* ICE and CME both see record trading volumes in February
Traded volumes on the world's two biggest oil futures markets reached record levels in February,
boosted by growth of close to 40 percent in futures and options trade on benchmark Brent and WTI
contracts. Each contract is for 1,000 barrels
Intercontinental Exchange (ICE) (ICE.N)
said the average daily trading volume for its futures markets rose 27 percent from the same month
a year before to a record 1.74 million contracts. The total futures volume for the month was a record
33 million contracts.
Volume in energy futures traded on markets run by the CME Group CME.N, including the New York
Mercantile Exchange (NYMEX), averaged 2.2 million contracts a day, up 26 percent from February 2010,
CME said.
The driving force behind this strong growth was the trade in futures on the NYMEX light, sweet
crude oil contract CLc1 known as West Texas Intermediate or WTI, which rose 39 percent to an average
daily volume of 935,000 contracts.
The options contract rose 35 percent for the month and set its third daily volume record of the
year with 325,000 contracts on Feb. 23 surpassing the previous record of 294,000 contracts set at
the end of January.
ICE Brent crude LCOc1 futures, considered a rival benchmark to WTI, traded on average a record
576,681 contracts a day in February. The daily traded volume of Brent futures and options contracts
combined rose 37.6 percent to 584,091.
Brent crude futures are listed on ICE Futures Europe, which posted a 39 percent jump in average
daily volume from a year earlier to 1.24 million contracts, and set a new daily volume record of
1.70 million contracts on Feb. 24.
Unrest in the Middle East and North Africa sent Brent prices surging as high as $116 dollars a
barrel earlier this week and reinforced its premium over WTI CL-LCO1=R. Europe is seen as more vulnerable
to supply disruptions from Libya, traders say.
ICE has benefited from the attraction of Brent as an alternative global benchmark to WTI.
Some analysts have suggested London will overtake New York as the biggest centre of crude and oil
product futures trade this year. [ID:nN28184087] (Reporting by Nia Williams; editing by Christopher
Johnson)
"Crude oil ended the month of April with the strongest monthly gain in 7 years, adding 22% to
the price. The low price caused "production destruction" and strong demand put the market on a
trajectory of market balance."
"We have said that oil prices have bottomed and the chief of the International Energy Agency
(IEA) agrees. "In a normal economic environment, we will see the price direction is rather upwards
than downwards," IEA Executive Director Fatih Birol said on Sunday during a G7 meeting of energy
ministers in Japan as reported by Reuters. He took the words right out of my mouth. Barring any
unforeseen economic catastrophes, the global oil market is at the low end of the cycle. We have
said for some time that now is the time to start positioning for a long term bullish move. The
low price that we saw in crude oil earlier this year may be the last time we see that for over
a decade. "
"Even as some shale operators say that they may actually bring on rigs after we hit $50 a barrel,
the truth is that many of the smaller operators will find it hard to bring rigs back on."
Paper oil sellers essentially dictate prices to real producers. So they are looting
producers. That's hurt the process of replacement of old wells with new ones (and shale oil well
live just several years, with only first two the most procductive) and as "paper oil" is Wall
Street fiction, and at some point paper oil market might collapse and oil prices go to
stratosphere.
As the price of oil begins to falter, Saudi Arabia has stepped up its rhetoric, even going
as far as to warn short sellers not to bet against the price of the commodity.
Saudi Energy Minister Prince Abdulaziz bin Salman gave "clear hints" on Thursday that there
could be a change of direction in production policy forthcoming as the price of oil continues
its slide, according to
Bloomberg .
He said Thursday: "We will never leave this market unattended. I want the guys in the
trading floors to be as jumpy as possible. I'm going to make sure whoever gambles on this
market will be ouching like hell."
At the same time, Brent was falling below $40 per barrel and the market continues to show
signs of waning demand. OPEC and its allies said they would be "proactive and preemptive" in
addressing the diminishing price, recommending "participating counties take further necessary
measures".
Abdulaziz started a meeting on Thursday with what Bloomberg called a "forceful condemnation"
of members who are pumping out too much supply. His ire may have been directed to UAE Energy
Minister Suhail al Mazrouei, who attended the meeting. The UAE has been "one of the worst quota
breakers" in OPEC+, only making 10% of its pledged cuts for August.
Abdulaziz said: "Using tactics to over-produce and hide non-compliance have been tried many
times in the past, and always end in failure. They achieve nothing and bring harm to our
reputation and credibility."
"Attempts to outsmart the market will not succeed and are counterproductive when we have the
eyes, and the technology, of the world upon us," Prince Abdulaziz continued.
UAE was overproducing by about 520,000 barrels per day in August and the country will try to
make additional cuts in October and November to make up for past month shortcomings.
Countries like Iraq and Nigeria have implemented more than 100% of their required cuts,
helping give OPEC and Abdulaziz credibility.
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Harry Tchilinguirian, head of commodities strategy at BNP Paribas SA, concluded: "You have
to hand it to Prince Abdulaziz. Since he became Saudi oil minister, the kingdom has kept OPEC+
in line through his diplomatic and compelling powers of influence."
If that were true, the energy world would be a lot better off. Producers want to contract;
consumers, probably even China, like the market price. For it can be manipulated easier by
consumers than by suppliers; because consumers control the intl banks and capitalist rules.
Unless China is kept from the market table , then it might accept contracting. Tough racket,
this sanctioning stuff is getting to be, eh?
The oil market is in disarray, a result of a coronavirus-led collapse in demand, surplus
supply following a price war and a shortage of storage. Yet there have been plenty of people
willing to bet on a rebound in basement-level crude prices, and for many retail investors the
vehicle of choice has been an exchange-traded fund. However, those wagers via the biggest
American ETF -– the U.S. Oil Fund, or USO -– have contributed to market mayhem and
helped push crude prices below zero.
1. What did the fund do?
It grew so huge so quickly that it became a sizable player in the market for West Texas
Intermediate, the U.S. benchmark for crude. Investors piled in during March and April,
convinced that oil prices that had been falling -- pushed down by a
price war between Saudi Arabia and Russia that boosted production just as demand
was slashed by pandemic-driven lockdowns -- would eventually recover once economies reopened.
At different stages, the fund held about a quarter of all May and June contracts for
WTI.
2. What's the problem?
Unlike shares that can be held as long as an investor chooses, oil futures have finite terms
and are agreements to buy or sell a physical product. The May futures contract, for example,
expired on April 21. Any holder who had not sold by then would need to take delivery of the oil
-- 1,000 U.S. barrels, or 42,000 gallons, for each contract.
3. Where does USO come
in?
As a favored investment vehicle for
many bullish speculators , the number of shares in the fund ballooned from 145 million at
the end of February to more than 1.4 billion by mid-April. Its outsized portion of the WTI
market -– on paper -- came at a time when demand for physical oil was cratering and
storage space was becoming harder and more expensive to find.
4. What does that have to
do with the price plunge?
For years, USO was
mandated to invest in the most-active WTI contract and to roll it over to the following
contract. (Rolling over means selling it and, often simultaneously, buying the following
month's contract.) The flood of money into May contracts earlier had pushed oil prices up; as
USO sold its May futures as part of the rollover and bought June and July contracts, prices
fell for May and rose for the following months, opening an unusually wide spread. Only a
handful of traders remained in the May contract on Monday, when prices plunged
well below zero .
5. What's the worry now?
With USO holding a significant level of June contracts, there are concerns that prices will
go negative again and that the whole process might repeat -- or might be worse, if the April
20th debacle scares off more investors. To try to mitigate the prospect, USO, which lost 37% of
its value in the first three weeks of April, has moved to allocate some holdings to contracts
expiring later in the year, since those prices tend to be less volatile. But the fund is adding
to pressure on oil prices in other ways.
There was so much demand for USO that it exhausted the number of shares it was allowed to
issue and, on April 20, asked regulators for permission to register an additional 4 billion,
more than double the existing number. Until the new shares are cleared for issuance, the ETF
will not purchase more futures contracts, according to analysts, potentially adding to pressure
on crude prices. Without new oil contracts, the fund will also become untethered from the
prices it's supposed to track.
7. Anything else?
ETF prices are kept in sync with the value of their holdings, their so-called NAV (net-asset
value), through the creation and redemption of shares. So-called "authorized participants" for
instance sell an ETF when it's rising and buy the underlying security to pocket a quick profit,
keeping the fund's price and NAV in lockstep in the process. However, with the authorized
participants no longer able to create shares, that's disrupted demand for the underlying
contracts.
8. How about other ETFs?
USO is hardly the only exchange-traded fund to be hammered by the swings in oil futures; the
effects were felt around the globe. The Samsung S&P GSCI Crude Oil ER Futures ETF, whose
holdings of the derivatives slumped 26% on Tuesday to $378 million , saw its traded units lose
half their value for a time Wednesday. Closing down 46% at HK $1.79 , the ETF had its biggest
drop and lowest finish since trading began in May 2016. Credit Suisse Group AG told investors in a
leveraged exchange-traded note that tracks the price of oil they probably won't get any money
back after the value of the note dropped below zero.
The Reference Shelf
A
QuickTake about the day when oil prices fell below zero.
A Bloomberg Opinion
column on the risks of oil ETFs.
A Bloomberg News
article on how negative oil prices are leading some traders to rewrite risk models, and
one on how others are betting the lows won't
last.
A
QuickTake on the OPEC price war that flooded markets with
oil just as demand cratered.
Bloomberg Professional subscribers can see oil net ETF positions at {.OILETFNT G Index
<GO>}.
The oil market is in disarray, a result of a coronavirus-led collapse in demand, surplus
supply following a price war and a shortage of storage. Yet there have been plenty of people
willing to bet on a rebound in basement-level crude prices, and for many retail investors the
vehicle of choice has been an exchange-traded fund. However, those wagers via the biggest
American ETF -– the U.S. Oil Fund, or USO -– have contributed to market mayhem and
helped push crude prices below zero.
1. What did the fund do?
It grew so huge so quickly that it became a sizable player in the market for West Texas
Intermediate, the U.S. benchmark for crude. Investors piled in during March and April,
convinced that oil prices that had been falling -- pushed down by a
price war between Saudi Arabia and Russia that boosted production just as demand
was slashed by pandemic-driven lockdowns -- would eventually recover once economies reopened.
At different stages, the fund held about a quarter of all May and June contracts for
WTI.
2. What's the problem?
Unlike shares that can be held as long as an investor chooses, oil futures have finite terms
and are agreements to buy or sell a physical product. The May futures contract, for example,
expired on April 21. Any holder who had not sold by then would need to take delivery of the oil
-- 1,000 U.S. barrels, or 42,000 gallons, for each contract.
3. Where does USO come
in?
As a favored investment vehicle for
many bullish speculators , the number of shares in the fund ballooned from 145 million at
the end of February to more than 1.4 billion by mid-April. Its outsized portion of the WTI
market -– on paper -- came at a time when demand for physical oil was cratering and
storage space was becoming harder and more expensive to find.
4. What does that have to
do with the price plunge?
For years, USO was
mandated to invest in the most-active WTI contract and to roll it over to the following
contract. (Rolling over means selling it and, often simultaneously, buying the following
month's contract.) The flood of money into May contracts earlier had pushed oil prices up; as
USO sold its May futures as part of the rollover and bought June and July contracts, prices
fell for May and rose for the following months, opening an unusually wide spread. Only a
handful of traders remained in the May contract on Monday, when prices plunged
well below zero .
5. What's the worry now?
With USO holding a significant level of June contracts, there are concerns that prices will
go negative again and that the whole process might repeat -- or might be worse, if the April
20th debacle scares off more investors. To try to mitigate the prospect, USO, which lost 37% of
its value in the first three weeks of April, has moved to allocate some holdings to contracts
expiring later in the year, since those prices tend to be less volatile. But the fund is adding
to pressure on oil prices in other ways.
There was so much demand for USO that it exhausted the number of shares it was allowed to
issue and, on April 20, asked regulators for permission to register an additional 4 billion,
more than double the existing number. Until the new shares are cleared for issuance, the ETF
will not purchase more futures contracts, according to analysts, potentially adding to pressure
on crude prices. Without new oil contracts, the fund will also become untethered from the
prices it's supposed to track.
7. Anything else?
ETF prices are kept in sync with the value of their holdings, their so-called NAV (net-asset
value), through the creation and redemption of shares. So-called "authorized participants" for
instance sell an ETF when it's rising and buy the underlying security to pocket a quick profit,
keeping the fund's price and NAV in lockstep in the process. However, with the authorized
participants no longer able to create shares, that's disrupted demand for the underlying
contracts.
8. How about other ETFs?
USO is hardly the only exchange-traded fund to be hammered by the swings in oil futures; the
effects were felt around the globe. The Samsung S&P GSCI Crude Oil ER Futures ETF, whose
holdings of the derivatives slumped 26% on Tuesday to $378 million , saw its traded units lose
half their value for a time Wednesday. Closing down 46% at HK $1.79 , the ETF had its biggest
drop and lowest finish since trading began in May 2016. Credit Suisse Group AG told investors in a
leveraged exchange-traded note that tracks the price of oil they probably won't get any money
back after the value of the note dropped below zero.
The Reference Shelf
A
QuickTake about the day when oil prices fell below zero.
A Bloomberg Opinion
column on the risks of oil ETFs.
A Bloomberg News
article on how negative oil prices are leading some traders to rewrite risk models, and
one on how others are betting the lows won't
last.
A
QuickTake on the OPEC price war that flooded markets with
oil just as demand cratered.
Bloomberg Professional subscribers can see oil net ETF positions at {.OILETFNT G Index
<GO>}.
Energy Minister Alexander Novak said that the fall in prices for WTI oil futures is due to
the actions of speculators.
"Yesterday's collapse of oil quotes of the us WTI brand occurred due to the sale of futures
for delivery in may at the end of trading on paper (after April 20, the may futures are not
traded on the exchange), the lack of demand for additional oil supplies in may and the
likelihood of overstocking storage facilities. This caused a speculative fall of the financial
instrument to negative values, " he said, according to TASS.
The head of the energy Ministry urged "not to dramatize the situation". According to him, it
is important to understand that this is "a paper market, not a trade in physical oil," RIA
Novosti reports.
The Minister also noted that the pressure on the oil market will continue until the start of
the OPEC+ agreement in may, after which the reduction of oil production by countries outside
the agreement and the easing of restrictions will begin.
"The oil market is currently in an extremely volatile state due to a sharp drop in demand
associated with measures to counter the spread of coronavirus, with the gradual overstocking of
storage facilities and the uncertainty of the timing of the global economic recovery. Pressure
on the market will continue until the OPEC + agreement begins in may, reducing production by
countries outside the agreement and easing restrictive measures, " he said.
Novak assured that OPEC+ countries are closely monitoring the situation in the oil market
and have all the capabilities to respond.
"But don't dramatize the situation. It is important to understand that this is a paper
market, that is, trading in derivative financial instruments, and not physical oil. Quotes for
June Brent and WTI futures are significantly higher, although they are also subject to
volatility due to the General negative mood in the market," Novak added.
The price of WTI oil for delivery in may ended Monday's main trading on the NYMEX on
negative values, falling to minus 37.63 dollars. The decrease was 300%. Before that, the quotes
reached minus 40.32 dollars per barrel. Later, the price of may WTI futures returned to
positive values, rising by 160% to $ 2.21 per barrel.
The price of a barrel of oil on the morning of April 21 was trading at $ 21.41.
If you live is USA, (I moved a decade ago) and you have a medical procedure you need done. I
would recommend not procrastinating and getting it done soon.
8% expense growth (faster than GDP) is unsustainable.
The real problem with american health care is bad management. Hospitals have no idea how much
it takes to cure a patient, and they sell treatments instead of cures. They don't know how
much the treatments cost either, so they just make up numbers. Pharmaceutical companies
charge whatever they can get away with, as the price of insulin shows.
Patients need more protection and better coverage so that insurers are forced to keep the
healthcare providers honest. That is why insurers need to be forced to provide coverage.
Markets economics works because the guy who pays applies pressure to the guy who delivers the
goods. This idea needs to be applied to health care, and prices would get back in line with
other rich countries.
Every week we watch these invenstory draws/builds and every week the commentariat is out
to explain how they drive the price fluctuations. Except there's -80% correlation between oil
price and USD Index. Implying that events that have nothing to do with these blessed
draws/builds have much greater pull on price changes... More here: "
Failure of price forecasting: the unit of account conundrum "
It looks like an accumulation at the time crude oil wti.
After the price will cross any border of the triangle with powerful candle we can open
BUY/SELL entry. Potential profit will be in 3...5 times bigger than risk.
It was the best of times, it was the worst of times, it was the age of wisdom, it was
the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was
the season of Light, it was the season of Darkness, it was the spring of hope, it was the
winter of despair, we had everything before us, we had nothing before us, we were all going
direct to Heaven, we were all going direct the other way -- in short, the period was so far
like the present period, that some of its noisiest authorities insisted on its being
received, for good or for evil, in the superlative degree of comparison only. - Charles
Dickens
Economics is the only profession where the more an idea fails, the more it is believed.
Consider the following theory:
Low interest rates lead to higher growth and higher inflation.
If it were true, then a decade of the lowest rates in recorded history would have seen the
global economy go gangbusters. Instead it's been mostly the opposite, leading any reasonable
person to at least question this theory.
But wait a second! A wunderkind econ whippersnapper fresh from Davos interrupts.
If not for low interest rates, things would have been even worse!
This kind of defensive argument is popular among failed forecasters. And to be fair, I can't
prove that it isn't true and low rates didn't prevent some unforeseen calamity. That's the
beauty of the Hyperbolic Avoided Hypothetical (HAH! for short) and why it has become a favorite
of the Central Banking elite. But it's junk science, because you can't disprove it either. For
example: I just used my superpowers to prevent a zombie apocalypse. Go ahead and prove that I
didn't. ( Do you see any zombies? No? You're welcome. )
These twin tendencies of believing an idea that keeps disappointing and justifying it with
all the worse outcomes that didn't happen are the pillars of the global liquidity trap that is
slowly pulling us all under. Ten years ago, there was a plausible theory that lower rates were
a good idea. When they failed, rates were taken to zero (zero interest rate policy, or ZIRP).
When that failed, they were taken negative (negative interest rate policy, or NIRP). At no
point was it ever even considered that maybe, just maybe, it's the theory that's wrong.
My belief is that in the short term, artificially low rates are deflationary, as they result
in investing booms that create excess capacity and misallocation of resources that hurts
growth. Uber, Lyft, WeWork and AirBnb have caused plenty of deflation by constantly raising
money to operate at a loss. Cheap debt enabled a fracking boom that's flooded the oil market.
Public companies that can borrow for nothing are more likely to spend that money on buybacks
than wages.
Oscar Peterson@48 - "...Targeting Saudi or UAE oil infrastructure is possible, but that
will be hard (and risky) if deniability is a goal..."
The second Iran is forced to resort to hitting Saudi or UAE oil infrastructure, we'll see
the Pepe
Escobar-described $1.2 quadrillion global financial Ponzi of fake money (derivatives)
implode and financial markets everywhere will be locked shut. In a matter of hours, not
days.
Now the Swiss banker's claim may be off by a few hundred trillion either way, but it
really doesn't matter. That's way too much money for some kind of secretive global financial
bailout - in fact, there isn't that much REAL money available in the whole world. The guy
that bought oil futures for pennies at $1000/bbl will now be a trillionaire. Except there
won't be anyone that can or will pay him. "But it's a futures contract - someone has to
buy his $1000/bbl oil. That's the rulez!" Yeah, he may as well have bought a stack of
Zimbabwe $10 trillion dollar notes instead and been a hundred trillionaire, for what that's
worth.
Pepe uses extremes to make his point, but oil doesn't really need to go to $1000/bbl. or
even $500/bbl. - $200/bbl oil will lock the oil derivative markets. Which will keep all
linked financial derivative markets (virtually all of them) locked or wiped out. The big
banks will be herding cats at that point and imploding themselves, and nobody will care about
fighting anyone in the Persian Gulf. Besides, all CENTCOM and USSOCOM personnel will be
needed back here in the United States to protect the government from the people.
Iran won't be affected much because the U.S. and Israel made sure they were never
allowed in the global financial sandbox. Poor countries with massive IMF loans? Yeah, they
won't care - the little people never saw a dime of that, anyway. Russia is as prepared as
possible and will do fine. China? Sorry. They're going down with everyone else. I'll let
everyone know how the food riots in the U.S. turn out. That's if I survive until 2025 when
the internet comes back up and if the planet isn't ruled by talking apes. Wait... that last
part already happened. Forget it.
I guess I'll just head north to steal a few barrels of tar sands from Canada. James: how
do I get there from Minnesota on foot? I won't have Google Maps. Nobody will. Do you have any
spare barrels?
Overproduction of capital – seeking a high, no risk return – is a certainty.
Especially with continuing QE. There is no end game now. That capital will find its way into
derivative casino capital gambling – of which only 2% ends up as a commodity changing
hands. The rest is hidden toxic exposure making the banking system untenable. Other outlets
include mergers and acquisitions (toward oligopolies of power); leveraged buyouts; and asset
stripping destroying any last real productive capacity for short term 'Global Death Protocol'
(GDP returns – one of the sensible points Monbiot made it is no substitute Human
Development Index). Pension fund raiding: there is thought to be a $30 tn black hole already
– now they want to release $90tn 'locked assets' without even the slightest chance of
ever getting an ROI. Overproduced capital will also find its way in to the tech bubble
– funding our AI-redundancy. Oil-rent, commodity-rent, bio-pharma-rent, agi-rent, and
tech-rent seems to be a major part of the capitalist death throes. But you cannot rent a host
humanity by making them redundant. Now they also want to rent nature back to us. Add in
spiralling exponential debt; EROI and a slow-burn falling net-energy crisis; and
authoritarian states merging with bureaucratised corporate capital down to the local
infrastructure level its humanity versus corporate state insanity.
And the bleated hope of sheep is that a nativist leader – like Jeremy Corbyn –
will come along and save us. Reality is going to have to hit the majoritarian massif really
hard in the face to wake people up to the systemic fragility of globalised capitalism.
Unfortunately, its internecine internal contradictions may prove fatal before that. My hope
is that something better may rise from the ashes: a humanist society contra all the fatal
contradictions of relentless coercive capital accumulation. Given the level of political and
ecological acumen we encounter on a daily basis I'm presently not too optimistic. But that
can change, rapidly. Consciousness is not timebound or limited by causality (see below). Now!
would be a good time for a consciousness evolutionary explosion a Big Bang of a new reality.
Depending on what the Big Bang of the old leaves intact! There will be a solution. It might
not be optimal though. I presently can't see any smooth transition taking place. Carpe deum
and enjoy the ride over the ever quickening rapids of the net energy falls!
To Wall Street, the shale industry has lost a lot of its allure. A decade's worth of
promises have failed to materialize, and Big Finance is cutting some of its ties with smaller
shale drillers who have not delivered.
The Wall Street Journal
reports that the shale industry only saw $22 billion in new bond and equity deals, down by
more than half from 2016 levels, which was a much worse time for the market.
The steep decline in new debt and equity issuance is a sign that major investors are no
longer rushing to finance unprofitable shale drilling. It's worth noting that this is a new
development. For years Wall Street financed unprofitable drilling, holding out on the promise
that rapid production growth would eventually pay off.
Shale wells suffer from precipitous decline rates, with as much as three quarters of a
well's total lifetime production coming out in the first year or two. After an initial burst of
output, shale wells enter a steep decline.
Of course, this has been known since the beginning and Wall Street has long been fully
aware. But major investors hoped that shale companies would scale up, achieve efficiencies and
lower breakeven prices to the point that they could turn a profit.
However, that has not been the case. While there are some drillers that are profitable,
taken as a whole the industry has been cash flow negative essentially since its beginning in
the mid-2000s. For instance, the IEA estimates that the shale industry posted cumulative
negative free cash flow of over $200
billion between 2010 and 2014.
The red ink has narrowed since then, but so too has the patience from Wall Street. In 2018,
even as oil prices hit their highest levels in years, new debt and equity issuance plunged.
That makes it harder for small and even medium-sized companies to finance growth. It's not all
that surprising, then, that a wave of spending cuts have cropped up in the last few months.
The WSJ notes that the credit environment also worsened when the market hit its nadir in
2016. Regulators tightened lending requirements, raising the cost of capital for indebted
drillers. That, of course, made it even more difficult for these drillers to turn a profit.
To top it off, all of these pesky investors are much more demanding than they used to be,
calling on companies to stop spending so much and instead return cash to shareholders. That
leaves less capital available to inject back into the ground. Earlier this month Barclays
issued a double-downgrade to Occidental Petroleum, lowering it from Overweight to
Underweight, citing the company's deficit after dividends at a time when the driller still
expected to aim for an aggressive production target.
But some companies are between a rock and a hard place. The WSJ notes that CNX Resources has
lost over 20 percent since late January when it announced that it was bowing to investor
pressure to cut spending. That led to speculation that the company wouldn't meet its production
target. It's a no-win situation for some.
What to make of all of this? As Liam Denning of
Bloomberg Opinion put it, "[t] the prevailing financial model for many frackers has hit a
wall ." Denning points out that the shale industry has not posted a return on capital above 10
percent any year since 2006, which says is a "feature of shale, not a bug."
According to Rystad Energy, the 33 largest publicly-traded shale companies, accounting for
39 percent of U.S. shale output, will struggle to please shareholders while also trimming debt.
"Shale E&Ps struggle to please equity investors and reduce leverage ratios simultaneously.
Despite a significant deleverage last year, estimated 2019 free cash flow barely covers
operator obligations, putting E&Ps on thin ice as future dividend payments remain in
question," Rystad Energy senior analyst Alisa Lukash said in a
statement .
Taking a step back, explosive shale growth was only possible because in the context of the
post-2008 financial crisis and the response by the Federal Reserve to drop interest rates close
to zero, something Bethany McLean argues in her book, "Saudi America." Cheap money financed the
debt-fueled shale revolution.
Rystad finds that over half of the total debt pile for the 33 companies it analyzed is due
within the next seven years. Ultimately, the industry may have to erase $4 billion in promised
dividend payments. "The obvious gap in expected versus likely dividend payments confirms the
industry's inability to deliver sustained investors' payback while simultaneously
deleveraging," Lukash said.
That doesn't mean that production is going to fall off of a cliff. These days, the shale
drilling frenzy is being pushed along increasingly by the oil majors, who have gobbled up
smaller companies. ExxonMobil and Chevron, for instance, can take a long view, and put
mountains of cash into drilling. Investor pressure is different for these multinationals and,
in any event, they are much more profitable than smaller shale companies due to various assets
in refining, chemicals, offshore and otherwise conventional production.
As such, production growth will continue for a while longer. But the go-go days are
over.
US reserves are estimated by some to about 50 billion barrels. Oil production, along with
reserve estimates, are growing in the US for one reason and one reason only, the advent of shale
oil. Reserve estimates before 2008 were based on conventional oil.
Onshore conventional oil production in the USA is in steep decline. Shale oil production is
intrinsically connected with financing and it produce along with oil a stream of junk bonds. At
some point investors might do not want them of the bubble start deflating. Then what.
Notable quotes:
"... Next three years for Shale Drillers may be a problem. I believe something like $150B in debt comes due between now and 2023. That's a lot of debt to roll over, as well as take on more debt to fund CapEx. ..."
"Dennis, with his calculation of a peak in 2025 + or – 3 years is about right."
That really depends on how much debt the Shale Drillers can take on, and presumes there is
not another global recession before 2025. Next three years for Shale Drillers may be a
problem. I believe something like $150B in debt comes due between now and 2023. That's a lot
of debt to roll over, as well as take on more debt to fund CapEx.
Without constant US Shale
production increases, world production peaks.
"... In the meantime, the strategy for oil and gas executives to appease investors is to focus on "quick cash, quarterly payouts and fast talk," Sanzillo says. "Either way the stocks lack a long-term value rationale." ..."
"... Meanwhile, the Wall Street Journal reports that the U.S. shale industry has been over-hyping the production potential from their wells. The WSJ compared well-productivity estimates from shale companies to those from third parties. After looking at the production data at thousands of wells and how much oil and gas those wells were on track to produce over the course of their lifespans, the WSJ found that company forecasts seemed to be misleading. ..."
"... Schlumberger, for instance, has reported that secondary shale wells near older wells in West Texas have been 30 percent less productive than the initial wells, the WSJ found. Also, many shale companies used data from their best wells and extrapolated forward, projecting enormous growth numbers that have not panned out. ..."
Of course, that is largely just a reflection of the sharp decline in oil prices. But the share prices of most oil and gas companies
are also largely based on oil price movements. So, the steep slide in oil prices in the final two months of 2018 led to disaster
for investors in energy stocks.
"The stock market went to hell in December. And when it got there, it found that the energy sector had already moved in, signed
a lease and decorated the place," Tom Sanzillo, Director of Finance at the Institute for Energy Economics and Financial Analysis
(IEEFA), wrote in a
commentary
.
The energy sector was at or near the bottom of the S&P 500 for the second year in a row, Sanzillo pointed out. And that was true
even within segments of the oil and gas industry. For instance, companies specializing in hydraulic fracturing fell by 30 percent,
while oil and gas supply companies lost 40 percent. "The fracking boom has produced a lot of oil and gas, but not much profit," Sanzillo
argued.
Looking forward, there are even larger hurdles, especially in the medium- to long-term. Oil demand growth is flat in developed
countries and slowing beginning to slow in China and elsewhere. The EV revolution is just getting started.
The last great hope for the oil industry is to pile into
petrochemicals
, as oil demand for transportation is headed for a peak. But profits in that sector could also prove elusive. "The industry's rush
to invest in petrochemicals to maintain demand for oil and gas is likely to continue, but the profit potential in this sector is
more limited than oil and gas exploration, and is likely to keep the energy sector at or near the bottom of the S&P 500," Sanzillo
concluded.
In the meantime, the strategy for oil and gas executives to appease investors is to focus on "quick cash, quarterly payouts
and fast talk," Sanzillo says. "Either way the stocks lack a long-term value rationale."
Meanwhile, the Wall Street Journal reports that the U.S. shale industry has been over-hyping the production potential from their
wells. The WSJ compared well-productivity estimates from shale companies to those from third parties. After looking at the production
data at thousands of wells and how much oil and gas those wells were on track to produce over the course of their lifespans, the
WSJ found that company forecasts seemed to be misleading.
"Two-thirds of projections made by the fracking companies between 2014 and 2017 in America's four hottest drilling regions appear
to have been overly optimistic, according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins
in Texas and North Dakota," reporters for the
WSJ wrote . "Collectively, the companies that made projections are on track to pump nearly 10% less oil and gas than they forecast
for those areas, according to the analysis of data from Rystad Energy AS, an energy consulting firm."
Schlumberger, for instance, has reported that secondary shale wells near older wells in West Texas have been 30 percent less
productive than the initial wells, the WSJ found. Also, many shale companies used data from their best wells and extrapolated forward,
projecting enormous growth numbers that have not panned out.
The upshot is that shale companies will have to step up spending in order to hit the promised production targets. However, so
many of them have struggled to turn a profit, and the recent downturn in oil prices has put even more pressure on them to rein in
costs.
That raises questions about the production potential not just from individual shale companies, but also from the U.S. as a whole.
Questionable, but still interesting perspective. Ignore marketing crap -- clearly there is marketing push within this presentation
-- she wants your subscriptions. "This is Main Street vs Wall Street" dichotomy sounds plausible. Neoliberalism is, in essence, is the
restoration of power of financial oligarchy.
But the idea of secret open bailout might explain why shale oil became so prominent despite high cost of producing it: Wall Street
was subsidised via backchannels for bringing price downand supporting shale companies by the US goverment
$21 trillion in "missing money" at the DOD and HUD that was discovered by Dr. Mark Skidmore and Catherine Austin Fitts in 2017
has now become a national security issue. The federal government is not talking or answering questions, even though the DOD recently
failed its first ever audit.
Fitts says, "This is basically an open running bailout. Under this structure, you can transfer assets out of the federal government
into private ownership, and nobody will know and nobody can stop it. There is no oversight whatsoever. You can't even know who is
doing it. I'm telling you they just took the United States government, they just changed the governance model by accounting policy
to a fascist government. If you are an investor, you don't know who owns those assets, and there is no evidence that you do. . .
. If the law says you have to produce audited financial statements and you refuse to do so for 20 years, and then when somebody calls
you on it, you proceed to change the accounting laws that say you can now run secret books for all the agencies and over 100 related
entities."
In closing, Fitts says, "We cannot sit around and passively depend on a guy we elected President. The President cannot fix this.
We need to fix this. . . . This is Main Street versus Wall Street. This is honest books versus dirty books. If you want the United
States in 10 years to resemble anything what it looked like 20 years ago, you are going to have to do it, and there is no one else
who can do it. You have to first get the intelligence to know what is happening."
Join Greg Hunter as he goes One-on-One with Catherine Austin Fitts, Publisher of "The Solari Report." Donations:
https://usawatchdog.com/donations/
Greg, with all due respect I don't you understand what CAF is saying. Forget about a dollar reset. The fascists, using
the Treasury, Exchange Stabilization Fund, HUD, DOD and any agency they choose, have turned the US government into a gigantic
money laundering operation. And they maintain two sets of books - the public numbers are a complete sham. Any paper assets held
by private citizens are not secure, are likely rehypothecated, and when convenient can be frozen or siezed by these fascists in
Washington. There is no limit to how many dollars the FED can create secretly and funnel out through the ESF/Treasury to prop
up and bail out any bank, black ops, pet project, mercenary army or paper assets they choose. The missing $21 trillion is probably
a drop in the bucket as there is no audit and no honest books for us to examine. In sum, all paper asset pricing in dollars is
a fraud and a sham. Any paper assets you think you own, whether it be stocks, bonds, or real estate are pure illusion: they can
be repriced or stolen at any time; in reality, you own nothing. To the man and woman on the street I say this: get out of paper,
get out of these markets and convert to tangibles in your physical possession - and do it secretly and privately, avoid insurances,
records, paper trails. This mass defrauding of the American people by this corrupt government in Washington will come crashing
down when the US dollar is displaced from reserve status; this is what China and Russia and the BRICS are setting the stage for:
world trade without the US dollar. When this happens, your dollars will become virtual toilet paper and all of your paper assets
will go poof.
"We have to fix this". Ok how does the individual fix this? Private armies are running around doing whatever private armies
do and I, the one man, is suppose to fix this. Please, will someone tell us what we are suppose to do, specific instructions not
a mix of large words that say " we must fix this", damn, we need a leader. Greg you ask almost every person you interview what
the middle class should be doing to protect themselves and you never get a "real" answer, just a dance around. Also you ask numerous
people what this coming change is going to look like and again, just silence or dance music, no answers. Damn we need a leader.
Your trying very hard to give us information that will help us weather the coming storm, so thank you for all you do, and you
do more than anyone else out there.
Question, why in part do I feel I am being lied to? Is it subscription hustle or is it, don't you believe your lying eyes!
Without knowing exactly what is what, anyone who would've watched Herbert Walker Bush's funeral with reactions from those who
received cards, whether they be Bush family, the Clintons, the Obamas and entourage. Jeb Bush went from being proud and patriotic
to panic like the funeral that he was at was for the whole family.
Joe Biden looked like he had a major personal accident and no way to get to the bathroom for cleanup.
George W. Bush after being asked a question, of which the answer was, "Yep" then proceeded to appear resigned and stoic! What
ever was on those cards essentially amounted to, for all those receiving a card, "the gig is up" and it appears they all damn
well knew it.
So, Catherine Austin Fitts, explain your, "Trump is colluding with the Bushies," I would say, that Canary in this mine of inquiry
is dead. I'm just an old disabled Vietnam vet of plebeian background and certainly not a revolving door Washington DC Beltway
patrician, so any explanation needs to be delivered in slow, logical step-by-step progression for I have not mastered the art
of selling the sizzle in hopes that the dupes will later pay for the steak. I prefer, Greg, when you actually get more combative
with Ms. Fitts. Make America, great again and do so, in the name of the Lord Jesus Christ, Amen.
35 min: Fitts gives a great synopsis of the problem. She never deviates in all of her interviews. greg doesn't seem to understand
at all. She repeats herself MULTIPLE TIMES and greg is still asking the same irrelevant PREPPER questions. IT DOES NOT MATTER
WHAT ASSETS YOU HOLD GREG, AND THAT INCLUDES GOLD!!!! WHEN YOU'RE EXISTING IN A TYRANNICAL SYSTEM THAT STEALS AT WILL FROM ITS'
CONSTITUENCY YOU CAN'T actually OWN ANYTHING!!!! lord! only so many ways to say
She lost credibility when she said Trump has "made a deal with the Bushes." That defies logic. The Bushes made a deal with
Trump! Trump has gained full control of the military with a $ 1 1/2 trillion war chest. Trump and Putin are putting the China
toothpaste back in the tube.
