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

[Cardboard]

Continental Resources released today their capex budget for 2016:

 

http://www.stockwatch.com/News/Item.aspx?bid=U-prDA07719-U%3aCLR-20160126&symbol=CLR&region=U

 

These guys have some of the highest netbacks in the shale industry, yet they too are cutting and are forecasting that production will decline 14% from the average of Q1 2016 to the average of Q4 2016. I would expect stories like that to be common theme this year.

 

Cardboard

[goldfinger]

Corelab's industry outlook:

 

http://www.corelab.com/

 

Industry Outlook and First Quarter 2016 Revenue and EPS Guidance

 

The balancing of worldwide crude oil markets continues, as evidenced by the continued sharp decline in U.S. onshore production during the second half of 2015. Further, the International Energy Agency estimated that worldwide demand increased in 2015 by 1,700,000 bopd and will increase a further 1,200,000 bopd in 2016 in response to low commodity prices. Core believes tighter crude markets will prevail in the second half of 2016, which, in turn, will lead to higher energy prices and increased demand for Core's unique technology-related services and products.

 

U.S. land-based crude oil production peaked in March 2015, and Core believes that production has decreased from that peak by 600,000 bopd, as compared to the Company's prior estimate of 500,000 bopd. Adding support to this view, Bakken production has clearly peaked, while Eagle Ford production began to decline early in 2015. Core Lab’s current estimated net decline curve rate for total U.S. production is 7.8%, owing to the concentration of U.S. production coming from high-decline-rate unconventional reservoirs, more than twice Core's new estimated net worldwide crude oil production decline curve rate of 3.1%. The current U.S. net production decline curve rate would even be greater if not for unsustainable production gains from the GOM late in 2015. In addition to second half 2015 production declines in North America, including Mexico, 2015 international production declines occurred in Asia-Pacific, South America, and Africa.

 

In 2016, at current activity levels in North America, year-over-year production declines of over 900,000 bopd are expected in Canada and the U.S., while international production levels are expected to continue to decline modestly. The Company believes that recent downward production revisions in Mexico and offshore eastern South America confirm these views, and that should precipitate higher commodity prices and the beginning of a recovery in Core's business in the second half of 2016.

[SharperDingaan]

Read up on industry commentary on drilling budgets.

 

Everyone is spending within their cash flow; and that cash flow is essentially at break-even. No drilling unless you absolutely have to. No production replacement. Every one of the NA fields is depleting daily, with oil cuts rising as the reservoirs tap out. Most decline rates are > 8-10%/annum; 13-20%+ is common in shale fields. Same dynamics in pretty much every other field in the world except the ME.

 

A simple back of the envelope.

 

Take Dec-2015 daily supply, subtract the ME component; multiply by 10% (conservative). That’s how much daily supply the ME needs to add by Dec-2016, if supply is to remain flat.

 

Take Dec-2015 daily demand; multiply by 5%. That’s how much additional price driven supply the ME needs to add by Dec-2016, if the price is to remain flat.

 

Add the daily supply and demand change the ME needs to make up. They cannot do it without aggressive new drilling and facilities upgrading; the technology to do it is Western. Slow the drilling, and prices must rise.

 

The numbers are understating, by roughly a factor of 3.

 

SD

 

 

[Cardboard]

I had mentioned previously that Obama would propose some gasoline tax in 2016 well, here it is in a different form:

 

http://www.cnbc.com/2016/02/04/white-house-wants-10-per-barrel-fee-on-oil.html

 

This guy should write a book once out of office: "How to put on a path of destruction the largest economy in the world."

 

Cardboard

[kfh227]

I had mentioned previously that Obama would propose some gasoline tax in 2016 well, here it is in a different form:

 

http://www.cnbc.com/2016/02/04/white-house-wants-10-per-barrel-fee-on-oil.html

 

This guy should write a book once out of office: "How to put on a path of destruction the largest economy in the world."

 

Cardboard

 

Or the rebublican desires:

"How to put on a path of destruction the planet Earth."

[NewbieD]

 

Or the rebublican desires:

"How to put on a path of destruction the planet Earth."

 

+1 There are countries used to 70% of gasoline costs being taxes, without the economy tanking. It's time to switch to less silly big vehicles:)

[Cardboard]

Good ideas get funded by themselves and do not require government imposing taxes. They are profitable on their own and do not require subsidies.

 

Canada has a lot of taxes on its gasoline. Is it any greener? No SUV's and pickups on the road?

 

Cardboard

[Jurgis]

Good ideas get funded by themselves and do not require government imposing taxes.

 

Like Internet for example.

 

Oh, wait...

[Pelagic]

I had mentioned previously that Obama would propose some gasoline tax in 2016 well, here it is in a different form:

 

http://www.cnbc.com/2016/02/04/white-house-wants-10-per-barrel-fee-on-oil.html

 

This guy should write a book once out of office: "How to put on a path of destruction the largest economy in the world."

 

Cardboard

 

Even Democrats wouldn't be caught dead voting for that in an election year. It's being sold as a tax on evil oil companies but who really pays the cost? American consumers. It's a regressive tax on working families who would be hit the hardest, taxing a commodity they need every day to commute or heat their homes isn't how you win votes. People might claim to support green initiatives but at the end of the day they usually vote with their pocket book.

