Friday, December 4, 2015

Week 48: November 29, 2015 -- December 5, 2015

The biggest non-story this week was the fact that OPEC punted, agreeing to agree to disagree, and letting members pump what they want. Although it rebounded slightly by the end of the week, WTI settled below $40 for the first time in more than three months earlier in the week.

The week ended with North Dakota issuing seventeen new permits, and QEP renewing twelve permits that were, apparently, about to expire. Meanwhile, the EIA is reporting a significant increase in crude oil storage capacity and inventory at Cushing, OK, and along the Gulf Coast. I did not link the article, but there was a story this past week that "a lot of money is being made in oil storage." If I see the article again, I will try to remember to link it. It was also noteworthy that Saudi oil imports into the US have plummeted in the most recent reporting period, though that was simply a snapshot in time. Most surprising, given the low cost of gasoline, demand for gasoline dropped for the first time this year below that demand for the same time period one year ago. Call me crazy, but that may be the biggest US economy story this week. If it's not the biggest US economy story this week, it's certainly the biggest story not reported. There are some analysts suggesting the US may slide into a recession next year; I ignored that talk until I saw the "gasoline demand" graph.

South Dakota approves its segment of the ETP Dakota Access Pipeline 

Bakken economy
Williams County's largest man-camp closes

Commentary -- Not Ready For Prime Time


December 10, 2015: from Yahoo!Finance --
Fadel Gheit, managing director and senior analyst at Oppenheimer, told Yahoo Finance's Alexis Christoforous in the video above that $100-per-barrel oil is a thing of the past—$60 to $70 per barrel is the new normal.
December 10, 2015: a must-read analysis from RBN Energy -- A New World Order? -- Global Crude Supply and Demand Through 2025 Bottom line: Although demand will increase, the report projects that demand growth is not expected to push prices back to 2014 levels before 2025. As the current crude oversupply is brought back into balance with demand the report suggests that we can expect a sustained period of supply/demand equilibrium with lower price volatility.

December 9, 2015: this is a teaser article to sway you to subscribe to an investment news letter, so consider that when reading it. But this writer says what I'm saying: we're not going to see $60 oil any time soon.
“The decision by the Organization of the Petroleum Exporting Countries to keep pumping at current production levels is either the ‘stupidest’ possible move the cartel could make or the ‘right call’ to defend market share from U.S. shale producers,” a handful of analysts told MarketWatch.

Most of the talking heads these days make it seem like OPEC has options in today’s oil market. Newsflash: They don’t. Once the U.S. shale boom made obvious the fact that the globe is NOT running out of black gold, it fundamentally changed the oil game.

“Oil sheiks don’t hold all the trump cards. Sure, they have the option to cut production. But when you actually look at the facts surrounding a production cut decision, you’d quickly realize that the amount of oil that OPEC would conceivably cut, wouldn’t rally oil prices much at all,” explains our resource maven Matt Insley. “It’s not like a few million barrels per day off the quota is going to get oil prices back to $80 – that simply won’t happen.”

The real trump card is the fact that the U.S. has a hell of a lot of economic oil at $50-60 per barrel. So we won’t see the price of oil rally much higher than that for any extended period of time, Matt says. Simply put, once the price of oil heads above $60, the U.S. shale spigots open up.
December 8, 2015: from the EIA, today:
While U.S. onshore oil production is expected to continue declining through most of next year, offshore oil output in the Gulf of Mexico is on track to steadily rise.
In its new monthly forecast, the U.S. Energy Information Administration said offshore Gulf oil production is expected to increase to 1.7 million barrels per day during the fourth quarter of 2016 up about 250,000 barrels per day from the fourth quarter of last year.
December 7, 2015: this article over at Platts is additional support for my argument that we are not going to see any supply-demand re-balance for a very long time. Everyone, including me, thought by shutting down those big CAPEX projects, oil prices would start to stabilize as early as 2016. Yergin has moved that out to 2017. But it turns out a lot of big CAPEX projects were well on their way in 2013 and will be coming on-line in 2016 and 2017:
Global oil supply is continuing to increase faster than demand in a trend unlikely to be reversed next year, Total CEO Patrick Pouyanne said Monday.

