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

[Graham Osborn]

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?

 

Honestly, I think Continental and some of the other shale producers are bluffing about their breakeven costs.  Before they said they could make money at 80, now 6-9 months later they suddenly can make money at 40-50.  Is shale technology likely to have lowered operating costs by that much in such a short period?  Unlikely.  I bet they are just trying to keep the bankers happy.  Talk about a perversion of the inverted production curve - producers continuing to pump and claiming to cover marginal costs just to maintain their covenants.  I think these guys are going to be in trouble even if Brent rebounds to 60 and just sits there.

 

There are two things about the rally (apart from the technical) that made me put money on it: (1) the absence of news apart from an olive branch from the shales which most probably recognized as a lame attempt to induce some bullish acts by the Saudis (2) the dissociation of crude/ commodities from the equity/ bond indices.  They were moving together for a while.  As some of you know I think that the major indices will lose a good hunk of their value this year and that will be preamble to a commodities boom.  As we get farther into a bear market I would imagine this counter action will increase.  Taken conversely, I think the dissociation is bearish for equities.  That pretty much sums up my long/ short position currently.

[Cardboard]

"Taken conversely, I think the dissociation is bearish for equities.  That pretty much sums up my long/ short position currently."

 

So basically your thesis is around a rejection of paper assets in favour of hard assets a la 2000?

 

Cardboard

[ni-co]

I'm short paper (XOP) as well. I've come to the realization that Saudi Arabia probably won't give in before the US shale oil industry will be completely destroyed – including the financial support structure. In other words, I think we'll have to see many more bankruptcies before we'll see a production cut otherwise they will have achieved nothing.

[Cardboard]

You should find individual shorts or a better thesis.

 

Shale cannot be destroyed. If the price goes back up and the resource is available to be exploited profitably, financing will return over time. Bankruptcy is simply a process of selling assets on the cheap to another owner to satisfy obligations.

 

So solid companies will still be around and the index will simply keep the good ones and add the new ones. The bankrupt ones already had their prices decimated so they are no longer relevant to the index that you are shorting.

 

Regarding Saudi Arabia, they are the ones destroying themselves with their stupid market share strategy. If they had supported the price around $50 or $60, the shale industry would have corrected on its own along with all expensive projects worldwide. This would have sufficed to keep their so called market share. Now they have caused a crash all the way to near $25 and have a huge deficit to deal with. This deficit will not stop even above $50 oil. Before the oil price moves back up to their deficit neutral level, their reserves will likely be gone.

 

Cardboard

[ni-co]

I'm not talking about the bankrupt companies but the ones that are going to go bankrupt. I think we haven't even started. Do you really think that on average the remaining companies are in such a strong balance sheet position that they can sit this situation out if it goes on for another year or so? A lot of those equity values are going to be a zero.

 

If you invest into companies via an ETF and they go bankrupt your money doesn't somehow magically pop up in another newly added company in the ETF – it's lost forever.

 

With regard to SA—we'll see. I think they have a lot more leverage here and are committed to give Russia and other oil countries a lesson thereby not only bankrupting the momentary shale oil companies but also the first round of distressed debt investors who buy their bonds. To be clear, I'm not betting the ranch on this scenario but I think it's the most likely and bought some puts. I think the situation has to get much worse before it gets better. And the first ones to suffer are the equity investors. There are large assets in the US but I don't think current equity holders will realize any of those values. They will go to the bondholders.

[Cardboard]

I will say it again. Review the holdings in the ETF, assess the companies in there that have the highest weighting and then you will likely come to the same conclusion.

 

XOP includes all the U.S. majors, all the solid independent and all the refiners!!! None of them will go BK over the next year.

 

The companies that are perceived to have trouble surviving the next year or longer, like PWE, are already trading like dead man walking. Their share prices are minuscule and with tiny weighting in ETF's if they are still included.

