Buy High, Sell Low -- US Government Economics 101 -- October 27, 2015; Is The Bakken The New Stragetic Petroleum Reserve?

This may explain why the price of oil continues to drop. Wow, this puts additional pressure on Saudi Arabia and OPEC. I marvel at how things have changed. A few years ago it was all about "peak oil" and $150 oil. Now there's a glut of oil as far out as one can see.
Bloomberg is reporting:

The U.S. plans to sell millions of barrels of crude oil from its Strategic Petroleum Reserve from 2018 until 2025 under a budget deal reached on Monday night by the White House and top lawmakers from both parties.

The proposed sale, included in a bill posted on the White House website, equates to more than 8 percent of the 695 million barrels of reserves, held in four sites along the Gulf of Mexico coast. Sales are due to start in 2018 at an annual rate of 5 million barrels, rising to 10 million by 2023 and totaling 58 million barrels by the end of the period. The proceeds will be “deposited into the general fund of the Treasury,” according to the bill.

Short term, and perhaps a knee-jerk reaction, this seems like a bad omen for the domestic oil and gas industry, but then this:

The sale is the second time the U.S. has raised cash from the reserve, created as a counter-balance to the power of Arab producers after the first oil crisis of 1973-74. The U.S. may sell also additional barrels to cover a $2 billion program from 2017 to 2020 to modernize the strategic reserve, including building new pipelines.

With regard to energy, this is a most exciting time to observe tectonic changes that were never, ever expected. (Memo to self: send another note to Jane Nielson). But more importantly, Saudi Arabia is living on borrowed time, perhaps ten years, whereas the US and Russia will be in the catbird seat of energy after 2020.  

With regard to the price of oil and the amount of oil being released from the SPR, let's keep it in perspective. 

• the sales don't begin until 2018
• the sales go on for eight years
• the annual rate is 5 million bbls (14,000 bopd)
• 14,000 bopd of "new" oil coming unto the market won't even be noticed
• the annual rate is 5 million bbls; North Dakota, despite all the headwinds, produces 5 million bbls in four days; unfettered, North Dakota could produced 5 million bbls in two days

Question: heavy oil or light oil in the SPR? The refiners need heavy oil, not more light oil.

The other interesting point: are the Bakken, Eagle Ford, and Permian the new strategic petroleum reserves. In those shale basins two things are going on:

First, companies are choking back on production on new wells. They can open the spigots in one hour if necessary; that's faster than what the SPR can do -- to open the SPR spigots require action by "someone" in Washington, DC, and that will never occur in one hour. My hunch is that North Dakota could increase production by 250,000 bopd if all spigots were opened wide. And that's just North Dakota.

Second, the fracklog in the Bakken has likely surpassed the 1,000 mark. At a measured pace, they can be brought back on line at three wells/day, and at 2,000 bopd, one could see 6,000 bopd increase each day for quite some time (yes, the 2,000 bopd initial rate would decline, yada, yada, yada,) but the fracklog is not trivial. 

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Misleading Title and More Of The Same

I was not going to post this article over at SeekingAlpha, with the headline that Big Oil is "in bed" with Saudi Arabia. It seemed the title was misleading and too much of the "Saudi perspective" everyone has been reporting for months. In other words, not much new in this article. But if I don't post it, I will have a gazillion readers sending me the link.

Let's get this out of the way first: the title is misleading. Big Oil is not in "cahoots" with Saudi Arabia. Big Oil is simply Big Oil. Read the article. I think Big Oil is mentioned once in that long article and certainly not in "cahoots" with Saudi. One can argue whether Saudi Arabia is out to "crush" shale. But for argument's sake, let's say the kingdom is out to crush shale; Big Oil is not out to "crush" shale. (If it did, that would be fine: the price of oil would hit $200/bbl; 50% of US production now comes from shale, and nothing will replace it for years.)

But this is where I really have problems with the article, as I wrote to Don (this is not ready for prime time):

The problem I have with the article is the emphasis the writer puts on Saudi's ability to control the price of oil. No doubt that is still true, but each day it becomes less and less accurate.

On the "increase" side: I think Saudi has pretty much come close to maxing out what they can produce; they need more oil for domestic consumption; Saudi itself has admitted that they are living on borrowed time, maybe ten years.

On the "decrease" side: there is no question that the price of oil would spike if OPEC announced they were cutting back, but there is so much oil in the ground in the US -- fracklog and choking back -- that the US could easily make up the difference. The press, of course, would go nuts with an announcement that OPEC is cutting back, but this is nothing like the embargoes of the past, or the cuts in the past. Things have changed.

I have never seen anything like this and if you had asked me in 1995 if there would ever be a glut of oil in my investing lifetime, I would have laughed. I don't think anyone has really figured out what this all might mean.