Friday, August 19, 2016

Idle Comments Not Ready For Prime Time -- August 19, 2016

Did Yahoo!Finance just change their "front page"? They have received a lot of criticism for their "new look." For the record, I hate Yahoo!Finance's new look and hope they return to their "old look."


It's been about two years since the oil sell-off began. One can see the EIA graph here.

I guess in round numbers, we hit a low of about $25 in February, 2016, after plummeting from a trading range of $90 - $110 for several years.

Oil at $25 takes us back to the years -- if you can believe this -- 1986 - 2002.

In the past two years, untold billions of dollars in CAPEX have been cut as deep-sea projects have been deferred or canceled outright. "OPEC" production has been producing at max rates, and Norway is reporting that they are now setting production records.

There are two schools of thought going forward:
  • some say there is no way US shale oil can possibly make up for all the deferred / canceled deep-sea and conventional projects
  • others say US shale oil can make up for loss of conventional plays
Most agree that we will find out one way or another, which argument was correct, in 2017, at the earliest, or maybe 2018, at the latest.

My hunch is we will find out in 2018 when the real data starts rolling in, but the market will "telegraph" the answer by mid- or late-2017.

So, expect rocky/volatile/scary WTI pricing between now and March, 2017.

July, 2017: the market will telegraph where oil will be trading in 2018

2018: we will see which argument won out.

For me, it's a win-win for Big Oil and for investors in Big Oil. If the deferred/canceled projects do not cause a problem, then Big Oil saved themselves from a huge disaster by bringing on even more projects. If the deferred/canceled projects result in a "relative shortage" of oil, the price of oil actually produced will be significantly higher.


Farther out, one can confidently say that by 2022, and possibly as early as 2020, we are going to start seeing stories of "Peak Oil" again. I wouldn't be surprised if the "Peak Oil Blog" didn't re-appear after being shut down some years ago coincident with the Bakken Boom.

No one will argue that Saudi Arabia will be a failed nation by 2022 if the price of oil remains under $60 between now and then. If oil stays under $50 for another couple of years, Saudi's entire cash reserves will be gone -- or shored up by debt. [Of course, no one expects oil to remain under $50 for two more years but even $60 oil is not particularly helpful for Saudi. They need a lot more.]

Saudi needs cash:
  • to support huge social program internally; pay for desalination; huge nuclear reactor program (just to make enough electricity for their own country)
  • to fend off Yemeni ankle-biters, costing them millions
  • to fend of Iran (remember, at one time the Mideast was all about Iraq vs Iran, with Saudi on the sidelines simply producing oil; no more; it's now all about Saudi vs Iran, with Iraq rising)
If Saudi is able to navigate successfully the next four years, they will only do so by getting oil back to at least $80/bbl, and even that, seems unlikely to be adequate.

If on the other hand, Saudi fails to get oil back to $80, one wonders if they can even manage their current production levels. It may be "relatively" inexpensive to produce Saudi oil, but it still requires a lot of cash.

As with the CAPEX issue above, the Saudi story is a win-win for oil bulls: either way, we are going to see oil well above $80 by 2022, if not sooner.

A Shout-Out To Harold Hamm

One really has to hand it to Harold Hamm. It was only a couple of years ago, during the height of the Bakken Boom, Hamm was talking about a "stealth" play in Oklahoma -- I forget now whether it was SCOOP, STACK, or both. At the time, I thought it was a bit of Hamm hyperbole. I was really, really wrong.

Like the Oklahoma land rush of 1889, "everyone" is rushing to Oklahoma. There are two amazing stories here. First, Hamm called it again, and he called it early. And second, he called it during the Bakken Boom when it would have been easier to drill out the Bakken than take on new risks. He was thinking like the Big Oil companies: concerned about new production in the out years.

Speaking Of CAPEX

From 24/7 Wall Street:
America’s two supermajor energy producers, Exxon Mobil Corp. and Chevron Corp., are joining forces with Hess Corp. to bid as a group for rights to drill in Mexico’s deepwater offshore fields.
The auction is currently set for December 5 and includes 10 offshore regions.
Since removing a nearly eight-decade ban on non-Mexican exploration and production companies, Mexico has held three auctions and achieved only modest success.
The first, in July 2015, resulted in just two of 14 shallow-water blocks being taken. A second auction last October resulted in three of five shallow-water offshore contracts being awarded, and the third, with bidders competing for onshore assets, drummed up 25 bids for 25 fields, most from small Mexican firms.
Some data points:
  • December deepwater auction: $44 billion expected from 26 companies; first-ever sale of deep-water rights
  • later this year, or early 2017: Mexico is planning to auction rights to onshore shale oil fields; previously it was a bust; bad timing
  • onshore shale oil: 
    • 60 billion bbls; 50% oil (Pemex estimate)
    • 104 billion bbls; of which 13 billion bbls are oil (EIA estimate) 
Reminder to newbies:
  • Bakken: 50 billion bbls recoverable; 93% oil

NOTE: in all my posts I often mix facts and opinions, and I don't often differentiate or spell out which is which. I am inappropriately exuberant about the US economy, the Bakken, and the oil and gas industry. Do not make any investment, financial, job, relationship, or travel decisions based on what you read here or think you may have read here. 

I often round numbers and generally do not say when numbers have been rounded. I often make simple arithmetic errors. There are a lot of typographical and factual errors which I try to catch later and correct. I ask readers not to tell me of typographical errors unless they materially affect my agenda.

I do have an agenda: to better understand the Bakken and to place the Bakken Boom in context with current events, to include a few selected non-energy issues. 

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