Thursday, December 10, 2015

The Red Queen Has Not Fallen Off The Treadmill Yet -- December 10, 2015; Top Story Of The Month?

It's possible a comment was made in the Director's Cut but I did not see it. I may have missed it.

The Director's Cut has had a monthly comment suggesting how many well completions were needed to maintain a certain amount of oil production.

The last time I saw that comment was in the July, 2015, Director's Cut (May data). This was the comment:
To maintain production near 1.2 million barrels per day, 110 - 120 completions must be made per month.
Did anyone note how many completions there were in October, 2015, as reported in the most recent Director's Cut? Yup -- 43 completions. I find that incredible. For the longest time it was reported that upwards of 120 well completions were needed each month to maintain 1.2 million bopd production in North Dakota, and in October, only 43 completions were reported. And that was down from 123 completions the month before. Forty-three completions, compared to 123 the month before (which was not out of the ordinary).

For now, this is the top story of the week. It may be the top story of the month. With regard to production, it may be the top story of the year.

Yes, I know, often the first month production is low because the well may have been completed the last day or the month; it's really the first full month of production that is under discussion when talking about the number of completions required to maintain a certain production level, but be that as it may ... well, we'll see what the "fallout" is next month with only 43 wells completed this month.

Those Were The Days, Mary Hopkin

So, What Fresh Hell Is This? Saudi Pumps Less Oil, Month-Over-Month -- December 10, 2015


Later, 8:33 p.m. CT: see first comment below with this link:
Original Post 

Tweeting now: Saudi Arabia tells OPEC it pumped 10.186 mil b/d in Oct, down 90,000 b/d.

See also:
If the data is correct, about 10.186 million bopd, that is well below the amount the last few years and about equal to what is was pumping in 2009 (see last link above).

Note: how accurate Saudi Arabia's figures are is anyone's guess.

Natural Gas Fill Rate And Gasoline Demand -- Weekly Update -- December 10, 2015; ObamaCare On Life Support -- Fiscal Times


December 15, 2015: Platts is reporting that there is an unquenchable thirst for gasoline in the US. The most recent data suggests that may not be completely accurate (see below), but this is what Platts is reporting:
Unseasonably strong gasoline demand is proving for US refiners to be the gift that keeps on giving this holiday season, as support from seasonal diesel demand is tamped down by record high temperatures across much of the US.

Gasoline prices are keeping margins healthy, as prompt pipeline unleaded gasoline in the US refinery hub along the Gulf Coast was assessed by Platts at $1.2752/g last Friday, up 15 cents/gal from the $1.1242/gal last Monday.
Original Post
Natural gas fill rate (dynamic link): -76. Second consecutive week with a negative fill rate.

Gasoline demand (dynamic link): flat; at last year's rate.
  • one year ago: 9.106 million bopd
  • this week (10/04/15): 9.160 million bopd
This single tea leaf is most prognostic of a sluggish economy, especially when gas is this cheap. Add this data point to surging claims for unemployment benefits, at 5-month high -- just in time for Janet Yellen to raise rates. 
The Writing On The Wall Ain't Graffitti

Of the 23 or so ObamaCare co-ops in existence last year, only one made money. Of the 23 or so ObamaCare co-ops, about one dozen have closed shop. The only one that made money last year is taking no new subscribers. At least I think I read this story correctly. The AP is reporting:
The lone health insurance cooperative to make money last year on the Affordable Care Act's public insurance exchanges is now losing millions and suspending individual enrollment for 2016.

Maine's Community Health Options lost more than $17 million in the first nine months of this year, after making $10.9 million in the same period last year. A spokesman said higher-than-expected medical costs have hurt the cooperative.

The announcement casts further doubt on the future of the cooperatives, small nonprofit insurers devised during the ACA's creation to inject competition in insurance markets. These co-ops immediately struggled to build their businesses. A dozen of the 23 created have already folded.