"The market is oversupplied and production capacity will continue to grow because a lot of projects were sanctioned in 2013 and 2014," Pouyanne told reporters on the sidelines of the International Petroleum Technology Conference in Doha.
The bulk of those upstream oil projects would come on-stream in 2016 and 2017. As a result, the international market would remain oversupplied in 2016.

Global crude and condensate output capacity this year was expected to rise by 1.7 million-1.8 million b/d in total from the 2014, marking one of the two biggest annual increments of the past decade, he said.
Original Post

My Disclaimer/Welcome provides my philosophy regarding my commentaries and the purpose of this blog. The bottom line is that this is idle chatter, personal thoughts, probably not ready for prime time, and certainly not well written, but it provides a bit of my thoughts on the current situation in a very, very general way.

There are two questions that need to be addressed. The first has to do with the price of oil, the second has to do with how this will all play out.

Price of oil

As I've stated many times, I won't predict the price of oil -- there are just too many variables. It's a fool's errand to predict the price of oil.

However, many talking heads suggest that prices will "stabilize" -- whatever that means -- sometime next year (2016) or 2017 at the latest. These talking heads argue that all the cancelled CAPEX projects will eventually catch up with us and sooner or later we will see a relative shortage of oil. I've said the same thing, using hyperbole, suggesting we will hear talk of $200-oil when we start to see the effects of those cancelled CAPEX projects, that is, a shortage of oil. The most recent to suggest a relative shortage sooner than later was Dan Yergin, in a video/article over at CNBC. Not only did he suggest the cancelled CAPEX projects would result in a shortage of oil, he suggested that by 2020, the world will require an additional 7 million bopd.

I mentioned that I disagree with Yergin, and I am now convinced that I have been wrong suggesting that we will "soon" hear talk of $200-oil in the not-too-distant future due to all those cancelled CAPEX projects. I'm wrong; it's not going to happen.

I am not aware of any cancelled CAPEX projects in Saudi Arabia or anywhere else in the mideast  -- the CAPEX projects that have been cancelled have been off-shore deep sea projects and projects in the Arctic. It's my impression that the Mideast has more than enough oil to adequately supply Europe, and along with Russia enough to supply China, for the next several years without any major new projects. Iran is soon to come on board (Saudi Arabia, by the way, says Iran is a "non-factor"; despite the sanctions, Iran has been producing, exporting oil all along and once sanctions are removed, we won't see that much difference; I don't agree; there are reports already of any number of German companies ready to move into Iran as soon as sanctions are lifted).

Meanwhile, in the western hemisphere, the glut of North America oil will last quite some time. I assume western Canadian oil production has been cut considerably. US shale production has not been reduced all that much yet, but potential production has been greatly reduced. I can't speak to the Permian or the Eagle Ford because I don't follow them closely. But I do follow the Bakken pretty closely. Unfettered, Bentek said North Dakota could produce 2.2 million bopd; that was at the beginning of the boom; since then, potential production in North Dakota has increased significantly.

If in the December Director's Cut (October data), North Dakota production comes in over 1 million bopd that will speak volumes. Bentek has already said that North Dakota's October production will come in at 1.2 million bopd. If that's accurate, that will be huge. The number of active rigs have been below 70 for quite some time, and despite that, there are now more than 1,000 wells waiting to be fracked.

I only assume it is "worse" in the Permian and the Eagle Ford.

As the price of oil starts to move up, those SI/NC or TATD wells in the Bakken will be fracked, and operators will add more rigs.

If the price of oil moves toward $60 and if the tea leaves suggest the price will remain above $60 and perhaps even increase, then the other plays, such as the Niobrara will come back into play.

