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

[Uccmal]

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

 

Pennwest - not for the faint hearted

[Jurgis]

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

 

Pennwest - not for the faint hearted

 

Pennwest is not worthless today... or is it? ;)

 

IMO, there's a lot of small caps some even without debt loads that will go 2x+ if oil goes to 50+. So pick your poison.

[rkbabang]

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

 

There is a lot of talk here of supply being reduced and oil rebounding, but wouldn't that just bring a bunch of supply back on line?  Just because it is currently off the market doesn't mean that the excess supply doesn't exist.  Wouldn't demand have to pick up drastically to raise the prices significantly for more than a short amount of time?  Or is this a simplistic view?  I'm not sure I understand the oil market all that well.

[jmp8822]

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

 

There is a lot of talk here of supply being reduced and oil rebounding, but wouldn't that just bring a bunch of supply back on line?  Just because it is currently off the market doesn't mean that the excess supply doesn't exist.  Wouldn't demand have to pick up drastically to raise the prices significantly for more than a short amount of time?  Or is this a simplistic view?  I'm not sure I understand the oil market all that well.

 

Theoretically, the price should rise to the marginal cost of producing the last barrel of oil that the market demands. The price of producing that 93rd millionth barrel for that highest cost producer in my opinion is closer to $80 per barrel than $30 per barrel.  The current price seems to be a medium-term side effect of oil that was $100+ per barrel. Drilling and investment from earlier price assumptions drove the oversupply, while today's prices might be pushing the market toward a deficit. The 'correct' price though should be the cost of that last barrel of oil.

[Uccmal]

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

 

There is a lot of talk here of supply being reduced and oil rebounding, but wouldn't that just bring a bunch of supply back on line?  Just because it is currently off the market doesn't mean that the excess supply doesn't exist.  Wouldn't demand have to pick up drastically to raise the prices significantly for more than a short amount of time?  Or is this a simplistic view?  I'm not sure I understand the oil market all that well.

 

Theoretically, the price should rise to the marginal cost of producing the last barrel of oil that the market demands. The price of producing that 93rd millionth barrel for that highest cost producer in my opinion is closer to $80 per barrel than $30 per barrel.  The current price seems to be a medium-term side effect of oil that was $100+ per barrel. Drilling and investment from earlier price assumptions drove the oversupply, while today's prices might be pushing the market toward a deficit. The 'correct' price though should be the cost of that last barrel of oil.

 

In theory, yeah...

 

The sawblade effect your talking about rkbabang is one outcome but not likely in a relatively tight supply situation.  This seemed to be the case in the 1990s when there was a huge oversupply.

 

If you break down the supply side a little you start to see the possible outcome as being a huge spike:

1) Arabs and persians keep pumping as normal

2) Russians keep pumping as normal -

1&2 are going full bore right now - no excess available

3) Offshore - drilling has essentially stopped - existing wells will run off.

4) Other countries - smaller suppliers run off due to high costs and low capital available.

5) US shale comes off - in theory it coukd ramp back up quickly but the workforce has scattered, the companies and their bankers are poor and skittish.  Does it bounce back quick enough to offset demand.

5) Canadian Oil sands comes off some. 

 

The IEA has said that something like 400 Billion in investment has been put off or cancelled so far, worldwide.  The IEA is projecting a long term supply squeeze. 

 

Ultimately know one knows how or when this all happens. 

[Uccmal]

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

 

Pennwest - not for the faint hearted

 

Pennwest is not worthless today... or is it? ;)

 

IMO, there's a lot of small caps some even without debt loads that will go 2x+ if oil goes to 50+. So pick your poison.

 

Actually Whitecap issued 95 million in equity today to develop production.  Worth a look.

[vinod1]

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

 

There is a lot of talk here of supply being reduced and oil rebounding, but wouldn't that just bring a bunch of supply back on line?  Just because it is currently off the market doesn't mean that the excess supply doesn't exist.  Wouldn't demand have to pick up drastically to raise the prices significantly for more than a short amount of time?  Or is this a simplistic view?  I'm not sure I understand the oil market all that well.