An Associated Press review of financial statements from 10 of the 11 surviving co-ops shows that they lost, on average, more than $21 million in the first nine months of this year. Those losses range from $3.9 million reported by Maryland's Evergreen Health Cooperative to $50.7 million booked by Land of Lincoln Mutual Health Insurance Co. in Illinois.
At least someone is paying attention even if mainstream American and mainstream media are not. Fiscal Times is reporting that ObamaCare is on "life support."
Still, as bad as the news has been over the past five years, the remaining illusions were shattered by the CBO and the White House itself this week. Obamacare didn’t make much of a dent in the uninsured rate, it has forced costs to rise faster than before, and it will kill millions of jobs that otherwise would be created.

“The labor force is projected to be about 2 million full-time-equivalent workers smaller in 2025 under the ACA than it would have been otherwise,” the CBO concludes in the latest analysis of Obamacare’s impact on the economy. Much of the reason — the CBO puts it at 75 percent — comes from the net increase of effective tax rates on labor, which will incentivize potential workers to stay out of the work force. Democrats claim that this is a feature rather than a bug, as people can choose not to work. However, even with that rose-colored glasses view, it means that the rest of the taxpayers will have to subsidize the health care of those who opt out, whether happily or unhappily.

The depressing impact on job growth is not the only illusion shattered, either. The Centers for Medicare and Medicaid (CMS) published a study on Obamacare’s impact on costs and on reducing the numbers of uninsured — and it fails on both counts. The CBO estimated after the passage of Obamacare that the number of uninsured would drop 19 million by 2014 from a 2010 benchmark. Instead, it has only dropped 12.6 million. As Avik Roy points out at Forbes , the 2010 level of uninsured was artificially high due to the impact of the Great Recession. Using 2008 as a benchmark, the number of uninsured has dropped by only 6.7 million.

Five (5) New Permits -- December 10, 2015

Wells coming off confidential list Friday:
  • 28974, 232, Crescent Point Energy, CPEUSC Amelia Grace 2H-7-6-158N-99W, Ellisville, t8/15; cum 28K 10/15;
  • 30980, SI/NC, EOG, Van Hook 76-15H, Parshall, no production data,
  • 31043, SI/NC, EOG, Austin 92-1807H, Parshall, no production data,

28974, see above, Crescent Point Energy, CPEUSC Amelia Grace 2H-7-6-158N-99W, Ellisville:

DateOil RunsMCF Sold


Active rigs:

Active Rigs65187193181200

Five (5) new permits --
Operators: CLR (4), BR
Fields: Elm Tree (McKenzie), Jim Creek (Dunn)

Oasis had eight (8) wells approved for "tight hole" status; all Andersmadson wells in McKenzie County.

Four permits canceled: three were Whiting permits, all Klose wells in McKenzie County; and Statoil had one canceled permit, a Helling permit in McKenzie County.

One (1) producing well was completed:
  • 29955, 2,238, Statoil, Heen 26-35 5H, Todd, t11/15; cum --

Pushback On Reason For Increased Production In North Dakota In October, 2015 -- December 10, 2015

This is an interesting article to look at a bit more closely.

The headline: "North Dakota Boosted Oil Output Ahead Of OPEC Meeting"

Source: Reuters, posted December 10, 2015.

The story begins:
North Dakota's oil producers boosted output in October to sell as much as possible ahead of last week's OPEC meeting, bucking an industry trend to scale back because of low crude prices.

The increase in the state, as well as parts of Texas and other U.S. oil fields, shows nationwide production may be more resilient than expected. But analysts and regulators caution that output could slip going into the new year as global supply exceeds demand.

The 13-member Organization of the Petroleum Exporting Countries failed to agree on a unified output cap at its semiannual meeting on Friday, effectively letting members pump at will. Oil prices have sunk further, bringing declines to more than 50 percent in the past year.
And then this:
"A lot of (North Dakota) operators were pretty pessimistic about the OPEC meeting, and they looked at October and November to sell oil at what may have been the high price for the next six months," Lynn Helms, head of the state's Department of Mineral Resources, told reporters on a Wednesday conference call.

The output increase appears prescient in hindsight, because prices have fallen significantly since the OPEC meeting.

North Dakota producers also were able to raise output, in part, because of new natural gas collection equipment coming online from Oneok Inc and others.
The source for the headline was Lynn Helms himself. He knows the industry better than anyone, I would assume, so I have to assume his analysis is correct. But somehow the story has the feeling of a Rudyard Kipling "just so" story, or what others might call an apocryphal story.