 

One candidate for bankruptcy included in XOP is WLL trading at $7 and change and down 80% over the last 9 months. You could short it and possibly see it go to zero but, it won't make a difference to the ETF from this point on.

 

And on the ETF, if a new company is IPO'd or a new one emerge via some merger, they will buy it because it is solid and will flush the one on the way to zero. So they will never give you full benefit of stocks going to zero and will benefit from new ones that are going up.

 

Finally, if you think that oil will go to $15 and stay there for 3 years then we have a different story. XOP short will be a winner but, then I think that many countries will be bankrupt beforehand and these companies would end up with very high demand on their hands.

 

Cardboard

[Uccmal]

My two cents:

 

Looking at the politics behind oil is pointless so not going into that but blaming Saudi Arabia doesn't make sense, or Russia for that matter (why is Russia pumping at max always ignored when they supply as much as SA). 

 

If I was SA, Russia or even the ceo of Exxon I would be pumping at max to put all those who need $80-100 oil out of business......the industry needs short term pain for the longer term stability of oil.  Why would any of them cut production to subsidize the players that caused the instability in the market??

 

I have also heard the argument that SA is hurting themselves by pumping at max which is pure BS, the medium/longer term gain from oil stability will more, and i mean much more, than offset the short term pain (in the big scheme of things low oil for 2 years is nothing).

 

And I don't think they are on some crusade trying to destroy US shale, they are going after high cost producers and the people that funded them around the world. 

 

In the podcast link above the analyst mentioned that SA is going after what he calls the "capital enablers", i.e. debt and shareholders who funded recklessly...I think he is on the money bc that goes to the core of the issue. 

 

No stupid funding = no oversupply, it is that simple.

 

Makes sense.  I think this is the politics behind oil FWIW. 

 

Everyone is pumping their max.  Who knows if the majors can even keep it up? 

 

The democratic countries have cut via the normal route and will come back more competitive.  That is the risk SA et al are taking. 

[SharperDingaan]

Drill a US shale well (at todays low cost); & it will be profitable at USD 40. US shale isn't going away.

But for the reasonably foreseeable future; it will cost way less to just buy a US shale well in a BK purchase - than drill for it.

 

Most pundits see the waiting 'wall of money' as being primarily hedge funds; it is far more likely to be Indian or Chinese.

India has very little of it. China is the 4th largest producer in the world; and mostly using what it produces.

Consumers buying options (BK purchases) on future supply.

 

All told its quite bullish.

 

SD

[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?"

 

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

 

I didn't think you were at all. It seems that the rig count has come down substantially more than the production has. Possibly we got rid of all the small and inefficient rigs. Also, in terms of the rally, how much of that was due to the "freeze" agreement? It seems right now that the price as gone away from reality to rumors about the supply side. These are just some thoughts that I had.

[AzCactus]

http://www.bloomberg.com/news/articles/2016-03-11/iea-says-oil-price-may-have-bottomed-as-high-cost-producers-cut

[Uccmal]

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

 

This webcast posted by Ni-co is quite good.  I have listened to the first 2/3 or so.  He covers the topics of alleged efficiency gains, rig counts (and their relevance - less than before).  The webcast is long but the guys are slow talkers and the site allows you to speed up their conversation - nice feature. 

 

He basically summarizes that while rig counts are important, they are not the be all and end all anymore, with much more pad drilling being done.  The reason, he surmises, that the rig counts still drive market behaviour, is that they are the only regular data point for investors to hang their hats on.  All other stats are infrequent and unreliable. 

 

He also challenges the notion of efficiency improvements being as high as they are.  I guess, drillers have been going after the low hanging fruit, so far.  As the decline rates catch up new drilling will cost more. 

 

Part of the cost curve has to do with relationships.  This has been discussed by various companies I follow: Arx, Wcp, Mullen.  One of the oil drillers, either Wcp or arx, I cant recall, stated that service prices couldn't go any lower without jeopardizing the solvency of the service providers.  In Western Canada it is important for Arc and Whitecap to support Mullen and vice-versa.  There is a high level of interconnectedness going back decades. 

