What is the extent of the 'opportunity' in the oil market?

[goldfinger]

At the risk of making a fool of myself(and i really got to stop this) i wouldn't add too much weight to ISIS....at least yet....

 

You have 4k Russians involved and no one really else from the major powers. France maybe a battle group flying only sorties(35 aircraft so far). And the Us is really only fying Sorties....so you have no "boots on the ground(maybe "advisers" only)." The Germans dont want a fight in Syria...thus the recent vote for a "non combat" role.

 

All of this opposed to the 70,000+ that went into Iraq in 03. Plus, yeah maybe you could say well its just beginning...i cant really speak to the future.

 

You have a ground breaking deal with Iran that was only just this summer. So in reality maybe "more peaceful ME" are priced in at the moment.

 

I mean yea the worlds a dangerous place but I dont think its as dangerous right now as the news makes it out to be......in other words look at the numbers and not at the headlines.

 

So now your going to say something about the Ukraine...well ask the Irish about that they've have a major power run into their cities not even 40 years ago....so im fairly confident that that will remain locally.

 

Ever since two monkeys crushed each others brains out as there been geopolitical risk.

 

 

An I stress in no way am i trying to diminish whats happening. Its a shame that it happens. I just think that the world is a "relatively" safer place....at least that's what the price of oil is telling me.

I am more focused on oil producers - ISIS is a small part of the issue: SA financed terrorist groups... Iran/SA are in competition in the middle east and the old fight in between Shiites and Sunnis is pretty much going on right now (Look at Syria/Iraq/Yemen etc...).

Also what happens when Iraq, Venezuela, Russia etc... and so on have to face budget deficit for a sustained period of time because of oil is another question...

[Cardboard]

At long last, Canada is finally making a first step to stop having its oil hostage to Americans. This should help narrow the discount vs Brent:

 

http://www.bloomberg.com/news/articles/2015-12-02/enbridge-line-9b-said-to-deliver-crude-oil-to-eastern-canada

 

Regarding the oil price reflecting a safer world this is not accurate IMO. Just a few current examples:

 

1- Venezuela will have its elections this week-end. The country is on the verge of collapse with inflation running above 100% a year! Civil war is not out of the question.

2- Algeria could turn unstable very quickly. Unemployment is very high and the oil price is hurting them big time. Civil war is not out of the question and ISIS will likely move there at some point.

3- A Russian jet shutdown by a NATO country. I will repeat: a Russian jet shutdown by a NATO country. What is going to be the revenge?

4- Terrorism acts against Russia, France, the U.S. and unfortunately likely more to come. Triple suicide bombers in Nigeria 12 hours ago.

5- Turkish troops in Mosul while Bagdad does not want them there.

6- Saudi Arabia and UAE having invaded Yemen or a proxy war with Iran.

 

And the list goes on and on. So no, I don`t think that the world is any safer today, actually the opposite IMO. The oil price is low because at the current price, producers are willing to pump enough of it to meet demand and there is enough in storage to prevent any fear of a shortage. That is why there is likely zero premium for geopolitically induced shortage.

 

Everything I read points in one direction: plenty for now, not enough tomorrow. Supply outside OPEC is coming down and long lead projects are cancelled on an unprecedented scale. This takes time but, the decline rate never stops working. The IAE predicts the 2nd half of 2016 for the market to be on balance or for demand to start chewing into inventories. That is factoring in a lot of growth from OPEC including Iran and not enough decline IMO from non-OPEC which is 67% of the equation.

 

One of the biggest bear or Ed Morse from Citigroup who was calling for $30 oil, is now calling for $55 in Q4 2016. That is a 37% increase from here. Do you really think that the S&P will or can deliver this much return in the coming year? There is only Goldman left here in the bearish camp among large players.

 

I will admit having no idea what oil will do tomorrow and it could even go to $20. However, the situation is clearly unsustainable if you look out a few years which should be the usual for an investor vs a trader. $60 oil does not seem crazy at all and I am near certain that such level would not trigger a "gold rush" to launch new oil sands projects, resume offshore projects and even develop shale oil.