This is where I have problems. It begins with the headline: "North Dakota" does not sell oil, nor does the state control production (at least not in the sense the headline suggests). Individual producers in North Dakota control their own production and no one elses. One can say "Saudi Arabia increased its production" and probably be correct, but one cannot say "North Dakota increased its production...."

Second, the amount of oil sold in October/November must have been decided some months earlier. I assume most oil is sold on contract and six month contracts at that. If there's any truth to the suggestion that North Dakota operators produced more in October/November because they were concerned about the OPEC meeting seems apocryphal. These events began a year ago. One has to ask the question why production decreased at all this past summer, using the same reasoning. Oil this summer -- somewhere between $35 and $45 -- was certainly better than the $27 /bbl price we're seeing now. (Yes, I know.)

I think there's much more to it than that. Let me count the ways:
  • these companies are in survival mode; they need cash flow
  • these companies have contracts to make
  • CBR -- railroads need cash flow, also; the harvest is over; BNSF could have significantly reduced rates to encourage shipping which has decreased significantly
  • going into October/November? going into the cold winter months when fracking will be limited, and then the spring thaws limit opportunities to get out into the fields; October/November is the operators' last push before next summer
  • the drillers are drilling/completing only in the very best spots in the Bakken
  • each new well that is completed/fracked is very likely producing a huge halo effect; these wells are not singletons on a pad; these wells are new wells on a multi-well pad with an index well drilled years ago and primed for huge halo effect
  • the flaring issue may be part of the reason; may wells were taken off-line before flaring rules relaxes; now that  the flaring rules are relaxed, some (many) of those wells were put back on line
Whether or not OPEC was part of the October production push is an interesting explanation -- something I would not have thought. When the numbers come out, we are going to see a relative huge decrease in Eagle Ford production in October/November. Some of the same drillers are in both fields; operators are "not" smarter in the Bakken than in the Eagle Ford.

Just my 2 cents worth. That and $1.98 will get you a cup of Starbucks. Tall.

I Wondered How Long The Good Times Would Last -- December 10, 2015

Now that you've reviewed the stories at the links above, the following should not come as a surprise. Fortune is reporting:
Its cash cow is drying up. If Alaska Gov. Bill Walker gets his way, the 49th state will begin to levy an income tax for the first time in 35 years.

In his “New Sustainable Alaska Plan” unveiled Wednesday, Walker called for measures to address the state’s expected $3.5 billion budget shortfall. Alaska fuels 90% of its general fund with oil tax revenue, according to a report by the Rockefeller Institute of Government at the State University of New York. But with oil prices and production in free-fall, the state is debating other methods to fund its services.

Oil-rich Alaska’s residents are accustomed to one of the lowest tax burdens in the nation, according to the Tax Foundation—it’s the only state that doesn’t levy either an income tax or a sales tax of its own. Plus, residents enjoy an annual royalties check for oil revenue that averaged a record $2,072 this year, according to the Wall Street Journal.

But Walker’s proposed budget would put the kibosh on those luxuries. He’s suggested levying an income tax that would take about 1.5% of the average household income, as well as reducing royalties checks. The budget would free up more money with $100 million in operational cuts, a higher minimum tax on the oil industry, and taxes on alcohol, tobacco, and motor oil.
Some of their problems, not all ... are self-inflicted. One wonders if $2,000/resident/year could have been "better spent." Like saving for a rainy day with a Legacy Fund. Good lessons for North Dakota.

That "Error" On Yesterday's Director's Cut -- December 10, 2015; Back In April, 300,000 BOPD Being Stored Underground Across The US Due To Fracklog

Earlier I had mentioned an error in the Director's Cut posted yesterday. It is definitely quibbling on my part, and may or may not be considered an error by others. Here's the story:

From the Director's Cut one month ago, September, 2015, data:
"At the end of September, there were an estimated 1,091 wells awaiting on completion services, 98 more than the end of August." [In the August, 2015, one month earlier: "...there were an estimated 993 wells waiting on completion services, 79 more than at the end of July."] 
Note the "accuracy of the delta between the estimated numbers.