This woman clearly knows nothing about the plan..she has not even mentioned that the world bank president has resigned who
was appointed by obumma. And that is HUGE. She was in government in the corruption, but she doesn't know how things will be fixed..she's
not in that loop of current things in the new reset..shes coming from her own perceptions
This woman always make me sick to my stomach. She comes out and says a bunch of scary stuff and offers no solution. If it's
too much for just one person, then we the people need to take control. We don't need a central bank. We need local and state banks
like the Bank of North Dakota then we can migrate over to them and then shut down the Fed.
You guys insist on continuing to think money isn't created from thin air by the Fed and
actually means something in the context of a substance that feeds you food. If you have to
have it, and you do have to have it, things will be done for you to get it. Borrowed money
that was created from thin air . . . who cares if you can't pay it back? You have to eat.
Consumption of oil is up. OPEC and Russia have reduced output. The price falls, because
there is no meaning to anything created from thin air when applied to something that depends
on physics.
You won't know anything until you find yourself sitting in a line waiting for gasoline.
You won't see it coming. You won't predict it. It will just happen someday.
Some truth to that Watcher. Simplistic thinking in investors. If we aren't making much money,
the US won't be making much money, so the price of oil must go lower. Not just simplistic,
flat out stupid.
And the number of people who think oil supply is limited is fairly scarce in relation to
the population as a whole. Probably less than the number of people who think chocolate milk
comes from brown cows.
"... By Justin Mikulka, a freelance writer, audio and video producer living in Trumansburg, NY. Justin has a degree in Civil and Environmental Engineering from Cornell University. Originally published at DeSmogBlog ..."
"... Wall Street caused the 2008 financial crisis, with some of its architects personally benefiting. However, while a few executives profited, the result was a drop in employment of 8.8 million people, and according to Bloomberg News in 2010, "at one point last year [2009] the U.S. had lent, spent, or guaranteed as much as $12.8 trillion to rescue the economy." ..."
"... JP Morgan (along with much of Wall Street) required large sums of money in the form of bailouts to survive the fallout from all of the bad loans made, which brought about the housing crisis. Is JP Morgan steering clear of making loans to the shale industry? No. Quite the opposite. ..."
"... To understand why JP Morgan and the rest of these banks would loan money to shale companies that continue to lose it, it's important to understand the gambling concept of "the vigorish," or the vig. Merriam-Webster defines vigorish as "a charge taken (as by a bookie or a gambling house) on bets." ..."
"... Wall Street makes money by taking a cut of other people's money. To a gambling house, it doesn't matter if everyone else is making money or losing it, as long as the house gets its cut (the vig) -- or as it's known in the financial world -- fees. ..."
"... Understanding this concept gives insight into why investors have lent a quarter trillion dollars to the shale industry, which has burned through it. If you take the vig on a quarter trillion dollars, you have a big pile of cash. And while those oil companies may all go bankrupt, Wall Street never gives back the vig. ..."
"... Trent Stedman of the investment firm Columbia Pacific Advisors LLC explained to The Wall Street Journal at the end of 2017 why shale producers would keep drilling more oil even when the companies are bleeding money on every barrel produced: ..."
"... "Some would say, 'We know it's bad economics, but it's what The Street wants.'" ..."
"... In 2017 "legendary" hedge fund manager Jim Chanos referred to shale oil companies as "creatures of the capital markets," meaning that without Wall Street money, they would not exist. Chanos is also on record as shorting the stock of heavily leveraged shale oil giant Continental Resources because the company can't even make enough money to pay the interest on its loans. ..."
"... The Wall Street Journal reports ..."
"... Growing production at any cost is the story of the shale "revolution." The financial cost paid so far has been the more than $280 billion the industry has burned through -- money that its companies have received from Wall Street and, despite the plea from Al Walker, continue to receive. ..."
"... Higher oil prices are yielding more stories about how 2018 will be the year that the shale industry finally makes a profit. Harold Hamm refers to it as Continental Resources' "breakout year." Interesting how potentially not losing money for a year is considered a "breakout year" in the shale industry ..."
"... I keep thinking that the whole enterprise was bankrolled specifically to crush oil prices and keep inflation tamped down, which provides much more profit to wall street via the assurance that the Fed's easy money policy lasts a lot longer. ..."
"... " If Wall Street is the bookie then who are the bettors?" It's a great question that leaves everyone guessing. My guess is pension funds, and calling them bettors is being kind. ..."
"... Bernie Sanders: The business of Wall Street is fraud and greed. ..."
"... I've mentioned this book a few times recently that I'm still in the middle of – Railroaded by Richard White . He points out that the 19th century railroad corporations were disorganized, poorly run, money losing enterprises. But that didn't stop people from investing in them and getting filthy rich. All you need is some fast talking and clever accounting. One example he mentions is that the railroads needed all kinds of supplies to keep things moving and so they would buy them from railroad logistics corporations or fuel from coal companies, etc. But guess who owned the suppliers? That's right, the railroad investors would set up separate companies to supply their own railroads and these companies were extremely profitable. ..."
"... But the pool of investors in these supplier companies was limited to the smart money in on the scam. In essence, the initial well heeled investors set up the railroads so that they could deliberately fleece them. He gives the example of one of the coal companies charging the railroad three times the going rate, which beggared the railroad but lined the pockets of the select few investors who owned stakes in both companies. ..."
"... I suspect that something similar may be going on in the fracking industry. So to figure out the whole scam, you would need to know if the logistics companies are making a profit and is there any common ownership between those companies and the frackers. ..."
"... The other book I recently read was The Whiskey Rebellion by William Hogeland which discusses finance and taxation during the period just after the American Revolution. Shorter version – Alexander Hamilton was a crook who deliberately set up a financial system to ensure that the rich get richer off the labor of the rest of us. ..."
"... The more you learn about the history of this country, the more you realize that there really is nothing new going on and the financial crooks of today are just following in the footsteps of their grifter forebears. And maybe someday they too will have cities named after them or at least a statue in the public square, because the US of A does love its con men. ..."
"... Hogeland's book Founding Finance is also great. Michael Perelman's book Railroading Economics is worth a read. The founders of economics in the US were looking at the example of the railroads and other corporations and acknowledging that competition was destructive and wasteful, but in their textbooks for college students they pushed the simplistic and misleading models that came to define neoclassical economics. ..."
"... Perhaps Wall Street and the banks are playing a larger game. When the U.S. had $4.00+ gasoline there was a real motivation to rework transportation systems and rely less on cars. Now, with the lower oil prices we are back to SUV's and pick-up trucks. So maybe a loss leader in the fracking scam has preserved a much larger cash cow in auto finance. There is also the whole oil services industry to consider. With new conventional discoveries at an all time low, what would the oil services sector do if there were no fracking? ..."
"... Can't help but wondering if this isn't all part of the neo-conservatives and their 'Great Games'. Since 1971 and the peak of conventional oil production in the US, the country has been a power in decline, economically if not militarily. If, as Frederick Soddy wrote almost a hundred years ago "Life is fundamentally a struggle for energy", then the country which controls that energy controls life on our planet. (I believe Kissinger said much the same thing.) This has all kinds of implications for issues from world (Middle East) peace and transitioning to renewable energy sources. Accidents of geology have left Middle Eastern countries with most of the world's remaining easily exploitable sources of conventional oil – and also as holders of much of the US and Western government debt upon which the international monetary system is based. ..."
"... Super (monetary) Imperialism ..."
"... I also can't help but wonder if Reagan shouldn't be most remembered for his instructions to White House maintenance personnel to 'take down those solar panels'. This is eight years after Hudson published Super Imperialism ..."
"... What the Saudis did in 2014 – 2016, maximizing output and spending ~2/3 of the 800 billion dollars equivalent in savings they then held to sustain their economy and regime, trying to bankrupt the U.S. oil industry (and secondarily, the Iranians, etc.) they quite literally cannot do again, anytime soon. They're close to broke, and fighting 1 – 2 wars. ..."
"... Regarding " The Saudis trying to bankrupt the U.S. oil industry" – The Saudis were not out to destroy the US oil industry. The US oil industry controls the Saudis through the US Military which keeps them in power. The Saudis were after the wildcat frackers who were not part of the global oil cartel (which includes US Big Oil). The wildcat frackers were not maintaining limited production quotas to maintain the monopoly oil price gouging. US Big Oil allowed the price collapse for long term goals with their Saudi partners. (Source: Antonia Juhasz) Apparently Wall Street was not in on the plan and kept the money flowing in the fracking Ponzi scheme. ..."
"... Luke is an oil man who brings to mind the Upton Sinclair quote "It is difficult to get a man to understand something when his salary depends upon his not understanding it." ..."
"... "There's a sucker born every minute" and Wall Street is P. T. Barnum directing investors with the sign "This Way to the Egress." The con will last as long as investors have cash to burn and think "product growth" is equivalent to "profit growth" – or in the words of Lucy "Well, uh maybe there is no profit on each individual jar, but we'll make it up in volume." ..."
The U.S. shale oil industry hailed as a "revolution" has burned through a quarter
trillion dollars more than it has brought in over the last decade. It has been a
money-losing endeavor of epic proportions.
In September 2016, the financial ratings service
Moody's released a report on U.S. oil companies, many of which were hurting from the
massive drop in oil prices. Moody's found that "the financial toll from the oil bust can only
be described as catastrophic," particularly for small companies that took on huge debt to
finance fracking shale formations when oil prices were high.
And even though shale companies still aren't turning a profit, Wall Street continues to
lend the industry more money while touting
these companies as good investments. Why would investors do that?
David Einhorn, star hedge fund investor and the founder of Greenlight Capital, has referred
to the shale industry as
"a joke ."
"A business that burns cash and doesn't grow isn't worth anything," said Einhorn, who often
goes against the grain in the financial world.
Aren't investors supposed to be focused on putting money toward profitable companies? While,
in theory, yes, the reality is quite different for industries like shale oil and housing.
Wall Street makes money by facilitating deals much like a Vegas bookie makes money by taking
bets. As the saying about Las Vegas goes: "The house always wins." What's true about casinos
and gambling also holds true for Wall Street.
Wall Street caused the 2008 financial crisis, with some of its architects personally
benefiting. However, while a few executives profited, the result was a drop in employment of 8.8 million
people, and according
to Bloomberg News in 2010, "at one point last year [2009] the U.S. had lent, spent, or
guaranteed as much as $12.8 trillion to rescue the economy."
JP Morgan (along with much of Wall Street) required large sums of money in the form
of bailouts to survive the fallout from all of the bad loans made, which brought about the
housing crisis. Is JP Morgan steering clear of making loans to the shale industry? No. Quite
the opposite.
As shown in this chart of which banks are loaning money to shale company EOG Resources,
while all of the big players in Wall Street are in on the action, JP Morgan has the biggest
bet.
To understand why JP Morgan and the rest of these banks would loan money to shale
companies that continue to lose it, it's important to understand the gambling concept of "the
vigorish," or the vig. Merriam-Webster defines vigorish as
"a charge taken (as by a bookie or a gambling house) on bets."
Wall Street makes money by taking a cut of other people's money. To a gambling house, it
doesn't matter if everyone else is making money or losing it, as long as the house gets its cut
(the vig) -- or as it's known in the financial world -- fees.
Understanding this concept gives insight into why investors have lent a quarter trillion
dollars to the shale industry, which has burned through it. If you take the vig on a quarter
trillion dollars, you have a big pile of cash. And while those oil companies may all go
bankrupt, Wall Street never gives back the vig.
Trent Stedman of the investment firm Columbia Pacific Advisors LLC
explained to The Wall Street Journal at the end of 2017 why shale producers would keep
drilling more oil even when the companies are bleeding money on every barrel produced:
"Some would say, 'We know it's bad economics, but it's what The Street
wants.'"
And "The Street" generally gets what it wants, even when it is clear that loaning money to
shale companies that have been losing money for a decade and are already deep in debt is "bad
economics." But Wall Street bonuses are based on how many "fees" an employee can bring to the
bank. More fees mean a bigger bonus. And loans -- even ones that are clearly bad economics --
mean a lot more fees.
Shale Oil Companies Are 'Creatures of the Capital Markets'
In 2017 "legendary" hedge fund manager Jim Chanos referred to shale oil companies as
"creatures of the capital markets," meaning that without Wall Street money, they would not
exist. Chanos is also on record as shorting the stock of heavily leveraged shale oil giant
Continental Resources because the company can't even make enough money to pay the interest on
its loans.
And he has a point. In 2017 Continental spent $294.5
million on interest expenses, which is approximately 155 percent of its 2017 adjusted net
income generation. When you can't even pay the interest on your credit cards, you are
broke.
And yet in 2017, investor capital was still flowing, with Continental Resources among those
bellying up to
the Wall Street trough for another billion in debt.
" In 2017, U.S. [exploration
and production] firms raised more from bond sales than in any year since the price
collapse started in 2014, with offerings coming in at around $60 billion -- up nearly 30
percent from 2016, according to Dealogic. Large-cap players like Whiting Petroleum,
Continental Resources, Southwestern, Noble, Concho and Endeavor Energy Resources each raised
$1 billion or more in the second half of 2017."
How big of a problem is this business of loaning money to an industry burning through
billions and burying itself in debt? So big that the CEO of shale company Anadarko Petroleum is
blaming Wall Street and asking its companies to please stop loaning money to the shale oil
industry. Yes, that's right.
" The biggest problem our industry faces today is you guys. You guys can help us help
ourselves. It's kind of like going to AA . You know, we need a partner. We really need the
investment community to show discipline."
The Wall Street Journal reports that Walker maintains: "Wall Street has become an
enabler that pushes companies to grow production at any cost, while punishing those that try to
live within their means."
Imagine begging banks to stop loaning you money. And being ignored.
Growing production at any cost is the story of the shale "revolution." The financial
cost paid so far has been the more than $280 billion the industry has burned through -- money
that its companies have received from Wall Street and, despite the plea from Al Walker,
continue to receive.
"It [the shale industry] has burned up cash whether the oil price was at $100, as in 2014,
or at about $50, as it was during the past three months. The biggest 60 firms in aggregate
have used up $9 billion per quarter on average for the past five years."
Higher oil prices are now being touted as the industry's savior but, as The Economist noted,
the shale industry was losing money even when oil was $100 a barrel.
Still Wall Street keeps giving the shale industry money and the shale industry keeps losing
it as it ramps up production. To be clear, this arrangement makes shale company CEO s and
financial lenders very rich, which is why the trend is likely to continue. And why Continental
Resources CEO Harold
Hamm will continue to repeat the myth that his industry is making money, as he did at the
end of 2017:
" For anybody to even put forth the suggestion we haven't had great expansion and wealth
creation in this industry with horizontal drilling and all the technology that's come about
the last 10 years, I mean, it's totally ridiculous."
No one will argue that Hamm and his partners on Wall Street are not extremely wealthy. That
has happened despite Hamm's company and the rest of the fracking industry losing epic sums of
money. The same year Hamm made that statement, his company couldn't even cover its interest
expenses. To put that in perspective, Continental Resources couldn't even make the equivalent
of the minimum payment on its credit card.
Watch What the Industry Does, Not What It
Says
Higher oil prices are yielding
more stories about how 2018 will be the year that the shale industry finally makes a
profit. Harold Hamm refers to it as Continental Resources' "breakout year." Interesting how potentially not losing
money for a year is considered a "breakout year" in the shale industry .
As reported on DeSmog, the industry certainly got a huge
boost from the recent tax law, which will help its companies' short-term finances.
Continental Resources alone took home $700 million in tax relief.
Recent reports in the financial press detail how the new approach in the shale industry will
be to focus only on profitable oil production, not just producing more barrels at a
loss. As The Wall Street Journal put it in a headline:
"Wall Street Tells Frackers to Stop Counting Barrels, Start Making Profits."
In that very article, Continental CEO Hamm assures that he is on board with this new
approach, saying, "You are really preaching to the choir." But has Continental actually
embraced this new approach of fiscal responsibility and restraint? Not so much.
The fracking firm appears to have done the opposite, increasing production to record levels
along with the rest of the shale industry. Continental recently reported plans to drill 350 new wells at an estimated
cost of $11.7 million per well, which adds up to over $4 billion in total costs on those wells.
The company currently holds more than $6 billion in debt and less than $100 million cash.
How will Continental fund those new wells? Hamm has promised that going forward, there would
be "absolutely
no new debt." Perhaps Continental will fund it by selling assets because without more debt,
Continental does not have the money to fund those new wells. However, if past is prelude, then
Wall Street will happily lend Continental as much money as it wants. Why would Hamm say one
thing and do another? Well, he personally has accrued billions of dollars while his company has
burned through billions. Despite leading Continental to another money-losing year in 2017, Hamm
took home
a fat raise .
Funny how the news cycle will go nuts if -- insert public pension fund -- has 0.07% of its
holdings in a gun stock.
But not a peep at 'golly aw shucks' Mr. Grandpa USA, Warren Buffet, over Wells Fargo its
retail banking or its fracking enabling. or at (pal of chuck schumer and clintons) Jamie
Dimon or USA-rescued Citi.
Don't forget that warren buffet also owns the trains that eat a lot of the profits of the
koch bros investments in the tar sands. That why they wanted that keystone pipeline soooooooo
baaaad
The article could use an explanation -- for those of use who are financial
dummies -- of who the investors are that are making these apparently foolish bets. If Wall
Street is the bookie then who are the bettors? Or are the Wall Street banks using deposit
money to invest in fracking?
On a recent drive through West Texas I noticed the landscape dotted with what looked like
newish mini factories -- presumably fracking operations. Clearly it's not a low cost
endeavor.
I keep thinking that the whole enterprise was bankrolled specifically to crush oil prices
and keep inflation tamped down, which provides much more profit to wall street via the
assurance that the Fed's easy money policy lasts a lot longer.
All the rest of this talk
about profitability is just BS cover story. It's also an employment plan, in the same way
that bankrolling student loan debt was a a huge employment plan for administration and
construction, and soaked up unemployment by lifting enrollment rates and taking people out of
the labor market.
I think we forget how so much of what happened after the financial crisis
was a way of getting around the fact that they wanted the stimulus so much bigger than the 1
trillion they didn't even manage to get. I mean, look at the for profit school industry
– that was an obvious total racket and a joke, yet they threw money at it, then
pretended to clean up the shocking unexpected mess after when it was safe to do so (when the
economy was more in the clear.)
The wall street insiders make a mint trading the junk stocks
up, then short the hell out of them when they know the game is over and make a mint on the
way down.
I've been wondering the same thing. There must be a huge pile of non-performing debt on
someone's balance sheet or it's being moved around to where significant write downs are
happening, but I have no idea where either of those two things might be. Who are the
stuffees? Is German banks buying subprime again?
" If Wall Street is the bookie then who are the bettors?" It's a great question that leaves everyone guessing. My guess is pension funds, and
calling them bettors is being kind.
A bit off topic but yesterday in links was an article about the long time it takes to sue
Goldman Sachs. Now, it's good to see a little bit of trouble coming their way but the article
describes the lady doing the suing as a sweet innocent young thing being mauled by the male
predators at Goldman and her specialty was the "sale of convertible bonds", a fee generating
bullshit jawb that made her more money in a year than a deplorable can dream of making in a
lifetime.
There were two problems however. One, the sexual predator grabbing her was a bit of a
sideshow and from reading the guts of the article, the much bigger one is about money and how
the ladies of Goldman were being cut out from their rightful share of the fee-loot generated
at Goldman Sachs.
Bernie Sanders: The business of Wall Street is fraud and greed.
Pension funds is a good guess but one would think the consistent losses would start to
show somewhere. The bezzle at this point has to be approaching trillions.
In the case of public pension funds, many of not most of the "shortfalls" are in fact
intentional under-funding of the plans, with contributions to the funds being skimmed off by
state governments and diverted into the general operating funds, because Taxes Bad.
No it isn't a low cost endeavor and that may be precisely how the scam works. Note that
the article mentions at the end that Hamm who founded Continental has made billions
personally while the corporation flounders.
So the question is, what else does he own?
I've mentioned this book a few times recently that I'm still in the middle of –
Railroaded by
Richard White . He points out that the 19th century railroad corporations were
disorganized, poorly run, money losing enterprises. But that didn't stop people from
investing in them and getting filthy rich. All you need is some fast talking and clever
accounting. One example he mentions is that the railroads needed all kinds of supplies to
keep things moving and so they would buy them from railroad logistics corporations or fuel
from coal companies, etc. But guess who owned the suppliers? That's right, the railroad
investors would set up separate companies to supply their own railroads and these
companies were extremely profitable.
But the pool of investors in these supplier companies
was limited to the smart money in on the scam. In essence, the initial well heeled investors
set up the railroads so that they could deliberately fleece them. He gives the example of one
of the coal companies charging the railroad three times the going rate, which beggared the
railroad but lined the pockets of the select few investors who owned stakes in both
companies.
I suspect that something similar may be going on in the fracking industry. So to figure
out the whole scam, you would need to know if the logistics companies are making a profit and
is there any common ownership between those companies and the frackers.
Also, for anyone interested in the shady world of corporate finance and how it came to be
in the US, I can't recommend the book linked to above enough. One other aspect I found
fascinating is how the railroad investors turned to Europe and specifically the Germans to
buy their bonds when they couldn't find enough suckers stateside. Reminds me quite a bit of
the mortgage crisis a decade ago that spilled into Europe.
The other book I recently read was The Whiskey Rebellion by William Hogeland which
discusses finance and taxation during the period just after the American Revolution. Shorter
version – Alexander Hamilton was a crook who deliberately set up a financial system to
ensure that the rich get richer off the labor of the rest of us.
The more you learn about the history of this country, the more you realize that there
really is nothing new going on and the financial crooks of today are just following in the
footsteps of their grifter forebears. And maybe someday they too will have cities named after
them or at least a statue in the public square, because the US of A does love its con
men.
Thank you very much for the book recommendations!
Maybe their back up investments are in "fixing" the externalized, environmental costs e.g.
water filtration systems that remove radiologocals/heavy metals from municipal supplies with
the cost of purchasing being inversely portional to the extent of privatized ownership
permitted?
We spread the radium & strontium flavored "produced water" on as a replacement for
road salt. Slickwater fracking of the Marcellus became sellable, after Katrina messed up
Shell's deep water platforms in the Gulf (ie: a Democrat administration in PA, allowed
fracking in a huge reservoir, 1/4 mile from two 40yr old reactors and "watering down" return
water to "permissable levels" of toxic substances illegal to disclose to the 850,000 folks
drinking "treated" water. (note the dates?) https://vimeo.com/44367635
https://www.propublica.org/article/wastewater-from-gas-drilling-boom-may-threaten-monongahela-river
Hogeland's book Founding Finance is also great. Michael Perelman's book Railroading
Economics is worth a read. The founders of economics in the US were looking at the example of
the railroads and other corporations and acknowledging that competition was destructive and
wasteful, but in their textbooks for college students they pushed the simplistic and
misleading models that came to define neoclassical economics.
I know nothing, but:
Banks can fund loans by creating deposits and then carry the debt on their books as assets.
And they can be hidden there, their assets are secret.
If the stuff can't be paid back it's toxic, just like subprime in 2008 .
And the party goes on until rising rates push the economy into recession, banks stop rolling
over loans, the borrowers go to the Wall, etc.
And then what? The usual thing is for gov to bail out the Tbtf banks rather than take them
over, and sack or jail the officers because can't hurt the biggest donors. But if it all
hangs together until 2020 and Bernie wins there might be a change in the script.
If Sanders thinks of running again, he should say something basically like . . .
" If I am elected, I will have in place some responses ready to roll out and apply when the
next crisis and depression breaks out during my term." And he could say why he is predicting
a "next crisis and depression". If he were to get elected and then we had a next crisis and
depression during his term, he would get public credibility for having predicted it. And he
might have more political latitude for "doing the FDR thing" in response.
Many corporations, education institutions have pulled out of the fossil fuel industry
investment funds, a cursory reading of the press will give you an update
My guess is that even thought the banks aren't necessarily lending directly to the
frackers and the fees they collect are lucrative, they still have some skin in the game
somehow. The investors who are putting up the cash must have got the money from some bank or
another. So the banks wouldn't put up this much money without some guarantee they would be
made whole when it all goes belly up.
And I can't think of a bigger wink and a nod than what happened about ten years ago after
the banks blew up the mortgage industry. If Uncle Sugar came to the rescue then, I think it's
safe for them to assume it will happen again. After all, their friends run Treasury and the
Fed.
And see article in FT posted in links a couple days ago "liquidity ousts debt as the big
market worry." It provides some charts showing that banks are shifting away from holding debt
and playing more of the role of broker (with some anti-regulation propaganda thrown it as
editorial spin).
@Jim M
May 6, 2018 at 8:28 am
-- --
One of the things the banks frequently do when their borrowers go into bankruptcy, is to
participate in the debtor-in-possession financing that the bankruptcy court guarantees to be
repaid. This allows them to earn some interest to offset any losses.
If the fracking companies don't go bankrupt, the debt will be rolled over continuously
until the whole system collapses and the Fed bails out the banks again.
I guess that all the money pumped (no pun intended) into fracking must have originated in
the several trillion dollars worth of Quantitative Easing funds created in the past decade.
All that money sloshing around had to go somewhere. Maybe the only good news is that this
will be all one way to cancel some of these excess funds. The bad news is that supporting an
insupportable industry will screw up huge tracts of land and water supplies for god knows how
long.
Though not as "profitable" as converting as much energy production as possible to solar,
wind, and Pumped Storage Hydro (to store otherwise wasted "free" energy at 1/20th the cost of
batteries), it seems inevitable that people will not keep paying so much extra for what
should be much cheaper energy.
I don't know what price the planet and ones keeping us on too expensive energy will pay in
the long run (financial market losses by suckers, or tax payers for Citizens United enabled
politicians and phony regulators), but I suspect the ones that see the inevitable are getting
as much profit as they can, while they can, and leaving so many more holding the bag
(financially, and in abused environment).
There are some that will make wiser investments in more sustainable energy, as they accept
lower returns more in line with energy production at much better cost benefit ratios (which
are also less environmentally damaging).
Perhaps Wall Street and the banks are playing a larger game. When the U.S. had $4.00+
gasoline there was a real motivation to rework transportation systems and rely less on cars.
Now, with the lower oil prices we are back to SUV's and pick-up trucks. So maybe a loss
leader in the fracking scam has preserved a much larger cash cow in auto finance. There is
also the whole oil services industry to consider. With new conventional discoveries at an all
time low, what would the oil services sector do if there were no fracking?
Can't help but wondering if this isn't all part of the neo-conservatives and their 'Great
Games'. Since 1971 and the peak of conventional oil production in the US, the country has
been a power in decline, economically if not militarily. If, as Frederick Soddy wrote almost
a hundred years ago "Life is fundamentally a struggle for energy", then the country which
controls that energy controls life on our planet. (I believe Kissinger said much the same
thing.) This has all kinds of implications for issues from world (Middle East) peace and
transitioning to renewable energy sources. Accidents of geology have left Middle Eastern
countries with most of the world's remaining easily exploitable sources of conventional oil
– and also as holders of much of the US and Western government debt upon which the
international monetary system is based.
Free the world from its dependence on fossil fuels and you free it from its dependence
reserve currencies, US government and Wall Street-created debt. I wish Hudson would return to
the theme which introduced me to his work, Super (monetary) Imperialism . End it,
i.e. replace the free lunch international monetary system from which the US and its
'exceptional people' derive the funds to spread murder and mayhem around the world, and you
open at least the possibility for the world to enjoy a little peace and get to work on
serious problems like climate change.
I also can't help but wonder if Reagan shouldn't be most remembered for his instructions
to White House maintenance personnel to 'take down those solar panels'. This is eight years
after Hudson published Super Imperialism – more than enough time for at least
policy makers, drawn mostly from the ranks of finance, to understand 'the game' (and the
orders from Saudi Arabia they must follow if they wished to keep playing.) Fracking is / was
just a feeble attempt to show some independence which it and the rest of the world do NOT
have so long as they remain hooked on the Middle East's 'ancient sunlight'.
They were installed on the roof so that the White House kitchen could have hot water. And
they didn't work well. So, Reagan had them removed. ISTR reading that a photovoltaic array was installed while Obama was president.
This does appear to be at the core of human nature, particularly if you substitute "power"
for energy as a term to include both physical BTUs, who's pursuit we share with all other
animals, and the social relations that can be commanded with it which are a strictly human
thing.
The question now front and center is, "is humanity capable of self-conscious restraint on
power, even at the risk of extinction?"
I can only imagine survival for our species if we can make a religion of opposing "power"
at the risk of life as a mater of faith. Power has to be a community resource used for
community aims that intergenerationally sustain the community, but "the coordination problem"
of large groups militates against this notion. A stretch I know, the limits of my creativity
are showing!
Thank you for posting this excellent piece. However, I question whether the domestic shale
oil industry is financially unprofitable when it is considered in the aggregate, or if it is
just the exploration and production sector. Setting aside for a moment the huge
environmental, health and other social costs associated with this industrial activity, there
is a vast network of entities that depend on this debt-fueled oil extraction and development.
They range from oil and gas steel pipe manufacturers in Youngstown and drilling rig
manufacturers in Texas to tank railcar manufacturers in Louisiana to major railroads to
refineries and petrochemical facilities to pipeline companies and to some extent the domestic
auto industry and military, etc. No question the domestic shale oil extraction sector itself
is not cost competitive with other global suppliers, but I am wondering about the cumulative
secondary and tertiary economic and employment effects.
The primary problems with this industry sector lie in the enormous long-term environmental
and social costs it imposes, maybe even raising existential questions. Then there is the
issue of oil pipeline companies being granted eminent domain to deliver this oil for export
when the nation as a whole is a major net importer. Is that really a "public purpose" for
which the eminent domain laws were intended, or simply to line the pockets of a few?
Considering the environmental impact of Non-conventional drilling ( fracking ) it should
be noted that although denied by the industry wells have a considerable leak rate which puts
methane aint the atmosphere and threatens potable water supplies. In addition the uptick in
fracking has suppressed the development of non fossil fuel energy production which leads us
headlong into the 1.5 to 3 degree temperature elevation that the Paris agreement seeks to
avoid. The following links are a good introduction to these dangers. It seems likely that
human intelligence will prove to be a lethal mutation.
What happens when the true costs of fracking- to the land, soil, water, and communities-
become part of
the equation? That can't come soon enough, in my view. The squandering of vast natural resources here in the USA! is just so saddening.
At least the poor warehouse worker knows he doesn't have the time, so he carries his new
P-bottle just in around in case; maybe the frack-daddies should wake up and start packing new
bottles!
This is a good post. It is an existential question.
If I remember my lessons from NC, in 2007 it was clear that the subprime mortgage
securitization scheme would tank as the housing market collapsed. The short spread bettors
couldn't get anyone else to see what was really happening. Then suddenly Bear Stearns was
sold, Lehman Brothers went bankrupt and AIG had to be rescued.
I assume that Wall Street will continue to make loans out of thin air and pocket the Vig.
The Fed assures that the banks have an infinite money supply with deregulation and not
forcing the banks to write off their bad loans. This is similar to the MMT funding of the
military's never ending overseas wars. Wars end – badly most of the time. Fossil fuels
are finite. When the fuel costs more money to produce than it can be sold; the system
collapses. So, does that portion of civilization that is dependent on that energy source if
there is no alternative available.
I work in the oil industry. My job is as a type of low-level geologist, actually living
and working out on oil rigs for weeks or months at a time. (I drive to the nearest town with
a ChinaMart about once a week or so to wash clothes and buy more groceries.)
Several observations:
1) What the Saudis did in 2014 – 2016, maximizing output and spending ~2/3 of the
800 billion dollars equivalent in savings they then held to sustain their economy and regime,
trying to bankrupt the U.S. oil industry (and secondarily, the Iranians, etc.) they quite
literally cannot do again, anytime soon. They're close to broke, and fighting 1 – 2
wars.
2) The U.S. oil industry cut costs dramatically over the 6-9 months from the end of 2014.
That was done primarily by cutting WAY back on drilling (active rig counts in ND declined by
90-95% over that time) and reducing what they would pay drilling and service companies.
Mudloggers, MWD, directional drillers, casing crews, etc., saw their wages go down by over
HALF, if they even still had a job. (Many to most did not.)
3) The oil industry is pretty busy right now, but is running into some constraints. Tops
is they are still in the early stages of raising wages back up; I only make about 3/5 as much
per day as I did in October 2014 (and there has definitely been some inflation in the prices
I pay for most everything since then). Many workers that left were older, so just completely
retired or found retirement jobs. Some bought trucks/farms/small businesses, so are reluctant
(especially at these still-depressed wages by 2014 standards) to uproot and come back. Many
just can't see the math working, while others (or their wives, which = to the same thing)
just can't stomach facing another inevitable downturn at some point, with inevitable job
loss.
4) More than a few oil companies have leases on which they must drill, either in a certain
time period before drilling rights expire, or must actually drill to retain them. Further,
while many oil industry investors sadly poorly understand the delay between "let's drill
there" and having oil to sell, many do. Some, perhaps a lot, of drilling is done in
anticipation of eventually (likely almost certainly) higher prices at some point.
5) Oil companies actually aren't that bad on the environment most of the time.
5-10,000′ feet down where the zones of interest typically are located, WGAF what is
pumped or spilled, as no one travels or lives there. (Very thick, impermeable casing
hydraulically seals off those zones from interacting with the surface, with innumerable
impermeable strata between fracked zones and surface water wells, the latter rarely even
1000′ deep, and usually more like <200'.) By comparison, ethanol (whether from grain
or sugar cane) requires vast acreage be farmed, using POL for many aspects (~90% of
commercial fertilizers and nearly all pesticides have oil origins), while windmills chop up
tens of millions of environmentally desirable, often endangered or protected, birds every
year in the U.S., with little or no sanctions on the windmill companies.
6) People working in the oil industry typically have the same attitude I have about
anti-oil protesters. That is, let the ones who don't use petroleum, complain. That's not just
gasoline, diesel, heating oil, kerosene, etc., but also lubricants, pesticides, fertilizers,
plastics, thermal insulation used in most dwelling and commercial buildings, and anything
produced or manufactured or transported by same. No food, no clothes, no utilities, no
transport besides feet -- that would kill easily 90% of Americans within 6 months. This is
part of why I figure all the sincere environmentalists have already committed suicide -- and
the rest are hypocrites.
Regarding " The Saudis trying to bankrupt the U.S. oil industry" – The Saudis were
not out to destroy the US oil industry. The US oil industry controls the Saudis through the
US Military which keeps them in power. The Saudis were after the wildcat frackers who were
not part of the global oil cartel (which includes US Big Oil). The wildcat frackers were not
maintaining limited production quotas to maintain the monopoly oil price gouging. US Big Oil
allowed the price collapse for long term goals with their Saudi partners. (Source: Antonia
Juhasz) Apparently Wall Street was not in on the plan and kept the money flowing in the
fracking Ponzi scheme.
Regarding: "while windmills chop up tens of millions of environmentally desirable, often
endangered or protected, birds every year in the U.S., with little or no sanctions on the
windmill companies." – This statement is just oil company propaganda. Quoting Stanford
Prof. Mark Jacobson: "Wind turbines reduce bird kills relative to natural gas, coal, and oil
for electricity and cause about the same bird death rate as nuclear power. A recent study
published in Energy Policy found that wind turbines kill less than one‐tenth the bird
deaths caused by each of natural gas, coal, and oil and similar deaths to that caused by
nuclear power. As a result, wind turbines reduce bird kills relative to fossil energy
sources. In addition, according to the American Bird Conservancy, the total number of bird
deaths per year due to wind turbines (a few hundred thousand) is orders of magnitude lower
than the numbers due to communication towers (10‐50 million), cats (80 million), or
buildings (900 million)." Source: https://web.stanford.edu/group/efmh/jacobson/Articles/I/MythsvsRealitiesWWS.pdf
Regarding: "Oil companies actually aren't that bad most of the time." – The same can
also be said of mass murders and child rapists. Oil company pollution and their global
ruthlessness is well documented – and as the oil man I know once told me – to
understand this industry all you need to do is watch the movie "There Will Be Blood."
Luke is an oil man who brings to mind the Upton Sinclair quote "It is difficult to get a
man to understand something when his salary depends upon his not understanding it." He would
have fit right in with those men cutting down the last tree on Easter Island -- unconcerned
about the future of their people. He thinks climate change is a crock because if it is true,
then his job is destroying the planet. For anyone paying attention to global pollution and
climate change, it is clear we need a rapid transition to renewable energy (solar and wind),
a reduction in consumption (transition to more leisure time), and stewardship for the planet
rather than the get-rich-quick mining mentality that leaves a giant mess for future
generations to clean up – assuming human civilization survives. The
economic/engineering outlines for this needed rapid transition are discussed by Prof. Mark
Jacobson in several publications – here is the one for California. ( https://web.stanford.edu/group/efmh/jacobson/Articles/I/CaliforniaWWS.pdf
) Current non-planning for the coming disaster just leave us "circling the drain" -- waiting
for the ultimate collapse.
