Oil, wow, WTF happened to all of the oil bugs on this site?

[Cardboard]

Honestly, I am scratching my head on this week EIA's numbers.

 

Not only are they not matching at all with inventory numbers from API while they were relatively close in prior weeks but, the increase in production from Lower 48 States is incredible.

 

The agency itself has stated that oil production from shale was coming down for January and February by over 100,000 barrels per month. I mean, where is the offset coming from?

 

The other fact in their report that is worth mentioning is the once again Adjustment number or Unaccounted for crude oil: 459,000 barrels a day this week and 338,000 barrels a day last week. The only two numbers that can be out of whack to necessitate such adjustment are Lower 48 States production and Crude oil input to refineries (doubts on that being so difficult to estimate with all the regulations on refineries). Alaska production is very accurate. Imports and exports require shipping permits.

 

So why not stating Lower 48 States production at what they have estimated plus or minus that Adjustment to arrive at a more accurate estimate since the other numbers are pretty much bang on?

 

It would equate more closely to Lower 48 States production shipped. Of course, producers have tanks in the field but, IMO the EIA has very little insight into that numbers and that is basically what that fudge factor truly represents. 459,000 barrels a day is 3.2 million barrels over the week which is a pretty large number when you consider that people go crazy about inventories in storage tanks going up or down from week to week from a number of similar magnitude.

 

Cardboard

[Cardboard]

https://www.rt.com/business/328895-transneft-russia-oil-exports/

 

If these export numbers come to fruition that would cut by about half the estimated current surplus. Add to this the estimated reduction of 600,000 barrels a day of U.S. production and the glut is gone.

 

The reduction in the rest of the world: North Sea, Brazil, Mexico and elsewhere would cover for any increase in Iranian oil. And the way these guys are cheating on most if not all U.N. resolutions, I have no doubt that the amount of oil "leakage" through Iraq, which is essentially under their control with Shiite leadership in Bagdad and boots on the ground, is not insignificant.

 

And all of this assume 0 demand growth in 2016 which is not the forecast from anyone.

 

Cardboard

[Hawks]

Cardboard: "Scratching my head" re the EIA numbers was my first thought too, but your insight confirms it. Thanks for your reply.

In general terms, what concerns me is the media continually mentioning the large surplus of global oil stocks with no statistical evidence re numbers related to global supply, demand, oil depletion and any mention of missile attacks on S.A. oilfields in the Yemen war, just to mention a few factors. As a retired college business teacher, if my students presented such an argument without complete factual data, they would be given a F.

In The Big Short, facts didn't seem to matter to most who were wheeling and dealing, nor the public in general, until a few individuals checked the facts and they didn't add up.

2016 is going to be a very interesting year for crude oil and the consensus viewpoint. Call me skeptical.

[SharperDingaan]

Couple of things to keep in mind.

 

For a firm to keep pumping - the net sale price has to exceed the cash lifting + transport costs. When it doesn't - the firm shuts in ALL production, & buys oil out of the market to meet its existing hedge obligations. If the local price does not change; the result is reduced supply & additional demand met from storage. We know that shut-ins are occurring, and the rate is accelerating.

 

We are experiencing the largest mass migration of refugees since WWII, simultaneous to a war in the ME - yet prices are at record lows, & reflecting no risk premium? We know from both Gulf War conflicts that prices should rise. It is very hard to see how the EIA numbers, and mass pablum over the ME, can be anything but deliberate manipulation.

 

We put it to you that the market actually has a rapidly growing excess demand, that so far - has been met by producers pumping flat out. We don't think producers have enough left to cover the new shut-ins and forced hedge covering; and the ability to hide it - is rapidly declining. 

 

SD

 

 

[Cardboard]

Even the Baker Hughes rig count report looks bizarre this week... I need a vacation!

 

14 rigs were removed in the U.S. but, only 1 for oil while there was 3 removed in the Eagle Ford, 7 in the Permian and 2 in the Williston bassin. Normally, these are all oil rigs in these 3 major oil areas. Almost looks like the rig numbers for gas vs oil have been entered in the wrong spot.

 

Unfortunately, Canada has added a lot of rigs for the second week in a row with 39 for oil. I know this is part of the seasonality but, right now any add hurts.