 

Lower for longer will also mean lower capex for longer. Where did you see huge housing development projects after the housing collapse? Same human nature at work here after a crash: fear, less interest, less funding.

 

There are companies such as Surge Energy and RMP that have very sound balance sheets, low production cost and that trade very cheaply. Oil bearishness, tax loss selling, etc. hurt the price big time. Some can also be found in the energy services space. So depending on how much risk you want to stomach or on how long you think oil will stay down, there are opportunities.

 

Cardboard

[SharperDingaan]

We have no idea what the next 5 years will bring, but we do know that time is a great healer; as whether one bets right or wrong - the longer one stays with the investment, the greater the odds of mean reversal. For some this is a good thing; for others, not so much.

 

In today’s climate, zero o/g exposure makes little sense. It’s really about how much exposure, where & what kind, & having a strategy as circumstance change. Some folks prefer to be prepared, others are content to jump the train as it pulls out the station. Obviously, some will miss.

 

Our view is that the oil world is a lot more dangerous than it was; even 6 months ago. Global supply outputs are declining at an accelerating rate as water/gas cuts increases, & wellhead pressures decline. It is also increasingly clear that a global warming solution – will be the permanent shut-in of a good chunk of the globes existing (higher cost) proven o/g reserves. Alberta Tar Sands may well become more valuable as a ‘green’ CO2 sequester sink, than as a ‘dirty’ oil.

 

It is also becoming highly likely that global energy policy will bias towards a higher consumer price for non-renewable energy, and a lower one for renewable energy as scale & technology improves. Today’s low crude price offset with higher pump taxes, & the $ subsidizing ‘cleaner’ industry.

 

Have a strategy as circumstance change.

 

SD

 

[goldfinger]

http://www.rigzone.com/news/oil_gas/a/141659/Analyst_Oil_Supply_and_Demand_to_Rebalance_in_2016

 

[Valuebo]

Isn't the question more "Is there any region that would actually benefit from lowering it's own production?" versus "What is a correct price level for oil?" ? Short and medium term, 101 economics don't seem to matter much. All parties need oil income and don't want to cave in because if you do, you are just going to be replaced by someone else. For some isn't the question also "Why not increase production even further"? No need to delay the inevitable? Idk, I'm quite clueless on these things but then again so is almost everyone else. :)

 

Everyone is pumping the max they can. Years of 100$ oil financed this. Projects still came online in 2015. Now at 40$ it is getting harder just to maintain production in 50+% of prod and what they called a glut has already narrowed down from 2.5mboe/day to 1-mboe/day in the last year. Stocks is the thing that allows for all these shorts to feel confident for now. Shale I think puts a soft cap on prices close to 60+$/boe.

 

 

But production still > than demand and no one will be willing to slow production before they are economically forced. So doesn't that simply mean that all those NA shale producers will simply go bankrupt or taken over by majors as they are the weakest players by far?

 

No one knows where the price goes from here but there sure seems to be little incentive for oil to go up given that all players are still hanging on. Many claim we won't see sub $30-$35 simply because ... ? Idk honestly. It seems unlikely but given everything, why not? $40 seemed just as unlikely a year ago.

 

So can someone tell me why all those North American producers aren't fucked?

[Cardboard]

The NA producers may face bankruptcy as you mentioned but, this only means a change of ownership, not a direct or immediate reduction in production.

 

On the other hand, lower prices will lower the incentive to drill for oil via funding and investments and to cherry pick what are lowest cost assets. This is and has already happened.

 

In the end, I have to admit that oil investments are risky here since most companies employ leverage. If you stick with low cost producers and having low debt level normally, you should do fine. However, if countries act crazy and maintain that war for a few years, then even these companies may not make it under a $20 scenario. Makes it uninvestable.

 

One thing that is becoming clear is that Saudi Arabia will be bankrupt in a few years looking at the current price and forward curve. Even if oil was to rebound to $60 and stay there, the deficits are so large that their reserves will deplete very quickly. Their ability to access the global credit market will also be shut down very soon if oil remains this low with bond vigilantes seeing what is happening to their finances.

