Idle Meanderings -- December 30, 2016

Source: EIA.

Looking at the far right side of the graph, three lines, A, B, and C. Essentially those are the three possibilities for 2017:

A) price of oil creeps up, trending toward $75/bbl by the end of the year
B) price of oil remains at present level, $53 +/- $5 per bbl
C) price of oil trends down, toward $40 but not much lower

Likelihood, my opinion:

A) 20% chance
B) 75% likelihood
C) 5% chance

Implications:

A) if the price of oil trends toward but without going over $75: huge win for almost anyone involved in production of oil, including passive investors; consumers see more expensive gasoline but probably not enough to send economy into recession, but nonetheless, painful
B) win-win for everyone, US producers and global consumers; at $50 - $55 barely adequate for Russia, Saudi Arabia, but better than C)
C) not good for anyone, except consumers, but particularly ominous for Saudi Arabia, Russia

Saudi Arabia and Russia would almost be forced to do "anything" to prevent C). Because oil at less than $40 becomes an existential issue for Saudi Arabia, my hunch is that Saudi Arabia would probably do almost anything to keep the price of oil from trending down again.

**************************************
Opportunity

The run-up in price the price of oil between 2007 and 2009 (just before the "crash") was critical for the Bakken to boom. Had this run-up not occurred, one can argue the Bakken boom would not have occurred; it most likely would have been significantly delay. 

The second opportunity came during the sustained increase in the price of oil after the "crash", from 2009 to 2014. Again, had this price increase not occurred, it's unlikely the Bakken boom would have been sustained.

If folks remember: it was incredibly expensive to explore, drill, frack, obtain leases, put in the roads, put in the pads, obtain the sand, etc., etc., in the early days of the boom. At $50-oil this boom could not have occurred. 

Now, in 2016, going into 2017:

• upfront leases -- incredibly expensive -- are a thing of the past
• oilfield services are so much less expensive
• sand is easily obtained, and much less expensive
• operators using more sand (cheap) and less ceramic (expensive)
• roads, pads, pipelines, rail -- the infrastructure is all in place (yes, more will be added, but hardly "needed"; and whatever infrastructure is added/"needed" pales in comparison to the story in 2007
• wells were much less productive in the early days
• wells costs have come way, way down (less then half?) and production has increased immensely in the first 90 days, and the first full year
• EURs have gone from 350,000 boe to 1.5 million boe
• pad drilling, DUCs, permits-in-hand, walking rigs, more effective rigs, better completion techniques now in place
• work force incredibly experienced; based on accuracy of drilling; speed of drilling
• geologists understand the Bakken; just before the 2014 crash, the middle Bakken was pretty much all mapped out but the Three Forks first bench hardly explored (by comparison); second, third, and fourth benches hardly explored at all -- handful of deeper wells in the Bakken pool

$100-oil was needed to light the Bakken boom.

**************************
 

Later, thoughts about the slump in the price of oil in 2008 - 2009; and in 2014 - 2016.