 

Another interesting thing about 2016 oil demand. We have had a very significant effect from El Nino. Now forecasters are saying that we have something like an 89% chance following such strong El Nino to have La Nina which is the exact opposite.

 

http://www.cnbc.com/2016/01/14/la-nina-could-happen-3-months-after-el-nino-ends-socgen.html

 

Cardboard

[nafregnum]

 

For a firm to keep pumping - the net sale price has to exceed the cash lifting + transport costs. When it doesn't - the firm shuts in ALL production, & buys oil out of the market to meet its existing hedge obligations. If the local price does not change; the result is reduced supply & additional demand met from storage. We know that shut-ins are occurring, and the rate is accelerating.

 

 

Thanks SD, I just learned something new: oil companies can "buy" from the market to fulfill their hedge obligations.  That would be a very profitable activity for companies with high-dollar long term hedges right now, a lot less work than pumping it out of their own wells, right?  So wouldn't that kind of activity resolve the oversupply problem twice as fast as if every operator were pumping? 

 

So, to attempt second level thinking: If such activity accelerates an oil price pop to say $45 then will all the "nearly dead and dying" firms just snatch up hedges at $45 where they're barely breaking even and then hope for oil to drop to $30 again as soon as everybody else pops the cap off their uncompleted wells and starts producing again, bringing on glut 2.0, 3.0, etc?  If that played out, would the imperiled but intelligent firms just turn into hedge-feeding zombies instead of going bankrupt?  Then: Would these zombies hasten end for the remaining unhedged players, or could it create a cycle of underproduction that leads back to $60 or $70 oil.  Feels like a game of zombie musical chairs ...

 

If many firms are shutting in, does that mean we're reaching the end of the oilpocalypse?  I'm long PWE, AXAS, AR, LNG, CBI and DNOW (and a tiny bit of BXE and XCO) and I'm telling myself it'd be safer to hold or buy more than to sell at these levels.  Maybe it's time to just go fishing and spend time in nature while the oilpocalypse plays out.  Or maybe it's time for me to learn how to hedge against further downside using options.

 

Thanks to Cardboard too, for your helpful posts.

 

[SharperDingaan]

Nobody wants to make money this way; once a producer closes, there is a very high chance they aren’t coming back. A producing well is just a hole in the ground; easy to price its production out of the collection networks. 

 

Assume you produce 10,000 bbl/day of heavy oil at a cash cost of $28/bbl. To avoid shut-down you sell the entire 10,000 bbl/day 6 months forward at $30/bbl. 20K/day (30-28)*10000 profit to cover overhead and interest, and 6 months for markets to get better. Survival.

 

Price falls to $5/bbl. Local industry recognizes they have to change practices.

The firm shuts down for 6 months; employees collect unemployment insurance, & hopefully most return when it is over. It buys a physical 10,000 bbl/day of heavy oil out of the market to meet its hedge, & uses the CF to repay debt. 250K/day profit (30-5)*10000, a 20,000 bbl/day drain on inventory, and EI paying its employees - forces the local price back up. Lots of ways to do it – and the more participants, the more certain it becomes.

 

To ensure re-opening, the heavy-oil producer is incentivized to buy 10,000 bbl/day of local light crude for delivery starting in 6 months. When they re-open in 6 months they can either resell the light crude directly, or blend it with their own production to ensure they can sell it at a profit.

 

So what?

 

Right now, a secure and significant supply of local light oil is extremely valuable to a heavy oil producer - It could even be the difference between life and death. You get it via 1) forwards, 2) royalty, or 3) the buyout of a light oil producer.

 

Most would argue that in Alberta - light oil is now a strategic resource, and highly likely to enjoy government protection. Deals will get done (at higher prices), there will be farm-ins (for future consideration), & there will be sweetheart drilling rates (to keep crews).

 

Ya dance with the one that brung ya, and ya all work it out.

Ya all don’t have to come back.

 

SD

 

[Cardboard]

https://www.iaea.org/newscenter/statements/iaea-director-general%E2%80%99s-statement-iran

 

Iran will now come back on-line officially. That should not be news to the market: sell the rumour, buy the news, but who knows since oil is certainly in a nasty bear market.