 

Clean energy and transportation will have its day, tossing taxpayer money at uneconomical "green" ventures that don't scale or have a prayer of competing with established foreign producers isn't the way forward.

[vinod1]

Good ideas get funded by themselves and do not require government imposing taxes.

 

Like Internet for example.

 

Oh, wait...

 

or

 

Microchip

GPS

Google

 

Vinod

[dorsiacapital]

Good ideas get funded by themselves and do not require government imposing taxes. They are profitable on their own and do not require subsidies.

 

Canada has a lot of taxes on its gasoline. Is it any greener? No SUV's and pickups on the road?

 

Cardboard

 

http://www.motherjones.com/politics/2014/04/oil-subsidies-energy-timeline

 

Very long history of tax breaks for oil companies. 

[dorsiacapital]

Good ideas get funded by themselves and do not require government imposing taxes. They are profitable on their own and do not require subsidies.

 

Canada has a lot of taxes on its gasoline. Is it any greener? No SUV's and pickups on the road?

 

Cardboard

 

And of course direct government research in and tax breaks for the development of fracking technology

 

http://www.huffingtonpost.com/2012/09/23/fracking-developed-government_n_1907178.html

 

 

[RichardGibbons]

Good ideas get funded by themselves and do not require government imposing taxes. They are profitable on their own and do not require subsidies.

 

I'm curious.  Where does the Tragedy of the Commons fit into this world view?  Does it just not exist as far as you're concerned? Or is it a new idea to you? Something else?

 

 

[Uccmal]

Good ideas get funded by themselves and do not require government imposing taxes. They are profitable on their own and do not require subsidies.

 

Canada has a lot of taxes on its gasoline. Is it any greener? No SUV's and pickups on the road?

 

Cardboard

 

http://www.motherjones.com/politics/2014/04/oil-subsidies-energy-timeline

 

Very long history of tax breaks for oil companies.

 

 

If we took away the direct and indirect subsidies oil gets the fuel would be much more expensive.  Proper accounting of all the externalities for O&G, would make wind, solar, and EVs look alot more competitive. 

 

 

[Cardboard]

Did I say that I was in favour of the various tax breaks that exist?

 

No! That is another form of punishing one to helping another and have some middle man somewhere to manage that and take a cut.

 

When oil & gas got expensive that is when you started to see all kinds of energy related ideas emerge. Am I opposed to that? No!

 

This is not government intervention. That is human ingenuity at work to solve problems. Is it government that made Einstein a genius, Tesla to develop AC motors, Bell to develop the phone, Galileo to look at the sky?

 

And who am I to try to convince a bunch of socialists of the benefits of freedom when a man like Buffett himself can understand the concept of frictional cost in money management but, cannot understand that same concept magnified by 100 times in government via corruption and mismanagement? Unless he does and appreciate the benefits of being plugged in?

 

Cardboard

[matts]

Did I say that I was in favour of the various tax breaks that exist?

 

No! That is another form of punishing one to helping another and have some middle man somewhere to manage that and take a cut.

 

When oil & gas got expensive that is when you started to see all kinds of energy related ideas emerge. Am I opposed to that? No!

 

This is not government intervention. That is human ingenuity at work to solve problems. Is it government that made Einstein a genius, Tesla to develop AC motors, Bell to develop the phone, Galileo to look at the sky?

 

And who am I to try to convince a bunch of socialists of the benefits of freedom when a man like Buffett himself can understand the concept of frictional cost in money management but, cannot understand that same concept magnified by 100 times in government via corruption and mismanagement? Unless he does and appreciate the benefits of being plugged in?

 

Cardboard

 

Yes, because we are all socialists on this board. Value investors are well know for their communist tendencies of course.

 

[ERICOPOLY]

Good ideas get funded by themselves and do not require government imposing taxes. They are profitable on their own and do not require subsidies.

 

Cardboard

 

An exception would be the building of the Panama Canal.  Good book:  A Path Between the Seas.

[dorsiacapital]

My point was that the oil industry's development of fracking was aided by government investment. Perhaps it would have developed exactly the same without that investment, but that's a hypothetical world, not the one we live in.

 

There's also a strong argument that countries that have industrialized successfully (U.S. in the 1800s, Japan, South Korea) did so with a tariff-heavy model that nurtured their internal industries that would not have survived if they'd been exposed to the open market.

 

http://www.theatlantic.com/magazine/archive/1993/12/how-the-world-works/305854

 

I think the over-usage of the world socialist to describe any governmental approach to the market beyond FREE MARKET RULEZ TAXES DROOL shows, at best, a sloppy and juvenile understanding of the world.

[Cardboard]

Is there still a point to discuss the EIA report?

 

It was about as positive as you could imagine for NA oil fundamentals. Last night API reported a build of 2.4 million barrels. Today, the EIA reported a 0.8 million draw and all this against expectations of a 3.2 million build by analysts.