"There's a sucker born every minute" and Wall Street is P. T. Barnum directing investors
with the sign "This Way to the Egress." The con will last as long as investors have cash to
burn and think "product growth" is equivalent to "profit growth" – or in the words of
Lucy "Well, uh maybe there is no profit on each individual jar, but we'll make it up in
volume."
"... And this is cool. As of July of last year, 35% of all ECB bond buys (aka lending to private companies with money from nothingness) were of individual bonds with -- get this -- negative yields. They not only loaned money to the company, they paid the company interest for holding the bond. ..."
"... And y'all think money is a meaningful metric for the overall circumstance of oil flow. hahahahahhaah How can it be? Schlumberger!!! Hell, they are funding US shale flow with money from nothingness. ..."
Not gonna scroll. Found some ECB corporate bond buys. Specific companies.
Daimler Deutsche Bahn no idea what that is BMW Eni (!!!!!) Air Liquide Schlumberger (!!!!!) Total (!!!!!)
The specific bond serial number (in the US it would be called CUSIP-like) of each purchase
is known. The buy takes place on the secondary market. Much the same way the Fed never bought
Treasury issuance direct from Treasury. There was always a go between -- which essentially
means nothing. This was never discussed about Mort. Backed Securities. Bought them from who had
them -- at about 1000X market price.
And this is cool. As of July of last year, 35% of all ECB bond buys (aka lending to private
companies with money from nothingness) were of individual bonds with -- get this -- negative
yields. They not only loaned money to the company, they paid the company interest for holding
the bond.
And y'all think money is a meaningful metric for the overall circumstance of oil flow.
hahahahahhaah How can it be? Schlumberger!!! Hell, they are funding US shale flow with money
from nothingness.
$200bn in debt looms over American oil and gas Published time: 7 Jan, 2015 17:44 Edited
time: 20 Oct, 2016 14:13 Get short URL
David McNew / Getty Images / AFP / AFP
The report by the Hills Group claims to rely on thermodynamics arguments to
predict oil's price-volume trajectory going forward. If does not stand up to
scrutiny.
Thermodynamic analysis of engineering systems is typically based on the
first law of thermodynamics together with mass balances.
The second law of thermodynamics introduces the entropy as a thermodynamic
property and the related concepts of reversible processes and reversible heat
transfer.
Irreversibilities in real processes are taken into account by assigning a value
of experimentally determined efficiency to equipment such as pumps, compressors
and turbines and
this way the reversible processes are related to the actual ones.
A relatively recent development has been to develop a systematic use of an
exergy balance to examine where in a complex energy system irreversibilities
take place. Exergy is defined as the maximum theoretical work that can be
obtained from a system and its environment as the system comes to equilibrium
with its environment. By combining the first and second laws of thermodynamics
an exergy balance can be written down.
Rudimentary exergy analysis can be found in the 1941 book Thermodynamics by
Joseph Keenan. It was called availability analysis at that time. The most
systematic development of the exergy analysis is in the textbook Fundamentals
of Engineering Thermodynamics by M. Moran, H. Shapiro, D. Boettner and M.
Bailey, 7th ed. John Wiley, 2011.
Although the entropy balance equation can be used (although typically only
for steady state systems) to determine the entropy production, to carry it out
requires that sufficient number of thermodynamic properties and interactions
are known at the system boundaries. Since such a calculation needs to be
carried out after the thermodynamic analysis has been completed, it is seldom
carried out in engineering practice because the knowledge of the same
properties allows the efficiency of the machine or system be determined.
The advocates of exergy accounting claim that knowing where the exergy
destruction takes place in a system is a good way of allocating development
money to improve it.
This kind of analysis has not taken hold in industry either, simply because,
manufacturer, say of turbines know that the irreversibilities are quantified by
measuring the efficiency of the turbine, and they direct their efforts toward
understanding how the blades of the turbine can be shaped in order to reduce
the irreversibilities. Such a task is based on aerodynamic calculations.
Compressors and pump are by the nature of the flow through them machines with
lower efficiency and their improvement requires again experts with fluid
dynamic knowledge to improve them. Similarly improving the heat transfer in a
heat exchanger is carried out by making improvements in the heat exchanger
surfaces and reducing pressure losses.
If these improve the heat transfer, the entropy production is reduced. Here
the expertise of a heat transfer specialist rather than a thermodynamicists is
needed.
One interesting application of exergy analysis is to calculate the second
law efficiency. A high second law efficiency means that the source of energy is
well matched with the application.
Thus heating shower water with a thermal solar heater is a good match as
unfocused solar energy raises the water temperature high enough to serve as
shower water, but not nearly so high as to create superheated steam to power a
steam turbine. Thus the most important insight to be obtained is to match the
source of energy to the application, and once this insight is internalized,
calculation of the second law efficiency adds only marginally to understanding.
For this reason it is seldom used in industry. To be sure, optimization of a
system's second law efficiency is still worth while, but using other metrics
this can be done with topics based on heat transfer, fluid dynamics, stress
analysis and the like.
Where thermodynamic analysis is helpful is in seeing how a thermodynamic
efficiency of a system such as a coal or nuclear power plant can be improved by
increasing the maximum steam temperature of the plant in which the turbine is
but one component. This requires that blades are made of materials that
withstand the stresses generated at these temperatures. Such developments have
increased the maximum temperature of these power plants to about 1000 F, but
further improvements have now stalled over the last half a century. For gas
fired power plants combustion temperature is higher and and turbine designers
implement both cooling technology for the blades and use high temperature
materials, that today are made of single crystals, that withstand the hot
combustion gases. Interestingly exergy analysis shows that most of the exergy
destruction takes place in the combustion of the fuel, but there is not much
one can do to reduce this destruction. For this reason a naive application of
exergy analysis may lead the poor allocation of development funds.
The report by the Hills Group proposes to use the second law of
thermodynamics as the starting point. The unsteady entropy balance for a
control volume with one exit and no inlet is given as
Next comes the assumption that at all times dS_cv/dt = m^dot s_e$. It is
based on the observation that because at the end of oil production when the
reservoir has been completely depleted the flow will stop and nothing much
takes place, then both of these terms are zero. After cancelling these terms
the entropy production is seen to be related to the heat transfer. But his
assumption is clearly unjustified while the oil is being extracted and these
two terms do not cancel each other. The neglect of the terms leads to an
equation that omits the entropy production that is caused by the
irreversibilities of the oil flow through the permeable reservoir rock.
The incorrect canceling leads to the equation
dot Q^dot_j/T_j = sigma^dot_cv or sigma^dot_cv= Q^dot_j/T_j
and this can be cast in these two forms, depending which term is known and
which is unknown. The report by Hills Group does not tell the reader which is a
known quantity and which is to be calculated. In fact, there is no indication
in the report how the heat transfer is calculated? In thinking about the heat
transfer, for a control volume that includes the reservoir only, it appears
that the heat interaction between the system and the surroundings is mainly
caused by the geothermal gradient. That is, heat enters from the lower boundary
and leaves across the upper boundary. This is a passive process.
The fact that the oil and water in the reservoir have some average
temperature in the geological setting only influences the viscosity of the
fluids and thus how well they move through the reservoir, but from the
energetic standpoint the sensible energy is not important. That is, there is no
attempt made to extract this energy in a heat exchanger, nor is the high
pressure used to extract energy in an expander. Rather the oil and water
mixture flows through a set of throttling valves, in which the exergy is
destroyed.
If the entropy production were known independently, then this equation could
be used to calculate the heat transfer, but the answer would be incorrect
because entropy production is caused by both heat transfer and irreversible
processes taking place inside the control volume. For the control volume
consisting of the reservoir, entropy production takes place mainly in the pores
of the permeable reservoir rock as the flow is forced out.
This takes place by local viscous dissipation and although it can be
calculated in principle, in practice such a calculation is nearly impossible to
carry out from first principles. The entropy production rate for the system
would then be calculated by integration of the local values over the entire
reservoir.
Next in the analysis is a calculation of E_Tp. It is defined as the total
production energy, or the total work required to extract, process, and
distribute a volumetric quantity (a gallon) of crude oil. The report offers the
equation
E_Tp = [(m_c C_c + m_o C_o ) (T_R-T_O)]/[m_c]
as a way to calculate it. But this is the energy of the sensible part of the
oil-water mixture above the reference temperature T_O. It does not include the
chemical energy of the crude oil and the formula cannot be reconciled with the
definition of E_Tp.
Thus there are two equations to use for calculating E_Tp and there is no
mention what the independent variables are and what is calculated using these
equations.
If the value of E_Tp is calculated this way then how is the previous equation
used? The only unknowns are the reservoir temperature T_R and the oil-water
ratio, if the total flow rate is determined from the depletion rate equation.
The reservoir temperature can be measured, so the unknown seems to be the water
oil ratio. However, the report makes use of an empirical equation for the
oil/water ratio as a function of the percent depletion of the reservoir.
Finally last equation can only be used to calculate the change in exergy,
and this would necessitate a new symbol to be introduced for exergy, and this
is not the same as energy.
The report next presents calculation of the oil extraction trajectory that
is based on Hubbert's methodology. The calculations are in close agreement what
others have found., with cumulative production 2357 Gb that is somewhat larger
than what Campbell and Laherrere's value 2123 Gb. It is now well known that the
in the calculations based on logistic equation there is a slow drift to large
values of the ultimate production as more data has been included in the
calculations with the passing of the
In the same section is also a discussion of the surface water cut as a
function of the percent of oil extracted from a reservoir. The curve is then
rotated in order to satisfy two criteria set by the authors. Now a rotation of
a curve is a mathematical transformation and a curve cannot be arbitrarily
rotated without destroying the underlying mathematical theory. Furthermore, the
report states that E_Tp cannot exceed E_G, the crude oil's specific exergy. The
terminology is again used loosely applied to both energy and exergy.
Returning to the calculation in Section 4.1 of the report for calculating $E_{Tp}$
by the equation
E_Tp = [(m_c C_c + m_o C_o ) (T_R-T_O)]/[m_c]
The statement on top of page 19 suggests that the water cut is an input
parameter, in which case the value of E_Tp depends only on the reservoir
temperature.
The reservoir temperature in turn is a function of the depth of the well,
owing to the geothermal gradient. This would allow this equation to be used to
calculate the sensible energy of oil-water mixture. But what purpose does this
serve?
The sensible heat of the crude oil is not used in any significant way. The
crude oil cools as it enters the ground facilities and it cools further as it
is transported in the pipelines. No power is generated from the sensible part
of the crude oil's energy. Only the chemical energy is valuable upon
combustion. The rest of the report relates to how prices are linked to the
energy delivered. There is no theory to predict how prices adjust to either
temporary surplus or deficit.
From what has been discussed above, the thermodynamic analysis is incorrect
and therefore any calculations and graphs based on this analysis must also be
unreliable. Readers have noted that the so called analysis predicts a peak in
oil production during the 2017-2018 time frame and troubles by 2023. That this
coincides with the time others have judged the difficulties to appear, seems to
give the report a superficial credibility.
If the authors have a better handle on how much energy is expended in oil
production, they can form the EROIE ratio and it would constitute an
independent check on the work of Hall and his coworkers on EROEI. Such an
independent analysis would have some value
Submitted by Nick Cunningham via OilPrice.com,
Despite the near record increase in U.S. oil inventories last week an increase of 13.8 million
barrels oil prices traded up on February 8 and 9 as traders pinned their hopes on a surprise
drawdown in gasoline stocks, which provided some evidence of stronger-than-expected demand.
The abnormal crude stock increase took inventories close to 80-year record levels at 508 million
barrels, and is another bit of damming evidence that should worry oil bulls. But the oil markets
were not deterred. In fact, that has been a defining characteristic of the market in recent weeks
optimism even in the face of some pretty worrying signals about the trajectory of the market
"adjustment" process.
More signs of optimism abound. Wall Street is pouring the most money into oil and gas companies
in the U.S. since at least 2000, according to Bloomberg. In January alone, drillers and oilfield
service companies raised $6.64 billion in 13 different equity offerings. "The mood is absolutely
different," Trey Stolz, an analyst at the investment banking firm Coker & Palmer Inc., told
Bloomberg. "Go back to a year ago and the knife was still falling. But today, it feels much, much
better."
"... Several companies have already been through bankruptcy proceedings (Chapter 11 primarily) and affected bondholders accepted a haircut. Integrated companies have recognized impairments to their balance sheets. So if only those who makes/supports these claims could come up with documentation of the conduits by which the bondholders/creditors are made whole by central banks it would be helpful. ..."
"... The losses/haircuts/impairments will be spread over several years (perhaps decades) and in relative terms the amounts involved do not pose a systemic risk ..."
"... No, of course not. You're buried in normalcy confirmation bias that believes QE creation of 25% of GDP over about 6 years is completely consistent with markets operating in laissez faire fashion. When did you, oh hell, when did anyone last hear the phrase moral hazard? Think about that when you next posture yourself offended. ..."
Rune, thank you for this. People here I believe had been asking for it, now, unfortunately, it
seems to have gone over most peoples heads. There is a fundamental detachment from reality here;
people think LTO development in America will have a never ending source of funding, regardless
of price, demand,
http://oilprice.com/Latest-Energy-News/World-News/EIA-Slashes-Crude-Oil-Demand-Forecast.html
or the economic/financial woes of the industry itself. I can't say that I understand that
myself.
I did not expect my post would unleash an avalanche with unsubstantiated claims about central
banks making bond holders/creditors whole for losses incurred by shale companies.
Several companies have already been through bankruptcy proceedings (Chapter 11 primarily)
and affected bondholders accepted a haircut.
Integrated companies have recognized impairments to their balance sheets. So if only those
who makes/supports these claims could come up with documentation of the conduits by which the
bondholders/creditors are made whole by central banks it would be helpful.
The losses/haircuts/impairments will be spread over several years (perhaps decades) and
in relative terms the amounts involved do not pose a systemic risk.
Ifcentral banks got involved it would be much easier (and better) to manipulate the
oil price higher.
Dood what substantiation do you need for the claim that if global systemic risk exists financially
from growing shale debt they will be bailed out? You got a problem with that claim? Where were
you in 2008 when nominal and gross credit default swaps were measured in trillions? Know anyone
at the ISDA or even the DTCC?
No, of course not. You're buried in normalcy confirmation bias that believes QE creation
of 25% of GDP over about 6 years is completely consistent with markets operating in laissez faire
fashion. When did you, oh hell, when did anyone last hear the phrase moral hazard? Think about
that when you next posture yourself offended.
Normalcy is gone. It's not coming back. Oil scarcity is relentless and is the likely cause.
I can offer you help in re-evaluating what is and isn't normal:. Have a look at the German 10
year Bund. 0.3%. German inflation? About 1.2%.
"... Light, sweet crude for March delivery recently fell 90 cents, or 1.67%, to $52.88 a barrel on the New York Mercantile Exchange. Meanwhile, brent, the global benchmark, dropped $1.02, or 1.8%, to $55.22 a barrel on ICE Futures Europe. ..."
"... We believe the market will soon get the catalyst it has been waiting for to push higher better inventory stats. Getting ahead of this catalyst is a good risk-reward proposition in our view. ..."
If you were hoping crude oil prices would end the week on a positive note after yesterday's rally,
you're likely to be disappointed.
U.S. and brent crude futures fell Friday as worries about
U.S. drilling activity once again weighed on the market following the release of data showing that
the number of active rigs
rose for a second consecutive week.
Light, sweet crude for March delivery recently fell 90 cents, or 1.67%, to $52.88 a barrel on
the New York Mercantile Exchange. Meanwhile, brent, the global benchmark, dropped $1.02, or 1.8%,
to $55.22 a barrel on ICE Futures Europe.
Crude prices have oscillated between gains and losses over the past several weeks as investor
sentiment has shifted almost daily. OPEC and its allies have so far followed through on promised
production cuts, yet fears linger that U.S. drilling will hurt efforts to curb global supply.
Crude prices
settled Thursday
at their highest prices in several weeks. But today's decline pushed futures contacts into the
red for the week. If U.S. and brent crude contracts settle at current levels, prices will fall more
than 0.6% for the week.
But Vikas Dwivedi and his team at Macquaire recommend increasing
oil exposure, pointing to a tightening sour crude market and storage trends. But he warns that 2018
looks challenging.
We believe the market will soon get the catalyst it has been waiting for to push higher
better inventory stats. Getting ahead of this catalyst is a good risk-reward proposition in
our view. However, we caution against turning a rally into a structural trade. Our balances
indicate the market is oversupplied again in 2018. Key 2018 drivers include the return of approximately
1.2 MM BPD of post-deal (OPEC and NOPEC ex U.S.) supply and 0.6 MM BPD of U.S. supply growth +
global.
The Energy Select Sector SPDR EnergyETF (XLE)
fell 1.3% in recent market action, while the iShares U.S. Energy ETF (IYE)
dropped 1.2%.
Elsewhere in the ETF realm, the United States Oil Fund (USO)
declined almost 1.8% and the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL
lost 2%. The U.S. Brent Oil Fund (BNO)
also fell 2%.
"Even as oil prices are rebounding, we are closing out one of the worst years for the oil and gas
industry in decades. In 2016, the U.S. oil and gas industry defaulted on $39 billion in high-yield
energy debt, more than twice as much as the $15 billion in defaulted debt in 2015, according to
Fitch."
"Bonanza Creek Energy Inc and two other energy firms announced on Friday plans
to file for bankruptcy in coming weeks, joining a long list of U.S. energy
companies that have succumbed to a drop in oil prices."
"As of Dec. 14, 114 oil and gas producers had filed for bankruptcy in 2016 with
$57 billion in total debt, more than double the number of filings in 2015, "
"Among companies that provide well-site services to energy exploration firms,
110 had filed for Chapter 11 protection with $17 billion of debt as of Dec. 14,
also more than double the 2015 number, according to Haynes & Boone."
224 total companies, $74 billion total debt whoo whee, sounds like a lot
of write downs
Dakota Plains Holdings Inc. (NYSE MKT: DAKP) and six of its wholly owned
subsidiaries filed voluntary Chapter 11 petitions in the United States
Bankruptcy Court for the District of Minnesota on Tuesday, December 20,
2016, initiating a process intended to preserve value and accommodate an
eventual going-concern sale of Dakota Plains' business operations.
.
Dakota Plains Holdings Inc. is an integrated midstream energy company
operating the Pioneer Terminal transloading facility. The Pioneer Terminal
is centrally located in Mountrail County, North Dakota, for Bakken and Three
Forks related Energy & Production activity.
The OPEC production agreement, which we called correctly, has already helped hoist the profitable
oil stocks we held, but what about 2017? One way I've looked at oil and oil stocks is by looking at
the crude curve the differentials between monthly contract prices. And a recent big move in the
curve makes 2017 look very positive indeed.
I've seen all kinds of futures curves in my 30+ years of trading oil, and many analysts believe that
the crude curve is really predictive of the future but more often than not, it is merely an outline
of what traders and hedgers are thinking.
here's a look at Thursday's curve:
... ... ...
These numbers represent an enormous change from the numbers we saw even two weeks ago, before the
big OPEC deal in Vienna. Since 2014, we had been seeing a deep contango market, where oil prices in
the future were a lot higher than where they were trading in the front (present) months. But what
does a contango market mean?
Many like to look at contango markets as a signal of crude storage, and that has merit but I like
to look at the curve through the eyes of its participants: when the oil market is collapsing, as it
has been since 2014, players in the futures markets know that the costs of oil recovery fall well
above the trading price, and will buy future oil contracts banking on a recovery. This drives buying
interest away from the present and into the future and creates our contango. This kind of market is
dominated by the speculators, who are willing to buy (bet) on higher prices later on.
In contrast, the hedging players are in retreat in busting markets, dropping capex and working wells
and trying merely to survive to see the next boom. It's when prices begin to recover and they gain
confidence in future prices that they try to hedge and plan for the coming up-cycle. This is when
speculators, if they are buying, are likely to move closer to the front months if they're buying
while producers (commercials) are looking to sell futures 12-24 months out. Suddenly, you have a
curve that is being more dominated by commercial players, selling back months and creating the
backwardation we're starting to see right now.
You may remember that I was able to nearly predict this year's bottom in oil prices by looking
for that flattening move of the crude curve in February. This latest move from a discount to a
premium curve has moved more than two dollars in the last week alone. This gives me added confidence
in oil prices for 2017:
Let's look, as a practical matter, why a premium (backwardated) market is absolutely REQUIRED to
see a long-term recovery in oil.
Imagine you're a shale producer and you've seen prices move from $45 to $52. You've been waiting for
a move like this to restart some non-core acreage that you could have working by the middle of 2017.
With a deep contango market, you might have gotten $55 or even more for a hedged barrel of crude in
June of 2017.
But you're not alone in looking to come out of your bunker, hedge some forward production and
restart some idle wells every other producer is trying to do the same thing. If all of you could
depend on a future premium, every producer would hedge out new production and ultimately add to the
gluts that have been already slow to disappear.
Related: The OPEC Effect? U.S. Rig Count Spikes Most In 31 Months
If you think about it, a premium market works to DISCOURAGE fast restarts and quick restoration of
gluts that a two-year rebalancing process has only slowly managed to fix and this is a good thing.
Producers have to be wary of adding wells so quickly, even in a market that is clearly ready to
again rise in price. In a truly backwardated market, the futures work to keep the rebalancing
process on track and production increases slow. That governor on production is the key to keeping a
rallying market strong, and the frantic addition of wells at a minimum.
The proof of all this is in the type of curves we see depending on how the markets are trading.
Now, take another look at the December-December spread chart I put up and you'll see that a Contango
market was a critical component to the bull markets we saw in oil prior to 2014. Unless something
very strange is happening, a Contango curve is indicative of a strong market, while a backwardated
one indicates a market under pressure. It's something I've watched closely for more than 30 years to
help me find major trends.
And convinces me today that oil will have a constructive 2017.
"... BHP went from $8 billion profit to $6 billion loss based on latest results ..."
"... This is a typical Wall Street racket. In this case oil producers are victims. ..."
"... It's a classic quandary: that oil priced at over $75 a barrel in today's dollars tends to crush economies, and oil priced under $75 a barrel in today's dollars tends to crush oil companies. There is no real sweet spot between those two places. We're ratcheting between them and each one of them entails a lot of destruction. ..."
"... That's a terrible quandary that we're in and it's being expressed in banking and finance and the people in charge of those things don't really know what else to do except continue the deformation of institutions and instruments. ..."
"... "U.S. shale oil production is expected to fall for a tenth consecutive month in September, according to a U.S. government forecast released on Monday, as low oil prices continue to weigh on production. ..."
"Capital and exploration expenditure declined by 42% to US$6.4 billion
and is expected to decrease further to US$5.0 billion in the 2017 financial
year (BHP Billiton share)(5)."
I don't know if there is enough detail to say how much came from oil
and gas operations. The Samarco dam accident seems to be budgeted at $1.2
billion so far.
Petrobras made a small profit but less than expected:
"In 2Q16, Petrobras's earnings attributable to its shareholders stood
at $106 million compared to $171 million in 2Q15. This was on account of
a fall in crude oil and natural gas prices, which impacted upstream earnings.
Plus, crude oil and natural gas production volumes fell by 6.3% over 2Q15
to 2.1 billion barrels of oil equivalent per day in 2Q16."
Production has picked up recently though and there is more to come with
several FPSOs in the pipeline, as long as they can avoid major unplanned
outages.
=== quote ===
Societies have a really hard time understanding what they're doing, articulating
the problems that they face and coming up with a coherent consensus about
what's happening, and coming up with a coherent consensus about what to
do about it. Combine that with another quandary, the relationships between
energy and the dead racket for concealing real capital formation. I like
to reduce it to one particular formula that is pretty easy for people to
understand.
It's a classic quandary: that oil priced at over $75 a barrel in
today's dollars tends to crush economies, and oil priced under $75 a barrel
in today's dollars tends to crush oil companies. There is no real sweet
spot between those two places. We're ratcheting between them and each one
of them entails a lot of destruction.
That's a terrible quandary that we're in and it's being expressed
in banking and finance and the people in charge of those things don't really
know what else to do except continue the deformation of institutions and
instruments.
"U.S. shale oil production is expected to fall for a tenth consecutive
month in September, according to a U.S. government forecast released on
Monday, as low oil prices continue to weigh on production.
"Total output is expected to drop 85,000 bpd to 4.47 million bpd, according
to the U.S. Energy Information Administration's drilling productivity report.
That is the lowest output number since April 2014.
"The EIA's previous forecast calling for an output decline in August
of 99,000 bpd was revised up to nearly 112,000 bpd, data shows.
"Bakken production from North Dakota is expected to fall 26,000 bpd,
while production from the Eagle Ford formation is expected to drop 53,000
bpd. Production from the Permian Basin in West Texas is expected to rise
3,000 bpd, according to the data."
Ron's graphs summarised this better but I don't have the previous history
to show it. Has anybody here explained why Eagle Ford drops are so much
more than Bakken?
Author, commentator and longtime friend-of-the-site James Howard Kunstler
returns to our podcast this week to discuss the importance of accurate diagnosis
-- in this case, of the scourge he sees as accelerating America's downslide
into economic and social decline: Racketeering.
More associated with the organized crime bosses of a century ago, it's not
a word used often these days. But that doesn't diminish in any way its relevance
to and impact on our lives today:
The disorders in politics that we're seeing now are really expressions
of the larger disorders in our economic life and our financial life.
That just happens to be the avenue that the expression is coming
out of. Another point I'd like to make is that the reason that people are
against Hillary or dumping on Hillary or don't like her, is because she's
a poster child for racketeering. I encourage people who are talking about
our circumstances and people who are interested in the news and election,
to use the word racketeering to describe what's going on in this country.
You really need the right vocabulary to understand exactly what's going
on.
Racketeering is just pervasive in all of our activities.
Not just in politics but in things even like medicine and education.
Obviously the college loan scheme is an example of racketeering. Anybody
who has to go to an emergency room with a child whose broken their finger
or something, is going to end up with a bill for $20,000. You know why?
Because of medical racketeering. And so, these are really efforts to money-grub
by any means necessary, often in ways that are unethical and probably illegal.
Let's use that word racketeering to describe our national situation.
And let's remember by the way, the activities of the central
banks is just another form of racketeering. Using debt issuance
and attempting to control interest rates in order to conceal our inability
to generate the kind of real wealth that we need to continue as a techno-industrial
society.
Societies have a really hard time understanding what they're
doing, articulating the problems that they face and coming up with a coherent
consensus about what's happening, and coming up with a coherent
consensus about what to do about it. Combine that with another quandary,
the relationships between energy and the dead racket for concealing real
capital formation. I like to reduce it to one particular formula that is
pretty easy for people to understand. It's a classic quandary: that
oil priced at over $75 a barrel in today's dollars tends to crush economies,
and oil priced under $75 a barrel in today's dollars tends to crush oil
companies. There is no real sweet spot between those two places.
We're ratcheting between them and each one of them entails a lot
of destruction . That's a terrible quandary that we're in and it's
being expressed in banking and finance...and the people in charge of those
things don't really know what else to do except continue the deformation
of institutions and instruments.
Click the play button below to listen to Chris' interview with James Howard
Kunstler (58m:21s).
Bloomberg Crude Slump Sees Oil Majors' Debt Burden Double to $138 Billion August 5, 2016
As crude trades well below $50 a barrel, Exxon Mobil Corp., Royal Dutch Shell Plc and other
oil giants have seen their debt double to a combined $138 billion, spurring concerns they'll need
to keep slashing capital spending and that dividend cuts may eventually be necessary.
The first-half results indicate that oil companies "are likely to generate large negative free
cash flows for the full year," said Dmitry Marinchenko, an associate director at Fitch Ratings
in London.
I like Art and now he thinks and writes but I also think that he as some Dennis Gartman blood
in him, he holds many ideas at the same time and he can argue any of them very well. These articles
seem to contradict each other a bit, but they are at least thoughtful..
"Two years into the global oil-price collapse, it seems unlikely that prices will return to sustained
levels above $70 per barrel any time soon or perhaps, ever. That is because the global economy
is exhausted" ~A.Berman ca. July. 2016
"But from 2008 to 2015, oil production actually fell in 27 of 54 countries despite record high
price. Thus, while peak oil critics have been proven right in North America they have been proven
wrong in half of the World's producing countries" ~ E. Mearns ca. July, 2016
It looks like my posts at this fine blog for the past 2 2.5 years are finally being read
and understood ..
Maybe one day even Dennis will get the message .
one can only hope ..
" while indeed initiated by geology, this time "PEAK" shall be by the way and in the form
of low prices " ~ Petro's main theme for the past 2 years on POB
Be well,
Petro
P.S.: a little hubris and arrogance is healthy now and then .
I totally agree with you. I see the oil price rising well over 100 bucks per barrel before the
end of the decade.
As for the persistent fantasies that Russian oil output will decline. The exact opposite will
happen in the long-term. Russian oil reserves easily dwarf anybody else's.
The concluding paragraph on the oil reserves of the Bazhenov formation in SW Siberia reaches
an unequivocal conclusion:
"Giant recoverable oil reserves contained in the fractures suggest that the Jurassic reservoir
is a primary oil accumulation which has no analog all over the world. Therefore, we believe that
Russia has the largest hydrocarbon reserves in the world."
It is fine and dandy that you show some arrogance when the data is starting to support your
hypothesis, however I must point out that a lot of people have been coming to the same conclusions
at about the same time. There are a lot of clever people in the world.
Ron Patterson has been onto oil decline for a very long time from studying oil production data.
He was about the first to realized that LTO was not a solution to the Peak Oil conundrum. He probably
realized about the 2015 Peak long before he put it on writing. He can tell us. I seem to recall
reading his prediction within the first half of 2015.
Euan Mearns seems to be reaching the same conclusion from the same background, his geological
expertise, but only now have I read him put it on writing.
Art Berman has come to the same conclusion from a very different background, the energy investment
field. This is also the first time I read him say it so clearly, but he probably reached his conclusion
some time ago and only now he dares to write something so strong in his influential blog.
Myself I reached the conclusion that Peak Oil was imminent in September 2014, from economic
insight after I clearly saw that the oil price crash was really bad news for the consumer long
term, while most people thought (think) that is great news for the consumer. I studied oil production
data and saw my fears confirmed. That is when I started my oil (and climate) blog, and my first
prediction on writing of a 2015 Peak Oil is from November 2014, and again February 2015.
My understanding of macroeconomy is not as good as yours, but is good enough to understand
that we are facing the end of the road and the can kicking will not continue much longer. Central
Banks are buying some time through desperate measures that will make the fall harder while the
elites hasten their preparations. We are contemplating the Peak of our civilization (in my opinion
Peak Civilization took place in the early 70's) and its unraveling is going to be a very long
stressful one.
You might be right and I might be wrong. What it is clear is that we see more or less the same
situation but a completely different outcome.
Two things separate completely my analysis from yours:
The first is that I see a monetary crisis as unavoidable in the not too distant future. Most
of the planet's wealth is in the form of electronic money (derivatives and financial instruments).
The folly of Central Banks is hugely increasing those that are in the hands of the financial elite
so there is less and less real wealth (land, resources, and productive industries) to support
that virtual wealth. At some point the bubble is going to be so big and the leverage so high that
there is going to be a run of that virtual wealth to become real at any cost and that is going
to destroy every currency you can buy something of value with. Over here in Europe I am already
seeing some worrying signs of what is coming, as payments in cash are being limited to ridiculously
low amounts and governments are trying to force everybody to have their money in the banks. With
a monetary crisis the price of oil in dollars has no point of reference and predictions have little
value. The US has no experience for generations on monetary crisis, so that is going to be a real
shock.
The second thing is that during economic crisis wealth gets distributed more unequally. The
middle classes and low classes lose their savings and everything of value they have while some
elite class fare quite well even if they lose part of their nominal wealth. This has several dire
consequences. It can lead to bloody revolutions like the French or Russian revolutions. And in
any way it leads to most people not being able to consume much. There won't be enough customers
for oil, making your price predictions useless.
My own personal thought is that the current pricing system for oil based on margin pricing
will have to be abolished once the shit hits the fan. It will simply not work. They'll think of
something to avoid total collapse of oil production.
Citigroup is "especially bullish" on commodities in 2017, the bank says.
"The oil market is treading water for now, but the oil price overshot to the downside earlier
this year and this is clearly setting the stage for a bullish end to the decade," Citi analysts,
led by Ed Morse, wrote in a research note published on July 11.
There is a quite a bit of volatility in commodity markets, especially for oil, but global demand
continues to grow at a steady pace. Prices have crashed on oversupply, but with oil production
going offline, particularly in the U.S., the markets could over-correct, creating the conditions
for higher prices next year.
"... The June trailing 12-month (TTM) U.S. high yield bond default rate is closing inon 5%, reaching 4.7% after another $3 billion of defaults thus far this month, The $46.4 billion of recorded defaults this year is just $2 billion less than the total for the entire 2015. ..."
"... Through mid-June, energy and metals/mining accounted for 84% of defaults ($38.9 billion). The May energy TTM rate stood at 14.6% following $12.7 billion of sector defaults last month while the E&P rate is at 28.6%. The average high yield bid levels are at 92.9, up from 91.1 last month and from 83.7 in February when crude oil prices were at their low point ..."
It should have been posted on the earlier post ,but now since this is up ,I am going to post it
here . This is for Denise (appreciate your work) who is far too optimistic . This is also for
shallow sands who does all those fantastic analysis on the shale guys . SS I hope you outlast
the punks , but frankly I am in Petro's camp "The music is playing but the party is over " . So
here goes, a copy paste job from Fitch :
Addendum: Fitch Blurb
We just noticed this small blurb from Fitch in our mail, summarizing the latest developments
in junk land:
U.S. HY Energy Defaults Tally $13 Billion in May; June TTM Default Rate Approaching 5%
The June trailing 12-month (TTM) U.S. high yield bond default rate is closing inon 5%,
reaching 4.7% after another $3 billion of defaults thus far this month, The $46.4 billion of recorded
defaults this year is just $2 billion less than the total for the entire 2015.
Through mid-June, energy and metals/mining accounted for 84% of defaults ($38.9 billion).
The May energy TTM rate stood at 14.6% following $12.7 billion of sector defaults last month while
the E&P rate is at 28.6%. The average high yield bid levels are at 92.9, up from 91.1 last month
and from 83.7 in February when crude oil prices were at their low point
Rebounding after a two-year collapse, it's only this month that oil prices have pushed up past
$50 a barrel, but Raymond James & Associates says this is just the beginning for higher prices.
In a note to clients, analysts led by J. Marshall Adkins say West Texas Intermediate will average
$80 per barrel by the end of next year - that's higher than all but one of the 31 analysts surveyed
by Bloomberg.
"Over the past few months, we've gained even more confidence that tightening global oil supply/demand
dynamics will support a much higher level of oil prices in 2017. We continue to
believe that 2017 WTI oil prices will average about $30/barrel higher than current futures strip
prices would indicate."
The team went on to lay out three reasons for their bullish call, all of which are tied to global
supply - the primary factor that precipitated crude's massive decline.
Here's how the rebalancing of the global oil market will be expedited from the supply side, according
to the analysts:
First, the analysts see production outside the US being curbed by more than they had previously
anticipated, which constitutes 400,000 fewer barrels of oil per day being produced in 2017 relative
to their January estimate. In particular, they cite organic declines in China, Columbia, Angola,
and Mexico as prompting this downward revision. "When oil drilling activity collapses, oil supply goes down too!," writes Raymond James. "Amazing,
huh?"
Adkins and his fellow analysts also note that the
unusually large slew of unplanned supply outages
will, in some cases, persist throughout 2017,
taking a further 300,000 barrels per day out of global supply.
Finally, U.S. shale producers
won't be able to get their DUCs in a row
to respond to higher prices by ramping up output, the
team reasons, citing bottlenecks that include a limited available pool of labor and equipment.
Combine this supply curtailment with firmer than expected global demand tied to gasoline consumption,
and Adkins has a recipe for $80 crude in relatively short order.
"These newer oil supply/demand estimates are meaningfully more bullish than at the beginning
of the year. Our previous price forecast was considerably more bullish than current
Street consensus, and our new forecast is even more so."
The only analyst with a higher price forecast for 2017, among those surveyed by Bloomberg, is
Incrementum AG Partner Ronald Stoeferle. He sees West Texas Intermediate at $82 per barrel next year.
The consensus estimate is for this grade of crude to average $54 per barrel in 2017.
Over the long haul, however, Raymond James' team sees WTI prices moderating to about $70 per barrel.
"... the U.S. Energy Sector is paying at least 50% of its operating profit now to just pay the interest on the debt. Q1 2016, it was 86% of their operation income just to pay the interest on the debt. ..."