 

The additional amount that will be shipped and when is also a question mark that the market will want answered. They need to book vessels (how many are available and right away?), insurance and get all the letters of credits and everything in order with the banks. How much they have available right away remains highly uncertain. They claim 500,000 barrels a day additional but, I find the news a week or two ago that Iraq reducing production by 200,000 barrels a day this year to be more than a coincidence. Leakage into Iraq during sanctions has certainly occurred since even ISIS is able to sell its oil!!!

 

Cardboard

[Cardboard]

Regarding oil hedges and futures, I read this week that non-commercial net long/short position is at an all time low. This was a very reliable indicator both in mid-March and late-August to coincide with the start of very powerful short covering rallies. If somebody can find that chart that would be great but, I have been unsuccessful this morning.

 

Related to all of this, who is selling these contracts to the producers? After all, the only user of crude oil in this world are refineries. These guys at the moment are likely eager to enter into future contracts with producers at these $30 prices while producers are likely hesitant to sell out future production a what is a very low price: very low incentive to protect future cash flows at that level or hedging to guarantee a loss when you factor in all costs?

 

So they have to turn to speculators or non-commercials willing to make that commitment. Since oil is coming down everyday (very consistently, no rally) and with the amount of leverage in these instruments, the profits for speculators are just too good to pass up. To give you an idea, just look at DWTI or a 3X oil bear ETN which is up 4 times since early November and with futures this is multiples of that.

 

So this is building into a major coiled spring until fear of a short covering rally takes hold. Astronomical profits in the futures market can turn into astronomical losses. What could trigger the next one is unknown but, speculation is very high in this market right now.

 

Cardboard

 

[SharperDingaan]

Short answer is speculators. Expectation that producers either don’t shut-in (meet from physical sold at a cheap spot), or that the speculator 1) can buy-in the paper oil at below their sale price, or 2) deliver physical from private inventory. This is their business.

 

Very different in the WCSB. It’s a small world, producers have much more sway, and the provinces have much more control. Put the collective mind to it, and the spring is way more effective.

 

Ultimately the WCSB needs to permanently remove the discount via a high capacity pipeline to the Pacific - pumping cleaner crude. The quickest way is to shut-in/repurpose the worst offenders, blend with lighter crude, and construct a 2nd high capacity line in the existing TCP corridor. Obviously not a quick fix, & perhaps not this exact fix - but something not that far off.

 

SD

 

[SharperDingaan]

And so it begins ....

 

http://www.telegraph.co.uk/finance/oilprices/12104064/Iran-sanctions-Middle-East-stock-markets-crash-as-Tehran-enters-oil-war.html

The Qatar stock exchange, fell 7.2pc to close at 8,527.75, and the Abu Dhabi Securities Exchange shed 4.24pc to finish at 3,787.4. The Kuwait market returned to levels not seen since May 2004 as it slid 3.2pc lower, while smaller markets in Oman and Bahrain dropped 3.2pc and 0.4pc respectively.

 

The Islamic Republic has vowed to return its oil production to pre-sanction levels that stood above 3m barrels a day. “The oil ministry, by ordering companies to boost production and oil terminals to be ready, kicked off today the plan to increase Iran’s crude exports by 500,000 barrels,”

 

SD

 

[goldfinger]

And so it begins ....

 

http://www.telegraph.co.uk/finance/oilprices/12104064/Iran-sanctions-Middle-East-stock-markets-crash-as-Tehran-enters-oil-war.html

The Qatar stock exchange, fell 7.2pc to close at 8,527.75, and the Abu Dhabi Securities Exchange shed 4.24pc to finish at 3,787.4. The Kuwait market returned to levels not seen since May 2004 as it slid 3.2pc lower, while smaller markets in Oman and Bahrain dropped 3.2pc and 0.4pc respectively.

 

The Islamic Republic has vowed to return its oil production to pre-sanction levels that stood above 3m barrels a day. “The oil ministry, by ordering companies to boost production and oil terminals to be ready, kicked off today the plan to increase Iran’s crude exports by 500,000 barrels,”

 

SD

It was known before. Besides Iran probably always sold its oil to someone... Aren't we close to the point of maximum pessimism?