 

The same is true for a few more countries: Algeria, Nigeria, Venezuela and even Iran. Of course, they could reduce their budget spending but, they have relied so much on that to keep control over a large unemployed population that it would create instability. And to create employment away from oil extraction takes years. So they are ill prepared.

 

I truly don't know what they are thinking since simply pulling 500,000 barrels a day from the market as a group would stabilize oil in the $50-60 level even with Iran coming in. Who in this world believes that the U.S. or other non-OPEC countries would rush to produce more oil at that price? It would remain a difficult situation where only top notch/low cost assets are exploited likely leading to still an overall decline in production.

 

Cardboard   

[Jurgis]

So can someone tell me why all those North American producers aren't fucked?

 

Some of them are. All of them? Not really. There are bunch of oil cos with great balance sheets. They are also not cheap though.

 

It will all depend on oil production decline. On days like today, you'd think production decline will never come. But it will. And not only from shale.

 

Demand is also going to grow absent global recession. Sure if USA goes into recession + China/etc continue to disappoint, then yeah, oil can go to $20. There are no guarantees.

[goldfinger]

Cash costs of existing production looks like this ww: http://screencast.com/t/rJ8Q0g2q5Fjv

below 40$ there is more than 2.5/3M boe/day of production that becomes uneconomic.

below 30$ this number increase by 1M to 2M

below 20$ there is around 14M boe/day of production that becomes uneconomic.

Let alone depletion (>3%/year with maintenance).

Companies start shutting in production when it gets uneconomic to produce.

Last time I checked the supply/demand equation was at 1M, 1.5M boe/day of excess production at most.

So how long does it take to make a dent to stocks at these price levels?

[goldfinger]

Nawar's very detailed analysis on what he calls the twin oil crashes of 2014 and 2015: http://www.authorstream.com/Presentation/nawar295779-2683608-2014-2015-oil-crash/

Highly recommended...

[Valuebo]

Cash costs of existing production looks like this ww: http://screencast.com/t/rJ8Q0g2q5Fjv

below 40$ there is more than 2.5/3M boe/day of production that becomes uneconomic.

below 30$ this number increase by 1M to 2M

below 20$ there is around 14M boe/day of production that becomes uneconomic.

Let alone depletion (>3%/year with maintenance).

Companies start shutting in production when it gets uneconomic to produce.

 

Market isn't that elastic really. It takes a while for these prices to bring change.

 

http://www.bloomberg.com/news/articles/2015-12-07/opec-unshackled-from-quota-could-add-millions-of-barrels-in-2016

 

So again I'd say many NA companies and their shareholders are fucked. This likely isn't going to resolved in a few quarters.

[goldfinger]

Cash costs of existing production looks like this ww: http://screencast.com/t/rJ8Q0g2q5Fjv

below 40$ there is more than 2.5/3M boe/day of production that becomes uneconomic.

below 30$ this number increase by 1M to 2M

below 20$ there is around 14M boe/day of production that becomes uneconomic.

Let alone depletion (>3%/year with maintenance).

Companies start shutting in production when it gets uneconomic to produce.

 

Market isn't that elastic really. It takes a while for these prices to bring change.

 

http://www.bloomberg.com/news/articles/2015-12-07/opec-unshackled-from-quota-could-add-millions-of-barrels-in-2016

 

So again I'd say many NA companies and their shareholders are fucked. This likely isn't going to resolved in a few quarters.

 

There should be a wave of bankruptcies early 2016 as 2015 hedges die and current prices are in effect...

Production in NA will decrease by more than 500k barrels next year, but yeah it will take next year at least to rebalance the market

[dcollon]

Some comments from Howard Marks (attached)

[Cardboard]

So much manipulation going on in this market: One thing that I have noticed and that you can easily see as well if you look at a daily chart of USO.