 

Obviously, the Russians and Saudi complex are subject to different dynamics.  The state pays for the oil and allocates profits according to its needs, or whims.  They are producing full bore but cracks are starting to show everywhere, and cuts seem to be on the horizon, even if unintentional.  I dont have any stats to back this up, but I personally think the Rus. and SA et al, have been producing more in the short term than they can do in the longer term.

 

 

[Cardboard]

Latest from Andy Hall:

 

http://valuewalkposts.tumblr.com/post/141453628427/oil-andrew-hall

 

Cardboard

[rkbabang]

Interesting report claiming that technology will make extracting shale oil even cheaper and more productive.

 

SHALE 2.0, Technology and the Coming Big-Data Revolution in America’s Shale Oil Fields

 

"Shale 2.0 promises to ultimately yield break-even costs of $5–$20 per barrel—in the same range as Saudi Arabia’s vaunted low-cost fields."

 

 

 

[Cardboard]

Interesting analysis with zero consideration as to what makes an oil field cheap to extract in the first place or size of reserves. True for any resource by the way.

 

Cardboard

[Cardboard]

Regarding future NA cost to extract oil, this is just one example of what is to come:

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aCNQ-2356028&symbol=CNQ&region=C

 

Moreover, I am not current on what is allowed by each State regarding flaring of natural gas but, expect this to come to an end in the not so distant future with environmental pressure. In Alberta, if you cannot collect the gas and transport it, the oil stays in the ground. To comply, means a lot of money required to develop natural gas processing and infrastructure or fees to contract it out.

 

Also consider the possibility of more stringent regulation regarding the injection of water and other chemicals due to earthquakes. This could make fields nearby populated areas out of reach due to higher costs/lower recoveries.

 

In other news, API just reported a build of 8.8 million barrels for the past week vs expectations of 2.7 million. Not good. Will have to see what EIA is saying tomorrow about gasoline consumption and refinery demand being in their turnaround season.

 

Cardboard 

[ni-co]

Latest from Andy Hall:

 

http://valuewalkposts.tumblr.com/post/141453628427/oil-andrew-hall

 

Cardboard

 

If he really believes that I have the feeling that this is going to be a very painful trade for Hall. I don't know how he's positioned exactly but I think he's overestimating the strength of the global economy. Of course, I might be wrong, but it won't be nearly as painful for me.

[Cardboard]

http://realmoney.thestreet.com/articles/03/31/2016/case-120-oil-2018?puc=yahoo&cm_ven=YAHOO

 

I agree with this view but, not sure that oil will spike all the way to $120. However, I am absolutely convinced that oil producers will have to climb a wall of worry before they go after new projects. This will cause a big delay to get the new oil on the market. It will require hedging, tough financing and very sweet payouts to justify to shareholders.

 

People talk a lot in the media and even Wall Street strategists but, most of these people never spent a minute reading financial reports of various companies. There you see the truth about the effect of decline rate, kind of capex required just to stay in place, difficulty obtaining financing, lower reserve values, how many people have been terminated, etc.

 

It is true that Iran is a wild card and some other ME players but, so much is being cut elsewhere and there is so little available for re-investment even in the Middle East that a supply crunch is highly probable.

 

Cardboard

[Hawks]

+1 Cardboard. Crunch will be sooner than most expect imo.

 

[Cardboard]

Inventory draws are already beginning:

 

"API weekly crude oil inventories fall: reports The American Petroleum Institute, an industry trade group, on Tuesday reported that U.S. inventories of crude oil fell by 4.3 million barrels in the latest week, according to news reports. The API data is closely watched for clues to official data, which will be released Wednesday morning by the Energy Information Administration. Analysts surveyed by oil-data firm Platts have forecast a 2.9 million barrel rise in inventories."