 

Theoretically, the price should rise to the marginal cost of producing the last barrel of oil that the market demands. The price of producing that 93rd millionth barrel for that highest cost producer in my opinion is closer to $80 per barrel than $30 per barrel.  The current price seems to be a medium-term side effect of oil that was $100+ per barrel. Drilling and investment from earlier price assumptions drove the oversupply, while today's prices might be pushing the market toward a deficit. The 'correct' price though should be the cost of that last barrel of oil.

 

It looks like the marginal cost of producing the last barrel also seems to decline along with the oil price. Something I did not realize before - at least not as much as they seem to be dropping. So I would not put much confidence in $80 per barrel marginal cost.

 

FWIW - This is way outside my circle of competence and just parroting what I read.

 

Vinod

[SharperDingaan]

It is highly likely that global demand has already begun to exceed supply. Most would expect oil in storage to aggressively start drawing down at USD 40-43/bbl (estimated CNOC marginal cost of production)

 

Shut-in oil will stay in the ground until price rises enough to make it worthwhile. Most wells will be under new ownership, incentivized to keep it shut in. Production commitments will be met out of oil in storage, via physical delivery on maturing forwards.

 

For the foreseeable future, the industry will buy versus drill. Tremendous job loss, & a decline in NA production anywhere between 10-20% - depending on how long it lasts.

 

SD

 

[Uccmal]

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

 

There is a lot of talk here of supply being reduced and oil rebounding, but wouldn't that just bring a bunch of supply back on line?  Just because it is currently off the market doesn't mean that the excess supply doesn't exist.  Wouldn't demand have to pick up drastically to raise the prices significantly for more than a short amount of time?  Or is this a simplistic view?  I'm not sure I understand the oil market all that well.

 

Theoretically, the price should rise to the marginal cost of producing the last barrel of oil that the market demands. The price of producing that 93rd millionth barrel for that highest cost producer in my opinion is closer to $80 per barrel than $30 per barrel.  The current price seems to be a medium-term side effect of oil that was $100+ per barrel. Drilling and investment from earlier price assumptions drove the oversupply, while today's prices might be pushing the market toward a deficit. The 'correct' price though should be the cost of that last barrel of oil.

 

It looks like the marginal cost of producing the last barrel also seems to decline along with the oil price. Something I did not realize before - at least not as much as they seem to be dropping. So I would not put much confidence in $80 per barrel marginal cost.

 

FWIW - This is way outside my circle of competence and just parroting what I read.

 

Vinod

 

Apparently, Its outside everyones "circle of comoetence".  The best one can do is stake their claim in a lower cost operator with a decent balance sheet, trading at a cheap price.... Come to think of it, its the same thing we do with any investments.

 

I agree, the marginal cost has likely come down some... cheaper labour and parts.

[Packer16]

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

 

Pennwest - not for the faint hearted

 

Pennwest is not worthless today... or is it? ;)

 

IMO, there's a lot of small caps some even without debt loads that will go 2x+ if oil goes to 50+. So pick your poison.

 

Actually Whitecap issued 95 million in equity today to develop production.  Worth a look.

 

Why does it make sense to develop production today versus defer it until prices rise?  I can see raising money to buy cheap assets but developing production today appears to be a negative NPV project or at least a less profitable project than it will be 18 to 24 months from now.

 

Packer

[Uccmal]

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

 

Pennwest - not for the faint hearted

 

Pennwest is not worthless today... or is it? ;)

 

IMO, there's a lot of small caps some even without debt loads that will go 2x+ if oil goes to 50+. So pick your poison.

 

Actually Whitecap issued 95 million in equity today to develop production.  Worth a look.

 

Why does it make sense to develop production today versus defer it until prices rise?  I can see raising money to buy cheap assets but developing production today appears to be a negative NPV project or at least a less profitable project than it will be 18 to 24 months from now.

 

Packer

 

Jeez, Keith.. Your nitpicking.. just read the press release.  I am agnostic - guy above asked which companies may be good investments in this environment - WCP may just fit the bill. WCP just raised equity in this environment - not debt, not asset sales. 

[Cardboard]

One of the better EIA reports in a long time.