 

Basically, the oil price moves up or down like you would normally expect until right around 2:00 pm. Then it comes down a fair bit to stop its move down about 10 minutes before 2:30 pm (or when the Mercantile Exchange closes) and then the chart goes dead or like the heart of a dead patient until 4:00 pm.

 

I saw that on so many days recently, it is crazy. Again today but, it was even more obvious on many other days. The difference in volatility is striking. Seems to me like the options/futures major player have found a way to bring back the price to where they like and then suck from weaker hands the contracts premium at the close at 2:30 pm. I don't know however, why and how the price stays there for almost 2 hours.

 

Maybe someone has a better explanation but, after seeing the USO chart all year, I had not seen this dead pattern after 2:15 pm until the close until this Fall.

 

Cardboard

[Evolveus]

I'm not a chartist, and I don't know what that end of day flatness means, but I have that chart handy so I'll post it here to bring an image to Cardboard's comment.

[Uccmal]

So much manipulation going on in this market: One thing that I have noticed and that you can easily see as well if you look at a daily chart of USO.

 

Basically, the oil price moves up or down like you would normally expect until right around 2:00 pm. Then it comes down a fair bit to stop its move down about 10 minutes before 2:30 pm (or when the Mercantile Exchange closes) and then the chart goes dead or like the heart of a dead patient until 4:00 pm.

 

I saw that on so many days recently, it is crazy. Again today but, it was even more obvious on many other days. The difference in volatility is striking. Seems to me like the options/futures major player have found a way to bring back the price to where they like and then suck from weaker hands the contracts premium at the close at 2:30 pm. I don't know however, why and how the price stays there for almost 2 hours.

 

Maybe someone has a better explanation but, after seeing the USO chart all year, I had not seen this dead pattern after 2:15 pm until the close until this Fall.

 

Cardboard

 

Interesting observation.  I was thinking about manipulation in this market this morning and the usage of the news media.  Opec announced nothing new or unexpected the other day, but the media spun it like it was some kind of catastophic event for oil production and prices. 

 

What actually happened to send prices down?  Fundamentals haven't changed in months in favour of cheaper oil.  If anything, the fundamentals suggest prices should go higher.  My conclusion is that talking heads on the short side manipulated the prices down using the news media.  Now they are closing out positions, and we can expect a report on Rig counts or a new skew on cancelled projects to push things the other direction.  This brings to mind the movie "Trading Places" where they are manipulating pork belly futures.

 

OPEC announced a theoretical production increase of 200 to 700 k per day, which of course they have already been pumping for months.  Take the mid point of 450 k and divided that by 92 M bpd and you get half a percent change in supply that was already hitting the market.  Never mind that 0.5 % change is well within the  margin of error on any estimates.

 

So much bullsh*t, so little reality.

[goldfinger]

Collapse of shale production has started: https://srsroccoreport.com/collapse-of-u-s-shale-oil-production-has-begun/

 

[goldfinger]

Collapse of shale production has started: https://srsroccoreport.com/collapse-of-u-s-shale-oil-production-has-begun/

 

Same here: http://peakoilbarrel.com/eia-says-shale-continues-to-decline/

 

[Cardboard]

Hi Goldfinger,

 

Thank you for bringing up that report from Nawar. This is one of the most comprehensive piece of analysis that I have seen on oil in a long time and well supported from various reputable sources.

 

I have been scratching my head for a few months as to why U.S. oil production was so resilient since it was shale that made it go up so much. There was also reports from States and even the EIA indicating that production from the Bakken, Eagle Ford and Permian was coming down and that they were losing/flattening on their so called "efficiency gains". Even propane inventories (related to NGL's production) were flattening to declining indicating some major slowdown in shale production.

 

So the missing link was new production from the Gulf of Mexico as indicated in this report and this should start to flatten out. Once that finally stops and removes the veil over true shale production, we may start to hear the truth from the media (hopefully) about this so called miracle that ain't so.