 

A draw for this time of the year is uncommon with demand for gasoline being lower. We also didn't see big builds in products and refinery input was down somewhat. We saw on the other hand a large drop in imports. Where are going these 1 to 2 million barrels per day of global oil surplus always proudly mentioned by the IEA?

 

Finally, the EIA did its job, or could no longer deny the size of the truth, and reported a decline of 30,000 barrels/day for Lower 48 States. That is after reporting for two weeks in a row zero change for that production. Then they keep on saying in other reports that field production is declining anywhere between 90,000 to 110,000 b/d per month. What a joke!

 

Oil spiked on the news only to head back down afterwards. What seems crazy is that NA fundamentals are obviously tightening while elsewhere we cannot say as much with Iran starting to export and large producers refusing to cut. At this very moment, Brent is up 2.2% while WTI is down 0.2% (from 2:30 pm close).

 

Now if you look at USO, it is down 2.2%. This does not add up to the 0.2% decline and what happened between 2:30 pm and 4:00 pm but, that is how it goes with spot price not matching the futures that they use. That is also ultra convenient for the trading and manipulation of UWTI and DWTI.

 

You also had daily weakness in the SPY matching the timing for weakness in crude. So maybe this can all be explained by correlation?

 

Sooner or later major trouble will brew up worldwide. I think that Nigeria, Angola, Venezuela and Algeria are close to the breaking point. They all have very bad economic problems and some are fighting extremists. Then you have Russia, Saudi Arabia, Irak and others bleeding cash heavily. Depending on how this unfolds, I can see a global crisis severely hurting the banking system (sale of financial assets and 1998 style defaults) or some major oil supply disruption which would cause oil to spike to a decent level stopping the contagion or going too high and causing a worldwide recession.

 

Somebody better find a way to put some equilibrium into this oil market very soon before it is too late.

 

Cardboard

 

 

[asterisk]

Hey Cardboard could you touch more on the manipulation of UDTI and DWTI? Thanks!

[Cardboard]

Manipulation may be a strong word but, there is something going on with USO, UWTI, DWTI and the futures markets. My belief is that large players push up or down one instrument with a relatively small sum to rake in large profits in another.

 

Often I wake up at 5 in the morning and take a look at the oil futures. Then for some reasons at right around 8 am, I observe almost daily a plunge in WTI from the earlier level or reaching the lowest price level before the 9:30 am stock market open. Futures trade 24 hours a day so that seems strange to me.

 

I also pointed out previously what seems to happen right before 2:30 pm or the NYMEX close in the U.S.: a sharp down move right before the close as we saw yesterday. Often, that move would occur and the price would remain stuck at that level until the close with very little variation. Kind of similar to what people have long complained about or stock call/put options being manipulated at expiration where the stock price would mysteriously move to a certain level making a lot of options worthless or less expensive to close for market makers.

 

Oil has a current fundamental problem, no doubt about it. However, when volumes transacted on the futures market exceed what is being transacted in the real world, you may start to see some strange behaviour. The banks have been accused and found guilty of manipulating almost every contract: FX, interest rates, copper, why would they not do it with oil? With fear rampant, exaggerating moves to the downside with all these instruments might have been easy and profitable.

 

Cardboard

[asterisk]

Thank you for the response. I believe you or others have mentioned the difference between an ETN such as DWTI and the actual price of crude do not respond in sync. Can you dive more into that. DWTI is bas on S&P GSCI Crude Oil Index Excess, which I have noticed is out of synch with the crude oil futures. Any help would be great? Thank you!

[Cardboard]

I have never studied it in detail so I can't really provide a good answer but, the price of these ETN's is based on futures that they hold. These expire and get renewed and depending on how far they are from spot prices you get mismatch.

 

To give you an example, April Brent future prices are currently at $33.01 while March WTI future are at $29.56. On Monday, the March WTI future expires. It is very likely that the new future will trade around the same price as the April Brent or $33: U.S. export ban has been lifted, U.S. production is declining and they were trading at about the same price a few weeks ago when they were expiring on the same timing.

 

Now, this difference is due to contango or a reflection of too much current supply vs what is available in the future. It is also impacted by the cost of storage and interest rates.

 

So I don't know how USO will adjust exactly for that gap of $3.50 a barrel but, looking at the chart, it is clear that it is declining faster than the oil price itself. Therefore, I would not put a dime in there if I was to bet purely on oil.

 

By the way, the EIA yesterday reported a 50,000 barrels per day decline in Lower 48 States production last week. That is the 2nd week in a row and it is accelerating. Oil rig count is down another 26 this week in the U.S. alone per Baker Hughes just now. Only 439 left and the decline has been brutal in recent weeks.

 

Finally, this fear constantly published by shorts of filling to capacity storage tanks is just it. Recent weeks show little build and by May, I see a very strong probability of draws being much larger than expected by the crowd.

 

Cardboard

[ni-co]

Be also aware of the fact that ETNs are essentially unsecured loans to the issuer like it says on the tin ("exchange traded note"). There is no commodity, equity or anything securing it.

[kfh227]

If oil were to rebound to $50+ are there any companies that are worthless today that will be profitable?