"... Unless Uncle Sam comes in and BAILS OUT the U.S. Energy Sector, it's in serious trouble. ..."
I find it interesting that the U.S. Energy Sector now has twice as much debt as it did ten
years ago at $370 billion as production declines.
Furthermore, the U.S. Energy Sector is paying at least 50% of its operating profit now to just
pay the interest on the debt. Q1 2016, it was 86% of their operation income just to pay the interest
on the debt.
Unless Uncle Sam comes in and BAILS OUT the U.S. Energy Sector, it's in serious trouble.
"... I also doubt that oil prices will remain under $80/b long term (more than 5 years). I expect by 2021, oil at $80/b(2016$) will be considered cheap. ..."
"... Look at the second to last slide "Resilience of the three American gas plays (UFDsim)" decline around 15% during the first four years for shale gas. We live in interesting times. ..."
The difference is simply the number of wells added per month. There is no a priori reason that
the number of new wells will be limited to 105 new wells per month, perhaps there will be no financing
available, but I doubt this would be a problem for Statoil or Exxon Mobil, they can do this out
of cash flow if needed.
I also doubt that oil prices will remain under $80/b long term (more than 5 years). I expect
by 2021, oil at $80/b(2016$) will be considered cheap.
A different view from a Total engineer, looks to be using proprietary modeling software. Seems
to capture the possibility of a fatter tail than the logistic curve does, but has already missed
the flat peak area:
Look at the second to last slide "Resilience of the three American gas plays (UFDsim)" decline
around 15% during the first four years for shale gas. We live in interesting times.
"... Shale guys are not borrowing at negative rates. They were borrowing at 4-12% and have accumulated debt that most of them will never be able to repay. ..."
"... Now they are issuing new equity and diluting existing shareholders. That's another way to get free money in order to be able to drill new wells. ..."
"... AlexS. Only the Permian guys seem to be able to issue shares, mostly at least. ..."
"... One of them, Pioneer, is planning to offer 5.25 million new shares at about $827 million. Part of the proceeds will be used to buy Devon's upstream assets in the Permian. Pioneer Goes 'Bold' as Devon Retreats in Top U.S. Oil Field ..."
"Only the Permian guys seem to be able to issue shares"
One of them, Pioneer, is planning to offer 5.25 million new shares at about $827 million. Part
of the proceeds will be used to buy Devon's upstream assets in the Permian. Pioneer Goes 'Bold' as Devon Retreats in Top U.S. Oil Field
"... Crude traders following Fibonacci rules. That's all. They took out the stops around 51, made their profits then went short. Pretty soon they'll go the other way again. Third quarter they'll go long and stay there. Guys already taking options on 100 a barrel. WTI will probably retest a 42 handle before it starts a steady climb. In the sixties in three months or so. Better dollars next year. ..."
"... 3/4 or more of the well bores will be abandoned and thrown on the backs of state governments if WTI and nat gas prices persist or go lower. ..."
"... At some point, there will be a rapid reversal, commodities become scarce, prices rocket up? One thing for sure, 1980s university finance professors never envisioned the kind of stuff going on. Crazy times. Hard to change long held views. ..."
Not too happy to see prices are headed back down in the face of what appears to be strong demand
and falling production. Strong dollar, negative rates. Ouch.
Petro. Are all commodities doomed, or just energy? How about grain?
I am going out on a limb here and say food and energy and precious metals will see money flow
and the government will print money to make sure we have food and energy. Folks can do with out
a lot but the streets will fill without food and energy. With respect to who will be right about
US seeing past highs in C+C production, I have my doubts under normal business conditions, but
i can envision that it could happen, but it would be under a "emergency" type all hands on deck
scenario. Unlikely but possible, our industry has surprised doubters in the past in our ability
to get the job done for the American people. lets make america great again
Crude traders following Fibonacci rules. That's all. They took out the stops around 51, made their
profits then went short. Pretty soon they'll go the other way again. Third quarter they'll go
long and stay there. Guys already taking options on 100 a barrel. WTI will probably retest a 42
handle before it starts a steady climb. In the sixties in three months or so. Better dollars next
year.
We just have to keep starving for a few more months. Oil in storage isn't helping much either.
By the end of the year, we should have a couple of reasons to smile for a change.
One other thought. I take it you see major deflation on the horizon? So, if both crude price AND operating costs deflate, what is the difference, unless one has
debt?
If one only has plugging liabilities, in a highly deflationary scenario, those liabilities
also deflate (cost of labor and cement) in relation to cash on hand. Further, those with plugging
liabilities and cash with no debt will, in my view, at least, have high leverage with state agencies
as to negotiating a long term P & A agreement.
The US has over 1 million wellbores, if there is a "royal flush" of E & P's, due to massive
deflation + high long term debts, I'd say anyone who agrees to P & A a few wells per year will
be looked on favorably. 3/4 or more of the well bores will be abandoned and thrown on the backs
of state governments if WTI and nat gas prices persist or go lower.
At some point, there will be a rapid reversal, commodities become scarce, prices rocket up?
One thing for sure, 1980s university finance professors never envisioned the kind of stuff
going on. Crazy times. Hard to change long held views.
Shallow Sand Here is the clueless take on things.
In general: Low interest rates are deflationary; High interest rates are inflationary. But,
they are used to fight the opposite problem. Inflation rising: raise interest rates. Deflation
on the horizon: print money and lower interest rates to cause inflation. However, at the extremes,
eventually the desired result is obtained.
In the 1970's they kept raising interest rates to fight inflation. Result, more inflation
until we got to 14% annual inflation and 18% interest on a home mortgage. Then a recessionary
collapse, and inflation was killed. Now we are in the reverse position including negative rates
in Europe, and everyone printing money. Result, deflation becoming more of a worry. At some future
breaking point, likely a SURGE in inflation.
Why is this? Because if you have debt, when interest rates rise, you have NO choice. You must
raise prices to pay it . There are no productivity gains; better way of doing things; more efficiency,
etc. to solve the problem. If you have debt and interest rates rise, generally you HAVE to raise
prices to pay the interest.
Now the reverse. Suppose long-term interest rates go to zero. You want to build a restaurant.
You borrow the total cost of $2 million for 20 years. No interest, just a balloon payment at the
end of 20 years. Okay, you can build your restaurant for zero cost of capital. For 20 years, you
just have to cover the variable costs food, labor, utilities and insurance. So, for 20 years,
you can undercut the price of anybody that does have a cost of capital. Your restaurant is a booming
success for 20 years, until you declare bankruptcy, since you have taken all of the profits as
your salary and have no money to pay back the debt. Meanwhile you have lowered the cost of eating
out in your market area for 20 years.
A mini model illustrating how the simple oil model works in chart below.
Basically well profile times number of wells added and add it all up.
Note that the well profile changes over time it is not fixed. Before 2008 there was a lower
well profile, it increased and remained relatively stable from 2008 to 2013, the well profile
increased in 2014 and 2015.
All of the well profiles and number of wells added each month from 2005 to 2016 (April), we don't
know what the future well profile will be. All of this information is in the spreadsheet I linked
earlier.
The minimodel is in the link below and illustrated in the diagram below.
Chart that goes with spreadsheet above is below, shows a dual peak scenario, it is all about
the number of wells completed, the peak only occurred because the number of completions fell from
200 per month to 45 per month in the ND Bakken/Three Forks.
An open truly clueless question. For many years, much of the gas in the Bakken was flared. During
that time, was measurement of gas as accurate and complete as when flaring no longer allowed and
it is now being sold?
The reason that I ask, is to assess if historical gas/oil ratios are meaningful.
If you read the ND govt reports, you will see oil and gas figures per well each month. Yes
gas produced has been counted all the way though. Gas captured and sold, is a separate number.
"... "I think the world is going to need Permian Basin oil production, and it's not going to grow until you get to $60 long term," he said. "When oil moves toward $60 per barrel, I believe a good $10 of it for a lot of companies will go toward paying off debt, or they'll start selling assets at decreased divesture prices. That extra $10 will be a huge difference for companies that have great balance sheets today. That's why I'm a firm believer we're in a $60 long term oil price environment." ..."
"I think the world is going to need Permian Basin oil production, and it's not going to grow until
you get to $60 long term," he said. "When oil moves toward $60 per barrel, I believe a good $10
of it for a lot of companies will go toward paying off debt, or they'll start selling assets at
decreased divesture prices. That extra $10 will be a huge difference for companies that have great
balance sheets today. That's why I'm a firm believer we're in a $60 long term oil price environment."
Seems to have changed his tune somewhat. But $60 does not get in done in most LTO plays. PDX's
production may be able to grow in the $60(60-69) but elsewhere not so much. But of course I will
take 69 over $48 anyday
"... While oil prices will definitely reach $60 at some point and shale is still doomed at the current price range, there are some contrarian tendencies visible now. If the world economy slows down considerably the rise of oil prices will slow down even more. Let's hope for the best and prepare for the worst. ..."
I remember Lynn Helms predicting a sharp drop in production for March.
In fact, in March Bakken output declined only 8 kb/d, but was down 69 kb/d in April.
April number for ND Bakken is down 6.6% vs. March, 10.9% vs. April 2015 and 15.2% (176 kb/d)
from the peak reached in December 2014.
Average output for January-April 2016 is 1044 kb/d, down 6.9% year-on-year.
As CLR's Harold Hamm and several other E&P CEOs are saying, $50 is a trigger for increased
completion of the DUCs.
Rig count has also bottomed, but significant increase in drilling activity is unlikely until WTI
reaches $60.
Nonetheless, it seems that we will see further declines in LTO output in the next several months
due to delayed impact of low oil prices.
While oil prices will definitely reach $60 at some point and shale is still doomed at the current
price range, there are some contrarian tendencies visible now. If the world economy slows down
considerably the rise of oil prices will slow down even more. Let's hope for the best and prepare
for the worst.
Until the capital markets open up and allow U.S. oil companies to spend outside of their cash flow,
production will not increase and crude prices will continue to rise, Tapstone Energy CEO Tom Ward
said Thursday.
"There's no increase in the capital spending, the debt side of the business is closed, and so
until we have something fairly dramatic happen like maybe a doubling of the rig count, I don't think
we can grow production in the U.S.," he said in an interview with CNBC's "Power
Lunch."
Therefore, "I wouldn't be surprised at all if we saw above $60 or even $70 [a barrel] by the end
of the year," added Ward, the co-founder of
Chesapeake Energy.
Tapstone Energy currently has three rigs online, down from four, and Ward said there are no plans
to add more rigs. It's the same across the industry, he said, because of
the lack of access to capital markets.
"I think prices will have to move up even higher than we're talking about for there to be a big
change in the rig count," said Ward. "We can't change the decline of the oil production in the United
States without more capital, and right now that's just not available."
That said, as soon as funds open up, Ward plans to start spending.
"We will spend whatever you give us. As long as there is money to be had through the capital markets,
then we'll use that to grow production, because that's what we're paid for."
"... Penn Virginia Corp., a company in which billionaire George Soros had a stake, booked paper wells in natural gas prospects where it hadn't drilled in years, according to letters from the SEC. ..."
"... Penn Virginia erased most of its undeveloped reserves this year. The company filed for bankruptcy May 12 with $1.2 billion in debt. Records show Soros sold his six million shares in the first quarter. ..."
Penn Virginia Corp., a company in which billionaire George Soros had a stake, booked paper
wells in natural gas prospects where it hadn't drilled in years, according to letters from the SEC.
"Your actual drilling has consistently failed to follow schedules," the SEC wrote in an April
2015 letter. Penn Virginia responded that it had intended to get to the wells within five years but
its plans changed when prices fell.
That's not what company executives told investors, according to conference call transcripts. H.
Baird Whitehead, Penn Virginia's chief executive officer, said in a November 2012 call that "under
almost no scenario" would the company resume gas drilling. Yet, when Penn Virginia filed its report
with the SEC three months later, the prospects accounted for more than 40 percent of its reserves.
During an April 2013 call, Whitehead said, "We don't plan on drilling natural gas wells." Still,
the undeveloped natural gas wells comprised 19 percent of the company's reserves at the end of that
year. Patrick Scanlan, a spokesman for Penn Virginia, declined to comment.
The company intended to follow the SEC's five-year rule, according to a person familiar with Whitehead's
thinking.
Penn Virginia erased most of its undeveloped reserves this year. The company filed for bankruptcy
May 12 with $1.2 billion in debt. Records show Soros sold his six million shares in the first quarter.
"... Ultra Petroleum Corp. was a shale success story. A former penny stock that made the big leagues, it was worth almost $15 billion at its 2012 peak. ..."
"... Then came the bust. Almost half of Ultra's reserves were erased from its books this year. The company filed for bankruptcy on April 29 owing $3.9 billion. ..."
Ultra Petroleum Corp. was a shale success story. A former penny stock that made the big leagues,
it was worth almost $15 billion at its 2012 peak.
Then came the bust. Almost half of Ultra's reserves were erased from its books this year. The
company filed for bankruptcy on April 29 owing $3.9 billion.
Ultra's rise and fall isn't unique. Proven reserves -- gas and oil resources that are among the
best measures of a company's ability to reward its shareholders and repay its debts -- are disappearing
across the shale patch. This year, 59 U.S. oil and gas companies deleted the equivalent of 9.2 billion
barrels, more than 20 percent of their inventories, according to data compiled by Bloomberg. It's
by far the largest amount since 2009, when the Securities and Exchange Commission tweaked a rule
to make it easier for producers to claim wells that wouldn't be drilled for years.
"... Long predicted as a natural development after the 2014 start of the collapse in the oil price the inevitable has been delayed by drillers squeezing every drop out of their wells, but that game is all but over. ..."
"... Declines in U.S. oil output set to accelerate ..."
"... A lack of drilling is about to catch up to US oil output. To maintain current production levels in the US requires 439 rigs, compared to the 280 in operation, according to ANZ Research. "If that trend persists, we could see production fall below 8.5mb/d by July," comments Daniel Hynes, commodity researach analyst. ..."
"... Financial stress could exacerbate this. Oil producers with sub investment grade debt maturing this year produced approximately 1.3mb/d of oil. We have also seen more downgrades of credit ratings in 2016 than over the past three years. ..."
"... This should see oil prices remain well supported over the next six months. ..."
U.S. oil production has entered the end game with output forecast to plummet as drilling
dries up and banks foreclose on oil companies teetering on the brink of insolvency.
Long predicted as a natural development after the 2014 start of the collapse in the oil price
the inevitable has been delayed by drillers squeezing every drop out of their wells, but that game
is all but over.
From a peak of more than 9.5 million barrels a day early last year current output has slipped
to 9.1mb/d but if a fresh forecast is correct the number could be 8.5mb/d by July and possibly
below 8mb/d in the September quarter
Saudi Smiles
The Saudi view has consistently been that the oil market will fix itself with low prices forcing
high cost producers out of business, leading to a sustainable price recovery.
What the ANZ has done with its report released earlier today is reinforce the Saudi position
with the headline telling the story: "Declines in U.S. oil output set to accelerate".
A lack of drilling is about to catch up to US oil output. To maintain current production levels
in the US requires 439 rigs, compared to the 280 in operation, according to ANZ Research. "If
that trend persists, we could see production fall below 8.5mb/d by July," comments Daniel Hynes,
commodity researach analyst.
Financial stress could exacerbate this. Oil producers with sub investment grade debt maturing
this year produced approximately 1.3mb/d of oil. We have also seen more downgrades of credit ratings
in 2016 than over the past three years.
This should see oil prices remain well supported over the next six months.
It has always seemed perfectly obvious to me that the price would HAVE to go back up, and it has
, quite a bit already.
The thing that surprised me is that it has taken as long as it has for the high cost producers
to start falling by the wayside. In other industries, the blood would have been in the water MUCH
quicker.
Does anybody have a figure for the "typical or average " cost of storing crude per barrel per
year? How has the price of storage varied for the last couple of years?
I tend to agree, but it will not surprise me to get a soft patch in prices late summer, if it
is shallow, no pun intended, we will have the episode be hide us and I would look at it as a time
to add to pub co stocks. By then the production trends as highlighted in the work presented here
will be very much in place. Who knows Dennis might have to adjust his trend lines on the C+C chart
by that time and will need to use peak flow as the starting point.
Shallow you do not need to tell me, of the hundreds of thousands of people who work in oil
an gas extraction the number of them "barons" would fit on one of the those new electric buses.
If we substitute Dean's better estimate for Texas into the EIA's US estimate (removing the
EIA's Texas estimate from the US total) and use the data from the peak in April 2015 to the most
recent monthly data point of March 2016 and fit a trend line using the method of least squares
we get production decreasing at an annual rate of about 200 kb/d over the most recent 12 months.
Middle East oil producers turn to debt markets. Oman
sold $2.5 billion in bonds on Wednesday, as it seeks to improve its financial position. The Gulf
state oil producer, who is not a member of OPEC, went to the debt markets for the first time in more
than twenty years, a sign of how badly it has been damaged from low oil prices. The move comes after
some of Oman's neighbors issued new bonds earlier this year Qatar sold $9 billion in debt and Abu
Dhabi sold $5 billion. Saudi Arabia is also expected to turn to the bond markets, perhaps selling
as much as $15 billion worth of bonds. But the IMF
warns that the Gulf States are going to need to do a lot more to cut spending in order for them
to hold onto their currency pegs.
Speculators gamble on $100 oil.Bloomberg
reports that some oil traders are buying contracts that will only pay out if oil surpasses $100
per barrel at some point in the next few years. The contracts do not suggest that such an outcome
is necessarily likely, but only that some traders view it as a potential profitable position. The
fact that traders are buying up these kinds of contracts suggests that the markets are starting to
believe that today's severe cutbacks in exploration and development will create the conditions for
a supply shortage somewhere down the line.
According to consulting firm McKinsey, the
current oil futures market is pointing to a coming balance between demand
and supply-a balance which has the potential to render most oil and gas
investments uneconomical.
The futures market is often a reliable
guide to forcasting the future direction of oil prices, and analysts rely
on both contangos or backwardation when determining their forecasts.
During a supply glut, a contango is typically observed. This is a
condition where the spot price for future contracts is far higher than
the current price for nearby contracts. This means that people are
willing to pay more for a commodity sometime down the road than the
actual price for the commodity.
Backwardation is noticed when the current demand is higher than the
supply, thereby making the nearby contracts costlier compared to future
contracts.
(Click to enlarge)
Until around 2005, backwardation was the normal condition, as seen in
the charts. But since 2005, contango has become the normal condition,
reports
Reuters
. Experts differ on their views regarding this shift.
Large contango is indicative of market bottoms. During the 2008-09
crude oil crash, the oil market witnessed a super-contango, when the
price difference between the first month and the seventh month contract
had reached up to $10 per barrel.
Similarly, during the current crisis, the contango reached $8 per
barrel twice, once in February of 2015 and again in February of 2016, as
shown in the chart below, after which, the markets bottomed out.
During the 1985-2004 period, the average backwardation was $1.07 per
barrel, and during the 2005-2014 period, the average contango was $1.50
per barrel as shown in the chart below. The current contango hovers
around $2 per barrel, which is close to the average during the 2005-2014
period.
(Click to enlarge)
The current oil crisis is unlike the oil
crisis of 2008-2009, as there is no demand destruction this time. Demand
for oil is on the rise and is likely to increase by 1.5 million barrels
per day, both in 2016 and 2017, according to the latest
Short-Term Energy Outlook
by the U.S.
Energy Information Administration.
In the short-term, the supply outages to the tune of 3 million b/d
have supported oil prices by easing the supply glut and restoring the
balance between supply and demand. If supply is restored, the oil markets
will again return to a surplus, putting pressure on prices.
Due to low oil prices, billions of dollars in investments have either
been scrapped or postponed. As and when the markets shift from surplus to
deficit, new supply will find it difficult to catch up with increased
demand. Markets need higher prices for investments to start trickling
into the industry.
However, consulting firm McKinsey believes that oil demand will peak
around 100 million barrels per day by 2030 from the current levels of 94
million barrels per day.
"This change is driven by three factors: first, overall GDP growth is
structurally lower as the population ages; second, the global economy is
shifting away from energy-intense industry towards services; and third,
energy efficiency continues to improve significantly," McKinsey's Occo
Roelofsen said. "Peak oil demand could be reached around 2030", reports
The Telegraph.
If oil demand behaves according to Mckinsey's expectations, most new
investments into oil will be uneconomical due to weak demand in the
future.
Though the long-term is slightly uncertain, balance is maintained in
the short-term. Unless we see supply outages restored, prices are likely
to remain in a small range following an impressive run.
U.S. oil and natural gas producer Devon Energy Corp said it would sell assets in Texas for
nearly $1 billion and that it was making progress on the sale of other assets as part of its plan
to improve its finances through divestitures.
Devon said on Monday it would sell producing assets in east Texas for $525 million and in Anadarko
Basin's Granite Wash area for $310 million.
The company will also sell its royalty interests in the northern Midland Basin in the Texas
region for $139 million.
With these sales, Devon's proceeds from divestitures of natural gas-focused assets would total
$1.3 billion, Chief Executive Dave Hager said.
"Proceeds for the entire divestiture program are well on their way to achieving our previously
announced range of $2 billion to $3 billion in 2016," Hager said.
The company said it expected to make an announcement within the next several weeks on the sale
of its 50 percent interest in Canada's Access Pipeline, which carries heavy oil across northeastern
Alberta.
Devon also said it was making progress toward selling more Midland basin assets that produced
an average of 25,000 barrels of oil equivalent per day in the first quarter.
Warren Resources Inc., Denver, filed for bankruptcy protection in a Houston federal court on
June 2 after negotiating a debt-for-equity swap with a group of senior lenders led by Blackstone
Group's GSO Capital Partners.
Senior lenders agreed to swap $248 million they are owed for an 82.5% stake in the reorganized
company, court papers showed.
Warren Resources primarily focuses on oil in the Wilmington field in the Los Angeles basin
of California, natural gas in the Marcellus shale in Pennsylvania, and the Washakie basin of Wyoming.
=========================================
On May 29, 2016, US subsidiaries of Linc Energy Ltd. filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code.
Linc Energy is a global business with oil and gas operations primarily onshore in the USA (Alaska,
Texas, Louisiana & Wyoming); exploration for shale oil and gas in the Arckaringa Basin in South
Australia; developing a proprietary technology for the extraction of heavy oil; and a number of
opportunities to apply its proprietary Underground Coal Gasification (UCG) technology in target
markets including Asia and Africa.
"... When the price's around $60, I asked Rex, "What do you think?" He said, "Well, it's going to be between $20 to $120, and we're set up for all of those environments. I think it'll go a little lower than higher, but what do I know? I've just been doing this my whole life." And I thought, he's kidding, but he really wasn't. ..."
The oil price is making a fool of everyone. That's according to Steve Schwarzman, cofounder of
private-equity giant Blackstone. The billionaire investor was speaking at the Bernstein Thirty-Second
Annual Strategic Decisions Conference 2016 on Thursday, and talked about the volatile oil price.
He said:
Let's just take energy first because it's in the news a lot. And talk about a crazy business
where there's almost not one person who knows what they're doing, right? At $120, it was going
to $140 a barrel. When you were at $80, it was going to stabilize at $60. And when you're in $60,
you didn't quite know, but maybe it would be $50 to $70. And then when it went to $24, everybody
is a bozo, right? And then it was going to stay there, sort of $25 to $35 or maybe $40 for the
next year or two, and now it's $50.
We've seen crazy swings in oil prices this year, largely driven by slowing demand, increased supply,
and speculation over a potential coordinated cut in the production of oil. US oil prices ended slightly
lower on Thursday after briefly rising above $50 a barrel in intraday trading.
Schwarzman said that his favorite person to talk to when trying to make sense of the oil market was
Exxon CEO Rex Tillerson. He said:
When the price's around $60, I asked Rex, "What do you think?" He said, "Well, it's going to
be between $20 to $120, and we're set up for all of those environments. I think it'll go a little
lower than higher, but what do I know? I've just been doing this my whole life." And I thought, he's
kidding, but he really wasn't.
"... Most probably you are wrong. LTO producers lost access to unlimited financing from Wall Street. They can't finance expansion from their cash flow (which is still negative), so they are cooked. Wells you are talking about were drilled, but not fracked. Drilling is only one third of the total cost of the well. So those two-thirds that are needed to complete the well is a problem. And will the particular well generate positive cash flow if oil price remains in $50-$60 range is another problem. Money spend on drilling are debt. Most shale wells will not compensate with their total production the amount of debt and interest. ..."
"... They need around $80 per barrel to revive their operations. ..."
Its interesting I've been baffled by the apparent confidence of the markets in rising prices,
and so far it seems they've been right. But I think we'll only know for sure later in the year.
I suspect $50 will be the signal for a lot of struggling tight oil operators to open up their
fracked but sealed wells, so there might be an unpleasant surprise for the bulls in the US market,
if not elsewhere.
I suspect $50 will be the signal for a lot of struggling tight oil operators to open
up their fracked but sealed wells
Most probably you are wrong. LTO producers lost access to unlimited financing from Wall
Street. They can't finance expansion from their cash flow (which is still negative), so they are
cooked. Wells you are talking about were drilled, but not fracked. Drilling is only one third
of the total cost of the well. So those two-thirds that are needed to complete the well is a problem.
And will the particular well generate positive cash flow if oil price remains in $50-$60 range
is another problem. Money spend on drilling are debt. Most shale wells will not compensate with
their total production the amount of debt and interest.
They need around $80 per barrel to revive their operations.
"... "Four tankers carrying over 2 million barrels of U.S. crude are stuck at sea and cannot discharge at a Caribbean terminal because Venezuela's PDVSA has not yet paid supplier BP Plc (BP.L), according to two sources and Thomson Reuters vessel tracking data. ..."
"... The deal was to import some 8 million barrels of West Texas Intermediate (WTI) crude so Venezuela could dilute its extra heavy crudes and feed its Caribbean refineries. ..."
Venezuela PDVSA is not paying for their imports from the US.
"Four tankers carrying over 2 million barrels of U.S. crude are stuck at sea and cannot discharge
at a Caribbean terminal because Venezuela's PDVSA has not yet paid supplier BP Plc (BP.L), according
to two sources and Thomson Reuters vessel tracking data.
The cargoes are part of a tender Petroleos de Venezuela [PDVSA.UL], known as PDVSA, awarded
in March to BP and China Oil. The deal was to import some 8 million barrels of West Texas Intermediate
(WTI) crude so Venezuela could dilute its extra heavy crudes and feed its Caribbean refineries.
While three cargoes for this tender were delivered in April, seven other vessels, including
BP's four hired ones, are waiting to discharge, leaving up to 3.85 million barrels of WTI in limbo.
"
If the whims of oil speculators are
anything to go by, then another oil price downturn looks increasingly
unlikely.
Oil prices have gained more than 80 percent over the
past three months, bouncing off of $27 lows in February to hit $50 last
week. Those sharp gains raised the possibility of another crash in prices
because the fundamentals still appeared to be bearish in the near term.
By early May, oil speculators had built up strong net-long positions
on oil futures, extraordinary bullish positions that left the market
exposed to a reversal. Speculators had seemingly bid up oil prices faster
than was justified in the physical market.
But the physical market got some help. The massive supply outages in
Canada (over 1 million barrels per day) and Nigeria (over 800,000 barrels
per day) provided some support to prices, erasing some of the global
surplus.
Now speculators who had started to short oil in May have retreated,
pushing short bets down to an 11-month low. "If you've been short since
February this has been a very painful ride," Kyle Cooper, director of
research with IAF Advisors and Cypress Energy Capital Management,
told Bloomberg
in an interview. "There are always a few die-hards but
otherwise you'd want to get out. This is indicative of the improving
fundamentals."
"... US oil production is now in its freefall phase and this makes me very optimistic about future oil prices. ..."
"... But the health of the USA economy in late 2016 and 2017 is a big open question and it might provide the celling for the oil prices. One of the key factors that prevented sliding of the US economy into the continuation of Great Recession in 2014 was the dramatic drop of oil prices, which started in the second half of 2014. So in 2014-2016 the resilience of the US economy was partially due to this "low oil price" factor. ..."
"... Impoverishment of the low 80% of population makes the recovery impossible; neoliberalism makes the redistribution of gains in favor of lower 80% impossible (most of the gains go to the top 0.1% - the financial oligarchy; top 20% probably hold their own; everybody else are gradually sliding into poverty). So this is a deadlock situation. ..."
"... So when oil price recovers to $80-$100 price band the stimulating role of low oil prices on the economy will be gone. From this point it might be a bumpy ride ..."
Production fell just 24 000 b/d and week. However, the previous number has been revised downwardly
by around 50 000 b/d and the recent number is down over 70 000 b/d, which is enormous and contributes
very much to the recent oil price rise. US production is down by over 6.4% and net product exports
fell considerably. This is exactly the right thing to do to bring oil prices up again.
US oil production is now in its freefall phase and this makes me very optimistic about
future oil prices.
US oil production is now in its freefall phase and this makes me very optimistic about future
oil prices.
Not so fast.
I am pretty positive that the worst days for the conventional oil are over, and "carpet drilling"
days for LTO are also history.
But the health of the USA economy in late 2016 and 2017 is a big open question and it might
provide the celling for the oil prices. One of the key factors that prevented sliding of the US
economy into the continuation of Great Recession in 2014 was the dramatic drop of oil prices,
which started in the second half of 2014. So in 2014-2016 the resilience of the US economy was
partially due to this "low oil price" factor.
But the effect was pretty small; due to this the FED was not able to "normalize" interest rates
(they made only one hike) and now can face the new phase of the recession with all the ammunition
already fired.
Impoverishment of the low 80% of population makes the recovery impossible; neoliberalism
makes the redistribution of gains in favor of lower 80% impossible (most of the gains go to the
top 0.1% - the financial oligarchy; top 20% probably hold their own; everybody else are gradually
sliding into poverty). So this is a deadlock situation.
Ves wrote something about his views on this subject in this thread and as far as I recall he
thinks that without artificially low interest rates the game is over.
So when oil price recovers to $80-$100 price band the stimulating role of low oil prices
on the economy will be gone. From this point it might be a bumpy ride
The EIA's Monthly Energy Review
is out today with production data for April. US C+C production fell 123,000 barrels per day
in April to 8,915,000 barrels per day. US lower 48 fell 100,000 bpd while Alaska fell 23,000 bpd.
This data matches the weekly data very close. 8,915 K barrels per day is the average
for April, not the production on the last day or the last week. The EIA has production for the
third week in April at 8,767 K barrels per day. So it looks like US production will fall about
the same amount in May as it fell in April, about 125,000 barrels per day.
US C+C production has fell 779,000 barrels per day since peaking one year ago in April.
"... Anybody got a handle on overall accurate storage stats? I believe that we are heading into a period that oil in storage and market sentiment will be more important than production at some point. At least I'm hoping we are getting there. That'd be a great idea for a new post Dennis. Oil in storage. But there are no stats on private storage in the lower 48 right? Hell, me and my two best business buddies have 25 thousand barrels in our tank farms right now. And we are small fry compared to the gangster bank backed shale guys. ..."
WTI and Brent spread has closed quite a bit lately. Anybody heard what the crooks at the tbtf
mega banks are giving as an excuse?
Citi just announced that crude was headed to 50 a barrel in Q3, that's a pretty amazing call seeing
as how it's pushing 49.50 right now. Those "analysts" probably will get a huge bonus for making
that call right?
Anybody got a handle on overall accurate storage stats? I believe that we are heading into
a period that oil in storage and market sentiment will be more important than production at some
point. At least I'm hoping we are getting there. That'd be a great idea for a new post Dennis.
Oil in storage. But there are no stats on private storage in the lower 48 right? Hell, me and
my two best business buddies have 25 thousand barrels in our tank farms right now. And we are
small fry compared to the gangster bank backed shale guys.
"... If on the other hand you have paid your share of drilling and completion costs with CLR, and lease operating expenses, and you are pleased with the outcome of your investment. Congratulations. You are one of very few. ..."
Mr. Tea, up hole you have said, I believe, this: "I have participated in LTO wells with CLR and
others in Oklahoma (we own minerals) " It is understandable that your glass might be half full
regarding the shale oil business if all your income associated therewith is free and clear of
all costs. If on the other hand you have paid your share of drilling and completion costs with CLR, and lease operating expenses, and you are pleased with the outcome of your investment. Congratulations.
You are one of very few.
Don't be dumbfounded, sir; I am an operator myself and do not believe that debt, and oil, works
together. It has not worked in the US LTO industry to date, and it will not in the future. Believe
it or not there are a lot of us experienced oil and gas professionals out here that feel the same
way.
"... Those one after another announcements compose into something resembling a Requiem (aka Mass for the dead; Latin: Missa pro defunctis) for LTO boom and "low oil price forever" gambit (with due apologies for the deviation from your neoclassical supply-demand article of faith ;-). ..."
Halcon Resources plans to file a Chapter 11 bankruptcy plan if enough lenders agree to the terms,
the company said Wednesday in a press release.
Since the start of 2015, 138 oilfield service companies and oil and gas producers have gone
bankrupt owing more than $61 billion, law firm Haynes & Boone said in an April 29 report.
Halcon Resources plans to file a Chapter 11 bankruptcy
Since the start of 2015, 138 oilfield service companies and oil and gas producers have gone
bankrupt owing more than $61 billion, law firm Haynes & Boone said in an April 29 report.
Those one after another announcements compose into something resembling a Requiem (aka Mass
for the dead; Latin: Missa pro defunctis) for LTO boom and "low oil price forever" gambit (with
due apologies for the deviation from your neoclassical supply-demand article of faith ;-).
"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the
end of the beginning." Sir Winston Churchill
LINN Energy LLC and LinnCo LLC have been delisted from The NASDAQ Stock Market. Trading of
LINN and LinnCo securities were suspended prior to the open of the market today, Tuesday, May
24, 2016.
On May 11, 2016, LINN Energy, LinnCo, certain of the company's direct and indirect subsidiaries,
and Berry Petroleum Co. LLC, filed voluntary petitions for reorganization under Chapter 11.
"... I think $80/b will be enough for the current average well to be profitable. I agree that eventually average new well EUR will decrease and higher prices will be needed for profitable wells. The figure below shows debt was being paid down in 2013, based on Rune Likvern's analysis. ..."
"... It is just hilarious that you got call from WSJ just right now to have a chat after all has been printed regarding fake shale "technology improvements", "efficiency", and "energy revolution" in general. If you get ever invite by CNBC/Bloomberg for live TV appearance please let us now so we can all watch :-) ..."
"... But I know that they don't want you near their parking lot because their audience is not ready to handle the truth. They will bring Mr. Ward who is not really independent analyst but he was part of shale for so many years so of course he knows the numbers. But he will only say things in small dosages, one tea-spoon at the time so audience can absorb the news in small bits. ..."
Mr. Tea; I am familiar with the history of LTO development, thank you; I have interest in shale
wells, sat them, know what they cost, seen and heard all the technology bells and whistles up
close and personal and have watched my checks dribble to nothing. I have spent a half century
of economic analysis on wells I have drilled with my own money; I can add and subtract. Most of
the time when I am analyzing shale oil economics I am subtracting.
I have also heard all the hubbub about the shale oil miracle that I can stand; much obliged.
The "long history of the US oil and gas business model" has absolutely nothing to do with shale
oil extraction. The two have little to do with each other.
We have NEVER seen debt play such an enormous role in oil extraction as today, not in the 80's,
never in history.
Shell and BP got out of the shale biz early, Chevron never got in. CNOCC does not send CHK
Christmas cards anymore, I promise you and if you could get a straight answer from Exxon, Statoil
and BHP they'd probably say they screwed up, big time. We'll see who buys what. I'd say if this
shale stuff was so valuable there would be fierce competition to buy the stuff at low oil prices,
now, when folks are so eager to get out of trouble; Mr. Alex is correct, thus far no major integrated
oil company has even whiffed at shale oil acquisitions.
Hoping for higher oil prices is not a plan for long term sustainability, Mr. Tea. Good luck,
sir.
I would consider XOM and Statoil as major oil companies. Both are involved in LTO.
Rune Likvern showed the Bakken LTO players were cash flow neutral before the price crash, but
perhaps there are no more good wells left to drill.
I think $80/b will be enough for the current average well to be profitable. I agree that eventually
average new well EUR will decrease and higher prices will be needed for profitable wells. The
figure below shows debt was being paid down in 2013, based on Rune Likvern's analysis.
Since that time well costs have decreased and lower prices may be adequate ($80/b rather than
$100/b).
Thanks Mike.
When 2 years ago at the time of oil price collapse I first looked at this "black box" called LTO
the only people that made sense regarding LTO economics were you, shallow, Mr Berman, and Mr.
Likvern. 4 people in the whole English speaking world!! There was one more person in Russian language
that I have read his thoughts where he touched on LTO economics but more in context of general
oil depletion. So 1000's of blogs, 1000's of tv channels, 1000's of newspapers and only 4 people
that made sense regarding this LTO subject in English!!! So after 2 years when shale economics
are crystal clear there are still 4 people in English speaking world talking common sense!! Unbelievable.