Now, to the October, 2015, data, posted yesterday: "At the end of October there was an estimated 975 wells waiting on completion services, 105 less than at the end of September." In this case, the delta between the estimated 1,091 and the estimated 975 is 116, significantly different than 105.

Again, the number of wells waiting to be completed is an estimate but it's been my impression that the delta has been the exact difference between the estimates posted. For some reason, this month (yesterday), the Director's Cut did not do that.

It's an extremely minor point and probably does not mean anything. However, the fracklog is being watched very closely and when I saw the 116 vs 105 it caught my attention.

It's possible I made an arithmetic error; or that last month's fracklog was revised; or I misread something. 

But if accurate, there is another story here. I don't keep track -- it might be impossible -- of the number of wells waiting to be completed (except when the monthly report comes out) but I do watch the daily report very closely. It's been my impression a lot more wells were permitted and/or drilled than were completed this month. I had expected the fracklog -- the number of wells waiting to be fracked -- to increase. So, the decrease caught me by surprise.

It is what it is. The Bakken continues to surprise.

I hope no one takes this too seriously. I remain completely in awe how absolutely excellent the NDIC is; I am their original fanboy.


For the archives. Don sent me this article a long time ago when I was traveling, and now just got back to it. From 24/7 Wall Street back in April, 2015:
Crude oil prices rose nearly 3% on Thursday as traders bid barrels higher following more reports of lower U.S. rig counts and more airstrikes against Yemeni rebels. West Texas Intermediate (WTI) crude for June delivery closed at $57.75 on the NYMEX after topping $58 briefly. Prices have pulled back to around $57.50 early Friday morning.

The pullback is likely due to a report from Bloomberg Thursday that claimed more than 4,700 drilled wells in the United States have not been completed while oil producers wait for prices to rise again. More than 1,500 wells in the Permian Basin, 1,250 wells in the Eagle Ford and 632 wells in the Bakken have been drilled but not completed.

The backlog in completions, which producers call the fracklog, is keeping 322,000 barrels a day stored underground, according to Bloomberg. That equals about the amount of oil currently being produced by Libya.

We noted earlier this month that producers are holding back production on the expectation that cuts in drilling and completions now being implemented will result in prices rising to levels that will once again produce profits. That level is around $60 to $65 a barrel.

Futures traders have been increasing their long positions for several weeks now, anticipating price increases. What is unknown is how quickly producers can turn idle wells into flowing moneymakers.

When Seconds Count, The SWAT Team Arrives In Minutes -- December 10, 2015

EIA's energy cookie for the day:
Weather forecasts for the current winter season predict warmer temperatures in regions east of the Rocky Mountains compared with last year. Based on those predictions and higher inventory levels, EIA expects propane and heating oil prices to be lower this season. In contrast, during the winter of 2013-14 persistent cold temperatures in much of the country increased demand for these and other heating fuels, depleting inventories. --- EIA
When Seconds Count

My wife, yesterday, was impressed with how fast the "SWAT" team arrived at the site of the infamous San Bernardino shooting. She said they got there within four minutes. Yup. You can count on the police to get there in minutes. When seconds count.

Family members of 14 dead and scores of injured, some seriously, probably thought SWAT did not arrive fast enough.

Next time you watch the last two minutes of an exciting championship NBA basketball game, note how long one second lasts. Then imagine someone breaking into your house, and then set your kitchen timer for four minutes to see how long four minutes last. And that's if the police get the 911 call and the police put you at the top of the list. Home burglaries are way down the list for police response. As long as the assailant is not an "active shooter," it is not a police priority.

Hey, here's an analogy. You've all seen the AED defibrillators in your local airport, and other public buildings. The move to put AEDs in airports started around 2004 when the Red Cross and others noted that a) the critical time for those suffering a "heart attack" was the first four minutes; b) that the local first responders had a "policy" to arrive on-scene within four minutes; and, c) the most common cause of death from a "heart attack" was ventricular fibrillation, the one and only thing an AED "treats." For their intended purpose, AEDs work.

Federal and state governments recognized that "four minutes" was a standard local first responders could not often meet, and even if theoretically they could meet that four-minute goal, in reality they did not. So to save the very, very rare heart attack victim that occurs in an airport, the federal and state governments mandated AEDs. And now you see them everywhere. I find it interesting what is mandated to save one life in a rare event that never gets any front page news when it occurs and what is not mandated to save large numbers of people in similarly rare events that always result in front page news.