 

U.S. oil inventories were up 3.5 million barrels which is less than half of what API reported last night or up 7.1 million barrels and pretty much right in line with analysts expectations of a build of around 3 million.

 

Remember that refineries are right in the middle of their turnaround for the summer season, so a build is normal. Input to refineries was down 1.14 million barrels last week.

 

What is weird is that net imports were down 117,000 barrels a day for the week or 819,000 barrels. So where is that build coming from? Oh! The Adjustment number or Unaccounted for Crude Oil!!! 2.24 million barrels...

 

More importantly, bears were quick to point out recently about builds in products such as gasoline, distillates and others. Meaning that the U.S. was slowing down or worst entering a recession. Well, this did not happen this time around. Gasoline was down 2.2 million barrels and Distillates down 1.7 million barrels. The sum of these two is actually quite a bit higher than the decline going into refineries. Demand is still there.

 

On the supply side, Lower 48 States production was down 35,000 barrels a day or the third week of decline in a row. Although, a lower decline than last week of 50,000, we are down 115,000 barrels a day in the past 3 weeks. Starting to look like a solid trend and with the rig count plummeting each passing week, it should accelerate.

 

What is not noticed by Wall Street at the moment is the very large decline in propane/propylene inventory that seems to be occurring on a weekly basis now. While winter consumption is a big factor, we are rapidly approaching last year's inventory level from a starting point that was much higher than last year. This is telling me that shale oil production is coming down fast. Propane, butane and other condensates are a significant by-product of shale oil.

 

If Saudi Arabia (true largest state sponsor of terror?) had not dumped 2 million barrels a day on the market, we would be in balance by now. Apparently that they want to send 150,000 troops in Syria in April to defend their gang. Their budget deficit will only grow exponentially and once their subdued population starts to revolt from the various cuts that are already happening, it will be too late.

 

Cardboard 

[SharperDingaan]

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

 

Pennwest - not for the faint hearted

 

Pennwest is not worthless today... or is it? ;)

 

IMO, there's a lot of small caps some even without debt loads that will go 2x+ if oil goes to 50+. So pick your poison.

 

Actually Whitecap issued 95 million in equity today to develop production.  Worth a look.

 

Why does it make sense to develop production today versus defer it until prices rise?  I can see raising money to buy cheap assets but developing production today appears to be a negative NPV project or at least a less profitable project than it will be 18 to 24 months from now.

 

Packer

 

Develop your field today, & you lock in todays discounted drilling costs for life (very attractive). The kicker is that the field has to be profitable at today’s prices - or less. That may be 2 in 10 fields at best, & even then – only if the operator has a strong competitive advantage. You also have to drill to keep your land position. However you can farm out the drilling; but only if the field is profitable at today’s prices - & there is local available capacity to move the product to market.

 

SD

 

[Cardboard]

Could someone explain to me why WTI is trading over $2 a barrel cheaper than Brent?

 

1- Currently, both are on the same April contract so there should not be a difference due to contango as we saw last week with WTI still trading on the March contract which expired Monday.

 

2- The export ban has been lifted and the surplus of U.S. very light oil is now being exported as can be seen in the numbers published by the EIA.

 

3- U.S. production is falling while Middle East production is increasing (Iran). So the glut should be in the Eastern hemisphere or closer to Europe where Brent is priced.

 

Cardboard

[rykelsap]

I believe the discount exists on WTI despite the comparability of the prompt month contracts because WTI is not a waterborne price. If I purchase oil at Cushing I still need to pay the pipeline tariff on Enterprise/Enbridge's Seaway line or TransCanada's Marketlink line to get it the coast for export. For light oil, this tariff is ~$2.45/bbl for uncommitted volume. Assuming the physical price at the Gulf Coast and the physical price of Brent are at or near parity, then WTI should trade at slight discount to Brent. If storage builds reverse in the US in the future, you may see WTI trade at a premium to Brent assuming the demand pull from the US pushes the expected import price far enough above Brent to offset the tariff.

[Graham Osborn]

Could someone explain to me why WTI is trading over $2 a barrel cheaper than Brent?

 

1- Currently, both are on the same April contract so there should not be a difference due to contango as we saw last week with WTI still trading on the March contract which expired Monday.