It is just hilarious that you got call from WSJ just right now to have a chat after all has
been printed regarding fake shale "technology improvements", "efficiency", and "energy revolution"
in general. If you get ever invite by CNBC/Bloomberg for live TV appearance please let us now
so we can all watch
:-)
But I know that they don't want you near their parking lot because their audience is not ready
to handle the truth. They will bring Mr. Ward who is not really independent analyst but he was
part of shale for so many years so of course he knows the numbers. But he will only say things
in small dosages, one tea-spoon at the time so audience can absorb the news in small bits.
Have a nice day.
There have always been three routes out of the unsustainably low prices: natural
decline/growth of supply/demand, collaboration constraints on supply, and military conflict.
Since January, while the talk of a growth freeze had no effect whatsoever on actual supply, the
natural decline/growth did reduce the overhang by a couple of hundred thousand barrels of oil per
day. Meanwhile, two little-discussed and less-understood military interventions took a combined
900,000 bopd out of supply in a virtual instant.
The history of attacks by rebels on oil infrastructure in the Niger Delta and the coincident
prosecution of a former rebel superficially suggested that this attack was another in protest. On
the other hand, responsibility for the attack was first claimed two months after the fact and by
a group not previously known to exist, namely the Niger Delta Avengers. Moreover, the
sophistication of the attack diverges from the historical airboat-and-AK style of rebels in the
region.
A similarly mysterious outage affected 600,000 bopd out of northern Iraq. Located in a region of
multi-lateral conflict and poor transparency, this interruption could be easily dismissed.
Nevertheless, the fact remains that the exact cause of this major supply interruption was not
publicly claimed or understood by any of the parties.
"... Yet another BK, as Rune notified me today. Halcon, ticker HK, with operations in the Bakken and EFS. $3+ billion of debt. ..."
"... One of the Permian guys here mentioned that those of us who survive this debacle need to hoist a few cold ones sometime. I'm ready, once I am sure the debacle has passed. ..."
"... From todays article regarding Halcon: "it plans to file for a prepackaged bankruptcy that would wipe out $1.8 billion in debt and help it survive the drop in crude prices." ..."
"... It is the game of pretending where debt is wiped out as Kramer from Seinfeld would say "Jerry they write it off (debt). They do all the time". And then magically a "new" set of investors show up with newly printed or digitally created numbers on the account and start process again. And start drilling cash into the ground in order to get any oil left regardless of monetary paper loss/gain. What that tells you that current economic system is completely broken. It is running on fumes. ..."
Yet another BK, as Rune notified me today. Halcon, ticker HK, with operations in the Bakken
and EFS. $3+ billion of debt.
Further, Mr. McClendon's new company, American Energy Partners, announced they are winding
down and closing up shop.
One of the Permian guys here mentioned that those of us who survive this debacle need to
hoist a few cold ones sometime. I'm ready, once I am sure the debacle has passed.
Ves, 05/19/2016 at 9:43 am
SS,
This is not bankruptcy in real sense.
From todays article regarding Halcon: "it plans to file for a prepackaged bankruptcy that
would wipe out $1.8 billion in debt and help it survive the drop in crude prices."
It is the game of pretending where debt is wiped out as Kramer from Seinfeld would say
"Jerry they write it off (debt). They do all the time".
And then magically a "new" set of investors show up with newly printed or digitally created numbers
on the account and start process again. And start drilling cash into the ground in order to get
any oil left regardless of monetary paper loss/gain. What that tells you that current economic
system is completely broken. It is running on fumes.
Goldman Sachs ... pronounced that the oil market is shifting into a deficit 'much earlier
than expected', as a fourth Nigerian crude grade, Qua Iboe, comes offline due to a damaged
pipeline. As demand growth continues to show strength, and outages start to add up, Goldman
Sachs suggests that the market has shifted into a deficit this month:
"... On May 11th the U.S. Energy Information Administration (EIA) reported that U.S. crude oil production declined by 206,000 barrels per day over the six weeks ending May 5 ..."
"... U.S. crude oil inventories unexpectedly fell by 3.41 million barrels during the week ending May 6, 2016 ..."
"... Gasoline inventories declined by 1.231 million barrels ..."
"... Distillate stockpiles fell by 1.647 million barrels ..."
"... When the oil markets are oversupplied, the speculators which control the oil futures markets tend to ignore supply outages that they consider short-term. ..."
"... The oil sands projects shut in by the fires are now coming back on-line, but it will take months before production is fully restored. ..."
"... Oil price cycles do not end well. The big ones, and this is one of the biggest ever, overshoot the mark and result in a supply shortage. With OPEC now producing flat out, there is very little excess production capacity in the world. After the end of 2016, when oil supply and demand are back in balance, all significant supply outages (i.e. Canadian fire, Nigerian militants, ISIS attacks in the Middle East, etc.) will send crude oil prices skyrocketing. The Wall Street analysts that are saying we will never see oil over $100/bbl again will be eating those words. ..."
On May 11th the U.S. Energy Information Administration (EIA) reported that U.S.
crude oil production declined by 206,000 barrels per day over the six weeks ending May 5, 2016. In
the same weekly report:
U.S. crude oil inventories unexpectedly fell by 3.41 million barrels during the week ending
May 6, 2016
Gasoline inventories declined by 1.231 million barrels
Distillate stockpiles fell by 1.647 million barrels
The International Energy Agency (IEA) say the annual summer spike in demand
for transportation fuels has begun.
When the oil markets are oversupplied, the speculators which control the oil futures markets tend
to ignore supply outages that they consider short-term. For example, the forest fires in Alberta
that shut-in more than a million barrels per day of Canadian heavy oil products in early May did
not seem to have much impact on the price of oil. As supply and demand move back into balance, an
outage of that size will send the NYMEX strip prices sharply higher. The oil sands projects shut
in by the fires are now coming back on-line, but it will take months before production is fully restored.
Nigeria has much bigger problems
On Friday, May 13 an explosion closed a second Chevron facility in Nigeria, Africa's biggest oil
producer. The explosion was the result of an attack by militants who are upset with their government.
70 percent of Nigerians live on less than $1/day. They see the "Top 1 Percenters" living like kings,
while they have trouble finding enough food to eat. Apparently, they have money enough for guns and
explosives.
Exxon Mobil also reported on May 13 that a drilling rig damaged a pipeline, shutting off more
production of crude. Nigeria's oil production was already down 600,000 barrels per day before these
two incidents, primarily the result of militant attacks. Shell is now evacuating workers from its
offshore Bonga oilfield following a militant threat. Shell's Forcados export terminal has been shut
down since a February bombing. To say Nigeria is a mess is an understatement.
Adding to the country's problems is the fact that they are over a year behind in paying invoices
for oilfield services. Schlumberger Ltd. (SLB) has pulled personnel and equipment
out of Nigeria, apparently tired of running up the bad debts.
Venezuela: Another OPEC nation on steep decline
Latin American oil production is now down close to 500,000 bpd from year ago levels.
On May 6, Bloomberg reported that Halliburton (HAL) has joined rival Schlumberger
in curbing activity in Venezuela due to lack of payment during the oil industry's worst financial
crisis.
"During the first quarter of 2016, we made the decision to begin curtailing activity in Venezuela,"
Halliburton, the world's second-largest oil services provider, said May 6th in a filing with the
U.S. Securities and Exchange Commission. "We have experienced delays in collecting payment on our
receivables from our primary customer in Venezuela. These receivables are not disputed, and we have
not historically had material write-offs relating to this customer," the company said.
Halliburton's receivables in Venezuela rose 7.4 percent in the first quarter to $756 million compared
to the end of 2015, representing more than 10 percent of its total receivables, the Houston-based
company said. If you own Halliburton stock, prepare yourself for a big bad debt expense later this
year.
On the demand side of the equation, May is the beginning of an annual spike in demand for hydrocarbon
based liquid fuels. In their monthly Oil Market Report dated May 12, 2016 the International Energy
Agency (IEA) forecasts that demand will increase by 1.66 million barrels per day from the first quarter
of this year to the third quarter.
If history repeats itself, the demand spike will be even larger. In 2010, the final year of the
last major oil price cycle, the IEA began the year forecasting a 1.0 million barrel per day increase
that year. Actual demand growth was 3.3 million barrels per day. The forecast error made in 2010
was that IEA's formula for calculating demand, did not consider the impact of lower fuel prices on
demand. I believe they've made the same mistake this time around.
Key points from the IEA report:
Global oil demand growth for 1Q16 was revised upwards to 1.4 mb/d, led higher by strong gains
in India, China and, more surprisingly, Russia. Russia had a cold winter and they still use a
lot of oil for space heating.
Oil inventory builds are beginning to slow in the OECD; in 1Q16 they grew at their slowest
rate since 4Q14 and in February they drew for the first time in a year.
"Changes to the data in this month's Oil Market Report confirm the direction of travel of
the oil market towards balance. The net result of our changes to demand and supply data is that
we expect to see global oil stocks increase by 1.3 mb/d in 1H16 followed by a dramatic reduction
in 2H16 to 0.2 mb/d."
"We have left unchanged our outlook for global oil demand growth in 2016 at a solid 1.2 mb/d.
However, for 1Q16 revised data shows demand growing faster at 1.4 mb/d, in spite of the northern
hemisphere winter being milder than usual. This strong 1Q16 performance might raise expectations
that demand will remain at this stronger level causing us to raise our average figure for 2016."
As you can see by this statement, IEA is already seeing the error in their forecasting model.
Like most government agencies, they will never come out and say they screwed up.
During the first quarter, oil prices were under pressure from predictions that China's demand
for oil would soften this year. Chinese demand growth has slowed down from the rapid pace of the
prior ten years, but it is still going up. This is thanks in part to sales of SUVs that are still
climbing in China. Apparently the Chinese people are becoming more status driven (like Americans),
owning an SUV in China indicates your family has joined the Upper Middle Class.
Per the IEA report, India is rapidly becoming the leader in global demand growth. Oil demand in
India increased by 400,000 barrels per day year-over-year in the first quarter.
I have worked in the upstream energy sector for 38 years. During my career the industry has survived
six major and a few minor oil price cycles. It will survive this one because the products made from
crude oil, natural gas and natural gas liquids (NGLs) are critical to the world economy. Our high
standard of living depends on a steady supply of oil.
Oil price cycles do not end well. The big ones, and this is one of the biggest ever, overshoot
the mark and result in a supply shortage. With OPEC now producing flat out, there is very little
excess production capacity in the world. After the end of 2016, when oil supply and demand are back
in balance, all significant supply outages (i.e. Canadian fire, Nigerian militants, ISIS attacks
in the Middle East, etc.) will send crude oil prices skyrocketing. The Wall Street analysts that
are saying we will never see oil over $100/bbl again will be eating those words.
Oil prices do not go up or down in a smooth line, as you can see in the chart above. Investors
that can look past the short-term noise and invest in the best companies will harvest market beating
gains as this cycle moves back to the long-term trend.
SandRidge Energy filed for bankruptcy protection Monday, saying it hopes to convert $3.7
billion of long-term debt into equity while allowing the company to keep its operations going.
The Oklahoma City-based company filed the Chapter 11 paperwork in the U.S. Bankruptcy Court
for the Southern District of Texas. The petroleum and natural gas exploration company said it had
the support of creditors who hold more than two-thirds of its $4.1 billion in total debt.
...Under the bankruptcy plan, the company would restructure $3.7 billion of long-term debt
into equity, including $300 million of debt that would later convert to equity in the reorganized
company. The company would still owe about $425 million in reserve-based lending facility debt.
"... Of course, as you mention, none of the companies are able to pay for wells right now out of cash flow. All have interest expense, many have interest expense in excess of $5 per barrel. Then, the question is when will any of these companies begin to use cash flow to reduce debt principal. Some have reduced debt, by buying back their own debt at distressed levels, and/or exchanging the debt with creditors for reduced principal new debt, but at much higher interest rates and more stringent terms (liens upon company assets as opposed to unsecured bonds). ..."
"... Many of the LTO companies sold their gathering and/or produced water disposal infrastructure in order to raise cash. They now are required to pay $X per barrel or mcf of gas in order to get their products to market. ..."
"... I would also note, 20% is a "base case" for Bakken royalties. ..."
Of course, as you mention, none of the companies are able to pay for wells right now out of
cash flow. All have interest expense, many have interest expense in excess of $5 per barrel. Then,
the question is when will any of these companies begin to use cash flow to reduce debt principal.
Some have reduced debt, by buying back their own debt at distressed levels, and/or exchanging
the debt with creditors for reduced principal new debt, but at much higher interest rates and
more stringent terms (liens upon company assets as opposed to unsecured bonds).
Also, another expense I have noticed with more frequency are gathering expenses. Many of the LTO companies sold their gathering and/or produced water disposal infrastructure in order to raise
cash. They now are required to pay $X per barrel or mcf of gas in order to get their products
to market.
I would also note, 20% is a "base case" for Bakken royalties. The actual figures can range
from 12.5% (1/8) to over 25% (1/4). If one is looking at the EFS or Permian, I suggest using a
"base case" royalty of 25% (1/4). However, taxes in TX are less than ND.
"... Breitburn's estimated proven reserves, which were valued at $4.5 billion at the end of 2014, were worth only $1.3 billion as of the end of 2015. ..."
"... On another part of this debacle .one of the auctioneers in West Texas saidthey are getting about $.15 on the dollar for oil field equipment at auction. ..."
"... I think this bust is trying to claim the top prize for most brutal oil and gas bust, ..."
HC Debt disease spreads to California
-About $3 billion of Breitburn's debts are bank and bond debt, topped by $1.25 billion in loans
from lenders led by Wells Fargo Bank, NA. Breitburn is carrying $650 million of senior secured
second-lien bonds and $1.1 billion in unsecured bonds.
-Breitburn's estimated proven reserves, which were valued at $4.5 billion at the end of 2014,
were worth only $1.3 billion as of the end of 2015.
-Breitburn has crude oil and natural gas assets in the Midwest, Ark-La-Tex, the Permian Basin,
the Mid-Continent, the Rockies, the Southeast and California.
"Crude Oil" ??
http://www.wsj.com/articles/breitburn-energy-partners-files-for-chapter-11-bankruptcy-1463400009
http://www.wsj.com/articles/sandridge-energy-files-for-bankruptcy-protection-1463404621
On another part of this debacle .one of the auctioneers in West Texas saidthey are getting
about $.15 on the dollar for oil field equipment at auction.
I also see the C & J services is rumored to be filing BK. I am not familiar with them, from my
reading they are a very large well completion company. Looks like their CEO passed away unexpectedly
at age 46 back on 3/11/16.
I think this bust is trying to claim the top prize for most brutal oil and gas bust,
"... Prices have bounced back to $46 a barrel from February lows in the mid-$20s ..."
"... That will not help smaller producers built for far higher prices. These companies have largely exhausted funding alternatives after issuing more equity and debt, tapping second-lien loans and shedding assets over the last two years to stay afloat as banks trimmed credit lines. ..."
"... Some companies are in more acute distress, faced with the expiration of derivative contracts that had allowed them to sell oil above market prices. ..."
"... "Everybody was able to hold on for a while," said Gary Evans, former CEO of Magnum Hunter Resources, which emerged from bankruptcy protection this week. "But once the hedges roll off you can't support that debt." ..."
"... Founded in 2003, Linn has about $10 billion in debt, about twice that of Samson Resources Corp and Energy XXI Ltd, two of the largest oil and gas companies to file recently. Linn was designed as a high-yield investment vehicle, which received beneficial tax treatment in return for paying out the bulk of its profits to unitholders. Because of this structure, it took on significant debt to grow through acquisitions. ..."
The wave of U.S. oil and gas bankruptcies surged past 60 this week, an ominous sign that the
recovery of crude prices to near $50 a barrel is too little, too late for small companies that
are running out of money.
On Friday, Exco Resources Inc, a Dallas-based company with a star-studded board, said it
will evaluate alternatives, including a restructuring in or out of court. Its shares fell 35
percent to 62 cents each.
Exco's notice capped off one of the heaviest weeks of bankruptcy filings since crude prices
nosedived from more than $100 a barrel in mid-2014.
Prices have bounced back to $46 a barrel from February lows in the mid-$20s , but
the futures market shows investors do not expect U.S. benchmark crude to rise above $50 for
more than a year.
That will not help smaller producers built for far higher prices. These companies have
largely exhausted funding alternatives after issuing more equity and debt, tapping second-lien
loans and shedding assets over the last two years to stay afloat as banks trimmed credit lines.
Some companies are in more acute distress, faced with the expiration of derivative contracts
that had allowed them to sell oil above market prices.
"Everybody was able to hold on for a while," said Gary Evans, former CEO of Magnum Hunter
Resources, which emerged from bankruptcy protection this week. "But once the hedges roll off
you can't support that debt."
Bankruptcy filers this week included Linn Energy LLC and Penn Virginia Corporation. Struggling
SandRidge Energy LLC, a former high flyer once led by legendary wildcatter Tom Ward, said it
would not be able to file quarterly results on time.
The number of U.S. energy bankruptcies is closing in on the staggering 68 filings seen during
the depths of the telecommunications sector bust of 2002 and 2003, according to Reuters data,
the law firm Haynes & Boone and bankruptcydata.com.
Linn's bankruptcy was the biggest among energy companies so far in this downturn, even though
the company is a modest producer of about 59,000 barrels of oil per day, and 607 million cubic
feet of gas per day.
Founded in 2003, Linn has about $10 billion in debt, about twice that of Samson Resources
Corp and Energy XXI Ltd, two of the largest oil and gas companies to file recently. Linn was
designed as a high-yield investment vehicle, which received beneficial tax treatment in return
for paying out the bulk of its profits to unitholders. Because of this structure, it took on
significant debt to grow through acquisitions.
Exco's warning showed that the crude price rout has not spared companies with highly experienced
management. Exco has reported a loss for the last five quarters in a row. It has a number of
big-name board members including billionaire investor Wilbur Ross and executive chairman John
Wilder, who engineered the giant leveraged buyout of TXU.
Valued at about $495 million as of Thursday's stock market close, Exco had long-term debt
of $1.32 billion on March 31, according to a regulatory filing.
One probable outcome, as Exco said on Friday, may include getting rid of debt by having
debtholders become shareholders, possibly wiping out existing equity owners.
Penn Virginia's strategy is similar. "Once the restructuring is implemented, the Company
will have substantially less debt and a much stronger balance sheet," Penn Virginia's Chairman
and interim CEO Edward Cloues said in a statement.
(Reporting By Terry Wade; Editing by Luc Cohen and David Gregorio)
"... There are rumored to be a couple more multi-billion dollar bankruptcies being filed next week. As I have stated, I was not paying attention in 1986. I feel that things are worse in this bust than in 1998-1999. ..."
"... Well, the '86 bust was bloody terrible for me; I had kids in university then. Of course it was much worse for some of the other guys. At least my wife had her teaching/research job in Sweden so we managed. On a personal level I'd say it depends on where you're sitting. Sometimes I feel like a shit babbling on here when some very smart, productive and capable people, like you, are in the thick of it. ..."
There are rumored to be a couple more multi-billion dollar bankruptcies being filed next
week. As I have stated, I was not paying attention in 1986. I feel that things are worse in this
bust than in 1998-1999.
Wonder if there is a way to determine which of the three busts has been the worst so far (I
do not think the current one is over yet, it could last quite a while)?
Well, the '86 bust was bloody terrible for me; I had kids in university then. Of course
it was much worse for some of the other guys. At least my wife had her teaching/research job in
Sweden so we managed. On a personal level I'd say it depends on where you're sitting. Sometimes
I feel like a shit babbling on here when some very smart, productive and capable people, like
you, are in the thick of it.
"... Since the start of 2015, 130 North American oil and as producers and service companies have filed for bankruptcy owing almost $44 billion, according to law firm Haynes & Boone. The tally doesn't include Chaparral Energy Inc., Penn Virginia Corp. and Linn Energy LLC, which filed for bankruptcy this week owing more than $11 billion combined." ..."
"... They survived by selling shares, junk bonds and flipping leases against a background of relentless/stupid hype. People were desperate to believe; finance lent and that was all that mattered and matters today. ..."
"... A few more months of low(ish) prices and the hype will be unmasked as fraud. Two years = 730 tomorrows. How many more before utopia arrives ? ..."
"... Never. $45/barrel = too low for drillers yet it is still too high for (broke) customers who would rather spend the spare change they have left on alcohol and beignets. ..."
OIL AT $45 A BARREL PROVING NO SAVIOR AS BANKRUPTCIES PILE UP
"Three bankruptcies this week shows that $45 a barrel oil isn't enough to rescue energy companies
on the verge of collapse
Since the start of 2015, 130 North American oil and as producers and service companies have
filed for bankruptcy owing almost $44 billion, according to law firm Haynes & Boone. The tally
doesn't include Chaparral Energy Inc., Penn Virginia Corp. and Linn Energy LLC, which filed for
bankruptcy this week owing more than $11 billion combined."
Not surprising as some (most) of these firms were underwater @ $110/barrel.
They survived by selling shares, junk bonds and flipping leases against a background of relentless/stupid
hype. People were desperate to believe; finance lent and that was all that mattered and matters
today.
A few more months of low(ish) prices and the hype will be unmasked as fraud. Two years = 730
tomorrows. How many more before utopia arrives ?
Never. $45/barrel = too low for drillers yet it is still too high for (broke) customers who
would rather spend the spare change they have left on alcohol and beignets.
OIL AT $45 A BARREL PROVING NO SAVIOR AS BANKRUPTCIES PILE UP
"Three bankruptcies this week shows that $45 a barrel oil isn't enough to rescue energy companies
on the verge of collapse
Since the start of 2015, 130 North American oil and as producers and service companies have
filed for bankruptcy owing almost $44 billion, according to law firm Haynes & Boone. The tally
doesn't include Chaparral Energy Inc., Penn Virginia Corp. and Linn Energy LLC, which filed for
bankruptcy this week owing more than $11 billion combined."
Not surprising as some (most) of these firms were underwater @ $110/barrel.
They survived by selling shares, junk bonds and flipping leases against a background of relentless/stupid
hype. People were desperate to believe; finance lent and that was all that mattered and matters
today.
A few more months of low(ish) prices and the hype will be unmasked as fraud. Two years = 730
tomorrows. How many more before utopia arrives ?
Never. $45/barrel = too low for drillers yet it is still too high for (broke) customers who
would rather spend the spare change they have left on alcohol and beignets.
"... Linn Energy LLC filed for chapter 11 bankruptcy after reaching a deal with lenders to restructure its $8.3 billion debt load and obtain $2.2 billion in fresh financing. In its bankruptcy filing press release, Linn announced that the holders of more than 66 percent of its credit facility have agreed to the "broad terms" of a debt restructuring but didn't provide further details. ..."
"... energy producer Penn Virginia also filed for chapter 11 bankruptcy protection Thursday. And just like Linn, the Pennsylvania-based explorer and producer deals said it had reached a prepackaged agreement with holders of 87 percent, or $1.03 billion, ..."
In the first case, oil and gas producer Linn Energy LLC filed for chapter 11 bankruptcy after
reaching a deal with lenders to restructure its $8.3 billion debt load and obtain $2.2 billion in
fresh financing. In its bankruptcy filing press release, Linn announced that the holders of more
than 66 percent of its credit facility have agreed to the "broad terms" of a debt restructuring
but didn't provide further details. The lenders also agreed to let Linn Energy spend the cash
securing their debt, known as cash collateral, and to help fund a new $2.2 billion term loan.
... ... ...
In the day's second bankruptcy, energy producer Penn Virginia also filed for chapter 11
bankruptcy protection Thursday. And just like Linn, the Pennsylvania-based explorer and producer
deals said it had reached a prepackaged agreement with holders of 87 percent, or $1.03 billion,
of its total funded-debt obligations to restructure under chapter 11 protection and eliminate
long-term debt by more than $1 billion.
"... And just think. Linn Energy, only a month or two ago, maxed out their line of credit, paid the upper crust extra bonuses and 18 months pay. I wonder what they saw coming? So is this good luck or fraud? ..."
Linn Energy Files for Bankruptcy, SandRidge Misses Quarterly Filing
HOUSTON, May 11 (Reuters) Linn Energy filed for bankruptcy on Wednesday, and SandRidge Energy
Inc said it could not file quarterly results in a timely manner, the latest sign of the turmoil
a deep price crash has caused among small firms in the U.S. oil and gas sector.
Linn's filing for creditor protection brings to about 60 the number of U.S. oil and gas
companies to go bankrupt since oil prices entered a slide in mid-2014.
And just think. Linn Energy, only a month or two ago, maxed out their line of credit, paid
the upper crust extra bonuses and 18 months pay.
I wonder what they saw coming? So is this good luck or fraud?
I shake my head sometimes, when it come to white collar crime, because this is just criminal
in any view of the law, other than the letter of the law!
"... In the US, all producers are feeling pain to varying degrees at Q1 prices, less so but still pain at current prices. ..."
"... For some reason investors are very accepting of US oil and gas losses, and only seem to get worried when there are signs that bank lines will be slashed below present balances and/or interest cannot be paid. ..."
"... It is not surprising that oil producers, both in and outside the U.S., "are feeling pain to varying degrees" at the bottom of the cycle. But most of conventional producers have much more affordable debt levels than the shale guys. ..."
"... Very true. And this is a big, I would say, decisive difference. ..."
"Money" suddenly stopped working and that is what market will realize. It is no coincidence
that same thing is happening at the same time to oil, gas, nuclear (it was article about that
on 35 billion Hinckley plant) or Tesla. We are running on fumes
In many "old" industries, "money" is still working. Companies are sticking to prudent financial
policies. BTW, this refers to most conventional oil producers.
Conventional is only losing less than shale per barrel. If they don't replace reserves as even
the most majors didn't last year than that it is just race to the bottom.
In the US, all producers are feeling pain to varying degrees at Q1 prices, less so
but still pain at current prices.
There are a lot of US industries that are showing good earnings. These are across a wide variety
of industries. Also, many of the smaller banks are also showing good results. I do not own large
banks, but have shares in some smaller regional banks, all posted record earnings.
For some reason investors are very accepting of US oil and gas losses, and only seem to
get worried when there are signs that bank lines will be slashed below present balances and/or
interest cannot be paid.
It is not surprising that oil producers, both in and outside the U.S., "are feeling pain
to varying degrees" at the bottom of the cycle.
But most of conventional producers have much more affordable debt levels than the shale guys.
Chesapeake announced yesterday that it would sell around 42,000 acres in the Stack field in Oklahoma,
which currently produces around 3,800 barrels of oil equivalent per day.
The assets will go to
Newfield Exploration Co. for an estimated price of
$470 million.
Furthermore, due to low oil and gas prices, the company will seek to sell additional assets that
will bring between $500 million and $1 billion in its coffers by the end of the year.
"... It is very easy to destroy an industry. And neoliberals proved to be pretty adept in this task while fattening their valets. In this case the USA oil industry. Generally destruction is a much easier task that building/rebuilding something. Nothing new here, move on. ..."
"... "After me deluge" mentality might eventually lead to some neoliberals hanging from the lamp posts. They consider themselves to be aristocracy, so that will be pretty fitting. ..."
"... "Let them eat cakes" did not work too well in the past. Same with oil shortages. "History Does Not Repeat Itself, But It Rhymes" - Mark Twain. ..."
Judging from price action today there are efforts to kill oil rally. I think if banks profits
from oil trading can drop like a stone, we collectively will be better off. They desperately try
to preserve the unnatural and ultimately destructive level of rent extraction from the oil industry
they've managed to create.
First: Tesla is going to sell so many electric cars so soon, based on their CC from yesterday.
Second: Continental Resources announced a wonderful quarter, and apparently $30 oil and $1.75
natural gas is no big deal.
I need to stop reading conference call transcripts. Never have I seen so much happy talk from
two companies who are in debt up to their eyeballs and posting losses quarter after quarter.
Don't be so silly. Oil price below the cost of production is an anomaly and normalization is inevitable
despite all efforts by Wall Street, the US government and EU to slow down this process to preserve
neoliberal globalization, which is threatened by high oil prices.
They might have a year to run of fumes, but I doubt that more then that. And as a result of
their valiant efforts the normalization might happen at the level above $80/bbl. Then what?
It is very easy to destroy an industry. And neoliberals proved to be pretty adept in this
task while fattening their valets. In this case the USA oil industry. Generally destruction is
a much easier task that building/rebuilding something. Nothing new here, move on.
"After me deluge" mentality might eventually lead to some neoliberals hanging from the
lamp posts. They consider themselves to be aristocracy, so that will be pretty fitting.
"Let them eat cakes" did not work too well in the past. Same with oil shortages. "History
Does Not Repeat Itself, But It Rhymes" - Mark Twain.
Massive debt is now like the sword of Damocles hanging over the whole shale industry. And that
created qualitatively new situation with reaction of the industry on rising oil prices delayed
and more muted then at times of "carpet drilling". Even money to complete DUCs are now a scarce
commodity. Everything goes to debt repayment. In addition many companies will be forced to sell
assets like Chesapeake:
Prices have dropped to levels destroying capital, bankrupting businesses, idling massive
amounts of equipment and manpower. The cycle is reversing now. The weekly EIA numbers are showing
steady declines in production (this is a balancing item not real production estimates) and
also increasing demand In the United States.
The IEA is showing the same thing in their monthly report that has a decent look at the
G7 countries and attempts to look at the G20. Between these two, there is a large world with
little accurate measurement. China for instance jailed a Platts reporter for espionage when
he tried to put together a fundamental energy statistics database.
Inevitably, we will have another price shock or at minimum an upside surprise. It's
unavoidable at this point.
Oil never transitions smoothly. Just like all the oil bulls had to be run out during the
declining price stage, all the price bears, like Dennis Gartman, will be run out when fundamentals
hit them over the head. Gartman, to his credit, will change his tune 180 degrees when he sees
the actual data shaping up. That's how he has survived so long and profitably as a trader.
But by then it will be too late, the world will want incremental supplies immediately
yet the industry cannot scale in real time. In order to motivate producers to get busy and
provide incremental supplies, prices must increase sharply from current levels.
My prediction $80/bbl in 18 months, but it won't last very long. I think $60 $70/bbl
is a healthy range.
JP Morgan reported that its non-performing loans jumped by 665 percent in the first quarter
from $0.2 to $1.7 billion with most of the bad loans coming from the oil and gas industry. Loans
considered to be a problem are now at $21.2 billion
"... "I think we'll see more filings in the second quarter than in the first quarter," ..."
"... U.S. oil and gas companies sold about $350.7 billion in debt between 2010 and 2014, the peak years of the oil-and-gas boom, with junk bonds making up more than 50 percent of all issuance, according to Thomson Reuters data. ..."
LTO companies debt and energy junk bonds problem can't be swiped under the carpet. It is just
too big for that. We are talking about around 350 billion of debt with half on them in junk bonds.
That's probably half of the gain of the US economy from oil prices crash (and, of course, not
all this debt will convert into direct losses; recovery in the range of 20% is still possible).
What form the day of reckoning will take is very difficult to predict. Much depends on debt
repayment schedule and bond maturity dates. But this level of debt completely undermines chances
of quick revival of LTO production in case oil prices jump up, as new capital to finance drilling
will not be here. So any talk about quick revival of the US LTO production as a reaction on higher
oil prices does not take into account the fact that that it will be very difficult to finance
new mass drilling this time. And drilling 1000 wells is around 6 billion. 1500 - 9 billions.
The number of U.S. energy bankruptcies is closing in on the staggering 68 filings seen during
the depths of the telecom bust of 2002 and 2003, according to Reuters data, the law firm Haynes
& Boone and bankruptcydata.com. Charles Gibbs, a restructuring partner at Akin Gump in Texas,
said the U.S. oil industry is not even halfway through its wave of bankruptcies. "I think
we'll see more filings in the second quarter than in the first quarter," he said. Fifteen
oil and gas companies filed for bankruptcy in the first quarter.
Until recently, banks had been willing to offer leeway to borrowers in the shale sector, but
lately some lenders have tightened their purse strings. A widely predicted wave of mergers
in the shale space has yet to materialize as oil price volatility makes valuations difficult,
and buyers balk at taking on debt loads until target companies exit bankruptcy.
In the debt market, there are also signs that lots of money could be lost this time around,
especially in high-yield bonds. During its boom, U.S. oil and gas companies issued twice as
much in bonds as telecom companies did in the latter part of the 1990s through the early 2000s.
Between 1998 and 2002, about $177.1 billion in new bonds were sold in the U.S. telecommunications
sector; less than 10 percent were junk bonds. U.S. oil and gas companies sold about $350.7
billion in debt between 2010 and 2014, the peak years of the oil-and-gas boom, with junk bonds
making up more than 50 percent of all issuance, according to Thomson Reuters data.
"... Oklahoma-based Midstates Petroleum Company and Texas based Ultra Petroleum have now filed for bankruptcy, citing combined debts of more than US$5.8 billion blamed on a long run of low commodity prices that have led to irreparable financial damage ..."
"... According to a recent Deloitte analysis , which examined 500 oil and natural gas exploration and production companies worldwide, 175 of the companies (or around 35 percent) were at high risk of going bankrupt. Together, these companies have more than $150 billion in debt. The report added that the situation is "precarious" for 50 of these companies due to negative equity or leverage ratio above 100. ..."
Two more oil companies have filed for Chapter 11 bankruptcy protection, as crude oil prices
hover just above $45 per barrel and financial woes take their toll.
Oklahoma-based Midstates Petroleum Company and Texas based Ultra Petroleum have now filed for
bankruptcy, citing combined debts of more than US$5.8 billion blamed on a long run of low
commodity prices that have led to irreparable financial damage.
... ... ...
Since early last year, some 70 North American oil and gas companies have filed for bankruptcy.
The numbers aren't stark: They only account for about 1 percent of U.S. output, but there are
fears the trend could pick up pace.
According to a recent
Deloitte analysis , which examined 500 oil and natural gas exploration and production companies
worldwide, 175 of the companies (or around 35 percent) were at high risk of going bankrupt. Together,
these companies have more than $150 billion in debt. The report added that the situation is "precarious"
for 50 of these companies due to negative equity or leverage ratio above 100.
"... In a normal economic environment, we will see the price direction is rather upwards than downwards ..."
"... he low price that we saw in crude oil earlier this year may be the last time we see that for over a decade ..."
"... Even as some shale operators say that they may actually bring on rigs after we hit $50 a barrel, the truth is that many of the smaller operators will find it hard to bring rigs back on ..."
"Crude oil ended the month of April with the strongest monthly gain in 7 years, adding 22% to
the price. The low price caused "production destruction" and strong demand put the market on a
trajectory of market balance."
"We have said that oil prices have bottomed and the chief of the International Energy Agency
(IEA) agrees. "In a normal economic environment, we will see the price direction is rather upwards
than downwards," IEA Executive Director Fatih Birol said on Sunday during a G7 meeting of energy
ministers in Japan as reported by Reuters. He took the words right out of my mouth. Barring any
unforeseen economic catastrophes, the global oil market is at the low end of the cycle. We have
said for some time that now is the time to start positioning for a long term bullish move. The
low price that we saw in crude oil earlier this year may be the last time we see that for over
a decade. "
"Even as some shale operators say that they may actually bring on rigs after we hit $50 a barrel,
the truth is that many of the smaller operators will find it hard to bring rigs back on."
"... Mr Jarand Rystad told a forum yesterday that with oil companies cutting back heavily on investments, the crude oversupply will quickly turn into shortage and, in turn, drive prices up. ..."
"... In his keynote speech at the Offshore Marine Forum yesterday, Mr Rystad, managing director of Norwegian-based energy consulting firm Rystad Energy, added that oil could reach US$105 a barrel by 2020. ..."
"... "This is just a classic commodity cycle not a structural shift," he said, noting that global oil consumption is still robust, while alternatives such as liquefied natural gas will likely have a visible impact on energy demand patterns only decades later. ..."
"... But the bigger worry, he warned, is that the massive investment cutbacks could lead to another period of cost inflation. "It is very dangerous to start to scale the industry," he said, citing how oil companies are adjusting their capacity to only a quarter of what it needs to be on a sustainable basis. ..."
Oil could rebound to US$60 to US$70 a barrel by the end of this year as increasing demand starts
to cut into the supply glut for the first time in years, according to an industry analyst.
Mr Jarand Rystad told a forum yesterday that with oil companies cutting back heavily on investments,
the crude oversupply will quickly turn into shortage and, in turn, drive prices up.
In his keynote speech at the Offshore Marine Forum yesterday, Mr Rystad, managing director of
Norwegian-based energy consulting firm Rystad Energy, added that oil could reach US$105 a barrel
by 2020.
