The “Hanging in There” Game for Oil Producers
By EconMatters
9.2 Million Barrels
The latest EIA report shows the US Production rate steady and holding at the 9.2 million barrels per day. And although there have been some anecdotal reports out of Canada at the start of the year on this recent down leg in oil prices, that this has triggered them to shut down production, that at these prices it makes no sense to continue operations; the rest of the beleaguered producers in the oil space are continuing to operate and hold on throwing more bad money after bad money.
Was the Business Case for $40 oil?
These producers aren`t getting it, these producers didn`t get into the business for $40 oil, these projects were started when the floor for WTI was $90 a barrel, with the extreme lows of a solid 5-year timeframe in the low $80s per barrel for oil. No business plan had a model with 16 months of average oil prices in the $45 barrel range. It might just take oil prices going to $25 a barrel for hands to be forced, so somebody will finally make the call, and pull the plug on some of these operations.
It seems everyone is on the hopium alternative reality trip that oil prices will recover at the back of 2016, and if they can just stay in business until then, then they can survive. But they aren`t getting it, the only way prices move higher by enough magnitude where they could actually survive, is if enough US production goes offline permanently, i.e., people go out of business – namely these same beleaguered producers who didn`t get into the business for $45 oil. Thus the Catch – 22 that none of these firms are getting is that sure prices may rise in the future, but not until you go out of business.
The Hopium Trade
You are the problem, taking US Production from 5 million barrels per day to 9.5 million is what is currently unsupportable in the market. The market will not clear and rationalize until you get out of the business for good. Therefore, the hopium trade is all built on a false premise, yeah if prices rise the second half of the year maybe you can last a little longer. But you’re missing the point, the oil market which supported $95 a barrel prices, the reason you got into the business in the first place, was built upon a 5 or 6 million barrel per day US Production number, and not 9.5 million barrels per day.
Therefore, these beleaguered producers who are trying to just hang in there hoping their competition goes by the wayside, don`t realize that everybody is going by the wayside over the 6 million barrels per day threshold for US Production. At least until global demand pics up considerably with a much stronger industrial growth phase with maybe some future CAP EX Development in underperforming regions like India, Africa, Latin America and China.
OPEC Production Stability
In concert with OPEC at least stabilizing production at 32 million barrels per day going forward for the next 5 years, and not trying to gain market share by increasing production at the current rate of the last two years in this current price war for market share. But OPEC has moved from 30 million to 32 million barrels per day during this price collapse in oil prices, and given the downturn in China`s rebalancing campaign, there is no doubt that US Domestic production needs to go out of business for the foreseeable future. In short, for oil prices to recover, US Production needs to drop to at the very least 6 million barrels per day for the market to rationalize in price.
Bank Regulators
This isn`t rocket science, anybody that recently got into the business taking US Domestic production from 6 million barrels per day to over 9 million barrels per day needs to cease operations for good. This isn`t a have your cake and eat it too moment. Oil prices don`t recover until you go out of business, so you are just delaying the inevitable. I cannot believe how stupid people are in the oil industry, 9.2 million barrels per day of US Production is just too much given the last 16 month`s pricing environment in oil markets. US Production needs to drop fast, stop looking around at your neighbor to stop producing, if you got into the business the last 5 years, prices are not recovering until you leave for good.
Economics Lesson
This is economics 101. Any first year economics student could pull the cord on projects that are unprofitable. Obviously these projects weren`t started with $45 oil in the model, so why are they continuing to operate when a banker, regulator, or business manager can look at the charts above, see the economic correlations between the three charts, and realize what needs to happen to rationalize the model back to the oil market being a balanced market. If you believe in the hang in there just a little longer notion, you are in dire need of an economics intervention. This is what the market will do it will give these producers an economics intervention, and send prices down to $25 a barrel, and speed up the decision making process. In essence, make the decision for you Oil Producers!
© EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle
(6 votes)
»
- EconMatters's blog
- Login or register to post comments
- Printer-friendly version
- Send to friend
- advertisements -
Going out of business does not destroy wells. It lowers their basis price.
Oooops.
It is a political prize
Many US oil comp will go out of business next year but US Goverment does not care. They prevent. Many loose their job.
They are totally focused on Russia
They want to bring Russia down..
Only Dollar Dominance matters.
So US Oil comp are fooled and rigged by US Goverment to continue producing to have the utmost negative impact on Russia economy
Do not tell. They are fooled in to believing they serve their country by doing this. Every day they produce 9.2 barrels is a day gained in the politics of US Goverment and Dollar world dominant currency.
They count and value a day very different. Every day is victory in dollar-Oil war.
......Oil prices don`t recover until you go out of business, so you are just delaying the inevitable. I cannot believe how stupid people are in the oil industry, 9.2 million barrels per day of US Production is just too much given the last 16 month`s pricing environment in oil markets. US Production needs to drop fast........,
They are made to believe that world dollar dominance is all - means serving your country - and you have to go broke for that as well...