 

Cardboard

[Cardboard]

This IMO is the beginning of the big story for oil this year:

 

http://www.cnbc.com/2016/04/07/venezuela-decrees-fridays-a-holiday-to-ease-energy-crisis.html

 

Have you noticed that oil is now refusing to go down despite news such as record shipment from Iraq, record post-Soviet production, Iran shipping more, likely no freeze at the Doha meeting, etc.?

 

The U.S. has been seeing a decline in production for a year now and the trend now looks much firmer but, the big story is what is going on outside the U.S. and the Middle East and that includes Venezuela. The country could very well be into a civil war before long and even if it doesn't, it does not have the money to re-invest in oil and their wells deplete too and their oil sands are very expensive. The supply risk premium may come back due to Venezuela.

 

It is the same story for Mexico, Columbia, Azerbaijan, Algeria, you name it. Then you are seeing decline in developed places such as Canada and the North Sea.

 

Before long, fear will return to the market but, it will be fear of not having enough oil to meet demand. Speculators will move quickly to the other side of the boat and the world will experience the effect of inelastic supply.

 

Cardboard

[Hawks]

+1 Cardboard   

S.A. has been so short sighted in its attempt to drive other nations to conform to its view of the global oil market. It has now put in motion a major rebound in oil prices which it will be unable to control. When you force others thru predatory pricing to go out of business, drastically reduce capital budgets, etc etc, there is going to be a price to pay which the world won't like. And consumers are going to be mad as hell.

 

[Cardboard]

While I am not able to verify this information, apparently that the Brent futures are in backwardation for the front months (1 to 2 months out). So, spot price is higher than these future prices.

 

If true, that means that oil is already tougher to get your hands on in the international market for immediate delivery or that we are getting very close if not already in balance between supply and demand. That would be ahead of consensus.

 

This may help explain why oil has remained into the $40's this week despite a larger than expected inventory build in the U.S. and a barrage of negativity and skepticism around the Doha meeting on Sunday. While true that a cut is out of the question, if a freeze is truly enacted and based on supply and demand coming into balance, $40 should become a bottom and not some recent high as indicated by most.

 

Cardboard

[SharperDingaan]

Backwardation/Contango began oscillating about 6 weeks ago - indicating that the current cycle was bottoming; since then the front months have progressively gone into backwardation. Assuming a Doha decision to freeze, most would expect the spot to rise & backwardation to extend out into the middle months as well.

 

As most oil is 'paper' oil, a position is very easy to reverse - but execution is volatile; in every month of a 100 bbl/day short, one has to buy in 200 bbl/day - pressuring the entire forward curve. The more that collectively rush to unwind at the same time, the more the forward curve moves up - & the greater the magnitude of the potential price spike. This is essentially the rationale behind the forecasts for higher prices over 2016-2H.

 

Inclined to agree that $40 ish is likely the new bottom - but we see it primarily as a spike to something higher, & a fade down to $40. At current workforce levels it will take a little time to get additional physical into the pipeline.

 

SD

 

 

 

 

While I am not able to verify this information, apparently that the Brent futures are in backwardation for the front months (1 to 2 months out). So, spot price is higher than these future prices.

 

If true, that means that oil is already tougher to get your hands on in the international market for immediate delivery or that we are getting very close if not already in balance between supply and demand. That would be ahead of consensus.

 

This may help explain why oil has remained into the $40's this week despite a larger than expected inventory build in the U.S. and a barrage of negativity and skepticism around the Doha meeting on Sunday. While true that a cut is out of the question, if a freeze is truly enacted and based on supply and demand coming into balance, $40 should become a bottom and not some recent high as indicated by most.

 

Cardboard

[opihiman2]

Doha meeting went kaput.  Not surprising since Iran has been saying over and over again it will not cut and S.A. is ready to go full on oil war on those guys. 

 

Monday is going to be interesting.

[Palantir]

Was it not supposed to go kaput? Iran didn't even come to the meeting...