"This is just a classic commodity cycle not a structural shift," he said, noting that global
oil consumption is still robust, while alternatives such as liquefied natural gas will likely
have a visible impact on energy demand patterns only decades later.
But the bigger worry, he warned, is that the massive investment cutbacks could lead to another
period of cost inflation. "It is very dangerous to start to scale the industry," he said, citing
how oil companies are adjusting their capacity to only a quarter of what it needs to be on a sustainable
basis.
"Oil companies and oil service companies are laying off too many people. If you're starting to
scale, you will end up with far too low a capacity. Then you'll have to hire new people (when
the industry recovers) and then you're back to the problem of cost inflation."
the fundamentally unsustainable pricing that we've seen for much of 2016, particularly after
the 2nd failed OPEC meeting, has been much more dependent upon speculative short positions in the
market, particularly from algorithmic momentum funds. We could track the speculative short
positions against the price of crude almost exactly as prices dropped below $40 the first time,
with long positions decreasing to their lowest levels in five years as crude dropped under $30 a
barrel.
"... A study by Wood Mackenzie (chart = h/t @WoodMacKenzie ) highlights that the trend of lower investment is set to persist. Their study projects $91 billion in capex cuts across 121 upstream companies this year: ..."
"... EIA has analyzed the annual reports of 40 publicly-traded U.S. oil producers, highlighting the significant differences in their financial situations. The group as a whole saw combined losses of $67 billion last year, although these losses varied wildly from company to company. ..."
IEA's chief Fatih Birol has chimed in on the topic today, highlighting low oil
prices have
cut investment
by about 40 percent over the past two years, and how the sharpest falls
have been in the U.S., Canada, Latin America and Russia.
4) A study by
Wood Mackenzie (chart = h/t @WoodMacKenzie)
highlights that the trend of lower investment is set to persist. Their study
projects $91 billion in capex cuts across 121 upstream companies this year:
... ... ...
6) Finally, the EIA has analyzed the annual reports of 40 publicly-traded U.S. oil producers,
highlighting the significant differences in their financial situations. The
group as a whole saw combined losses of $67 billion last year, although these
losses varied wildly from company to company.
Eighteen of the forty companies experienced losses in 2015 in excess of 100
percent of their equity (termed as high loss companies HGLs). The driving
force behind the HLG's deteriorating financial conditions was leverage; their
long-term debt-to-shareholder equity ratio averaged 99 percent, compared to
the non-HLGs whose debt was at much-lesser level of 58 percent of shareholder
equity.
Not only were the HLGs the most leveraged, but their assets were revised
down the most too. Last year the 18 HLGs saw a 21 percent reduction in proved
oil reserves, while the non-HLG group saw a drop of just 6 percent. The lower
reserves for the HLG group caused impairment charges, decreasing the value of
their assets. This lower asset value is ultimately reflected in lower credit
availability to these companies.
"... non-OPEC production would fall this year by the most in a generation. ..."
"... IEA chief Fatih Birol said low oil prices had cut investment about 40 percent over the past two years, with sharp falls in the United States, Canada, Latin America and Russia. ..."
Oil rose in early trade after the International Energy Agency (IEA) said
non-OPEC production would fall this year by the most in a generation.
IEA chief Fatih Birol said low oil prices had cut investment about 40
percent over the past two years, with sharp falls in the United States,
Canada, Latin America and Russia.
Incredible joy in Western MSM due to the fact that OPEC did not agree to freeze oil prices, with
KAS playing the role of a spoiler. And here is GS with its "talking your own book" forecasts...
Notable quotes:
"... Goldman said on Monday that it was maintaining its fourth-quarter 2016 forecast of $45 a barrel for WTI crude and said that its full-year 2017 average WTi forecast was $58 a barrel ..."
Global oil prices and stock markets tumbled on Monday after major oil producers failed to agree
on a deal to freeze output, but analysts are insisting that no deal is actually the best possible
outcome for markets.
... ... ...
Despite the collapse of talks, oil market watchers said the lack of a "Doha deal" would be better
in the long term and would mean that a rebalancing process of supply and demand can continue to its
natural conclusion.
... ... ...
Goldman said on Monday that it was maintaining its fourth-quarter 2016 forecast of $45 a barrel
for WTI crude and said that its full-year 2017 average WTi forecast was $58 a barrel, Reuters
reported. In the short-term it said its forecast for $35 a barrel for WTI in the second quarter was
now "more likely" following the decision not to freeze production.
The founder and CEO of
Continental Resources, who previously told CNBC that "the fundamentals of
supply and demand were really close," reiterated during a
"Power Lunch"
interview on Monday that this year's third-quarter will absorb most of the excess
oil supply, which in turn will lead to "stronger pricing."
The billionaire
suggested that oil is past an inflection point and prices have surged 50 percent
from previous lows. Hamm foresees crude prices soaring to $60 a barrel by the
end of the year, as lower oil prices are unsustainable. He contends, however,
that even when the oil "overhang goes away," ramping up production will take
U.S. producers a long time, as rig counts are at an all-time low.
He added that U.S. rig counts "are down 77 percent."
...Hamm
argued that oil producers in the Middle East are "pretty much tapped out."
"... Emerging market economies will increase global oil demand about 1.4 percent a year through 2020, stronger than the past decade, Bernstein analysts said in a research note e-mailed today. ..."
"... The world is well supplied with oil, which will keep the average price between $60 and $70 a barrel through the end of the decade, Bernstein said ..."
"... Emerging economies will spur global oil demand growth from 94.6 million barrels a day last year to 100 million by 2020 and 108 million between 2030 and 2035. In developed countries, crude demand is beginning to shrink amid improvements in energy efficiency and as consumers switch to alternative fuels, outweighing expanding populations and economic growth. ..."
Emerging market economies will increase global oil demand about 1.4 percent
a year through 2020, stronger than the past decade, Bernstein analysts said
in a research note e-mailed today. Demand will peak between 2030 and 2035, creating
a window for one final spike in prices before the fossil fuel begins its inexorable
slide to irrelevance amid greater fuel efficiency and more electric vehicles.
"We still believe that there could be one more super-cycle in oil before
demand peaks in 2030-35," Bernstein said in its note. "Assuming tight oil peaks
out before demand does, it could result in another period of supply tightness
as OPEC becomes a dominant force in supply, just as it did in the 1970s."
The world is well supplied with oil, which will keep the average price between
$60 and $70 a barrel through the end of the decade, Bernstein said. The relatively
low prices will lead to more use, with demand growth from 2016-2020 expected
to be the highest since 2001-2005.
Emerging economies will spur global oil demand growth from 94.6 million barrels
a day last year to 100 million by 2020 and 108 million between 2030 and 2035.
In developed countries, crude demand is beginning to shrink amid improvements
in energy efficiency and as consumers switch to alternative fuels, outweighing
expanding populations and economic growth.
If U.S. shale oil production peaks before demand does, the world will have
to go back to higher cost oil production, such as deepwater and Canadian oil
sands, necessitating higher prices to justify investment. In previous super-cycles
in the 1970s and 2000s, inflation-adjusted oil prices rose about tenfold, Bernstein
said.
In the long run, oil demand will peter out to about 20 million barrels a
day by 2100 as the world becomes more energy efficient and switches to lower-carbon
energy sources. As that happens, the intensity of oil decreases and economic
growth no longer creates crude demand growth.
Lenders including JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. are slashing
credit lines for struggling energy companies. It's a tacit acknowledgment that energy prices aren't
coming back, and represents an abrupt turnaround from last year when banks were lenient on struggling
drillers in the hope that better times were coming.
Since the start of 2016 lenders have yanked $5.6 billion of credit from 36 oil and gas producers,
a reduction of 12 percent, making this the most severe retreat since crude began tumbling in mid-2014,
according to data compiled by Bloomberg.
And it isn't over yet. Banks are in the middle of a twice-yearly review of energy loans, where
they decide how much credit they are willing to extend to junk-rated companies based on the value
of their oil and gas reserves. With crude hovering near $40 a barrel, drillers' assets are worth
far less than they were two years ago.
Banks are cutting their oil and gas exposure in part because they are facing pressure from
regulators and investors to rein in risk.
"The banks are walking a tightrope," said Spencer Cutter, a credit analyst with Bloomberg Intelligence.
"They don't want to push the companies into bankruptcy, but on the other hand they're getting
a lot of heat from regulators and investors. They can't keep kicking the can down the road like
they did last year."
A bank that denies credit to a company could find itself liable for damage to the borrower,
said David Feldman, a restructuring lawyer at Gibson Dunn & Crutcher LLP.
"Lenders are very torn because it's a difficult call," Feldman said.
Borrowers are feeling the pinch. At least 15 companies have seen their credit lines cut, including
Whiting Petroleum Corp., Rex Energy Corp., and Halcon Resources Corp. Goodrich Petroleum Corp.'s
lenders cut its credit line in January to $40.3 million from $75 million, limiting how much the
cash-starved company could draw. The oil and gas driller gave creditors until May 6 to vote on
a reorganization plan.
Last month, in exchange for waiving Energy XXI Ltd.'s loan covenants, lenders led by Wells
Fargo cut the company's credit line to $377.7 million, the amount the oil producer had already
borrowed under what had been a $500 million facility. The lenders also required Energy XXI to
cash out its oil hedges and use the money to pay down the loan, according to Securities and Exchange
Commission filings.
Banks are setting aside more money to cover losses on energy loans. Wells Fargo, which had
$17.4 billion in outstanding oil and gas loans at the end of 2015, set aside $1.2 billion to cover
potential losses. JPMorgan, which had $14 billion in outstanding oil and gas loans, said in a
February presentation that it will boost its energy loan loss reserves to $1.3 billion in the
first quarter, a $500 million increase from the end of the year.
Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America and Citigroup could need an additional
$9 billion to cover souring oil and gas loans in the worst-case scenario, Moody's Investors Service
said in an April 7 report. Still, the lenders would be able to absorb such losses out of one quarter's
earnings.
Thanks AlexS, great article. I think this comes under the general heading of closing the barn
door after the cows are gone. Which is normal operating procedure for banks. I laugh at the idea
that banks are walking a tightrope. Of course they are - they built the tightrope and jumped onto
it happily. The only question for the banks at this point is how do you unwind this thing without
killing it, and themselves, in the process.
Oil traders see the bottom for crude prices. After nearly two years of a down
market, oil traders are growing confident that we have passed the low point. "The down market is
behind us," Torbjorn Tornqvist, CEO of Gunvor Group Ltd.,
said on Tuesday at the FT Global Commodities Summit in Lausanne. "It is the beginning of the
end of that for sure." Although there will be a lot of volatility for quite a while, Tornqvist
said that "from here on, the trend is up." The CEO of Trafigura Jeremy Weir
echoed that sentiment at the commodities summit. "I believe we've seen the bottom unless there is
some sort of catastrophic situation political or otherwise," he said. Glencore's (LON:
GLEN) top executive was a little more cautious, arguing that a rebound would not be
quick because of the large stockpiles of oil that need to be worked through.
... ... ...
U.S. banks hit by energy. Major U.S. banks are set to report earnings this
week, and many are facing regulatory pressure from the Federal Reserve, the Federal Deposit
Insurance Corporation and the Office of the Comptroller of the Currency to reduce their exposure
to risky energy companies. Most banks insist that energy is a small part of their portfolio, but
the FT
reports that the banks' trading and investment banking units could report their worst quarter
since the financial crisis in 2009, although much of that is likely due to turmoil in global
financial markets. Still, credit re-determinations are wrapping up, and many analysts expect cuts
of 15 to 20 percent on average to the credit line for oil and gas companies.
"... Researchers at Bernstein expect global oil demand to increase at a mean annual rate of 1.4 percent between 2016 and 2020, compared with annual growth of 1.1 percent over the past decade. ..."
Researchers at Bernstein expect global oil demand to increase at a mean annual rate of 1.4
percent between 2016 and 2020, compared with annual growth of 1.1 percent over the past decade.
"We expect oil markets to rebalance by the end of 2016. This will allow prices to recover towards
the marginal cost of $60 per barrel," Bernstein said, adding that it expects global demand to
reach 101.1 million bpd by 2020, from the current 94.6 million bpd.
"... Producers are not just shrinking production; they are also laying off staff in the thousands. Over the short-term, this will help them, or at least some of them, to survive. In the medium-term, however, production curbs and layoffs will benefit the energy industry in another way: it will make them temporarily less capable of responding to the growing demand for oil and gas. ..."
"... A report from Bernstein puts the mean growth rate for oil demand at 1.4 percent annually for the next five years, up from 1.1 percent for the last decade. The International Energy Agency expects average annual demand growth of 1.3 percent, much of which will come from non-OECD economies. ..."
There's not much money in new well drilling these days. In fact, the latest
figures from the American Petroleum Institute (API) reveal a 70 percent annual decline in new
natural gas well completions along with a staggering 90 percent drop in new oil wells as of the start
of April.
The drop hardly comes as a surprise, especially in the light of the continual
reduction in active drilling rigs across the U.S. as
reported on a
weekly basis by Baker Hughes.
As of April 8, there were 354 active oil rigs-8 fewer than the week before, and 406 fewer than
a year ago. The number of active gas rigs was 89, down from 225 on April 8, 2016.
Given the low oil and gas prices that have pushed many energy firms to the brink of bankruptcy,
these developments were only to be expected, although they are certainly worrying with regard to
the resilience of some players in the sector. Yet, gloomy as the news seems, its implications for
the future are rather positive.
Prices of crude oil and natural gas are at multi-year lows. Producers are not just shrinking
production; they are also laying off staff in the thousands. Over the short-term, this will help
them, or at least some of them, to survive. In the medium-term, however, production curbs and layoffs
will benefit the energy industry in another way: it will make them temporarily less capable of responding
to the growing demand for oil and gas. And demand will grow.
A report from Bernstein puts the mean growth rate for
oil demand at 1.4 percent
annually for the next five years, up from 1.1 percent for the last decade. The International Energy
Agency expects average annual demand growth of 1.3 percent, much of which will come from non-OECD
economies.
The U.S. saw oil production fall by 14,000 barrels last week. The U.S. oil industry has posted
consistent declines in recent months, and while the weekly data from the EIA is sometimes inaccurate,
the best guess is that the U.S. is producing 9.008 million barrels per day right now. While it could
take weeks or months to know conclusively, the U.S. could be about to drop below the key threshold
of 9 million barrels per day in oil production.
... ... ...
A massive fire hit ExxonMobil's (NYSE: XOM) refinery in Baytown, Texas on April 7, spewing black
smoke into the air. The fire was extinguished and there were no injuries reported.
Oilprice.com: The IEA has been accused of overestimating global supplies. The WSJ says that
somewhere around 800,000 barrels per day are unaccounted for, meaning they are not consumed nor
have they ended up in storage. Are these "missing" barrels a big deal?
Mike Rothman: The issue has not been one of the IEA over-estimating supply, but rather
under-estimating demand. There are basically two ways to arrive at figures for global oil demand.
The IEA methodology is built on an estimate of GDP and an assumed ratio of oil demand growth to
GDP growth.
... ... ...
OP: The oil industry is making massive cuts in investment. Should we be bracing ourselves
for a price shock at some point in time? If yes when do you see this occurring?
MR: You cannot cut CAPEX and reduce upstream activity and somehow think future production growth
goes unaffected. We forecast non-OPEC supply to contract this year for the first time since 2008.
That was a way-out-of-consensus call to make a year-ago when most pundits vigorously argued
non-OPEC production would still expand even with the drop in oil prices. What we've communicated
to our clients and those we deal with directly in OPEC is that the spike down in oil prices
is basically setting up an eventual spike up.
OP: Will bankruptcies in the U.S. shale industry do anything to balance the market?
MR: We expect that it will feed into the contraction we forecast for U.S. output. We also see the
credit availability issue as likely being a limiting factor moving forward, sort of like what we
saw in 1986 and then again in 1999.
... ... ...
OP: Lenders to the oil and gas industry have been fairly lenient with companies. Do you
believe that the banks will start to tighten the screws a bit more as the periodic credit
redetermination period finishes up?
MR: The old joke is that bankers are the guys who will lend you an umbrella and then ask to have
it returned as soon as it starts to rain. Yes, we think lending will become much more highly
scrutinized and financing less readily available.
"... What's critical to note is how the media, and surprisingly most analysts, see global oil merely through the prism of U.S. independent shale players. To me, this is the critical grave mistake they make. Recent lease outcomes in the Gulf of Mexico, problems in Brazil and the likely end of spending for all new Russian oil projects are just a few of the other gargantuan gaps in global production we're likely to see after 2016. ..."
"... the shale players, even with their low well drilling costs and backlog of 'drilled but uncompleted wells' (DUCs) cannot in any way repeat their frantic production increases they achieved from 2012-2014 ever again. I believe this because of financing constraints and the lack of quality acreage among other reasons but I don't have to even "win" this predictive argument. ..."
"... Chevron estimated in 2013 that oil companies would have to spend a minimum of $7-10 trillion dollars to 2030 to merely keep up with demand growth and the natural decline of current wells. And this was without factoring in the drop in exploration spending that is occurring now and throughout the next two years. Severe capex cuts from virtually every oil company and state-run producer over the last two years has put this necessary spending budget way behind schedule. ..."
"... You can see why I tend to have a much more radical view of the decline line in production beginning in late 2016 and lasting, in my view, at least until the middle of 2018, when production again only begins to get the funding (and time) it needs to try and "catch up". ..."
...most analysts agree that the sharp drop in Capex budgets, not just among shale producers, will
have its effect on sharply lowering production this year and putting growth in reverse, efficiencies
and well cost reductions notwithstanding. What's critical to note is how the media, and surprisingly
most analysts, see global oil merely through the prism of U.S. independent shale players. To me,
this is the critical grave mistake they make. Recent lease outcomes in the Gulf of Mexico, problems
in Brazil and the likely end of spending for all new Russian oil projects are just a few of the other
gargantuan gaps in global production we're likely to see after 2016.
... ... ...
While the EIA and most other analysts agree that sharp capex drops will begin to have their halting
effects on oil production, they tend to argue over when those production drops come and how steep
they will be. In all cases, they argue that any drop in production will be answered by a rally in
oil prices, to the degree that U.S. shale players again 'turn on the spigots' and reestablish the
gluts that have kept us under $50 a barrel for most of the last year. In this scenario, production
never or at least exceedingly slowly rebalances to match demand.
I see it much differently. I could argue that the shale players, even with their low well drilling
costs and backlog of 'drilled but uncompleted wells' (DUCs) cannot in any way repeat their frantic
production increases they achieved from 2012-2014 ever again. I believe this because of financing
constraints and the lack of quality acreage among other reasons but I don't have to even "win"
this predictive argument.
Longer-term projects from virtually all other conventional and non-conventional sources that have
not been funded for the past two years will see their results, in that there won't be the oil from
them that was planned upon. Chevron estimated in 2013 that oil companies would have to spend
a minimum of $7-10 trillion dollars to 2030 to merely keep up with demand growth and the natural
decline of current wells. And this was without factoring in the drop in exploration spending that
is occurring now and throughout the next two years. Severe capex cuts from virtually every oil company
and state-run producer over the last two years has put this necessary spending budget way behind
schedule.
You can see why I tend to have a much more radical view of the decline line in production beginning
in late 2016 and lasting, in my view, at least until the middle of 2018, when production again only
begins to get the funding (and time) it needs to try and "catch up".
Interesting post. Presumably "Expectations" = Crude Oil Futures
Contracts. If so, who controls the price of Oil futures contracts and made
the decision to throw the Bakken under the bus, along with more than a few
sovereign nations who rely to a significant degree on oil exports
economically and to maintain domestic political stability?
Role of demand suppression from high levels of consumer debt, China's
economic slowdown, ongoing fallout from the 2008 financial collapse,
neoliberal government austerity policies, improvement in energy efficiency,
emergence of renewables, and other factors were understated here IMO.
In the past here has also been a variable time lag between low oil prices
and rising levels of economic activity.
But maybe this development is overall not such a bad thing given global
warming considerations.
CG, I was thinking something similar, that "expectations" is the
euphemism for speculation in the futures markets, which, as most know
from this site, is now dominated by investor-speculators. The model they
used refers to Killian who is one of the handful of academics who try to
refute anyone who argues speculators have influenced oil (and other
commodity) prices.
My own take (anyone interested can read it
here) is there was a series of bubbles generated from the futures
market that created the belief higher oil prices were here to stay.
Noted your article was written before the Central Banks-Primary
Dealer cartel renewed pumping equities on February 11 IMHO. Jury is
out on whether they've jumped the shark. Also, whether they care.
'The observed drop in oil prices should have a slightly positive
impact on the EU economy.'
Probably true. But likely there's a "J-curve effect."
That is, the initial deflationary shock hikes corporate bond spreads
(driven by the energy sector) and feeds recession fears. Such fears
encourage investors to seek the safe haven of government bonds, at the
expense of stocks and credit bonds.
Later as confidence returns, the beneficial effect of lower energy costs
(including bolstered consumer demand) can actually be realized.
Arguably, Jan-Feb 2016 constituted the bottom of the "J." We'll see.
"... there is one thing I do know, that is if oil prices remain in the region of $39 a barrel then production will definitely continue to fall and fall rather dramatically. And that is not just in the USA but around the world. ..."
"... A prolonged price of $39 dollars a barrel would be devastating for the oil industry. ..."
"... they will have to rise to a lot higher than $39 a barrel, or even $50 a barrel. $50 a barrel will not be high enough to cause world production to start to increase again. ..."
"... That is because oil at above $100 a barrel did not cause oil in the rest of the world, outside the US and Canada to increase in the last five years. Well, that is outside of OPEC. OPEC, or Persian Gulf OPEC, is another matter. That is because politics come into play here and not just geology. ..."
"... I would be surprised if we had not reached $100/b by then unless there is a severe global recession between 2016 an 2018. ..."
WTI averaged $30/b for the month of February. Do you believe oil prices will remain under $40/b
for the remainder of 2016? I do not. Output will fall by 700 kb/d in the US to 8450 kb/d by the
end of the year and oil prices will rise, to $50/b or more in my opinion.
Dennis, I have no idea where oil prices will remain for the remainder of 2016. But there is
one thing I do know, that is if oil prices remain in the region of $39 a barrel then production
will definitely continue to fall and fall rather dramatically. And that is not just in the USA
but around the world.
A prolonged price of $39 dollars a barrel would be devastating for the oil industry.
Yes, I do believe oil prices will rise. But they will have to rise to a lot higher than
$39 a barrel, or even $50 a barrel. $50 a barrel will not be high enough to cause world production
to start to increase again.
Any increase in production caused by an increase in price to above $50 a barrel would have
to come from the US and Canada. That is because oil at above $100 a barrel did not cause oil
in the rest of the world, outside the US and Canada to increase in the last five years. Well,
that is outside of OPEC. OPEC, or Persian Gulf OPEC, is another matter. That is because politics
come into play here and not just geology.
I agree, $39/b will not cause the decline in output to stop, but my guess is that the decline
would be faster at $30/b than at $40/b and faster at $40/b than it would be at $50/b. In fact
at $50/b the decline might stop eventually, but I agree with Guy who suggested $60/b will be needed
to get drilling to increase and probably more like $80/b for 6 months before any noticeable increase
in US and Canadian output. That might not occur until 2018, it will depend on the World economy
and demand for oil. I would be surprised if we had not reached $100/b by then unless there
is a severe global recession between 2016 an 2018.
"... Any forecasts of oil (and gas) demand/supplies and oil price trajectories are NOT very helpful if they do not incorporate forecasts for changes to total global credit/debt, interest rates and developments to consumers'/societies' affordability. ..."
Any forecasts of oil (and gas) demand/supplies and oil price trajectories are NOT very
helpful if they do not incorporate forecasts for changes to total global credit/debt, interest rates
and developments to consumers'/societies' affordability.
The permanence of the global supply overhang could be prolonged if consumption/demand developments
soften/weakens and it is not possible to rule out a near term decline.
Recent demand/consumption data for total US petroleum products supplied show signs of saturation
which provides headwinds for any upwards movements in the oil price.
While prices were high many oil companies went deeper into debt in a bid to increase production
of costlier oil. Many responded to the price collapse with attempts to sustain/grow production
in efforts to moderate cash flow declines and thus ease debt service.
If the forward [futures] curve moves from a present weak contango (ref also figure
02) to backwardation, this would erode support for the oil price.
Some suggest that growth from India will take over as China's growth slows.
Looking at the data from the Bank for International Settlements (BIS) there is nothing there that
now suggests India (refer also figure 05) has started to accelerate its debt expansion.
The Indian Rupee has depreciated versus the US dollar, thus offsetting some of the stimulative
consumption effects from a lower oil price.
The recent weeks oil price volatility has likely been influenced by several factors like short
squeezes, rumors and fluid sentiments.
Near term factors that likely will move the oil price higher.
Continued growth in debt primarily in China and the US. {This will go on until
it cannot!}
Another round with concerted efforts of the major central banks with lower interest rates
and quantitative easing.
"... Your prediction looks sensible to me. A few years with oil prices below $70/b will reduce supply, let's say until 2018, then maybe by 2019 oil prices rise to $100/b or more, if they remained under $125/b for 5 years (and more than $100/b) the World might be able to muddle along at slow growth of 1% to 2%, but that scenario does seem far fetched. ..."
Loooong is less than 100 years, but several years. Several years
with oil prices, say below $70/b, will affect the supply side.
In this context a sustained oil price [$100+/b] lasts more than 5
years.
Sorry, I think it is difficult to be more precise as everything
increasingly now seems to become fluid.
I appreciate your answer, that clarifies your statement
a lot. I agree predictions in this environment are difficult,
yours would be much better than mine, in my opinion.
Your prediction looks sensible to me. A few years with
oil prices below $70/b will reduce supply, let's say until 2018,
then maybe by 2019 oil prices rise to $100/b or more, if they
remained under $125/b for 5 years (and more than $100/b) the
World might be able to muddle along at slow growth of 1% to 2%,
but that scenario does seem far fetched.
More likely is a spike in oil prices by 2022 or sooner to
over $150/b (2016$) and then a severe recession within a year or
two which will bring oil prices below $100/b.
This may not be what you have in mind, but it roughly matches
a few years under $100/b and less than 5 years at more than
$100/b and seems moderately plausible, at least to me.
Lenders to the oil and gas industry have been extraordinarily lenient
amid the worst downturn in decades,
allowing indebted companies
to survive a little while longer in hopes of a rebound in oil prices. But
the screws are set to tighten just a bit more as the periodic credit
redetermination period finishes up.
Banks reassess their credit lines to oil and gas firms twice a year,
once in the spring and once in the fall. While the lending arrangements
vary from bank to bank and from borrower to borrower, lenders largely
punted
on both redetermination periods last year, providing a grace
period for drillers to wait out the bust in prices. But oil prices have
not rebounded much since the original crash in late 2014.
Time could run out for companies that have been hanging on by
a thread.
Debt was not seen as a big problem in the past, as triple-digit oil
prices had both lenders and borrowers eager to see drilling accelerate
and spread to new frontiers. Indeed, debt rose even when oil prices
exceeded $100 per barrel. According to The Wall Street Journal,
the
net debt
of publically-listed global oil and gas companies grew
threefold over the past decade
, hitting a high of $549 billion
last year. In fact, debt accumulated in the sector at a faster rate
between 2012 and 2015 a period when oil prices were exceptionally high
than in previous years.
With oil prices down more than 60 percent from the 2014 peak, piling
on ever more debt to a loss-making operation looks increasingly
untenable.
Distressed energy loans loans in danger of default
account for
more than half
of the energy portfolio at several major banks.
"When oil was at $100 a barrel, debt was easy to get," Simon Thomson,
CEO of Cairn Energy, told the WSJ in an interview.
"What
we're seeing today is a number of people suffering the hangover of having
secured that debt and now possibly having trouble servicing it."
About 51 oil and gas companies from North America have filed for
bankruptcy since early 2015, but there are 175 more that are in danger of
not being able to meet debt payments. For context, 62 oil and gas
companies fell into bankruptcy during the financial crisis in 2008 and
2009.
Companies struggling with debt payments and shrinking revenue could
see the taps shut off or at least reduced.
Some analysts see cuts
to credit lines on the order of 20 to 30 percent.
Whiting Petroleum, for instance,
announced
in early March that its credit line would be slashed by
more than $1 billion, a reduction that could be one of the industry's
largest. Whiting had a $2.7 billion loan revolver at the end of 2015, and
the company's CEO expects to have "at least $1.5 billion" left after this
spring redetermination.
Regulators are also pressing banks for more scrutiny, and lenders are
increasingly using the metric of classifying loans to companies with debt
exceeding four times EBITDA as "substandard" or lower. According to
Oil & Gas 360
,
banks are moving loans with a debt-to-EBITDA
ratio exceeding 4x to their workout units.
"This has the makings of a gigantic funding crisis,"
the head of Deloitte's restructuring department, William Snyder, told the
WSJ.
Oil & Gas 360 says that banks are also marketing their troubled debt
to hedge funds, marking down distressed debt to cents on the dollars.
Hedge funds could buy up discounted debt in hopes of repayment.
Meanwhile, although the credit markets are squeezing drillers,
equity markets remain open, at least to some.
Reuters
reported
last week that about 15 companies have announced new equity
offerings in 2016, and most have not been adversely impacted. Most of the
15 companies issuing new stock have performed better than an oil and gas
producer index by about 3 percent on average. Of course, only relatively
strong firms have decided that the equity markets would be open to them.
Around $10 billion in fresh equity has been issued so far this year.
The credit redeterminations are currently wrapping up and the
details of many of them could soon be released.
The deeper banks
cut their credit facilities, the more likely struggling oil and gas
companies could be forced into bankruptcy.
So basically Yellen is behind the scenes sucking off bankers to
hold off on O&G companies. I'm guessing we will get some sort of QE
plan starting by June whereby the FRB will buy up the loans off the
banks books. It has to be soon as mark-to-market is actually going to
be implimented again...well until TPTB find out how shitty the books
and market are, then be promptly suspended again.
Any good insider sources for bank lending exposure in O&G? I have a
good friend at a major bank who swears most of the majors have
syndicated or otherwise laid off almost all of their risk.
Just another demonstration of the failures of "free market"
economics. Sound companies MUST borrow as much as they can get their
hands on, in order to withstand competitors who borrow and spend on
rapid growth. He who lags last, no matter how sound his management,
is eliminated from the competition by those who get bigger feeding on
funny money. Then the funny money goes away and the entire industry
collapses. Big Banking eventually destroys any industry they touch,
but it's always blamed on wayward executives and mismanagement. In
fact the system forces management to make decisions which are
guaranteed to be unsound in the long term, in order to assure
short-term survival (and the size of their own retirement funds for
when it all goes bust).
Strict banking regulation is a NECESSARY component of any
large-scale market, as nations from ancient Babylon to Ancien Regime
France have proven, each in their own ways. It's not optional;
failure to keep bankers in their places leads to economic collapse
each and every time it's tried, while well-regulated nations such as
Ptolomaic Egypt or Tokugawa Japan are stable and prosperous.
The collapse in oil prices has demolished investment in new projects,
the results of which will be felt in the 2018 to 2021 timeframe, due to
multiyear lead times
Oil production in the UK actually
increased a bit in 2015, after about two decades of steady declines.
The additional 100,000 barrels per day came from new offshore oil projects
that were initiated in 2012 when oil prices were much higher, plus extra
oil squeezed out from existing fields.
The collapse in oil prices has demolished investment in new projects,
the results of which will be felt in the 2018 to 2021 timeframe, due to
multiyear lead times. The number of new projects greenlighted in 2015 was
less than half of the level seen in 2013 and 2014.
As a result, beginning in 2018, the UK could see more severe production
declines.
Oil prices have hovered at $40 per barrel for much of the last week, as the
markets try to avoid falling back after the strong rally since February.
Investors
see shale production falling and demand continuing to rise, which point to the
ongoing oil market balancing.
But it is unclear at this point if the rally from
$27 per barrel in February to today's price just below $40 per barrel is here
to stay. Fundamentals, while trending in the right direction, are still weak.
Short sellers have begun
targeting Texas banks with ties to the energy industry, betting that damaged oil and gas
drillers will impair their lenders as well. Short bets on regional banks in Texas increased by 35
percent so far this year. Energy loans typically make up only a small portion of most banks'
lending portfolio. But for banks where energy makes up more than 4 percent of their portfolio,
their share prices have plunged more than 22 percent.
"... "There is a clear risk for a pull-back in Brent crude oil with a return to deeper contango again. Long positioning in Brent is at record high and vulnerable for a bearish repositioning." ..."
"... Barclays said in a note on Monday net flows into commodities totaled more than $20 billion in January-February, the strongest start to a year since 2011, and prices could fall 20 to 25 percent if that were reversed. ..."
OPEC and other major suppliers, including Russia, are to meet on April 17 in Doha to discuss
an output freeze aimed at bolstering prices.
But with ballooning global inventories, signs some OPEC members are losing market share, plus
little evidence of a strong pick-up in demand, analysts said oil is likely to trade in a range.
"There is a rebalancing on the way, but we are still running a surplus and stocks are building up
as far as we can see," SEB commodities analyst Bjarne Schieldrop said.
"There is a clear risk for a pull-back in Brent crude oil with a return to deeper contango
again. Long positioning in Brent is at record high and vulnerable for a bearish repositioning."
Data on Monday from the InterContinental Exchange showed speculators hold the largest net long
position in Brent futures on record. [O/ICE]
U.S. commercial crude oil stockpiles were expected to have reached record highs for a seventh
straight week, while refined product inventories likely fell, a preliminary Reuters survey showed
late on Monday.
Barclays said in a note on Monday net flows into commodities totaled more than $20 billion in
January-February, the strongest start to a year since 2011, and prices could fall 20 to 25
percent if that were reversed.
While the recent surge of oil seems to have run into a wall at $40, one thing seems to be in
place. The market lows appear to have been put in with the drop into the mid-$20s and subsequent
bounce back, and at least one top firm we cover here at 24/7 Wall St. thinks the low for the
cycle is in.
A new Jefferies research note says that for the first time in history global capital expenditures
in the energy industry will have fallen for two consecutive years. In addition, a combination of
demand growth and non-OPEC production declines could very well set the stage for a $50 price
handle by the end of this year.
Bad energy debt to exceed good energy debt. The number of
energy loans that are in danger of default could jump above 50 percent this year, according to The
Wall Street Journal, presenting some problems for several major banks. Lenders are starting to back
away from new loans, declining to renew credit, and selling off bad debt. That could slash the available
credit lines for some struggling oil and gas producers this year, potentially raising some liquidity
pressure on E&P companies. (Coming to the Oil Patch: Bad Loans to Outnumber the Good
)
An estimated 51 oil and gas companies have fallen into bankruptcy since
early 2015. The periodic credit redetermination period is coming up, which could result in credit
lines offered to energy companies being reduced by 20 to 30 percent. The total debt in the entire
oil and gas sector hit $3 trillion in 2014, or about three times higher than 2006 levels.
... ... ...
Oil
industry still able to access capital. Despite posting record losses in potentially seeing
credit lines cut, several oil companies have returned to the equity markets, where they are still
being welcomed with open arms. Reuters reports that at least 15 oil companies have
announced
new offerings in 2016, with minimal damage to their share prices. The companies surveyed have
outperformed an oil and producers index by 3 percent on average.
But another way of looking at that statistic is that only well-positioned companies have issued
new stock.
Companies like Pioneer Natural Resources (NYSE: PXD), Callon Petroleum Co (NYSE: CPE),
and Oasis Petroleum (NYSE: OAS) have performed better than some of their peers since announcing new
stock offerings. Shareholders seem willing to provide companies with new cash infusions.
"People
would rather they have money in their pocket and survive," Irene Haas, analyst at Wunderlich Securities,
told Reuters. "They'll worry about dilution later." U.S. oil and gas exploration companies have issued
a combined $10 billion in new equity this year.
"... That should give some thoughts to shale enthusiasts. In 2020 the shale industry has to pay back over USD 200 bn. The total revenue is currently less than 100 bn per year. Even if the industry can roll over debt, how will it get more debt for new production in 2020? ..."
"... Still this is "too late to drink mineral water to cure your liver, damaged by binge drinking" type of the situation. ..."
That should give some thoughts to shale enthusiasts. In 2020 the shale industry has to
pay back over USD 200 bn. The total revenue is currently less than 100 bn per year. Even if the
industry can roll over debt, how will it get more debt for new production in 2020?
@ Dennis,
I was out in the woods last weekend, so I didn't have the opportunity to respond to your questions
in last Ronpost.
Dennis: "if you think that LTO output of 4.5 Mb/d can go to zero and OPEC, Canada, and Russia
can make up that difference, I believe you are incorrect."
I believe LTO output of 4.5 Mb/d will go to (nearly) zero rather soon (5 or 6 years, so 2021 or
2022), but I do not believe OPEC, Canada and Russia can make up that difference.