What is the incentive for someone running an unprofitable company on borrowed money to fire themselves and their friends/family? There is none. This is Common Sense 101.
Additionally, I would question the suggestion that nowhere else in the country or world is there any production that can't survive at current prices.
Sure, oil prices would rebound of huge swaths of the market cut production, but at the moment no one seems to have the incentive. Stable, cash-rich companies and countries think they can force others into bankruptcy and buy firesale assets later. Less stable companies are running on borrowed money and have no incentive to fire themselves before the cash runs out... at least they have a chance if they stay in business. The only cohort that has the right-way incentive to demand a cut in production is investors/owners of stable, cash-rich companies. If they cut production, their stock prices would rise... benefitting investors and executives who own options linked to the stock price. While they would no longer have the opportunity to buy firesale assets at some indeterminate point in the future, they would immediately secure their well-being and boost their own current wealth.
Goddammit back in 1986, when we were grooving to "Burning Fart" by Survivor, oil was $9.00/bbl and I could start a speech at the Ladies' Desk and Derrick Club of Houston with this joke: "You know how to tell when a blonde revenue accountant is having a bad day? She can't find her pencil and a tampon is behind her ear...". Now social attitudes have changed. Young male traders were skinny jeans and are tatted up and have round things in their fucking earlobes and they all have an MBA or an EE or ME or a PE and they talk about "algos" and HFTs and fucking "models". Back in the 80s, when we talked about models we were talking about the girls who would walk around the Cattleguard Restaurant on Smith street in fucking gray see through babydoll gowns whith bunny tail buttons as we talked business with Charter crude oil reps who tried to act professional with a poorly augmented half naked "model" sitting on their lap. Now oil is $32.00/bbl and wooooo-weee the whole world is coming to an end. But the old bastards like me, with our Presidential Rolexes and our Sans-a-belt slacks have seen all of this and know how to survive it and we won't survive it with day-glo orange soccer shoes and flat-brimmed ball caps and hairstyles with a rat tail or a fucking man-bun and horizontal golf shirts, with faux-hawk hair-dos and spiff designer stubble.
Geezer!
I remember 86 well, was in my second year of engineering at the University of Alberta. the year before I worked in the Arctic over the summber with Bueadrill looking for the big one in the Beuafort....but April, just as exams were ending, oil shat itself down to 9 bucks......all the MBA types and ANALists said it was going to 50....wrong again, go figure.
Anyhow, that was the first summer itn eh history of the University of Alberta that engineering students could not find summer work. But you could get great deals on oil derricks, trucks, graders, skidders, dozers, trail bikes, boats, motorhomes....everything, it was all lined up along highway 16 east of Edmonton...all for sale. That was the year I learned that yes, real-estate can and certainly DOES go down as well as up.
But like you you said, we survivied. Slowdowns are good as all the bullshit artists finally get asked to leave. Every industry needs a big enema from time to time, its petroleum's turn this time. Banking's turn is on deck closely followed by government.
Cheers,
Squid
All done deliberately to try to crush Putin. Everything else is collateral damage. Chalky does not work for us.
And all thanks to the House of Saud.
Pretty amazing how cheaply you can sell your product if you don't have to pay taxes and slaves do all the work.
Would you please stop harping on this until my second lease bonus is in my pocket?
And my wife's retirement funds are distributed? Jee wiz.
The reason most of these producers is still producing is to generate cash needed to pay interest on debt. And the debt was acquired because of ZIRP...in short, too good of a deal to pass up. If interest rates had been normal back in the days of $90 oil, a lot of these producers would not have joined the market. So, yes, another "win" for the Fed...not.
What's odd is that the stock prices of the publicly-traded producers seem to imply an oil price of maybe $60. So investors in these companies are also living in a dream world. Yeah...nothing new about that.
But... but... SAUDI ARABIA!!!
Great, a chart guru that knows exactly what is going on in the oil market and they even have free email. What wonderful people.
Very balanced view in my somewhat informed opinion.
However the oil-price drop came about, shale and tar sands oil can never compete with low cost producers like Saudi Arabia (though the medieval Kingdom has problems), Iran at $1 pb I've read, and Russia with production costs in roubles and quite low anyway.
It is not about the cost of production in oil economies. It is about the political/economic cost of holding an oil economy together. For Saudi that is about $70 a bbl. For Iran about $100 a bbl. I have not seen a figure for Russia.
And the crisis is just starting...
yup, thanks a dollar 50 a gallon for all this nonsense courtesy of zirp and misallocation.
may keynsians create life conditions that create chaos and strife for joe sixer...
thanks too to janet and ben.
keep fucking the average person. they don't understand wtf is going on, for sure.
oh, and a sincere thanks to wall street for handling the hy bonds to finance this misallocation via zirp discount window financing dollas. hey the fed has your back, cudos for your savy investing, fees and all.
bonus for all cept the oil workers that just got there truck repossesed. they didn't understand all this. they just took the job and lived life like a ruffneck does.
good luck for a properous year in the oil patch...