[SharperDingaan]

Not even close. They intend to go to 3M bbl/day from the existing 500K, which was already being supplied.

 

SD

[Cardboard]

I think it is getting out of hand too. March Brent at $27.88 is now selling almost a full 1$ below February WTI. Some of these guys will face a lot of hardship and I feel good about it.

 

Now if the 5th fleet could only go back home and let the bombs fly.

 

Cardboard

[AzCactus]

I think it is getting out of hand too. March Brent at $27.88 is now selling almost a full 1$ below February WTI. Some of these guys will face a lot of hardship and I feel good about it.

 

Now if the 5th fleet could only go back home and let the bombs fly.

 

Cardboard

 

Cardboard, what stocks or how are you planning to benefit from the oil situation long term ?

[goldfinger]

Not even close. They intend to go to 3M bbl/day from the existing 500K, which was already being supplied.

 

SD

Iranian oil production has been on the decline for a long time and mismanaged. It will take them a while to ramp up and at these prices, how are they attracting investments? This market is now well into irrational territory, below almost any marginal cost of production of new barrels anywhere in the world.

It may want to see confirmation of some additional supply disruption - it may be surprised by the speed at which it will happen now...

[Cardboard]

I don't know if I will benefit at all long term with my E&P's. Nobody is making money at these prices. Lifting costs are below current prices but, that means nothing long term since it costs a lot more than that to maintain production. I mentioned PWT, BXE and TBE.DB before. They may not make it...

 

Small caps in the Alberta service sector look a lot more safe and still ultra cheap IMO.

 

Cardboard

[goldfinger]

I don't know if I will benefit at all long term with my E&P's. Nobody is making money at these prices. Lifting costs are below current prices but, that means nothing long term since it costs a lot more than that to maintain production. I mentioned PWT, BXE and TBE.DB before. They may not make it...

 

Small caps in the Alberta service sector look a lot more safe and still ultra cheap IMO.

 

Cardboard

 

Bellatrix is 70% Natural Gas...

Penn West even with 200/300M value for most non core assets and 50K/flowing barrel for core production still exceeds 1CAD/share (net of debt).

At 1.45CAD/$ exchange rate they can still sell oil at 40/45CAD - not enough to maintain production but enough to survive for now...

 

Do you envision oil staying below 40$ for all of 2016?

[Hawks]

Would like to talk about actual stats re world oil supply, demand, and depletion rates. I know this is a radical idea because I see very little of this in the mass media today. So, it must be heretical to do so.  This info has been mentioned previously in an attachment from Islamorada Investment Management. see islainvest.com and his piece re oil. I forget who the poster was who originally mentioned this analysis.

 

Global Supply(Production) approx 95 million BOPD per day

Global Demand(Consumption) approx min 94-max 96 million in 2016. And growing. Check China/India demand.

Current "Surplus"(Oversupply) approx 1-1.75 million

Current Decline Rates (conservative 5.8%, max 10%) Hence we need to find brand new production of min 5.5 million per day just to stem the loss each year.

Conclusion: that so-called "surplus" is gone in a hearts beat.

Note: before you beat me up with "words", why not check your own and others numbers to see the actual situation. I would love to see others numbers and what they say about the situation. And do check the IIM argument mentioned above. Would be great to see someone invert on that argument.

Imo, as Cardboard said, the spring is really getting wound tight on the downside; the upside should be huge. When will that happen? Have no clue. One significant event? Change in investor psychology? The shorts get too greedy?

But am tired of reading articles that do not even mention any statistics at all to "support" a thesis of the "world being awash in oil". I look forward to your responses and stats.

Meanwhile, I will suffer with my recent Cdn oil purchases.

[Cardboard]

Even Goldman Sachs who was the big bear is saying that late 2016 should be the start of a bull market for oil. Their forecast for H1 2016 is an average of $40. Better start soon...

 

Cardboard

[tylerdurden]

Oil should come back, I agree. Many producers cannot profit at these prices, underinvestment will cause imbalances in the future, Saudis cannot ignore social programs forever and cannot afford these budget deficits. We can certainly see OPEC finally coming together under Saudi leadership like in end of 90s I believe. Having all these said, when I look into the attached graph that scares me. From 1986 to 2003, like 17-18 years inflation adjusted oil price was below $40. Perhaps, we had lots of ample capacity back then. I am not sure but the graph makes me think all sorts of possibilities...