 

For anyone who reads financial reports from various companies, you realize very quickly that whenever you stop drilling these shale plays that decline rates are truly around 30% a year. Any slowdown in the number of holes that you put into the ground means a major and almost immediate impact on your current level of production. Check Lightstream for fun which has stopped any drilling since the start of the year! I have never read in any of these companies' reports that 1 rig was now worth 3, no matter how much more efficient drilling/fracking or other technique has become in the last 12 months.

 

Cardboard

[TheAiGuy]

Collapse of shale production has started: https://srsroccoreport.com/collapse-of-u-s-shale-oil-production-has-begun/

 

Do you know if the author has a strong opinion on bitcoin? It seems like he'd have a strong opinion on bitcoin.

[goldfinger]

Collapse of shale production has started: https://srsroccoreport.com/collapse-of-u-s-shale-oil-production-has-begun/

 

Do you know if the author has a strong opinion on bitcoin? It seems like he'd have a strong opinion on bitcoin.

 

Sorry I do not follow him, just caught up on the news through different articles...

[goldfinger]

Hi Goldfinger,

 

Thank you for bringing up that report from Nawar. This is one of the most comprehensive piece of analysis that I have seen on oil in a long time and well supported from various reputable sources.

 

I have been scratching my head for a few months as to why U.S. oil production was so resilient since it was shale that made it go up so much. There was also reports from States and even the EIA indicating that production from the Bakken, Eagle Ford and Permian was coming down and that they were losing/flattening on their so called "efficiency gains". Even propane inventories (related to NGL's production) were flattening to declining indicating some major slowdown in shale production.

 

So the missing link was new production from the Gulf of Mexico as indicated in this report and this should start to flatten out. Once that finally stops and removes the veil over true shale production, we may start to hear the truth from the media (hopefully) about this so called miracle that ain't so.

 

For anyone who reads financial reports from various companies, you realize very quickly that whenever you stop drilling these shale plays that decline rates are truly around 30% a year. Any slowdown in the number of holes that you put into the ground means a major and almost immediate impact on your current level of production. Check Lightstream for fun which has stopped any drilling since the start of the year! I have never read in any of these companies' reports that 1 rig was now worth 3, no matter how much more efficient drilling/fracking or other technique has become in the last 12 months.

 

Cardboard

 

Your welcome Cardboard. Nawar does great balanced detailed research from lots of reputable sources and it has great value. Glad it is useful to you!

[TheAiGuy]

Collapse of shale production has started: https://srsroccoreport.com/collapse-of-u-s-shale-oil-production-has-begun/

 

Do you know if the author has a strong opinion on bitcoin? It seems like he'd have a strong opinion on bitcoin.

 

Sorry I do not follow him, just caught up on the news through different articles...

 

Sorry, that was opaque -- that guy's nuts. A lot of ALL CAPS and bold red text is SUPER CONVINCING. I do appreciate the other source you posted (which actually has a lot of the same data) but I had to laugh a little reading this.

[Travis Wiedower]

Don't apologize, that was a good joke. That Nawar presentation was great, learned quite a few things. Thanks for posting.

[Uccmal]

Collapse of shale production has started: https://srsroccoreport.com/collapse-of-u-s-shale-oil-production-has-begun/

 

Same here: http://peakoilbarrel.com/eia-says-shale-continues-to-decline/

 

The drop in worldwide rig count is astounding.  There is no possible way the rigs have gotten 90% more efficient in one year, as Cardboard suggests.

[Cardboard]

While everybody has focused on the Lower 48 States production decline or shale since that is where most global production growth has come from over the last couple of years, I think that one of the key going forward is offshore and there is little to no discussion on that.

 

Besides late phase projects in the Gulf of Mexico according to Nawar, this has come to a near halt globally: North Sea, Russian Arctic, Brazil, Shell abandoning major Alaskan project, etc. Offshore is a major source of production and with no new project due to their high cost and reduced infill drilling we should see big decline there for many years out.

 

API reported a 1.9 million barrels inventory decline last night which exceeded analyst estimates. Let's see what EIA brings out at 10:30...

 

Cardboard