Bottom line: with OPEC's failure to discipline itself this past week, we will see a new trading range for the next six months, a trading range between $30 and $40. (By the way, when Janet Yellen raises rates, that will strengthen the dollar, and oil will fall -- all else being equal -- another $3 to $5. If there is a recession next year, the price of oil will drop even further.)

The $30 to $40 trading range will last until the middle of the year (2016) when it will "stabilize" or get back to $40 - $50, where it will remain for quite some time. We might see $60 again in my investing lifetime but I doubt it. [About ten minutes after I wrote and posted that, I find that Platts is saying the same thing: the "fat python may be here to stay."]

By the way, do you want to be reminded of something staggering? Earlier today I posted this snippet:
Oil's finite nature has proven remarkably slippery. Peak Oil theories dictate that there can only be so many barrels beneath the ground, and at some point the world will have pumped more than half of them, and it's all downhill from there. But how many barrels are available is a function of money as well as rocks: If you make it cheaper to get at barrels, then more of them "exist." Consider that since 1980, the world has produced just under 900 billion barrels of oil -- and its proved reserves actually went up by just over 1 trillion barrels in that time
Let's parse that last sentence. Since 1980 -- 35 years -- the world has produced less than 900 billion barrels of oil. During that time global reserves actually went up by 1 trillion bbls.

Does anyone remember the estimated original oil in place (OOIP) in the Bakken alone? Five hundred (500) billion bbls. At a recovery rate of 20% that equals 100 billion bbls or more than 10% of all the oil produced globally since 1980. A lot of companies are going to go bankrupt or otherwise disappear but the Bakken oil is not going to go anywhere, and operators are not going to forget how to frack. And with less than 60 active rigs and 1,000 wells drilled to depth but not completed, and production still at one million bopd, it's not difficult to see that if push comes to shove, North Dakota can easily get to two million bopd. And that's just the Bakken. They say the Permian is better and the Eagle Ford is probably just as good.

How will this play out?

The other question is how this plays out? The question is asked with a country like Venezuela in question. I don't know; I don't understand macroeconomics and the oil industry well enough to even hazard a guess.

For those who are trying to answer the question, it's not as simple as saying there is a "glut of oil." It's not just "a glut of oil" but it's the kind of oil that matters. US refineries are optimized for heavy oil (a long, long story, that involves the Keystone XL which we've discussed numerous times before). The only reason Bakken oil "works" is because it is mixed with heavy oil before refining. Despite the glut of US shale oil, the US still needs to import heavy oil from somewhere -- Canada, Venezuela, for example. So, although Venezuela itself looks like it's about ready to implode, the fact is that US imports of Venezuela oil -- though way down by historical standards -- seems to have plateaued for the past several years. Canada is even more interesting -- staggering, one might say. If there is such a huge glut of US oil, one has to ask the question why Canadian imports are where they are -- and this is without the Keystone.

By the way, did you see what Venezuela was asking OPEC to do? All Venezuela was asking for was a 5% cut in production. Five percent would not have made a difference in the actual glut; but just the psychology of a "cut" would have "stabilized" prices -- or at least that's what it appears Venezuela was suggesting. 

Bottom line: the US will need to continue importing heavy oil from somewhere -- Venezuela, Canada, regardless of the political events in those countries.


I think the more interesting question is the existential question. Saudi Arabia needs $100-oil, as do most other OPEC countries. $20-oil could do significant harm to the US oil industry but $20-oil won't destroy the US oil industry. Saudi and the Mideast do not have enough oil to supply the entire world with $20 oil. It will be interesting to see how long Saudi Arabia and the other Mideast countries can survive on $30 oil. I personally don't think very long.

This all precludes a major geopolitical event such as a) an all-out war in the Mideast; or, b) the entire state of California falling into the Pacific Ocean. Either of those two things happening will have a significant effect on the price of oil. I say that because my hunch is that President Putin is also very interested in the existential question, specifically Russian existentialism. Forcing a bear into a corner is not necessarily something one wants to do.

Looking Forward, Looking Back, Slim Dusty

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