"Is that your assumption? Do you believe OPEC will fill that 4.5 Mb/d gap"
No. My assumption is that gap will not be filled. My assumption is the world will encounter Peak
Oil very soon (if not yet).
"What are your assumptions about the future price of oil?"
That's a tough one. Despite the model provided above by Ian Schindler. Let me take a wild guess:
WTI in the $70-$80 range by december 2016. $110 by mid 2017 followed by another collapse of the
price, due to real problems in China or India.
"Do you think the Brent oil price will be $35/b in Dec 2016 (STEO forecast)?"
See above: Brent versus WTI will vary within a 15% margin from eachother mayby Brent being the
cheaper one during 2016. (If you ask why?: This is just gut feeling.)
Thank you for your input. Very interesting considerations, that actually correlate with my
own thoughts on the subject. Especially possible return to recession in the second half of 2017
. I also feel that Brent might be very close to WTI from now on. Lifting export ban eliminated
premium. Unless "artificial WTI" shipments spoil the broth.
One question. If we assume that is the return to recession in the second half 2017, will it
necessary cause another collapse in oil prices; or may be downturn in oil prices will be more
muted ?
One feature of the return to recession is the collapse of junk bond market, which makes financing
of both shale and oil sands more difficult. And it typically happens before the actual economic
downturn. That will make ramping up shale oil production in 2017 extremely challenging. High oil
prices will be only of limited help, as there is no return to "good old days" of Ponzi financing
of shale.
Even speculative financing (revolving credit, aka evergreen loans) is already under threat
and will remain in this condition for the foreseeble future.
So shale players might have no money to re-start "carpet drilling" again.
I think difficult days are coming for US shale/LTO players and even temporary return to above
$100 price range might not restore previous financing bonanza for them - with enough financial
thrust you can make pigs fly, but you better do not stand in the place where they are going to
land.
Of course they may be propped by the next administration for strategic reasons. Who knows
I don't know. Really. I'm just trying to get grip on things like most of us. I't been a tough
day in here in Belgium today. A lot of game changers might come to surface very soon. I mean very
soon.
This is not investment advice, but I think both of you are correct.
I've been working from an old Deutsche Bank analysis which expects big swings in the price
of oil. The high prices cause demand to drop and the low prices prevent exploration from happening.
Result: total oil production declines continuously.
Citing the "dramatic decline in oil prices, the continued low prices of oil and natural gas,
and the general uncertainty in the energy markets," another Denver energy company has filed for
bankruptcy protection.
Emerald Oil Inc. ( NYSE: EOX) said it's filed voluntary Chapter 11 petitions in the U.S.
Bankruptcy Court for the District of Delaware. Its oil and gas operations are located in the
Williston Basin of North Dakota and Montana.
... ... ...
Emerald headquarters are at 200 Columbine St. in Denver and the company has 42 employees,
according to YahooFinance.
It's the second Denver energy company bankruptcy filing this month: On March 18, Venoco Inc., an
oil and gas company focused on pumping oil in southern California, filed a voluntary petition for
Chapter 11 bankruptcy protection.
"... The contango, as the structure is known, narrowed to $5.82 on Monday, its lowest in almost nine months, and down nearly two thirds from about a month ago. ..."
"... Surely they don't. They think that the oil price rally is not sustainable, so they want to lock in prices in low $40s, for 2016 and $45-50 for 2017-18. ..."
"... Locking in through 2017 scores of wells completed in 2015 that will never payout. ..."
"... "locking in the high side at these levels also locks in a long period of little cash flow " Exactly. That's why I think they will hedge only a small part of their sales at current prices. According to IHS, as of the beginning of 2016, North American E&Ps have hedged just 14% of their total oil production volumes for 2016 and 2% for 2017. ..."
"... Sub $50 WTI simply doesn't work for US onshore lower 48 production to any significant scale. There is a big media disconnect between LOE and CAPEX. Although a broad generalization, the lower the current LOE, the newer the well and the higher the decline rate in the next year, etc. ..."
"... I have been looking at Q1 2016 earnings estimates for US E&P, as well as FY 2016 earnings estimates. Horrible. Two years in a row of record losses are coming, with year 2 worse than year 1. ..."
Struggling U.S. shale producers have scrambled to sell future output at their fastest pace in
about six months in recent weeks, curbing a rebound in prices and potentially prolonging the oil
market's worst rout in a generation, traders say. As spot prices of crude rallied almost 60 percent
from 12-year lows touched in mid-Feb, turnover in the long-dated oil contracts has soared to record
highs, as producers started to lock in prices in the $40s, traders have said. Turnover in the U.S.
crude contracts for December 2017 surged to record highs of over 30,000 lots this past Friday while
volumes in the December 2016 delivery touched an all-time high of nearly 94,000 lots. Combined, that equates to almost 125 million barrels of oil worth over $5 billion, a small portion
of overall daily volume in U.S. crude futures, but enough to catch traders' attention.
Now, brokers and traders say that has turned into execution, with some producers willing to hedge
in the high $30s or low $40s in 2016 and between $45-50 next year, levels that are just about breakeven
for many.
That is also below the $50 psychological threshold that many had thought would be necessary to
prompt producers to seek price protection, suggesting drillers have accepted a new reality of lower-for-longer
prices as
"The cost of production has declined to the point where at mid-40s they can hedge actively to
remain viable." Piling on hedges could prevent prices rallying through $45 a barrel while the extra
protection may delay further U.S. production cuts, seen as key to eroding the glut
The impact of the pickup in hedging activity was most conspicuous in longer dated oil contracts.
The 2017 WTI price strip has risen only about 15 percent over the past six weeks, much lower than
the prompt contract's gains, while the selling has almost erased the far forward contract's premium
over spot.
The contango, as the structure is known, narrowed to $5.82 on Monday, its lowest in almost
nine months, and down nearly two thirds from about a month ago.
John Saucer, vice president of research and analysis at Mobius Risk Group in Houston, said he
saw a "material" increase in producer hedging, with most action in this and next year's contracts,
but extending through the whole of 2018.
Lack of forward buying by major consumers, like the airlines, has also meant prices have not received
any boost as producers have been selling, adding to the pressure on prices.
To be sure, many hope for prices to go even higher.
"If prices recovered to that range north of $60, we'll be seriously considering hedging," billionaire
wildcatter Harold Hamm said on a conference call.
Do they really make money on these prices, since most of them where barely profitable at 100$+
oil?
Or do they just log in to make profit by pumping from their already drilled holes while ignoring
front load costs? If they would make money after hedging, why isn't there a new boom where everybody drills like
mad?
Surely they don't. They think that the oil price rally is not sustainable, so they want
to lock in prices in low $40s, for 2016 and $45-50 for 2017-18.
One wonders if much of the hedging is being required by banks.
Hedges at these levels likely locks in enough cash flow to pay LOE, taxes, G &A and interest.
However, locking in the high side at these levels also locks in a long period of little cash flow
for CAPEX and/or retiring debt principal.
An interesting exercise once the hedges are fully disclosed would be to insert the resulting
revenue number into cash inflows in the SEC 10K, and then calculating both undiscounted and discounted
future net cash flows.
Also, assume we have a Bakken well that produces 120,000 barrels after royalties, that was
completed 1/1/15 and has been hedged at an average price of $47 WTI for 2015-17.
A $7 discount puts us at $40. 10% severance puts us at $36.
Our $6-9 million well has only grossed $4.3 million in its first three years. Hedging at these
levels locks in many wells to no hope of payout, as we will likely need to subtract another $6-8
per barrel, or more for LOE and $2-3 more for G & A. Oh yes, and another $4-7 more per barrel
of interest expense.
Locking in through 2017 scores of wells completed in 2015 that will never payout.
Sub $50 WTI simply doesn't work for US onshore lower 48 production to any significant
scale. There is a big media disconnect between LOE and CAPEX. Although a broad generalization,
the lower the current LOE, the newer the well and the higher the decline rate in the next year,
etc.
For example, California Resources corporation has LOE around $20 per barrel, yet lower decline
rates, while US LTO is around $6-9 per barrel, but has high decline rates. Further, CRC LOE will
be more stable over time. Without addition of substantial new wells, US LTO LOE will surpass that
of companies like CRC in less than 5 years IMO.
Again, I am speaking in broad terms, each well is different from every other, and each varies
over time.
My view is Bakken wells producing under 1000 barrels net of royalties per month have LOE of
$15+ generally.
I do apologize for mixing up OPEX and LOE over the last year plus.
I guess OPEX includes royalties, lifting costs and severance taxes?
LOE is lifting and operating expense. Same is calculated on net barrels, after royalties are
paid. Expenses such as severance taxes, interest and general and administrative expenses are not
included in LOE.
Further, always be aware that LOE is calculated in BOE, so gas and NGLs are included. Gas is
on a 6 to 1 ratio with oil.
Many US LTO are touting reduced LOE, when the reality is the company wide gas to oil ratio
is increasing. One BOE of gas is selling for $6-10 at the well head right now.
CLR is a good example. Their gas to oil ratio has went from 30:70 to 40:60 in about three years.
So, part of the LOE per BOE is directly offset by lower realized per BOE prices. Further, gas
is usually cheaper to produce than oil on a BOE basis in the US, so this also must be factored
in.
I have been looking at Q1 2016 earnings estimates for US E&P, as well as FY 2016 earnings
estimates. Horrible. Two years in a row of record losses are coming, with year 2 worse than year
1.
That should give some thoughts to shale enthusiasts. In 2020 the shale industry has to pay
back over USD 200 bn. The total revenue is currently less than 100 bn per year. Even if the industry
can roll over debt, how will it get more debt for new production in 2020?
"... "Two things happened: we had high oil prices, and central banks had zero interest rates and quantitative easing policies," says Spencer Dale, the chief economist of BP, who formerly held that role at the Bank of England. "That was a potent mix." ..."
It was a classic bubble, says Philip Verleger, an energy economist. "It was irrational investment:
expecting prices to rise continually. Companies that borrowed heavily when prices were high are going
to have a very tough time."
...In June 2014, a barrel of Brent crude for 2020 delivery was $98. And central banks' post-crisis
monetary policies pushed investors towards riskier assets, including oil and gas companies' equity
and debt.
"Two things happened: we had high oil prices, and central banks had zero interest rates and quantitative
easing policies," says Spencer Dale, the chief economist of BP, who formerly held that role at the
Bank of England. "That was a potent mix."
From 2004 to 2013, annual capital spending by 18 of the world's largest oil
companies almost quadrupled, from $90bn to $356bn, according to Bloomberg data. The assumptions used
to justify that borrowing were fuelled by a textbook example of disruptive technological innovation:
the advances in
hydraulic fracturing and horizontal drilling that made it possible to produce oil and gas from
previously unyielding shales. The success of those techniques added more than 4m barrels a day to
US crude production between 2010 and 2015, creating a glut in world markets that has sent prices
down 65 per cent since the summer of 2014.
The expectations of sustained high prices have vanished: crude for 2020 delivery is $52 a barrel.
Oil is now back to where it was in 2004, but most of the debt that was taken on in the boom years
is still there.
In the US and Europe, banks have been quick to reassure shareholders that, while their losses
are mounting, they are entirely manageable. French banks account for four of the 10 banks with the
highest exposure. Crιdit Agricole, whose $29.8bn credit exposure to energy is the second highest
in Europe, has told investors that 84 per cent of the portfolio was investment grade. The disclosures
were largely effective in soothing fears about energy debt.
... "It's alarming that things are getting pulled forward so much," says Julie Solar, an analyst at
Fitch Ratings. "The pace of deterioration is coming quicker than what was previously disclosed."
... Since crude prices began to fall in the summer of 2014, investors in oil and gas companies
have lost more than $150bn in the value of their bonds, and more than $2tn in the value of their
equities, according to FT calculations.
... At Machinery Auctioneers, Mr Dickerson has been stocking up on cut-price oilfield equipment. He
bought four mobile sand containers used in fracking, with list prices of up to $275,000, for $17,000
apiece. When the industry recovers, he expects to sell them for up to $100,000 each. But before that
recovery comes there are likely to be plenty more bargains on his lots.
The state-owned Brazilian oil company announced that
it lost more than 36 billion reals in the fourth quarter, or USD$9.6 billion, a 40 percent
increase compared to the fourth quarter of 2014.
the company has enough cash flow from its operations to meet all of its obligations through
the end of 2017 at least, even if it fails to realize the planned $14 billion in asset sales.
"Even if we hit a road-bump we have sufficient cash through 2017," Bendine said. "This doesn't
mean if we have good opportunities to raise cash or lengthen maturities we won't do it."
"... From 2006 to 2014, the global oil and gas industry's debts almost tripled, from about $1.1tn to $3tn, according to the Bank for International Settlements. The smaller and midsized companies that led the US shale boom and large state-controlled groups in emerging economies were particularly enthusiastic about taking on additional debt. ..."
Distress in the oil and gas industry is acute . Many companies are being liquidated
or forced to cut to the bone:
About 600 people packed on to the Machinery Auctioneers lot on the outskirts of San Antonio,
Texas, last week to pick up some of the pieces shaken loose by the oil crash.
Trucks, trailers, earth movers and other machines used in the nearby Eagle Ford shale formation
were sold at rock-bottom prices. One lucky bargain hunter was able to pick up a flatbed truck
for moving drilling rigs - worth about $400,000 new - for just $65,000.
Since the decline in oil prices began in mid-2014, activity in the Eagle Ford, one of the heartlands
of the shale revolution, has slowed sharply. The number of rigs drilling for oil has dropped from
a peak of 214 to 37, and businesses, from small "mom and pop" service providers to venture capital
companies, are trying to offload unused equipment.
Terry Dickerson, Machinery Auctioneers' founder, says sales doubled last year, in part thanks
to the oil crash. Sellers are sometimes disappointed by low prices for oil-related assets, but
they have to accept reality, he says. "I feel like a funeral director," he adds. "I'm the one
that has to tell them the bad news."
Lenders went on a spree . While this is a notoriously cyclical industry, the
shale gas frenzy drew in a lot of newbies, particularly among investors. The fact that so many players
made heavy use of borrowings, with the Fed's negative real interest rate policies all too successfully
pushing lenders into risky assets, has amplified the damage. From the story:
From 2006 to 2014, the global oil and gas industry's debts almost tripled, from about $1.1tn to
$3tn, according to the Bank for International Settlements. The smaller and midsized companies that
led the US shale boom and large state-controlled groups in emerging economies were particularly enthusiastic
about taking on additional debt.
The hangover has only just begun :
Standard & Poor's, the credit rating agency, assesses oil companies based on an assumption
of an average crude price of $40 this year. On that basis, 40 per cent of the US production and
oilfield services companies it covers are rated B-minus or below. "B-minus is a very weak rating,"
says Thomas Watters of S&P. "You don't have a long lifeline."
Make no bones about it: a B- or worse means you are barely hanging on. To illustrate:
Linn Energy, one of the 20 largest US oil and gas producers, warned last week that it expected
to breach its debt covenants. It has net debts of $3.6bn, but only $1m in borrowing capacity.
Many US producers are now having their borrowing limits, which are based on the value of their
reserves, redetermined by their banks. The falling value of those reserves means loan facilities
will be cut back, leaving some companies without enough liquidity to stay afloat.
Even when companies can be restructured, lenders are taking big hits :
When oil and gas companies go into bankruptcy, there are often slim pickings for creditors.
Quicksilver Resources, a Texas-based gas producer, went into Chapter 11 bankruptcy protection
last year with about $2.4bn of debt. This year it announced sales of its US assets for just $245m,
and some of its Canadian assets for $79m. Its creditors are on course for losses of about $2bn.
Do the math. That's an 83% loss of principal. The story reassuringly points out that even bigger
amounts are at risk at national oil companies like PDVSA of Venezuela and Petrobras.
In a worrisome parallel to subprime risk before the crisis, investors are getting rattled by banks
increasing their forecasts of losses:
"It's alarming that things [bank loan loss estimates are getting pulled forward so much," says
Julie Solar, an analyst at Fitch Ratings. "The pace of deterioration is coming quicker than what
was previously disclosed."
Since crude prices began to fall in the summer of 2014, investors in oil and gas companies
have lost more than $150bn in the value of their bonds, and more than $2tn in the value of their
equities, according to FT calculations.
The grim reaper tone of the article suggests that things will get worse in energy-land before
they get better. The oil bust in 1980-1981, which was a regional affair in the US, was bloody and
took down pretty much all of the Texas banking industry. It's hard to know from this far a remove
what the trajectory will look like, particularly since even with things his visibly dire, the incumbents
all have strong incentives to make things appear less bad than they are. Any reader intelligence
would be very welcome.
craazyman ,
March 22, 2016 at 7:07 am
every real man wants to keep drilling until the money runs out. And if you can't keep drilling,
you have to find a new hole. That's what they say. Some holes cost more than others, but a real
man needs a hole. What does a man do now, when his hole is dry and he can't drill? Or if drilling
doesn't get him where it used to? Those were the days, when a man could drill around and have
it be good every time. Each real man has to face the day when just showing up with his drill doesn't
work anymore. He better hope the hole he has is good. And he better not have drilled on borrowed
cash, because once a hole is dry for a man there's no going back to the good times, that's for
sure.
My dad got stuck into KYN, a high yield energy-related MLP back in 2011 considered suitable
for IRAs.
The dividend got its first 16% haircut in Dec. The div was maintained in Q1 2016. But when I took
a cursory glance at the financial statements of the top five holdings that comprised 48% of this
MLP, this is what I uncovered:
Collectively, these 5 companies had a combined net income of ~40m and ended 2015 with 849m
in cash. One of these companies had a negative (~ -1.5b) net income. Collectively, they paid out
~13b in dividends in 2015. The funding of those 13b in dividends was largely accomplished through
~17b in financing activities, via issuing debt and selling stock. Needless to say, they are all
heavily in debt and the financing activities doesn't even address financing interest expenses
and the like.
The reason I mention the above is to cite the caption "companies have borrowed heavily to fund
their growth" in the EIA chart above as a gross mis-characterization. Their financing activities
were funding their dividends in 2015, and without access to the same funding channels in 2016,
not only will the divs l be zeroed out they will all be fighting for survival with little cash
cushion and little net income to see them through to another day.
Maybe we could use the high yield to buy Credit Default Swaps on the high-yield fund and retire
on those?
Peabody Energy is going tits-up. Similar story, gorged itself on roid's in the form of cheap
debt to fuel "growth" and now all of that bulk is pulling it down the drain. A -800% return on
the stock in last 4 years. Impressive. Almost 99 % yield on the unsecured bonds. Chapter 11 seems
to be priced in.
From what I've read, the investment arms of banks have been busy issuing new stocks and bonds
in energy companies with bad loans on the parent bank's books. The proceeds go to repay these
outstanding bank loans, mitigating some or all the damage banks face. What's left will be largely
unsecured loans that the banks could care less about since they belong to some other sucker. Of
course the stocks when issued have declined sharply in price thus burning shareholders as well.
It appears banks may have learned their lesson from previous meltdowns by farming out the losses.
"One lucky bargain hunter was able to pick up a flatbed truck for moving drilling rigs - worth
about $400,000 new - for just $65,000."
Lucky? @15 cents vs new? 86′ the bottom fishing was at 9% or less sold in many cases by the
pound
The First Liens of the Banks are seriously underwater especially in Canada. The surge in oil
prices and the associated refinancing of bonds and secondary stock offerings will get some high
profile company exposure off the books of the banks as they take the liquidity for a pay down
but the decline will last far beyond the momentary manipulation.
This exposure extends well beyond oil and gas to all natural resources worldwide in 86′ the
problem was isolated. The previous five years had interest rates for Treasuries north of 9%
in fact deep double digits by 85′ so the cancer of debt issuance was more limited for that reason
plus Junk Bonds 82′ to 85′ were in their market infancy and so were the Commercial Banks acceptance
since the Investment Banks were unrelated entities.
This debacle will prove the integrity of the principles of Glass Steagall between Commercial
and Investment Banking are absolutely necessary as the separation of Church and State.
Supposedly smart insiders like banks also caught the falling safe of the subprime market by
buying mortgage servicers in the supposed bottom of January 2007.
Everything in the FT piece is true, and it's a useful read. But there's a problem with the
timing. This thing is likely to go into the books alongside the famous Business Week cover story
on "The Death of Equities".
Two things about oil: First, the glut is not as big as you think. IMO games are being played
in effect painting the tape with big imports that show up in US storage (where the reporting
is most transparent) and are hyped by players with agendas. More important, there are 10 15
people in the world who can collectively decide within broad limits where oil should trade.
They can't put it back at $100 not right away, not this year but they can pop it $20 from
here with no trouble at all. That will happen soon, because they need it to.
If you're feeling lucky you can rummage through that pile of junk debt, and find yourself an
issuer that might not go bankrupt. Then buy the bonds not the stock.
If a man lives by drilling from bed to bed on borrowed cash, it's not likely to end well. A
real man knows when the holes runs dry to him and the cash is gone it's time to hit the road -
because the bed don't work no more.
If you're a man who lent money to a man who's hole's ran dry and has nowhere to drill, and
not even a bed, then it's time for you to look in the mirror and see the way a real man sees.
The way a cowboy looks at the blue sky, out from under the shade of his hat, and thinks about
God.
it means there'll be a lot of holes open to drills that still have cash to spend. If your drill
is tired, you can upgrade to a huge new drill and a truck for next to nothing and drive around
hoping to get lucky. But if you do, make sure it's a hole you want to live with, because it might
dry up on you and your drill may lose its juice. When it does, you won't want to hit the road
anymore. That's a game for a man with a drill that's just getting going.
At the very least, it means many people with high-paying jobs going on unemployment, a lot
of areas whose real estate prices rose seeing them fall, and a lot of loans not being made as
credit dries up as banks try to meet their reserve obligations as they write off the loses. At
worst, it means another round of bank bail-outs and even greater political anger and strife here
in the home of fracking, the good old US of A.
A wave of projects approved at the start of the decade, when oil traded near $100 a barrel, has
bolstered output for many producers, keeping cash flowing even as prices plummeted. Now, that production
boon is fading. In 2016, for the first time in years, drillers will add less oil from new fields
than they lose to natural decline in old ones.
About 3 million barrels a day will come from new projects this year, compared with 3.3 million
lost from established fields, according to Oslo-based Rystad Energy AS. By 2017, the decline will
outstrip new output by 1.2 million barrels as investment cuts made during the oil rout start to take
effect. That trend is expected to worsen.
"There will be some effect in 2018 and a very strong effect in 2020," said Per Magnus Nysveen,
Rystad's head of analysis, adding that the market will re-balance this year. "Global demand and supply
will balance very quickly because we're seeing extended decline from producing fields."
A lot of the new production is from deepwater fields that oil majors chose not to abandon after
making initial investments, Nysveen said in a phone interview.
... ... ...
Companies cut capital expenditure on oil and gas fields by 24 percent last year and will reduce
that by another 17 percent in 2016, according to the International Energy Agency. That's the first
time since 1986 that spending will fall in two consecutive years, the agency said Feb. 22.
"... According to Art Berman, during the 5 year period (2008-2012), Chesapeake, Southwestern, EOG, and Devon spent over 50 billion dollars more than they took in. Such a great profitability. ..."
The question that needs answering is what was the effect of cheap funding?
The LTO oil boom was the result of companies making a nice return at $100+ oil. At that price
range production increased at a rate of one million barrels a day for three years.
If the cost of funding was say 3 to 5% higher what would have been the results?
Companies would still be making money, and they would also be borrowing, but the amount borrowed
would have been lower.
At a lower amount of borrowing, production growth would not have been one million per year.
One estimate that growth would have been around 750 kbd.
So after three years, U.S. Production would have been 750 kbd lower than it was.
At that growth rate world production would have stayed in balance, prices would have stayed
in the $100 range, and the Saudis would not have ramped up production by 1 to 1.5 million a day.
So IMO the net effect of cheap money was to grow production more than the market could use
and then crash prices.
In either case, with or without cheap money, the LTO boom would still have happened.
I believe that $100 plus oil prices was the real fuel that fed the growth in LTO production.
At that price a very good ROR was made and fund were provided.
It was simply the situation in which Wall Street needed a place to dump money provided by Fed
and shale came quite handy.
According to Art Berman, during the 5 year period (2008-2012), Chesapeake, Southwestern, EOG,
and Devon spent over 50 billion dollars more than they took in. Such a great profitability.
Most of the companies you talked about are Nat gas production companies. We are talking about
LTO.
But Art only talked about what was spent. If you look at LTO what was gotten was in increase
in production of about 4 million barrels a day of production. That is a rate of 1,460, 000,000
barrels a year.
That generates sales at $100 oil of $146,000,000,000 per year.
Art Berman talked about what these companies have spent (capex) and what they got (operating cashflow).
During the whole period of the shale boom, shale companies' capex significantly exceeded their
operating cashflows.
That doesn't mean that all that cash was "burned". Operating cashflow is what they get from today's
sales. Capex is what is spent on tomorrow's production. Given that until recently production volumes
were rapidly increasing, that partly justified cash overspending.
"... Don't waste your time calculating something that is so fuzzy as breakeven price. Price of oil went up 55% in month and half? So demand went up that much? In middle of winter? :-) In the middle of "glut" and oil storages bursting from that overflow of oil? :-) Just like that with a snap of finger. ..."
"... There is a huge difference between daily price curve and average quarterly price curve. Using average price for a longer period instead of daily price helps to smooth abrupt price movements and allow models like presented above to look more reasonable. Think about price curve as the result of juxtaposing of several sinusoid waves with different periods like in Fourier transform. Using average for a longer period essentially filters waves with a short period. ..."
Daniel, Don't waste your time calculating something that is so fuzzy as breakeven price.
Price of oil went up 55% in month and half? So demand went up that much? In middle of winter?
:-) In the
middle of "glut" and oil storages bursting from that overflow of oil? :-) Just like that with
a snap of finger.
There is a huge difference between daily price curve and average quarterly price curve. Using
average price for a longer period instead of daily price helps to smooth abrupt price movements
and allow models like presented above to look more reasonable. Think about price curve as the
result of juxtaposing of several sinusoid waves with different periods like in Fourier transform.
Using average for a longer period essentially filters waves with a short period.
There was pretty long exchange between me and Alex on this subject some time ago that covered
those issues.
"... One question. If we assume the return to recession in the second half 2017, will it necessary cause another collapse in oil prices; or may be downturn in oil prices will be more muted ? ..."
"... I think difficult days are coming for US shale/LTO players and even temporary return to above $100 price range might not restore previous financing bonanza for them - with enough financial thrust you can make pigs fly, but you better do not stand in the place where they are going to land. ..."
@ Dennis,
I was out in the woods last weekend, so I didn't have the opportunity to respond to your questions
in last Ronpost.
Dennis: "if you think that LTO output of 4.5 Mb/d can go to zero and OPEC, Canada, and Russia
can make up that difference, I believe you are incorrect."
I believe LTO output of 4.5 Mb/d will go to (nearly) zero rather soon (5 or 6 years, so 2021 or
2022), but I do not believe OPEC, Canada and Russia can make up that difference.
"Is that your assumption? Do you believe OPEC will fill that 4.5 Mb/d gap"
No. My assumption is that gap will not be filled. My assumption is the world will encounter Peak
Oil very soon (if not yet).
"What are your assumptions about the future price of oil?"
That's a tough one. Despite the model provided above by Ian Schindler. Let me take a wild guess:
WTI in the $70-$80 range by december 2016. $110 by mid 2017 followed by another collapse of the
price, due to real problems in China or India.
"Do you think the Brent oil price will be $35/b in Dec 2016 (STEO forecast)?"
See above: Brent versus WTI will vary within a 15% margin from eachother mayby Brent being the
cheaper one during 2016. (If you ask why?: This is just gut feeling.)
Thank you for your input. Very interesting considerations, that actually correlate with my
own thoughts on the subject. Especially possible return to recession in the second half of 2017
. I also feel that Brent might be very close to WTI from now on. Lifting export ban eliminated
premium. Unless "artificial WTI" shipments spoil the broth.
One question. If we assume the return to recession in the second half 2017, will it necessary
cause another collapse in oil prices; or may be downturn in oil prices will be more muted ?
One feature of the return to recession is the collapse of junk bond market, which makes financing
of both shale and oil sands more difficult. And it typically happens before the actual economic
downturn. That will make ramping up shale oil production in 2017 extremely challenging. High oil
prices will be only of limited help, as there is no return to "good old days" of Ponzi financing
of shale.
Even speculative financing (revolving credit, aka evergreen loans) is already under threat
and will remain in this condition for the foreseeable future.
So shale players might have no money to re-start "carpet drilling" again.
I think difficult days are coming for US shale/LTO players and even temporary return to
above $100 price range might not restore previous financing bonanza for them - with enough financial
thrust you can make pigs fly, but you better do not stand in the place where they are going to
land.
Of course they may be propped by the next administration for strategic reasons. Who knows
"... The key factor here is that the amount of oil to replace natural depletion of existing wells that can be extracted at prices below $70 is low to compensate natural depletion. For example, despite all this buzz about rising efficiency of shale production, the US shale does not belong to this category. ..."
"... Low oil price regime started to show crack already in early 2016, when agreement to freeze production was first discussed. Essentially in plain English that is a message to oil importing countries "f*ck yourself". ..."
"... The next step will be agreement to limit production based on natural decline rates and low capex environment. The huge, paranoid level of fear of such an agreement is clearly visible now in MSM. And of course the US state department along with EU will do the best to crash such a possibility. ..."
"... In other words this shale/Saudi induced price crash just speeded up the day of reckoning by several years and will make the next spike of oil prices much closer and much higher. ..."
"... How long the oil prices can be suppressed by the threat of resumption of shale production remain to be seen, but if there will be a bounce in shale production at below $80 prices it will be a "dead cat bounce" and will not last long as if prices drop again all those guys who tried to anticipate higher price environment and started "carpet bombing", sorry, drilling, again will be swimming naked again. Shale is a Red Queen race in any case. That means that shale will add to amplitude of the oscillations of the oil prices and might somewhat prolong the agony, but can't prevent oil price rise to above $80 level. ..."
All I am sure that none of us know what will happen.
What do you mean? Here most posters are adherents of the peak oil hypothesis. If so, this is
a nonsense statement.
Bets when oil will , say, above $80 belong to the casino, but if trend is predicted right then
it is clear that the prices should rise at least to the max level they reached before (above $100)
within some reasonable period (say before magic 2020). And to above $70 within much shorter time
period. Probably with some crazy spikes in both directions in between. When Wall Street speculators
see profits around 25% a quarter they are ready to kill own mother.
The key factor here is that the amount of oil to replace natural depletion of existing
wells that can be extracted at prices below $70 is low to compensate natural depletion. For example,
despite all this buzz about rising efficiency of shale production, the US shale does not belong
to this category.
It will be more difficult to induce the second oscillation of oil prices by repeating the same
trick again with forcing debt burdened producers to produce at a loss. When oil producers were
caught naked in 2014 with a lot debt to service they have no choice but to continue production.
That was an interesting neoliberalism induced wealth redistribution play in which oil producing
countries started to subsidize oil importing countries (aka G7) to the tune of 0.5 trillion a
year. They did it instead of working together on conservation and keeping oil price at reasonable
level they destabilized the system using Saudi in a bait and switch fashion. It might be an Obama
attempt to bring Russia to knees, attempt to save economy from secular stagnation or sling to
new recession, whatever. What is done, is done. But this racket can't run forever. And what can't
run forever will eventually stops.
Low oil price regime started to show crack already in early 2016, when agreement to freeze
production was first discussed. Essentially in plain English that is a message to oil importing
countries "f*ck yourself".
The next step will be agreement to limit production based on natural decline rates and
low capex environment. The huge, paranoid level of fear of such an agreement is clearly visible
now in MSM. And of course the US state department along with EU will do the best to crash such
a possibility.
But if such an agreement materialize despite all efforts to block it, it will have effect of
the A-bomb on Wall street speculators and the second nail into "oil price forever" myth coffin.
The same speculators who drove the oil price down from this point will drive it up like there
is tomorrow. And as GS trading desk change their bets, those despicable presstitutes from Bloomberg
instantly will change tone and start crying loud about coming oil crisis. Financial oligarchy
has no allegiance to any country, only to their own bank accounts.
In other words this shale/Saudi induced price crash just speeded up the day of reckoning
by several years and will make the next spike of oil prices much closer and much higher.
How long the oil prices can be suppressed by the threat of resumption of shale production
remain to be seen, but if there will be a bounce in shale production at below $80 prices it will
be a "dead cat bounce" and will not last long as if prices drop again all those guys who tried
to anticipate higher price environment and started "carpet bombing", sorry, drilling, again will
be swimming naked again. Shale is a Red Queen race in any case. That means that shale will add
to amplitude of the oscillations of the oil prices and might somewhat prolong the agony, but can't
prevent oil price rise to above $80 level.
"... There has been a long history of oil price model failures. I was wondering whether you could comment on how your model has overcome the weaknesses of earlier models. I have the impression that the oil price in the short, medium but also long term depends on many highly non-linear factors. That just makes it difficult for me to see how any model, even just theoretical, could make reasonable predictions. ..."
There has been a long history of oil price model failures. I was wondering whether you could
comment on how your model has overcome the weaknesses of earlier models. I have the impression
that the oil price in the short, medium but also long term depends on many highly non-linear factors.
That just makes it difficult for me to see how any model, even just theoretical, could make reasonable
predictions.
Suppose there was such a model, that had a little better predictive power than the market.
Wouldn't market participants then not rush in to make money using the model, which would again
destroy its predictive power?
The idea to use autocorrelation came from just eyeballing Figure 1. Low prices seemed to be
associated with constant rates of growth. If the rate of growth decreases or stops, the price
pops. I gave a bunch of variables to Aude (who is a statistician) and asked her to look for correlations.
She fiddled around with the data for some time trying different transformations. When she came
back with what worked I slapped myself and wondered why I hadn't told her to try that first.
As I said in the introduction, this work is preliminary and there is a lot we don't know. What
I believe is going on is that many variables normally associated with demand are hidden in past
extraction data. Exactly which variables are included and which excluded is to be determined.
I think that if traders started using this model to estimate prices the model would work better.
It would be a self fulfilling prophecy. The reason for this is that I think price speculation
is not included in the variables used, so if the speculators were closer to the "right" price,
there would be less variation.
If data were available it would be interesting to split the model by API density using the
average price for each tranche of density. The model explained past data much better with EIA
C & C data than it did with the BP data that included NGL (as Dennis thought it would).
If you have references to other price models, I am interested as well.
"... Since the EIA analysis is based on current production, changes in EURs and future areas of
derisked production are not included. For example the Permian, and Three Forks have zones that have
little production history and are not included. Also plays that are just opening up, like the Unita,
which has 1.2 trillion barrels of OOIP, is just now seeing horizontal wells with good results being
drilled in zones that has never see this type of drilling. ..."
"... With respect to LTO extraction, in my opinion the big revolution is that because of high initial
flow rates and short investment cycles, LTO extraction has introduced boom bust economics to oil extraction.
In terms of the price model LTO extraction could bring on a faster decline in oil extraction by scaring
investors away from longer cycle extraction projects such as deep water. ..."
"... The Saudis recognized that LTO production growth was a product of cheap and plentiful financing.
They set out to pop the bubble and they have. The bankruptcies are piling up. LTO economics are overstated.
The wells will not produce anything close to what the companies claim. LTO could come back if the banks
and debt investors are dumb enough to lend to the companies. My guess is that any debt financing will
have much higher costs and tighter covenants. Borrowing for 10 years unsecured at 4-5% probably won't
be coming back. ..."
One of the problems with using historical models to make predictions is that when disruptive technology
comes along this type of model may have errors that are hard to adjust for.
Many believe that Light Tight Oil (LTO, also known incorrectly as shale oil), is only a high
priced flash in the pan, that will quickly die. Over the past few years both of these assumptions
are proven to be quite wrong.
The EIA on Sept 24, 2015 came out with an updated report under "Analyisis & Projections" called
"World Shale Oil Assessments"
This analysis places the U.S. LTO resource potential at 78.2 billion barrels. A detailed breakdown
can be seen by clicking on "US" in the
table.
The U.S. analysis is a bottoms up analysis taking (1) the area of potential, (2) well spacing,
(3) EUR per well to determine what they call the "Technically Recoverable Resource " (TRR). When
doing a Peak Oil Analysis, these is what the ultimate recoverable is.
It should be noted that EURs can change quite a bit so for example for the Bakken they sub
divided it into 41 subregions.
The other piece of the disruptive technology is the cost of production. Over the last few years
this has come down much more than many believe. The lower costs can be seen in two ways.
The first place is in the EIAs monthly "Productivity Report" which shows that rig production
in barrels per day per month, for the last five years, in the Bakken has gone from 100 to 230,
and in the Eagle Ford it has gone from 100 to 300. This equates to a major reduction in costs.
The second way lower costs can be seen is what ROR the oil and gas companies are expecting.