Civil War

I am enjoying Susan Cheever's American Bloomsburg: Louise May Alcott, Ralph Waldo Emerson, Margaret Fuller, Nathaniel Hawthorne, and Henry David Thoreau: Their Lives, Their Loves, Their Work.

The title is almost longer than the book. The title is longer than some of the chapters which all run less than five pages. Most chapters run three pages. It is a very disjointed book. But it is delightful. I read it a couple of years ago; I did not enjoy it then. I am now outlining it and find it much more enjoyable. With chapters only three pages long, I can get a chapter "done" while waiting in line the US Post Office near our little hovel to mail Christmas gifts. [By the way, one quasi-government agency that I love is the US Post Office; I may not like certain parts of it, and I may talk critically of it often, but I have a very, very soft spot in my heart for the US Post Office. When one serves in combat zones overseas one starts to appreciate things we take for granted here in the states. By the way: if you think US Postal rates are high, compare them to UPS -- which I also appreciate.]

Wow, that was another typical MDW digression.

Although Cheever does not mention it, an interesting takeaway from the book is the role New England politics played in starting the Civil War. I guess everyone knew that but me. I'm not a huge Civil War fan, but every once in awhile I get caught up in it.

Anyone following the tea leaves knew by 1855, maybe 1854, that the Civil War was destined, the only question was when. The "when" was "set" by New Englanders, and probably "determined" in the Boston - New York City corridor, and perhaps Concord, MA, specifically, the site of the "sound heard around the world" about three-quarters of a century earlier. One can argue that political events in Concord, MA, between 1854 and 1860, were the tipping point that led to Fort Sumter. Interestingly, there were probably as many "mad" (as in "insane") men as sane men that set in motion that tipping point. It's scary to think that "insane" men may have had as much to do with starting the Civil War as to think what might have been.

I now understand a whole lot better: John Brown; Lawrence, KS, 1856; Pottawatomi Creek; Harper's Ferry, The Missouri Compromise; the Kansas-Nebraska Act, the Dred Scott decision. And the alarming "truth" about Abraham Lincoln. Abe isn't around to defend himself but he put in writing his thoughts on slavery. And Concord, MA, was in the center of all this. Something I did not see mentioned in the Spielberg movie, starring Daniel Day-Lewis as Lincoln.

Crazy, Gnarls Barkley

Looking Forward, Looking Back -- December 10, 2015

It is time to bring this forward. I posted my commentary on Friday night, December 4, 2015, but have provided external links subsequent to the original post to support my commentary.

Pricing Of Oil 
I Was Wrong
Commentary -- Not Ready For Prime Time


December 10, 2015: Reuters is reporting that OPEC points to larger 2016 oil surplus as group's output hits multi-year high:
OPEC pumped more oil in November than in any month since late 2008 and forecast little increase in demand for its crude next year, pointing to a larger supply surplus even as low prices hurt rival producers.
The Organization of the Petroleum Exporting Countries in a report also forecast supply from non-member countries will fall more sharply next year, which would suggest its strategy, reaffirmed last week of defending market share, is working.
Supply outside OPEC is expected to decline by 380,000 barrels per day (bpd) in 2016, the report said, as output falls in regions such as the United States and former Soviet Union. Last month, OPEC predicted a drop of 130,000 bpd.
But OPEC also increased its 2015 non-OPEC supply growth forecast by 280,000 bpd, citing upward revisions to output from the United States, Brazil, Russia and the UK, among other countries.
As a result of the report's changes to 2016 and 2015 non-OPEC supply forecasts, demand for OPEC crude next year is expected to average 30.84 million bpd - just 20,000 bpd more than OPEC expected previously.
OPEC production, which has surged since the policy shift of November 2014 led by Saudi Arabia and Iraq, is far higher than forecast demand. Supply rose by 230,000 bpd in November to 31.70 million bpd, said the report, citing secondary sources. [Let's do the math: 31,700,000 - 230,000 = 31,470,000.  230/31,470000 = 0.73%. That's the surge in production. Yes, I know that's not the production number from a year ago. Wiki says OPEC produced 30,560,000 bopd in November, 2014. 31,700,000 - 30,560,000 = 1,140,000. 1,140,000/30,560,000 = 3.73% -- that's the OPEC surge, year-over-year.]
That is the highest monthly rate since late 2008 when Indonesia was still an OPEC member, according to a Reuters review of OPEC's previous reports on the group's website. The latest figure does not yet include Indonesia, which rejoined OPEC last week boosting its ranks to 13 countries.
December 10, 2015: I predict a major geopolitical event will occur not later than August, 2016, to greatly affect the price of oil (a greater than $10/bbl move).

