Friday, December 4, 2015

OPEC Meeting Summary -- December 4, 2015

There is one important data point in this entire article, reported by Bloomberg at Rigzone:
OPEC agreed to set a new oil-output ceiling of 31.5 million barrels a day, a level that’s in line with the group’s most recent production estimate. Crude fell as much as 3.6 percent in New York.

The increase is from a previous output target of 30 million barrels and does not include production from Indonesia, which joined the producer group after a break of almost seven years, according to a delegate with knowledge of the matter, who asked not to be identified because the decision hasn’t been made public. OPEC pumped about 31.4 million barrels a day of crude in October.

Venezuela, whose foreign currency reserves are at the lowest level in 12 years, led calls for a reduction in output, supported by Ecuador.

Iran is poised to boost output after sanctions over its nuclear program are lifted and it won’t seek permission from OPEC to do so. OPEC requires consensus among members to alter its output ceiling. Global oil stockpiles have risen to record levels as Saudi Arabia, Russia and Iraq boosted supply.

The market is oversupplied by as much as 2 million barrels a day, equivalent to about 2 percent of global output.
Bloomberg/Rigzone is reporting that Alberta's jobless rate exceeds that of Ontario's for the first time in two decades.

Brian Wilson and Sir George Martin In The Studio

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

Seventeen (17) New Permits -- December 4, 2015

Active rigs:

Active Rigs64191192181199

Seventeen (17) new permits:
  • Operators: CLR (14), BR (3)
  • Fields: Elm Tree (McKenzie), Corral Creek (Dunn)
  • Comments: Nine CLR permits on one pad, Hereford Federal permits; five CLR permits on one pad, Hereford/Antelope Federal permits
QEP renewed twelve (12) permits, all MHA permits in Dunn County.

One (1) producing well completed:
  • 28255, 2,513, XTO, Nelson Federal 41X-5C, Antelope, Sanish pool, t10/15; cum 4K 10/15; after two days;

The Nut Of The Argument -- December 4, 2015

I'll come back to this article later (if I remember) but it's about as good an explanation as I've seen.

Bloomberg is reporting why OPEC has to keep pumping. It's a long article and a great article but I think these two paragraphs are the nut (as Hunter S Thompson would say) of the argument:
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.

Are some countries overstating their proved reserves? Probably. Yet there's a recent example of new oil reserves suddenly showing up that is hard to overlook: Advances in technology, financing (particularly the use of hedging to raise capital), and operational efficiency have made a mockery of the notion that U.S. oil production is in terminal decline.
Reuters is reporting that the number of active rigs in North Dakota likely to fall further following the most recent NOPEC meeting:
North Dakota's drilling rig count is expected to fall further after OPEC failed to agree on a unified output cap on Friday, the state's oil regulator said.
The drilling rig count in the second-largest U.S, oil producing state has dropped in the past year to 64 from 191, due to falling oil prices and improving efficiencies.
The state sees OPEC as one of its biggest rivals, and on Friday the 13-member group failed to agree on an oil production ceiling, effectively flooding the global market with even more crude.
Lynn Helms, head of North Dakota's Department of Mineral Resources, said he was "disappointed" with the OPEC meeting's outcome and added that it likely serves as an ominous harbinger for the state's drilling rig count.
"This will most likely increase downward pressure on the state's rig count and potentially effect additional wells requesting not-completed status," Helms said in an email to Reuters.
Venezuela ... tick, tick, tick.

Friday, December 4, 2015 -- Robust Jobs Report; Rate Hike Coming; Participation Rate Jumps

We've talked about this before:

Active rigs:

Active Rigs64191192181199

RBN Energy: great update on Corpus Christi.

NRG CEO resigns. Link here. I may come back to this. I have never invested in NRG; never will. But NRG is our electric utility down here in north Texas. From my perspective, their rates are unnecessarily high due to NRG's green energy initiatives. Apparently, the board agrees that the CEO's emphasis on wind energy was ill-advised. From my perspective, no love lost between NRG CEO and me.

