely lose influence on the US and World market and their benchmarks after they lost Chinese and Indian markets to Russians and Iran as a part of trade dedollarization efforts which is exemplified by opening of the first Chinese oil market denominated in Yuan just recently and that includes Saudis’ participation and further collapse of petrodollar.
After next step, which would be development of Chinese investment banking to provide margin loans for oil contracts and we will kiss petrodollar dominance bye bye.
As far as fracking itself is concerned, the industry is extremely over-leveraged, massively loosing money as we speak regardless of any technological improvements. We see this desperation with unsound mining practices technically maximizing production over existing rigs, shortening their longevity to pay bondholders and survive another day.
That would explain steep drop of the production or a cascade that will show up in statistics even more from October on. As soon as interest rates normalize (if ever) or banks will not be able to sell their junk bonds (it’s already happens), they all will go bankrupt if Saudis keep the price low and they will (discounting like crazy) for their own survival. We are just waiting for all the $90 hedges to expire and that’s will be it or another massive FED bailout, this time it would be junk bond holders since their market is dead now. May be that’s why Fed did not raise rates yet.
As a result of geopolitical tension between US and Russia, Saudis are step by step moving towards accommodation with the eastern powers to balance Iran support by Russia and China.
Just recently the number two sheik, defense minister of Saudi Arabia is in S. Petersburg, Russia talking about energy and military cooperation and perhaps purchasing weapons. It is clear political shift indicating much more independent new monarch who rebuked Obama just few weeks ago and without clearance from Washington attacked Iranian interests in Yemen.
Saudis even substantially reduced purchasing of US treasuries while China is selling en mass, a historical development challenging of petrodollar. Saudis even started selling bonds to cover budget deficit due to their currency peg which will break soon as in China mostly due to war spending and invasion of Yemen, since one cannot wage a war without freely printing money.
One way or another with big oil companies abandonment of the projects, the future of the shale industry is bleak and probably will be with marginal importance in the US. Now they buying them off on the cheap and shutting them down waiting for better times. Already fracking has been almost abandoned in Europe since nobody want to challenge Saudis.
On the Oil situation’s true impact on the real economy:
https://contrarianopinion.wordpress.com/economy-update/
Very interesting take on the so-called shale revolution and its demise posted already over 9 months ago I found at:
https://sostratusworks.wordpress.com/2015/01/15/the-shale-game/
You hit all the main points correctly, but could you PLEASE learn to use English grammar? It's teeth-grinding, going through all of your improperly conjugated verbs.
Apologies for the rant if English is not your native language. If that is the case, I'd be interested in knowing what is. I like to learn to recognize writers' origins by their typical misuse of the language.
I don't see this "rising global demand" that the author speaks about. Europe is going full retard in renewables and efficiencies, China is crashing with the rest of the EM and even in the US mileages are up... so where exactly this "rising global demand" is coming from again?
From a historical cyclical perspective, scroll down to this model shown on 2015.08.21 [XOI.X], which has performed well in the past, suggesting a bottom in oil in the mid-October 2015 time frame.
With any luck, they'll never stabilize again. At least in terms of the definition that the current looters mean when they use the word.
There couldn't possibly be any wishful thinking in this article? Because the author is a fracker? No! Of course not, how silly!
If ther Saudis let their women drive I am sure capacity would grow.
No matter what they say the only ones still drilling are doing it to hold acerage.
I note that what is labeled on the chart as OPEC production is actually SAUDI production......I stopped reading at that point,
A very nice supply-side analysis. But at least half the problem is demand. Now that major oil producers have been thrown into dire straits and China's galloping growth has begun to fail, all that supply hits a wall where nobody can afford to buy it. China has stopped building bridges to nowhere and cities for nobody. ALL commodity prices have collapsed, and when all's said and done, oil is a commodity.
You're not going to see world commodity demand go over the 2008 peaks again. Ever. The Limits To Growth have been reached. It's all down from here. The only question is, "how far?"
Desperately delusional.
he thinks the global economy is growing, What is his take when he finally gets into his head that the global demand will fall below 80 mbpd before any kind of pick up, anemic or otherwise
This isn't how these things happen. Prices of commodities "stabilize" and turn up again long before any of the fundamental "causes" become nicely visible to all and sundry. Besides, the prices of commodities are not merely a function of the supply of and demand for commodities themselves. They are also a function of the amount of money in the economy. The supply of US dollars has nearly quadrupled since 2000, so it is to be expected that the lower range of oil prices is pretty close - in fact, we are probably right there.