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 3 - 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

Reuters Did Not Mince Words: Jobless Claims At 5-Month High -- December 10, 2015

The headline did not mince words, but the lede certainly was spun. LOL. The tea leaves suggest that 2016 is going to be a very, very tough year economically. I am inappropriately optimistic so I would never suggest a recession for 2016 but that's what the tea leaves suggest, based on one data point, as far as I am concerned. Unemployment benefits claims numbers support that one data point.

Link here:
The number of Americans filing for unemployment benefits rose to a five-month high last week, but likely does not signal a deterioration in the labor market as the underlying trend remained consistent with tightening conditions.

Other data on Thursday showed cheaper crude oil and a strong dollar keeping imported inflation pressures subdued in November. The reports will probably do little to change views the Federal Reserve will raise interest rates next Wednesday for the first time in nearly a decade.
The numbers:
Initial claims for state unemployment benefits increased 13,000 to a seasonally adjusted 282,000 for the week ended Dec. 5, the highest level since early July, the Labor Department said.

Claims data tend to be volatile around this time of the year. The four-week moving average of claims, considered a better measure of labor market trends as it strips out week-to-week volatility, rose only 1,500 to 270,750 last week.
For those keeping score at home, the number of claims surged 13,000 this week; they surged the previous week by 9,000.

GOP Poll

CBS News is reporting:
Thirty-five percent of Republican primary voters support Trump, up 13 points since October, and his highest level of support in CBS News polling.
Ted Cruz (16 percent) has moved into second place, while Ben Carson, who led the October poll, has dropped to third.
Marco Rubio is in fourth place with 9 percent. Jeb Bush is getting the backing of just 3 percent of Republican primary voters nationwide, his lowest percentage to date in CBS News polling. Carly Fiorina's support has also dropped; she is at just 1 percent now.
It's (way past) time to limit the number of GOP white men to five on stage at the next debate. In fact, if I had my way, it would be four on stage, but "even" numbers are unlucky in Japan. But four on stage would eliminate the individual I like least.

California Gun Sales

Fox News is reporting:
Gun sales in California spiked in the days after the deadly Dec. 2 terrorist attack in San Bernardino, in spite of having some of the strictest gun laws in the country – with as many as 6,000 guns being sold a day in the days after two jihadists massacred 14 people.

Figures provided by the California Department of Justice to show that in the four days after the massacre, there were 20,664 sales, compared to only 12,649 from Nov. 29 to Dec. 2.

In November, with the exception of a typical surge around Thanksgiving, there were few days that saw more than 3,000 sales a day, and no days that saw 4,000+ sales. However, after the shooting, there were 6,108 sales on Dec. 4, 6,558 on Dec. 5, 4,500 on Dec. 7 and 5,763 on Dec. 8.

The California Attorney General’s office told that the numbers do reflect gun sales, although roughly 1-2 percent of all sales are later denied for reasons such as criminal histories.

While the AG’s office noted that they frequently see an increase in sales at the end of November and throughout December, the numbers are still significantly higher than in December 2014, which saw 16,443 sales in the same time period. 
The best part of that story? The California Attorney General's comments: roughly 1-2 percent of all sales are later denied for reasons such as criminal histories. That's all? One to two percent. Maybe it's just me but that seems a bit scary. From Newsweek, nearly 20 percent of Americans are affected by mental illness every year:
Every year, about 42.5 million American adults (or 18.2 percent of the total adult population in the United States) suffers from some mental illness, enduring conditions such as depression, bipolar disorder or schizophrenia, statistics released Friday reveal.