 

2- The export ban has been lifted and the surplus of U.S. very light oil is now being exported as can be seen in the numbers published by the EIA.

 

3- U.S. production is falling while Middle East production is increasing (Iran). So the glut should be in the Eastern hemisphere or closer to Europe where Brent is priced.

 

Cardboard

 

Thursday's WSJ had an article stating that refiner margins are a good bit lower this year and refiners are cutting their run/ capacity ratio.  US refiners have a bit of a stranglehold on producers due to the limited number of export points.  Historically I think that might help explain the lag..

[Graham Osborn]

This is just a comment on trying to forecast a secular shift in Brent.  The recent price action certainly has my attention but I've been thinking about this for at least 1.5 years.  I had a view last year that we would see support in the 40-50 range based on marginal production cost.  I was clearly dead wrong :) Since then I've been looking for secular patterns to help explain what is going on and when we should expect the bear market to end.  As many of you know I think the next few years will contain an analogue to 1974 (see the Dalio thread), and if that were true that would mean a bull market in commodities probably in the next 5 years.  Basically right now I think:

 

1. A substantive bull market in Brent will not begin until we have had a substantive bear market in financial assets.

 

2. A good time to buy (as a secular bull) will be when the SSE shows good support.

 

I look forward to a good thrashing..

 

P.S.  To address the elephant in the room - obviously I'm looking at the 2007-2010 range as more of a blip in a secular bear market in commodities after the great 2002-2007 commodities bull market following the tech bubble bursting in 2000-2001. 

[ni-co]

This podcast episode is very interesting for oil bulls and bears alike. Highly recommended:

 

Macro Voices: The Coming Bottom in Oil Prices Part I: Deep into Fundamentals with Art Berman

https://overcast.fm/+F9abLcik0

[Travis Wiedower]

This podcast episode is very interesting for oil bulls and bears alike. Highly recommended:

 

Macro Voices: The Coming Bottom in Oil Prices Part I: Deep into Fundamentals with Art Berman

https://overcast.fm/+F9abLcik0

I was skeptical listening to this bc most energy analysts are superficial and full of shit.  But this was the best analysis I have heard on the issue so far.  Thanks for the link!

 

+1. Really enjoyed that podcast.

[Graham Osborn]

Does anyone think this might be the secular shift?  I don't really care - once Brent broke the resistance line Thurs or Fri I bought in after a few false starts.  Today it's just up and up with a series of tight consolidative rallies.  The Houston shale accord and the Saudi-Russian deal don't seem to drive or explain this price action, which makes it all the more interesting to me.  I think the thing that sets me apart from the Street's thinking on this point is I am utterly without bias on the price implied by the fundamentals.  So I'm perfectly happy to trade Brent on technicals - and sooner or later the secular shift should transition this from scalping to the pyramid trade of a lifetime.. whenever.

[Cardboard]

I have no idea if this oil rally is real or not. It is the fourth time that oil rallies since the beginning of this bear: Feb 2015, Apr 2015, Aug 2015 and now.

 

What feels different this time is the amount of skepticism and that some fundamentals are improving. Although, I read that bets or the amount of futures on an increase in the oil price were at record highs over the last few days which is not a good sign. For a while, it truly felt like climbing a wall of worries and this sharp down move today is very good to flush out weak hands which is the essence of bull markets: slow climbs, sharp down moves.

 

The API inventory report today shows a build of 4.4 million barrels vs expectations for 3 million, yet oil is calm tonight. There is a growing understanding that inventories will start to draw once the refinery turnaround season is over and gasoline is used up for the driving season. The EIA report last week was quite bearish IMO except for the continued decline in U.S. oil production. Oil still rallied strongly in the days after. Going up in the face of bad news is also indicative of a bull market.

 

One brokerage firm also pointed out that oil didn't collapse following Iran's increased oil shipments and that their latest attempt to attract foreign capital for oil development has been mixed to poor. With oil being this low, who is going to commit billions of capital in a country that continues to challenge U.N. resolutions? So many projects are awaiting capital globally.