Oil prices: Yergin on oil prices. I disagree. I plan to do a post on this but I keep running out of time. Maybe this weekend. Yergin is way smarter than I am, and has much more data available to study, and a whole think tank working for him, so I know I'm wrong, so he's right and I'm wrong but that won't stop me from thinking differently, respectfully disagreeing.

Jobs: rate hike coming. Bloomberg is reporting:
Employers added more jobs than forecast in November, underscoring Federal Reserve Chair Janet Yellen’s confidence that the U.S. economy is strong enough to withstand higher borrowing costs.
The 211,000 increase in payrolls followed a 298,000 gain in October that was bigger than previously estimated, a Labor Department report showed Friday. The median forecast called for a 200,000 advance. The jobless rate held at a more than seven-year low of 5 percent.
Employee pay increased at a slower pace last month. Average hourly earnings at private employers rose 0.2 percent in November after a 0.4 percent gain. The year-over-year increase in hourly pay compared with a 2.3 percent increase in October.
The labor force participation rate -- the share of working-age people who are employed or looking for work -- rose to 62.5 percent from 62.4 percent.
Note To The Granddaughters

I'm in a great mood. While cleaning the house I came across a piece of junk mail from Gerber life insurance that I would have received about two years ago. That reminded me. Life insurance is really, really inexpensive for children under the age of 14 years of age.

Yes, I know the arguments "against" life insurance, and the arguments regarding term insurance vs permanent insurance. I have no problem with that. It's an individual choice. But for me, I'm a big "believer" in permanent life insurance. There are two types, whole life and universal life.

I sent a photocopy of the Gerber life insurance ad to my primary insurance company, Thrivent, and they referred me to our local agent here in Grapevine, Bob Pangrac. My daughter and I spent 2 1/2 hours with Bob yesterday. I learned a lot and found the experience very enjoyable. I wasn't looking forward to the appointment but I was pleasantly surprised. I think my daughter also learned a lot.

Bob did a great job explaining the difference between whole life and universal life. 

The most important reason for permanent life insurance, as far as I'm concerned, is "insured insurability." Buying these policies before the grandchildren turn 14 years of age, means that they are insurable through the rest of their lives regardless of their medical condition in the out years. In this particular case, with no medical history or exam, our granddaughters can purchase significantly more insurance nine (9) times later in life. Some of these events are age-related (at age 16, 18, 21, 23, etc) and others are event-related (getting married, having children).

So I got three incredibly great policies for the granddaughters at a monthly premium for all three that will be less than the cost of one sushi dinner. In fact, if I have a martini with my sushi dinner, the total cost of these three policies will be about 75% of the cost of the dinner.

I've had a Thrivent policy for decades and couldn't be happier. I have a similar MONY policy for my wife and am similarly happy. I bought the daughters a Thrivent policy shortly after they were born 30 years ago, and their grandfather bought them a Sons of Norway policy about the same time. Even with multiple policies, I do not feel anyone is overinsured and am very happy with the small premiums. The policies for my wife and myself have been completely paid.

So, I'm in a good mood. It was coincidental that the Wall Street Journal had an article on universal life insurance. Bob talked about that yesterday, completely unaware, obviously, that the WSJ was going to have an article on that exact topic. And it's now new. The WSJ had a similar article back in August.

Note to the Granddaughters

We attended the largest Christmas Parade in Tarrant County, Texas (Ft Worth) last night, here in Grapevine. It seemed to go on forever and ever. About two hours long. The weather was perfect and that might account for the fact that the parade route was packed; the crowds seemed much bigger than last year. Much bigger. It was like Times Square, NYC, on New Year's Eve. The weather was incredibly mild and absolutely dry. Beautiful night. It was the first time our granddaughter, a flutist, marched in a parade. She loved it.