Shell Conducts Review Of Its New Zealand Business -- December 10, 2015

This may seem to be an odd article to place on a Bakken blog, but, trust me, it may be important some day in the future. Or not. Whatever. Here it is, from Rigzone:
Royal Dutch Shell, seeking to be a simpler, more profitable and resilent company, announced Thursday that it is conducting a strategic review of its business interests in New Zealand.
"Shell announced that its interests in New Zealand are under review," Shell New Zealand said in a press release, adding that the review arose as "choices have to be made to streamline the global portfolio given the current environment ... (and) Shell is focusing on large growth opportunities, with deepwater and integrated gas as growth priorities."
The supermajor is a notable player in New Zealand's upstream sector and the company-owned ventures account for around 50 percent of domestic natural gas production and a significant proportion of the country's condensate production. Shell has three major upstream assets in New Zealand, comprising stakes in the Maui gas and condensate field, the Kapuni gas and condensate field and the Pohokura field.
It is also the operator of New Zealand exploration license PEP 50119 in the Great South Basin -- its first New Zealand exploration outside the Taranaki region.
Much more at the link.

Alice In Wonderland And Puff The Magic Dragon -- December 10, 2015

Reuters/Rigzone is reporting that North Dakota boosted oil output ahead of OPEC meeting:
North Dakota's oil producers boosted output in October to sell as much as possible ahead of last week's OPEC meeting, bucking a trend for contraction amidst plunging crude prices. The 13-member bloc of global oil producers had long been expected to keep or raise its unified output cap at its semiannual meeting.
Because output wasn't trimmed and members were effectively allowed to pump at will, oil prices have sunk further since the meeting, adding to losses of more than 50 percent in the past year. "A lot of (North Dakota) operators were pretty pessimistic about the OPEC meeting, and they looked at October and November to sell oil at what may have been the high price for the next six months," Lynn Helms, head of the state's Department of Mineral Resources, said on a Wednesday conference call with reporters.
The move now appears prescient, as OPEC's meeting ended last week without a reference to its output ceiling.
North Dakota producers also were able to raise output, in part, because of new natural gas collection equipment coming online from Oneok Inc and others. About 86 percent of produced natural gas was collected and processed during October, 5 percentage points higher than the previous month and far above state-required minimums.
Roughly 260 wells had failed to meet the minimum during September and had been temporarily shuttered by state officials, but they were able to come online by October, fueling part of the production rise. Still, the state's oil producers only fracked 43 wells in October, 65 percent fewer than the previous month, an ominous harbinger as at least 110 must be completed each month to maintain long-term production.
Much more at the link.

Poof, The Magic Dragon


Later, 10:59 a.m. CT. Seeking Alpha reports
Companies such as Chesapeake Energy pushed the SEC for an accounting change in 2009 that made it easier to claim reserves from wells that would not be drilled for years, but Bloomberg says the chickens will come home to roost in the next few months when billions of barrels of shale drillers’ reserves are wiped out.
The rule requires the undrilled wells to be profitable and be drilled within five years, but now the time is up, and the companies must soon report 2015 figures - and prices are down, way down.
Regulatory filings show CHK's inventory will be cut by 45%, Bill Barrett will lose as much as 40%, and Oasis Petroleum will lose 33%.
"How are these reserves going to come back?” says a Guggenheim Securities analyst.
“Because if you have to spend within cash flow, those reserves aren’t coming back. Not unless we get a spike in prices, or we return to levered growth.” 
Original Post
Meanwhile, Bloomberg/Rigzone is reporting that "in a puff of smoke, oil reserves have vanished":
In an instant, Chesapeake Energy Corp. will erase the equivalent of 1.1 billion barrels of oil from its books.
Across the American shale patch, companies are being forced to square their reported oil reserves with hard economic reality. After lobbying for rules that let them claim their vast underground potential at the start of the boom, they must now acknowledge what their investors already know: many prospective wells would lose money with oil hovering below $40 a barrel.
Companies such as Chesapeake, founded by fracking pioneer Aubrey McClendon, pushed the Securities and Exchange Commission for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects.
But the rule has a catch. It requires that the undrilled wells be profitable at a price determined by an SEC formula, and they must be drilled within five years.
Time is up, prices are down, and the rule is about to wipe out billions of barrels of shale drillers’ reserves. The reckoning is coming in the next few months, when the companies report 2015 figures. 
This is an important article for another reason. This is the second time in the past two weeks that we have seen what is meant by "proven reserves." Analysts look five years out when estimating proven reserves.