 

Cardboard

[asterisk]

The concern I have is that if oil stays in the high 30's and even the low 40's then over time will American production return. Are we going to be in the same boat next fall?

[Uccmal]

The concern I have is that if oil stays in the high 30's and even the low 40's then over time will American production return. Are we going to be in the same boat next fall?

 

Who knows, but all new or continuing projects require investment.  Any outside capital would be pretty skittish for exactly the possibility you mention.  On the other hand, they could convince themselves that everyone else has cut back and now is a good time.

 

Also, I have read about a few huge long tail projects that have been put on ice or cancelled; deep water, and arctic, in particular. 

 

In a somewhat related issue, Major energy companies are shifting capital toward renewables.  Enbridge, has explicitly stated that they are putting more investment in non O&G projects.  Might this sort of thinking lead to a bottle neck in Oil - again who knows. 

[Cardboard]

"The concern I have is that if oil stays in the high 30's and even the low 40's then over time will American production return. Are we going to be in the same boat next fall?"

 

What about climbing a wall of worries? High $30's and low $40's oil? The $30's were unconceivable to the industry in December 2015.

 

I am not picking on you Asterisk but, that is what everyone is wondering now.

 

There are two things in that statement that need to be discussed:

 

1- American oil is not everything. While the media keeps putting most emphasis on U.S. production and U.S. inventories, there is a much larger world around the U.S. $100's of billions of capex have been cut around the world and the effect is just starting to appear: Brazil, North Sea, Canadian oil sands, you name it. As Uccmal mentioned, many of these are large, long lead projects with low decline rates. While the decline in production takes longer to appear, it will be much more profound longer term. Projects that were completed in the Gulf of Mexico of that type are the cause of the lower than expected decline in U.S. production so far.

 

2- The American shale oil boom is over. The rig count has been cut by 2/3 and most of these employees who have been laid off have gone elsewhere. Many oil & gas service firms will disappear or be consolidated. Older rigs are also being scrapped (see Precision Drilling for example). Even the bravado king Harrold Hamm is forecasting a 9.5% production decline year over year at Continental. The decline would be even worst if one was to look at the 2016 exit rate. The acquisitive and arrogant Crescent Point is cutting its dividend, again, this morning. We should see at 10:30 am what the EIA has to say but, the trend in production was firmly down over the last 4 weeks.

 

When the stock market goes up along with oil, you don't hear about the energy debt crisis but, it was discussed yesterday. This issue is not going away at $30, $40 or even $50 oil. Line of credits are going to get cut in April no matter what and the bond market is nearly shut.

 

The situation is very similar to any cyclical industry. Take U.S. housing for example from 2001 to 2010. Financing was easily available. Cost of housing, construction labor, material and land were going up continually. Then it reversed. Financing dried up. Cost of housing, construction labor, material and land were going down. How long did it take post 2009 until the situation stabilized and homes were built again?

 

I would say that we are into the restructuring and consolidation phase. Production should keep on declining as only the very best assets will be drilled with still high decline rates of roughly 30% a year.

 

Cardboard

[Cardboard]

EIA report was good for inventories and weak for U.S. production if you are an oil bull.

 

Oil inventories were higher by 3.9 million barrels but overall, products declined by 4.6 million barrels with strong demand for gasoline. Once again we are in the midst of the maintenance/turnaround season for refineries so these numbers bode well especially with gasoline demand being much higher in late spring.

 

Lower 48 States production was up 3,000 barrels/day. In some ways, I almost preferred when these guys kept the number constant from week to week or kind of indicating that they simply did not re-estimate it. Now, they seem to move it up or down by a few thousand barrels to show some activity in the numbers...

 

I mean, these production numbers should be going up and down every week and a fair bit. For example, Alaska which is exact production (not an estimation) has moved down 0.4% this week or 2,000 barrels/day and that is a small move compared to many other weeks. That would correspond to a 34,000 barrels/day move for Lower 48 States. Seems totally abnormal to have so many weeks during a year at 0 change or close to it.

 

Then you have enormous moves every week in commercial stock and Adjustment (Unaccounted for crude oil!) which makes you wonder if you can trust at all the bulls.. that is being presented.

 

Cardboard