Note to the Granddaughters

A month or so ago, Texas Monthly published their list of the top 25 barbecue joints in Texas. There must be a thousand barbecue joints in Texas. There's a group in Dallas -- I believe associated with the Dallas Morning News -- whose mission in life is to visit the best barbecue joints across the state. "They" are serious down here when it comes to barbecue, as serious as they are about football specifically, and sports in general. I say all that because it was a huge surprise that one of the 25 was right here in Grapevine, Meat U Anywhere. (In fact, it's across the street from "my" bicycle shop.) After seeing that article in Texas Monthly, I visited one, about a month ago, and then yesterday I took my wife, and then later took my daughter (after the life insurance policy visit), not to eat, but just to see it in anticipation of her in-laws coming to visit over Christmas. We want them to experience real Texas barbecue. From the linked article:
When Andy Sedino, the managing partner and director of operations for Rudy’s Bar-B-Q’s North Texas franchises, left his post in 2012 to launch his own venture, expectations were rightly high. Not only has Sedino met them, but in the short time Meat U Anywhere has been open, the small restaurant has attracted loyal customers eager to pack the joint, especially on weekends, when it serves prime rib, mammoth beef ribs, and thick-cut turkey slices rubbed liberally with herbs.
Yesterday when my daughter and I stopped by to check the menu at lunchtime, the line stretched out the door. We walked right in, walked to the front of the line, but told folks we were only checking out the menu -- not cutting in line -- everyone was as friendly as could be. No one was upset that we might be trying to "cut in." For a large group, I recommend take-out. Order ahead and bring home pulled pork, brisket, smoked turkey, sausage. Menu here.

The Sports Page

We got home from the parade in time to see the last quarter of the Green Bay Packer - Detroit Lions game last night. All I can say is "incredible." 

America Is In Good Shape

Data points:
  • gasoline is dirt cheap and will remain dirt cheap for years
  • auto sales are hitting records
  • the country can afford free college tuition for all -- Hillary
  • Playboy Magazine will end nude photos after January/February, 2016, issue; Pamela Anderson will be last nude pictorial
  • US Attorney General will prosecute right-wing "hate" speech; apparently more dangerous than jihadists
  • despite all that talk about bird flu, there was apparently no shortage of turkeys this Thanksgiving; walking through grocery stores yesterday I was amazed at all the frozen turkeys still available
  • open enrollment for ObamaCare is now open through December 15 if one wants coverage by January, 2016
  • fighting back, controlling climate change, man is corralling Mother Nature -- not one severe hurricane this past year -- or in the past ten years for that matter
  • San Bernardino mass shooting not that big a deal -- NPR:
The shooting in San Bernardino, Calif., was the 355th mass shooting in the U.S. this year — or more than one per day on average so far in 2015 — according to groups monitoring such attacks in recent years.
The San Bernardino case, where 14 people were killed, wasn't the only mass shooting on Wednesday. A 34-year-old woman was killed and three males, ages 17 to 52, were injured by gunfire in Savannah, GA, earlier in the day. Police believe at least two shooters were involved in that incident, but no arrests had yet been made.
  • David Letterman won't be on television this Christmas.

Baby, Please Come Home, Darlene Love

Many years ago it was pointed out that the most dangerous place for pedestrians was in pedestrian crosswalks. More pedestrians are hit by motor vehicles in crosswalks than anywhere else. I was reminded of that when reading this Breitbart report: in the US high-profile shootings are more likely to occur in gun-free zones than anywhere else.
WaPo points to a study by Mother Jones that claims that high-profile shootings began increasing in gun-free zones in late 2011/early 2012. The examples Mother Jones provides are the Aurora movie theater, Sandy Hook Elementary, and the D.C. Navy Yard, all of which were gun-free zones.
Other examples of shootings in gun-free zones that could have been cited are Arapahoe High School (December 2013), Fort Hood (April 2014), Emanuel African Methodist Episcopal Church (June 2015), Chattanooga military offices (July 2015), the Lafayette Grand Theatre (July 2015), and Umpqua Community College (October 1). [And now San Bernardino, Inland Regional Center, another gun-free zone.]
Note the source: not Fox News but Mother Jones. I don't know if Baltimore is a gun-free zone, but homicides in Baltimore stand at 316 today (a dynamic link).