Much more at the link.

For clarification, and perhaps a correction to one of my recent posts: based on the Reuters/Rigzone article linked above, the "proven reserve" estimate in North Dakota may go down this year, but the amount of oil originally in place (OOIP) in the Bakken remains the same, whatever that "number" may be. Only God knows for sure. And the Bakken gods.

Wednesday's Daily Activity Report Has An Error -- December 10, 2015


Later, 8:13 a.m. CT: I see that the "Daily Activity Report" for yesterday has been corrected.
Original Post
The "Daily Activity Report" released yesterday was delayed. The daily report normally comes out at 5:00 p.m. Monday through Friday, but by 5:30 p.m. last night it had not been released.

This morning I see it has been released but the "permits approved" segment seems to be wrong. Look for a correction during the day.

Right now, the report shows that five oil and gas permits were approved, permit numbers #30147 - #30151, inclusive. Those are "old" permits, that were, in fact, renewed yesterday; they were not new permits. "Permit renewals" are generally not in this section but in the "permit renewal" section.

In fact, the NDIC is now up to #32380, which I have posted. In addition, there is a new operator in North Dakota.

Watch for a corrected "Daily Activity Report" later today. Perhaps as early as 8:00 a.m.

The NDIC also released it's monthly Director's Cut yesterday which also appears to have an error, but I will get back to that one later.

Thursday, December 10, 2015

Some days are busier than others. This is going to be one of those days. If you are at all interested in oil pricing, perhaps the best article to read today is the RBN Energy post today: A New World Order? -- Global Crude Supply and Demand Through 2025.

Rigzone also has a story along those same lines:
Among the most galvanizing themes confronting oil and gas in the foreseeable market are those of increasing geopolitical threats and instability. And that’s going to leave oil prices lost in translation.
As analysts at Simmons & Company International explained in a December update, it’s the geopolitical instability and the inherent tumult it creates throughout the world that have created a “massive disconnect” - one that’s placed oil prices close to 50 percent below what’s needed to grow production and renew inventory. 
“Increased military conflict in the region now is preordained and it would seem that the optionality for further regional destabilization has increased,” they said. “Furthermore, one would think that the cost of capital for regional energy investment will move higher as well given the destabilization.”
The top Drudge story at the moment -- Rahm and Chicago -- is a huge story, as is the Supreme Court case on affirmative action, though I think the Court will again manage to find a way to skirt the issue.

I wanted to do a long piece on what the Director's Cut that was released yesterday but I'm going to hold off for awhile.

And, of course, there's going to be all the jobs data and energy data released today. By the way, there's a huge article out there about the possibility of a "mass" stop-loss event if Janet's rate rise goes awry. Nah, that won't happen.

And, if that's not enough, Ebola is back. 

Yes, it's going to be a busy day.

Active rigs:

Active Rigs65187193181200

RBN Energy: see link above. The article will be archived.

At least it's easy to treat. Ebola is back. The Wall Street Journal is reporting:
Twice this year, Liberia, the worst hit of all Ebola-affected nations with at least 4,800 deaths blamed on the disease, has been declared Ebola-free, only to see new cases appear. Liberian officials and medical researchers now wonder how soon their country and its neighbors will be completely rid of the scourge.
The World Health Organization judges a country “free of Ebola transmission” when 42 days pass without a new case of the hemorrhagic fever. The African nations most affected by the disease—Liberia, Sierra Leone and Guinea—have struggled mightily for the designation, an international clean bill of health that means they can at last turn the corner on an epidemic that has taken the lives of more than 11,300 people.
But with new instances of the disease in Liberia, doctors and public-health officials in West Africa now face another prognosis. While another large Ebola outbreak is highly unlikely due to enormous progress in detecting and responding to the disease, patients infected with the virus may continue to walk through hospital doors for months, possibly years, to come. 
In my note on the Director's Cut yesterday I reiterated that the NDIC has changed the one-year rule for operators to complete wells within one year. Here is one source for that comment.