[Uccmal]

Would like to talk about actual stats re world oil supply, demand, and depletion rates. I know this is a radical idea because I see very little of this in the mass media today. So, it must be heretical to do so.  This info has been mentioned previously in an attachment from Islamorada Investment Management. see islainvest.com and his piece re oil. I forget who the poster was who originally mentioned this analysis.

 

Global Supply(Production) approx 95 million BOPD per day

Global Demand(Consumption) approx min 94-max 96 million in 2016. And growing. Check China/India demand.

Current "Surplus"(Oversupply) approx 1-1.75 million

Current Decline Rates (conservative 5.8%, max 10%) Hence we need to find brand new production of min 5.5 million per day just to stem the loss each year.

Conclusion: that so-called "surplus" is gone in a hearts beat.

Note: before you beat me up with "words", why not check your own and others numbers to see the actual situation. I would love to see others numbers and what they say about the situation. And do check the IIM argument mentioned above. Would be great to see someone invert on that argument.

Imo, as Cardboard said, the spring is really getting wound tight on the downside; the upside should be huge. When will that happen? Have no clue. One significant event? Change in investor psychology? The shorts get too greedy?

But am tired of reading articles that do not even mention any statistics at all to "support" a thesis of the "world being awash in oil". I look forward to your responses and stats.

Meanwhile, I will suffer with my recent Cdn oil purchases.

 

These are the numbers I am roughly acquainted with.  Sorry I am not going to beat you up with words.  Logic dictates that this shouldn't persist very long.  In the short term markets dont follow logic. 

 

In terms of Iran, I am finding it hard to belive that they are going to get much "new" supply to market that isn't already there.  It sounds like cage rattling to irritate the Saudis.  If you look at maps of the area there are pipes, and roads going every direction from the major oil fields.  I think they have been running full bore during the entire period of sanctions, similar to what Cardboard has suggested.  Isis, and others are getting their oil from somewhere to resell onwards.  Iraq been buying Iranian oil and reselling?  I dont think this qualifies as conspiracy so much as just doing business any way they can.  They certainly dont seem to be suffering like a country under sanctions could be. 

[SharperDingaan]

With Iran we think its more "give us the quota we used to have prior to sanctions, or we flood". To bring the negotiation to a head, Iran dumps an additional 2.5M bbl/day from existing/accessible land/floating inventory - in addition to their 500K of production/day.

 

Ultimately we go back to what market share used to look like prior to the Gulf Wars, ISIS gets its funding cut off, Assad gets replaced, & ME tension de-escalates.

 

SD

 

 

 

[Cardboard]

Dumping what in addition to their so called 500,000 barrels/day additional? The condensates that they hold in vessels since months and that nobody wants?

 

Regarding your vision for the Middle East, it is all wrong IMO. Assad will likely be replaced but, by another Shiite and in agreement with Moscow and Teheran. Saudi Arabia and UAE will not be able to get themselves out of Yemen with a win. That is their Vietnam war and the funding from Iran will not stop. They just received necessary funding or 100's of billions to pursue their expansionist plan. It is very likely that they will fund discord in Bahrain next and then Eastern Saudi Arabia.

 

Expecting that a religious war that has been going on for centuries will suddenly stop after just what happened between the two countries that want to expand their way of thinking is delusional. 

 

Cardboard

[SharperDingaan]

Apparently taking physical delivery on paper oil at maturity is not possible? - with zero storage cost, and all nicely hidden until maturity. It is also not possible to roll an accumulating paper position month-to-month, to avoid buying all of it at once? And nobody, since Ari Onassis, has ever sold an oil cargo at sea.

 

Agreed the ME has its own issues, & they aren't going away. Ultimately the East & West will supply the weaponry, for oil, and there will be forced regime changes. Great for the weapons & oil businesses; not so much for the civilians - just the way of the world.

 

Obviously, low level conflict is better than a hot war. Take away the hardware, & a lot of the heat goes out of the equation. We sold you the stuff, we also know how to disable it - a routine hazard when selling to despots.

 

SD