For example EOG is estimating that their ATROR for five different plays is 30% at a WTI price
of $40. Just a few years ago the threshold price of LTO was throught to be $80 to $100.
Since the EIA analysis is based on current production, changes in EURs and future areas
of derisked production are not included. For example the Permian, and Three Forks have zones that
have little production history and are not included. Also plays that are just opening up, like
the Unita, which has 1.2 trillion barrels of OOIP, is just now seeing horizontal wells with good
results being drilled in zones that has never see this type of drilling.
The beautiful part of this model is that it does not take extraction cost into account. Whatever
the cost of extraction, based on what is extracted, this model gives you the price.
With respect to LTO extraction, in my opinion the big revolution is that because of high
initial flow rates and short investment cycles, LTO extraction has introduced boom bust economics
to oil extraction. In terms of the price model LTO extraction could bring on a faster decline
in oil extraction by scaring investors away from longer cycle extraction projects such as deep
water. Can LTO extraction replace all other types of extraction? If extraction levels decrease,
the model says the base price will decrease as well. This will accelerate the contraction phase.
I believe that what has happened in this cycle in the oil market is that an increase in U.S. production
from LTO of one million barrels a day for four years caused the S/D balance to shift to over supply.
The difference in this cycle, making it longer and deeper than expected is the Saudi change
in response.
From 1999 to 2013, each time there was a dip in price the Saudis cut their production by an
average of 1.5 million barrels a day. This happened five times.
In 2013 as prices started down they started to cut production, but then something changed.
As prices went lower instead of cutting production they increased it by over one million a day.
Was it to punish Iran or Russia. I don't think so. I believe it was to slow down the runaway
freight train of US LTO production. I believe that they understand the potential of this new resource
to change the oil market.
The Saudis recognized that LTO production growth was a product of cheap and plentiful financing.
They set out to pop the bubble and they have. The bankruptcies are piling up. LTO economics are
overstated. The wells will not produce anything close to what the companies claim. LTO could come
back if the banks and debt investors are dumb enough to lend to the companies. My guess is that
any debt financing will have much higher costs and tighter covenants. Borrowing for 10 years unsecured
at 4-5% probably won't be coming back.
"... It is sometimes said the futures curve is not "forward-looking". If that means the curve is not a simple forecast and is not good at predicting what will happen to spot prices in future, the statement is correct. ..."
"... Given many market participants believe oil supplies will fall sharply, demand will increase, and stocks will peak and begin to fall later this year, the recent rise in prices and narrowing of the contango are entirely rational. Any other price response would be irrational because it would violate the requirement for inter-temporal consistency. The market could be wrong in its expectations for supply, demand, stocks and prices later in the year and in 2017, but it is being absolutely rational. ..."
"... If futures prices are above the spot price, the spread is negative and the market is said to be in contango. If futures prices are below the spot, the spread is positive and the market is trading in backwardation. ..."
"... In most cases, rising spot prices will be accompanied by a narrowing of the contango (or a move from contango into backwardation). Conversely, falling spot prices will normally be accompanied by a widening of the contango (or a move from backwardation into contango). This is exactly what is happening at the moment: the market's newfound bullishness is resulting both in a rise in the spot price of Brent and a narrowing in the contango. ..."
"... In most cases, higher prices have been associated with a narrower contango, or even backwardation, while lower prices have been associated with a wider contango ( tmsnrt.rs/22p6Fmy ). ..."
"... In the current environment, the oil market is looking past short-term oversupply towards the end of 2016 and 2017 when oversupply is expected to be much less, or there might even be excess demand. ..."
"... Via the storage and inventory financing relationships embedded in the futures curve, the expectation of a future tightening in the supply-demand balance later in 2016 and 2017 is pulling up the spot price of oil now. ..."
LONDON, March 17 The oil futures curve is flattening as a wave of bullishness washing across the
market raises the price of near-dated contracts faster than that of contracts for deferred delivery.
Brent for delivery in May 2016 has risen more than $10 per barrel since early February, while
prices for delivery in 2017 are up less than $7 over the same period.
The discount for Brent crude delivered in May 2016 compared with the average of 2017, a price
structure known as contango, has narrowed from $9 to well under $6 per barrel since Feb. 11 (
tmsnrt.rs/22p4vn8 ).
The shape of the futures curve is intimately connected with expectations about supply, demand,
stocks and the availability of storage ("Brent contango is hard to square with missing barrels",
Reuters, March 10). So the narrowing contango implies the market now expects less oversupply and
a smaller build-up in stocks in the months ahead. But market bullishness is at odds with warnings
from influential analysts forecasting supply will continue to outstrip demand and stocks rise ("Oil
shrugs off Goldman warning about premature rally", Reuters, March 14).
MAYBE WRONG, BUT RATIONAL
It is sometimes said the futures curve is not "forward-looking". If that means the curve is
not a simple forecast and is not good at predicting what will happen to spot prices in future, the
statement is correct.
But the futures market is actually very forward-looking and focused on how the balance between
supply, demand, stocks and prices will evolve in the coming months and years. Via the futures curve
and the mechanism of financing and storage, those expectations about medium-term supply, demand,
stocks and prices are ruthlessly discounted back to the present.
Given many market participants believe oil supplies will fall sharply, demand will increase,
and stocks will peak and begin to fall later this year, the recent rise in prices and narrowing of
the contango are entirely rational. Any other price response would be irrational because it would
violate the requirement for inter-temporal consistency. The market could be wrong in its expectations
for supply, demand, stocks and prices later in the year and in 2017, but it is being absolutely rational.
SPOT PRICES AND SPREADS
The price of oil for delivery on a future date (e.g. calendar average 2017) can be thought of
as the sum of a spot price (May 2016) and a spread (the price difference between May 2016 and the
calendar average of 2017).
As a matter of convention, the spread is normally expressed as the spot price minus the futures
price (it can just as easily be expressed the other way round).
If futures prices are above the spot price, the spread is negative and the market is said
to be in contango. If futures prices are below the spot, the spread is positive and the market is
trading in backwardation.
For example, if the future price is $50 and the spot price is $40, the future price can be analyzed
as a spot price of $40 plus a spread of $10 contango.
Many real trades are arranged this way, with the customer buying (selling) near-dated futures
contracts and then adjusting their position by selling (buying) the spread between the near date
and the forward one. The advantage of executing trades as two transactions (spot and spread) rather
than just one is that it enables dealers and customers to make best use of the greater liquidity
in spot contracts. In principle, spot prices and spreads are determined independently and can move
separately. In practice, there is normally a high degree of correlation between them.
In most cases, rising spot prices will be accompanied by a narrowing of the contango (or a
move from contango into backwardation). Conversely, falling spot prices will normally be accompanied
by a widening of the contango (or a move from backwardation into contango). This is exactly what
is happening at the moment: the market's newfound bullishness is resulting both in a rise in the
spot price of Brent and a narrowing in the contango.
PRICES MOVE TOGETHER
As the market becomes more bullish, the price of contracts for short-term delivery rises faster
than the price of contracts for later delivery. The result seems paradoxical since an improved outlook
for supply-demand balance over the next few months and years has its biggest impact on the price
of oil delivered now. In fact, this behaviour is typical for oil and other commodity markets.
Over the period from 1992 to 2016, taken as a whole, there is no correlation between the level
of oil prices and the degree of contango or backwardation in the futures curve (
tmsnrt.rs/22p42kQ ).
High spot prices have coincided with backwardation (January 2008) and contango (May 2008). Low
spot prices have coincided with contango (January 1999) and backwardation (April 1999).
But the large shifts in the absolute level of prices since 1992 obscure the short-term relationship
between spot prices and the shape of the futures curve. A more granular analysis reveals there has
been a fairly close correspondence between spot prices and the shape of the futures curve for most
sub-periods since 1992.
In most cases, higher prices have been associated with a narrower contango, or even backwardation,
while lower prices have been associated with a wider contango (
tmsnrt.rs/22p6Fmy ). This relationship
has held in almost all sub-periods since 1992 with the exception of 2005/06 and the first half of
2008 ( tmsnrt.rs/22p49wG ).
The relationship grows even stronger if we compare the change in prices with the change in the
shape of the curve.
That makes sense since an increase in spot prices is associated with a narrowing of the contango,
and a fall in spot prices is associated with a widening of the contango; both respond to the expected
supply-demand balance.
LOOKING BEYOND THE GLUT
Since 1992, changes in the outlook for oil production, consumption and stocks have had the biggest
impact on futures contracts near to delivery rather than those with longer maturities.
As a result, spot prices have been much more volatile than the price of futures contracts with
many months or years to delivery. In the current environment, the oil market is looking past
short-term oversupply towards the end of 2016 and 2017 when oversupply is expected to be much less,
or there might even be excess demand.
Via the storage and inventory financing relationships embedded in the futures curve, the expectation
of a future tightening in the supply-demand balance later in 2016 and 2017 is pulling up the spot
price of oil now.
The market might be wrong to expect the supply-demand balance to tighten by the end of 2016 or
early 2017. The short-term increase in oil prices could also be self-defeating if it stimulates more
production and thereby perpetuates the oversupply ("New oil order: the good, the bad and the ugly",
Goldman Sachs, March 11). But if the market is right to expect the supply-demand balance will tighten
later in the year or in 2017, then spot prices have to rise now and the contango must narrow. Any
other outcome would be time-inconsistent. (Editing by Dale Hudson)
The 21st century version of the American gold rush is coming to a swift end.
A shakeout is sweeping through the U.S. oil and gas business, putting small-time petroleum
prospectors who got rich off of shale energy out of business as rock-bottom oil prices reshape
the sector despite the commodity's slight uptick in recent weeks.
The pain low oil prices have sparked has spread into other corners of the energy industry. This
week, coal miner Peabody Energy warned that it may have to file for bankruptcy protection and
SunEdison, a developer, installer and operator of alternative energy plants said it discovered
problems in its accounting processes, the latest in a string of troubles for the company.
"... I have read your comment on the last thread and I completely disagree with your point 2 that you make: "shale companies have always been growth-oriented, and the market (investors and lenders) has been rewarding them for growth rather than capital discipline." This a definition of ponzi scheme that you describe and ponzi always end when you run out of greater fools. And shale is at that point. Their relentless drilling of the remaining sweet spots AT ANY price will not change their financials at all. ..."
"... Oil price will steadily rise as shale start running out of the sweet spots and their production start decreasing so shale will never meet that imaginary price of $80-$100. Shale will run out of sweet spots long before the price is at $80-100 range. ..."
"... If we both agree that shale is continuously drilling regardless of price and profit how can you claim (on the last thread) that shale will make new peak in production at some imaginary future higher price point? What is the basis of that assumption? ..."
"... There was a very simple, albeit pervert, economic logic in 2015 - top brass bonuses (along with several other factors like pipeline contracts, etc). Redistribution of wealth up should never stop :-) ..."
"... Are you sure? Which of major banks anticipates bright conditions for junk bond market, and especially shale junk bonds, in 2017 ? I think most banks increased their loss provisions from junk for 2016. In view that survival of companies is in question, inquiring minds want to know, who are those happy investors who by trying to earn some extra points (chasing yield) already lost quite a bit of money and want to lose more. Or this is just new fools from never ending global supply. But like with oil there might be that "peak fools" moment is behind us :-) . ..."
"... If WTI is on average $40-45 by the end of the 2016 how much US shale and US total production will be on December 2017? ..."
"... The decline might be as high as 1.5 Mb/d for total US output if oil prices remain under $43/b, with shale maybe about half of this (800 kb/d), the EIA is predicting WTI at $35/b in Dec 2016 and $45/b in Dec 2017 (the EIA's oil price forecast is too low in my view). ..."
"... Very difficult to predict, it may be that capitulation in the US oil sector is close at hand. In that case output falls by more than I have guessed, but there is no way the EIA price forecast turns out to be correct in that case. ..."
"... If US falls by 1 Mb/d, that may be enough to balance the oil market, ..."
"... And what do you think might happen in the rest of the world? In 2016 oil production will fall in most oil producing countries. Oil production will rise in a very few countries. The oil market may balance a lot sooner than a lot of people realize. ..."
"... You may be correct on that point. If we take the US and Canada out of the equation I think increases in Iran's output might balance the declines in World minus US+Canada+Iran. The question then becomes (if my previous assumption is roughly correct), how much does US+ Canada decline in 2016? My guess is 1.25 Mb/d. I would be interested in your estimate, because you track the numbers more closely than me. Or just your estimate for World C+C decline in 2016 would be fine. ..."
"... Thanks Dennis. I don't think the increase in Iranian production will come close to offsetting the decline in the rest of the world minus the US and Canada. I believe the decline in ROW less US and Canada will be about twice the increase expected from Iran. ..."
"... Breaking it down, Iran may increase production, from February, another half a million barrels per day. That would be almost 700,000 bpd from their January production. The rest of OPEC will be flat to down, most likely down slightly. Non-OPEC, less US and Canada will be down from one million to 1.2 million bpd from their December production numbers. ..."
"... Did you mean 1-2 oil sands project that are very close to completion in 2018? I think there is very minor one. But here is some hush hush info from oil sands patch that there will not be any new oil sands project even if the price goes much higher in the near future without export pipeline in place. But who knows. ..."
I have read your comment on the last thread and I completely disagree with your point 2
that you make: "shale companies have always been growth-oriented, and the market (investors
and lenders) has been rewarding them for growth rather than capital discipline." This a
definition of ponzi scheme that you describe and ponzi always end when you run out of greater
fools. And shale is at that point. Their relentless drilling of the remaining sweet spots AT ANY
price will not change their financials at all.
Oil price will steadily rise as shale start running out of the sweet spots and their production
start decreasing so shale will never meet that imaginary price of $80-$100. Shale will run out
of sweet spots long before the price is at $80-100 range.
You asked why companies are still drilling when oil price is $37 and they are making losses?
I said that I do not see economic logic, but they were doing that in the past, continue to do
so now, and will continue to drill and complete wells at loss in the future.
I do not mind if you call it "ponzi scheme", but this is reality. In the first 2 months of
2016 shale companies sold about $10 in equity, diluting existing shareholders, but they found
new buyers. Bondholders are happy that oil companies' bonds are up 20% in the past month and are
ready to invest more. Private equity is ready to invest tens of billions in distressed companies.
I do not mind if you call all them fools, but this is reality.
Did I say that this is normal? I didn't. Did I say that this will continue forever? I didn't.
If we both agree that shale is continuously drilling regardless of price and profit how
can you claim (on the last thread) that shale will make new peak in production at some imaginary
future higher price point? What is the basis of that assumption?
Alex, You asked why companies are still drilling when oil price is $37 and they are making losses?
I said that I do not see economic logic
There was a very simple, albeit pervert, economic logic in 2015 - top brass bonuses (along
with several other factors like pipeline contracts, etc). Redistribution of wealth up should never
stop :-)
But 2016 is a completely different game. "After me deluge" type of thinking on the top run
its course: they run out of money and can't get new loans. For most shale companies it was something
like waking up the next morning after several days of binge drinking
Bondholders are happy that oil companies' bonds are up 20% in the past month and are
ready to invest more.
Are you sure? Which of major banks anticipates bright conditions for junk bond market,
and especially shale junk bonds, in 2017 ? I think most banks increased their loss provisions
from junk for 2016. In view that survival of companies is in question, inquiring minds want to
know, who are those happy investors who by trying to earn some extra points (chasing yield) already
lost quite a bit of money and want to lose more. Or this is just new fools from never ending global
supply. But like with oil there might be that "peak fools" moment is behind us :-) .
http://knowledge.wharton.upenn.edu/article/do-junk-bond-defaults-signal-trouble-for-2016/
The iShares iBoxx $ High Yield Corporate Bond ETF, a $14.4-billion exchange traded fund
that tracks the performance of the junk-bond market, posted an annual loss of 5.5%, and ended
2015 off a startling 12.4% from its February high. Likewise, the S&P U.S. Issued High Yield
Corporate Bond Index lost 3.99% for the year, while BofA Merrill Lynch U.S. High Yield Index
fell 5% for the year, its first annual loss since 2008.
BTW Vanguard increased the quality of bonds in their junk bond fund. And that means that they
think that the storm is ahead not behind us.
In the Bakken, the number of well completions has fallen from 185/month for the 12 months ending
in March 2015 to 70 well completions in January.
If US falls by 1 Mb/d, that may be enough to balance the oil market, output in Canada may also
fall, the low oil prices will eventually reduce output and oil prices will rise maybe by late
2016, eventually (probably 6 months later) oil output will gradually flatten and then rise, possibly
reaching the previous peak, this will depend in part on demand for oil and the price of oil.
The decline might be as high as 1.5 Mb/d for total US output if oil prices remain under
$43/b, with shale maybe about half of this (800 kb/d), the EIA is predicting WTI at $35/b in Dec
2016 and $45/b in Dec 2017 (the EIA's oil price forecast is too low in my view).
Very difficult to predict, it may be that capitulation in the US oil sector is close at
hand. In that case output falls by more than I have guessed, but there is no way the EIA price
forecast turns out to be correct in that case.
Hi Dennis,
I agree on EIA price prediction in sense that I always stay away from predicting price for anything.
Even for my weekly grocery shopping bag. :-)
If US falls by 1 Mb/d, that may be enough to balance the oil market,
And what do you think might happen in the rest of the world? In 2016 oil production will
fall in most oil producing countries. Oil production will rise in a very few countries. The oil
market may balance a lot sooner than a lot of people realize.
You may be correct on that point. If we take the US and Canada out of the equation I think
increases in Iran's output might balance the declines in World minus US+Canada+Iran. The question
then becomes (if my previous assumption is roughly correct), how much does US+ Canada decline
in 2016? My guess is 1.25 Mb/d. I would be interested in your estimate, because you track the
numbers more closely than me. Or just your estimate for World C+C decline in 2016 would be fine.
Thanks Dennis. I don't think the increase in Iranian production will come close to offsetting
the decline in the rest of the world minus the US and Canada. I believe the decline in ROW less
US and Canada will be about twice the increase expected from Iran.
Breaking it down, Iran may increase production, from February, another half a million barrels
per day. That would be almost 700,000 bpd from their January production. The rest of OPEC will
be flat to down, most likely down slightly. Non-OPEC, less US and Canada will be down from one
million to 1.2 million bpd from their December production numbers.
Thanks. I was under the impression that there were projects coming on line in that would offset
some of the 1.2 Mb/d decline in non-OPEC less US and Canada. I may be wrong of course (happens
all the time). :-)
Did you mean 1-2 oil sands project that are very close to completion in 2018? I think there
is very minor one. But here is some hush hush info from oil sands patch that there will not
be any new oil sands project even if the price goes much higher in the near future without export
pipeline in place. But who knows.
While the oil price will rise in 2016, it will stay below the level at which shale
production is profitable. But drilling activity will start increasing again at price levels below
breakeven. I have recently read a prediction that we need to see $60-70 WTI to see many rigs added.
Completion rate will fall to around 50 new wells per month by May and might stays at that level
until Dec 2016. It is unclear how many more wells can be drilled in the remaining "sweet spots" and
drilling might be forced to move into more marginal areas Hovering around 100 per month during 2015,
spuds plunged in February 2016 to a multi year low of 29.
https://www.dmr.nd.gov/oilgas/stats/2016monthlystats.pdf.
Notable quotes:
"... In my opinion, the industry has finally cut production in earnest. This is very likely the main reason for the recent price recovery. The latest action provides a good basis for a significant price rise in the fall of 2016. ..."
In my opinion, the industry has finally cut production in earnest. This is very likely the
main reason for the recent price recovery. The latest action provides a good basis for a significant
price rise in the fall of 2016.
The oil price may have finally bottomed out, the International Energy Agency (IEA) said Friday, noting
its "remarkable recovery" over recent weeks.
In its monthly report, the IEA said talk among oil
producers to freeze production amounts to "a first stab at co-ordinated action" with the presumed
aim of pushing oil up to US$50 a barrel, compared with about US$40 now.
Among other factors restraining oil supply the IEA said that Iran's return to the market had been
"less dramatic than the Iranians said it would be".
The bank said it expects Brent prices to average US$39 a barrel in 2016
and US$60 a barrel in 2017, down from its previous forecasts of US$45 and
US$62 a barrel respectively.
Goldman also trimmed its 2016 West Texas
Intermediate (WTI) price forecast by US$7 to US$38 a barrel, and its 2017
price forecast by US$2 to US$58 a barrel.
Predicting a slower recovery into next year and sharper oil production
declines in 2016, the bank said it does not foresee production hitting
previous peaks until mid-2018.
"... Bondholders are paying dearly for backing a shale boom that was built on high-yield credit. Since the start of 2015, 48 oil and gas producers have gone bankrupt owing more than US$17 billion, according to law firm Haynes and Boone. Fitch Ratings Ltd predicts US$70 billion of energy, metal and mining defaults this year, and notes that US$77 billion of energy bonds are bid below 50 cents, according to a note Thursday. ..."
Investors are facing US$19 billion in energy defaults as the worst oil crash in a generation leaves
drillers struggling to stay afloat.
The wave could begin within days if Energy XXI Ltd, SandRidge
Energy Inc. and Goodrich Petroleum Corp. fail to reach agreements with creditors and shareholders.
Those are three of at least eight oil and gas producers that have announced missed debt payments,
triggering a countdown to default.
"Shale was a hot growth area and companies made the mistake of borrowing too much," said George
Schultze, founder and chief investment officer of Schultze Asset Management in New York, which has
been betting against several distressed energy companies.
"It's amazing that so many people were willing to lend them money. Many are going to file for
bankruptcy, and bondholders and equity are going to get wiped out en masse."
Bondholders are paying dearly for backing a shale boom that was built on high-yield credit. Since
the start of 2015, 48 oil and gas producers have gone bankrupt owing more than US$17 billion, according
to law firm Haynes and Boone. Fitch Ratings Ltd predicts US$70 billion of energy, metal and mining
defaults this year, and notes that US$77 billion of energy bonds are bid below 50 cents, according
to a note Thursday.
A representative at Energy XXI declined to comment. Representatives for SandRidge and Goodrich
didn't respond to requests seeking comment.
"Absent a material improvement in oil and gas prices or a refinancing or some restructuring of
our debt obligations or other improvement in liquidity, we may seek bankruptcy protection," Energy
XXI said in a March 7 public filing.
Goodrich Petroleum is asking shareholders and bond investors to approve a restructuring deal that
would convert its unsecured debt and preferred shares into common stock. For the plan to work, shareholders
must approve it at a March 14 meeting and enough bondholders need to participate by the March 16
exchange deadline.
"Absent a successful completion of the recapitalisation plan, the company will have no alternatives
other than to seek protection through the bankruptcy courts," Walter Goodrich, chairman and chief
executive officer, said on a March 9 conference call.
"... Not an expert on Canada drilling but the production numbers won't be that impressive in 6 months as I understand this is the time they suppose to be drilling. ..."
"... AND since US + Canada are the ones that been keeping world production up we all need to hope for some serious Iran drilling in the coming months (won't happen though). Price spike here we come my and my guess this is in August/September. ..."
Although the overall decline in oil rigs is slowing, key tight oil
basins have lost 10 oil rigs.
Also note a significant decline in horizontal rigs.
Horizontal rigs drilling for oil:
down from 311 to 301 for the week.
down 120 units (-28.5%) from the end of 2015
down 814 units (-73%) from the peak on November 26, 2014
Canadian Rig Count is down 31 rigs from last week to 98, with oil rigs down 22 to
28, and gas rigs down 9 to 70.
Canadian Rig Count is down 122 rigs from last year at 220, with oil rigs down 57, and gas rigs
down 65.
Not an expert on Canada drilling but the production numbers won't be that impressive in 6 months
as I understand this is the time they suppose to be drilling.
AND since US + Canada are the ones that been keeping world production up we all need to hope for
some serious Iran drilling in the coming months (won't happen though). Price spike here we come
my and my guess this is in August/September.
Everyone will be like: I thought we had a surplus? WTF happened?
Executives of the Woodlands-based oil explorer had said last month it would reduce its capital
spending by half this year amid low oil prices and evaluate its staffing needs as it reduces
activity.
... ... ...
After an 18-month oil bust, energy layoffs are nothing new. Oil producers, their suppliers,
service providers and equipment makers, along with refineries and pipeline operators, have so far
cut more than 320,000 jobs worldwide, according to Houston consultancy Graves & Co., which has
tracked industry layoffs since the downturn began.
Within the United States, Anadarko produces oil and gas in Colorado's DJ Basin, in the Permian
Basin in West Texas, in the Gulf of Mexico and elsewhere. After ConocoPhillips, it's the
second-largest independent U.S. oil company, which means it doesn't have its own refining assets
like Chevron Corp. and Exxon Mobil Corp.
... ... ...
It's about the same size reduction that Apache Corp. made last year. Houston-based Apache cut
more than 1,000 employees, or 20 percent of its workforce, through direct reductions and asset
sales in 2015, which included its liquefied natural gas assets in Canada and Australia and its
upstream unit in Australia.
David Walters · Houston Community College
All that bold talk a year ago how Houston's economy is so much more diverse is facing its
first real test.
Glenn Gustafson · University of Houston
Trouble in the oil bidness always means tough times for Houstonians. Best wishes to those
who have/will lose jobs because of this.
Douglas James Fusilier · Spring, Texas
Thank God I'm still holding on. I feel for all my colleagues who have lost jobs in this
downturn.
Terry Smith · Publisher/General Manager at Amazing Publishers
Fourth largest oil company and they only have about 6,000 employees?
While some investors are predicting that market expectations for oil at $50 a barrel might be
too fast, and too soon , Bill Smith, chief investment officer and senior portfolio manager at
Battery Park Capital, told CNBC the energy sector will find equilibrium by the second quarter of
2016. And it will not be pretty for those holding bearish trades.
Speaking to CNBC's " Squawk Box ", Smith said if indeed oil prices stabilize, much-battered
energy stocks will follow crude prices higher.
"It's going to be a short covering rally that rips people's faces off," said Smith. "It's going
to be ugly."
Battery Park Capital has assets under management worth $340 million. Short-selling refers
to selling an asset in the hope of buying it back at a lower price later. The recovery in oil
prices has been supported by reports suggesting that oil producers are planning to work together
to reduce excess supply in the market.
Earlier this week Reuters, citing New York-based oil industry consultancy PIRA , reported major
OPEC producers were discussing a new price equilibrium of around $50 a barrel.
Broadly, Smith was less upbeat about the U.S. economy. He said while the economy wasn't heading
into recession, it wasn't growing either.
.. View gallery
Oil market rally could 'rip people's faces …
Nick Oxford | Reuters. Investors betting on falling shares of energy companies could have their
&quo
"We don't have the building blocks to bust out and go on a growth trajectory," he said, adding
there's no reason for runaway inflation at this point in time.
Government data showed core inflation rose 1.7 percent in the 12 months ended in January. The
U.S. Federal Reserve 's inflation target is at 2 percent.
But Smith said he doesn't see any reason why the Fed would raise interest rates just yet, even
due to currency risks.
Last December, the Fed raised interest rates from near zero percent for the first time since
2006. Following the rate hike, the dollar initially found strength against major currencies
around the world before losing some momentum earlier this year. But the move also created a major
sell-off in global stock markets in January.
The Federal Open Market Committee is due to meet next on Mar. 15 - 16.
Smith said, "Every time they even talk about raising rates, the dollar rips higher and it's just
creating chaos globally. So, I would much rather see them sit on the sidelines now."
"... EIA oil price projections are unrealisticly low IMO. Removing 1.5 million bopd from USA, plus world wide demand growth of 1-1.2 in 2016, plus other worldwide declines that Ron has illustrated, add up to more than Iraq and Iran can boost production. KSA appears to be incapable of going past 10.5 million. Russia cannot quickly increase production. ..."
"... Things can change fast regarding oil prices, witness the volatility since 1/1/16. We are hearing there could be a real supply squeeze coming and are seeing real evidence of that anticipation based upon some long term offers to hedge well above the current strip, sharply increased local basis and refinery planning chatter. ..."
"... And that talk of 500k from Iran waiting to flood the market is bogus story from the beginning and it was just used to perpetuate "glut" narrative. ..."
"... Iran will not piss 500k at these prices unless there is a deal between Russians and Saudis regarding the quotas. ..."
"... As for prices, Alex should always superimpose EIA STEO prediction from a year ago on the current. Otherwise posting such a graph does not make much sense and looks like a free promotion for crappy job that EIA performs with this metric :-) ..."
"... BTW they are unrealistic by design as they are based on futures. Futures are a bad predictor of oil prices dynamics as they are often used by producers and by hedge funds for hedging and offsetting other bets. Probably worse then a typical "oil expert" predictions :-) ..."
ND rigs at 33. Burlington has one to stack. My estimate is rigs will bottom at 26-27.
EIA oil price projections are unrealisticly low IMO. Removing 1.5 million bopd from USA, plus
world wide demand growth of 1-1.2 in 2016, plus other worldwide declines that Ron has illustrated,
add up to more than Iraq and Iran can boost production. KSA appears to be incapable of going past
10.5 million. Russia cannot quickly increase production.
Things can change fast regarding oil prices, witness the volatility since 1/1/16. We are hearing
there could be a real supply squeeze coming and are seeing real evidence of that anticipation
based upon some long term offers to hedge well above the current strip, sharply increased local
basis and refinery planning chatter. All are anecdotal, but are not signifying worries of tanks
topping.
Also add 600k disruption from Iraq Kurdish area due to complete change in
geopolitics in that area, that 600k is NOT coming back to the market until there is deal and safe
infrastructure on moving that oil towards the south terminals through areas controlled by Iraq
government. And that talk of 500k from Iran waiting to flood the market is bogus story from
the beginning and it was just used to perpetuate "glut" narrative.
Iran will not piss 500k at these prices unless there is a deal between Russians and Saudis
regarding the quotas.
I would just watch March 20th meeting and try to decode the statements from the meeting.
EIA oil price projections are unrealistically low IMO
As for prices, Alex should always superimpose EIA STEO prediction from a year ago on the current.
Otherwise posting such a graph does not make much sense and looks like a free promotion for crappy
job that EIA performs with this metric :-)
BTW they are unrealistic by design as they are based on futures. Futures are a bad predictor
of oil prices dynamics as they are often used by producers and by hedge funds for hedging and
offsetting other bets. Probably worse then a typical "oil expert" predictions :-)
I suspect farmers were buying diesel fuel in the past several weeks for field work coming up in
the next two months.
Two million farmers buying 2100 gallons of diesel fuel is 42,000,000,000 gallons, 1,000,000,000
barrels of diesel fuel; there it was, gone.
A thousand gallon on farm diesel tank, pour some into the tractors, trucks, all which will
hold another thousand gallons easy, you have your demand in storage waiting to be burned doing
field work. The pickups have a one hundred gallon tank in the pickup bed for some more fuel, fill
those too. Fill the combine too, add some stabilizer, you're ready to go.
Plus a can of starting fluid for cold starts, just what you need to start a cold diesel engine.
Might as well order it before the price starts to rise in April. No sense in spending another
fifty cents per gallon, that is another 21 billion dollars and might as well have it in the bank
account for some fertilizer and soybean seed.
My point is that in the energy space, shockingly, money continues to pour in whenever
it's being requested.
The facility of even the most distressed oil company to raise capital, and the least
distressed feeling the need to do so, combined with the short covering move in oil futures, rightly
spooked the equity shorts everywhere in the oil sector. You might be waiting to see a stock go, rightly,
to zero, but if companies are continually able to extend their timelines on that at will, the possibility
that oil will recover in time to save them obviously increases the risk in the short position.
The short-covering panic affected the sector stocks differently, of course -- those
with the strongest balance sheets and lowest short commitment rallied the least; those on the other
side of the spectrum -- the ones most likely (still) to face Chapter 11 (like SeaDrill) rallied spectacularly.
But now where are we? There's been a long-overdue, short-covering rally that I've been
expecting. So what? And now what?
Here are some things I can say:
Oil has bottomed. We won't see any of the $10 or $20 targets that
some have picked. Unless the momentum algorithms regroup and again begin to accumulate (which is
easily trackable), we won't even see another $26 retest again, in my view. The contango (again trackable)
would have to begin to spike outwards as well.
Oil still isn't ready to get long-term bullish, yet, either. While
this short covering could easily take prices back to $40, that still only gets oil from a ridiculously,
unsustainably low price to merely an unsustainably low price. We still need to see a whittling away
of producers and drillers before any rally can be sustained. Drillers like SeaDrill have managed
to "add wick to their time bomb fuses" but we still await a few of those bombs to explode before
we'll be convinced the bear market is turning for good.
"... Interesting we are seeing a crude oil rally in March, as in 2009 and 1999. Of course, we also had a rally in April in 2015 that didn't hold. ..."
"... There are some that are saying this is due to a massive short squeeze ..."
"... Could be anything. Could be short squeeze, could be Chinese, could be Japan (based on a secret G-20) agreement. Who is the biggest beneficiary of an oil price "stabilizing" around $35 45? Besides the containment of contagion from energy to banking sector Obama to Hillary baton hand-off. ..."
There are some that are saying this is due to a massive short squeeze as happened
recently with iron ore, but I had not thought about the March correlation.
Last April didn't include the most important presidential election this country has seen in decades.
If either of the two insurgent candidates wins it could deliver a mortal blow to the empire. Anyone
who thinks they know why the price of oil is rallying is living in crazy-town.
Could be anything. Could be short squeeze, could be Chinese, could be Japan (based on a
secret G-20) agreement. Who is the biggest beneficiary of an oil price "stabilizing" around $35
45? Besides the containment of contagion from energy to banking sector Obama to Hillary baton
hand-off.
The more recent descent of oil prices below $30 per barrel is inducing another period of
contraction in drilling activity, which is clearly visible with the rig count in free fall.
Individual shale basins are feeling the pinch to various degrees. The Eagle Ford shale in
South Texas, for example, had over 200 rig counts as of late 2014. That figure has fallen to just
46 as of early March. Oil production from the Eagle Ford has declined by 0.5 million barrels per
day since the middle of last year. The Permian Basin in West Texas had over 500 oil and gas rigs
at the end of 2014, a level that has plunged to just 158. Oil production from the Permian has
finally come to a halt, and could begin to decline through this year.
There tends to be a lag between movements in the oil price and the resulting effects on the
rig count. As a result, the rig count may not rebound immediately even if oil prices rise. That
means that with production in the U.S. now declining, the declines should continue at a steady
pace until oil prices post a sustained rally.
Oil speculators are becoming more bullish on oil prices. Hedge funds are rapidly liquidating
their short bets, as fears of sub-$20 oil have all but vanished for now. According to data from
the CFTC, net-short positions fell by 15 percent for the week ending on March 1. "We might see
the real bottom being behind us," Ed Morse, head of global commodity research at Citigroup Inc.,
said on Bloomberg TV on March 4.
In addition, although a lot of questions remain, OPEC representatives are planning on meeting
with Russia's energy minister between March 20 and April 1 to follow up on their production
"freeze" agreement. An outright cut to production remains a long-shot, especially since Saudi
Arabia's oil minister Ali al-Naimi all but ruled it out at the IHS CERAWeek conference in Houston
in late February. It is hard to imagine OPEC and Russia shifting course from the production
freeze, but any agreement to take additional action represents an upside risk to oil prices.
Given the mounting evidence, it seems that the oil price rally is finally here, then? Maybe.
But it is also possible that bullish sentiment is starting to outstrip the fundamentals, even if
the fundamentals are trending in the right direction.
"... Anyone who thinks they know why the price of oil is rallying is living in crazy-town. Could be anything. Could be short squeeze, could be Chinese, could be Japan (based on a secret G-20 agreement). ..."
There are some that are saying this is due to a massive short squeeze as happened recently with
iron ore, but I had not thought about the March correlation.
Last April didn't include the most important presidential election this country has seen in decades.
If either of the two insurgent candidates wins it could deliver a mortal blow to the empire.
Anyone
who thinks they know why the price of oil is rallying is living in crazy-town. Could be anything.
Could be short squeeze, could be Chinese, could be Japan (based on a secret G-20 agreement). Who
is the biggest beneficiary of an oil price "stabilizing" around $35 45? Besides the containment
of contagion from energy to banking sector Obama to Hillary baton hand-off.
Crude oil traders like Vitol Group and BP (BP)
take advantage of the broader contango market. These traders buy front-month crude oil futures contracts
and take delivery upon their expiration. They store this crude oil in Cushing, Oklahoma, and then
sell it at higher prices in six months. Industry surveys estimate that leasing costs at large tanks
in Cushing were 2535 cents per barrel per month compared to the 12-month contango price of $8.27
per barrel, as shown in the chart above. Thus, the storage cost of crude oil for 12 months could
be $4.20 per barrel at most, keeping administrative fees and other pumping costs at $1 per barrel
for 12 months. This means traders could make a profit of $3 per barrel.
Further, the EIA (U.S. Energy Information Administration) estimates that storing crude oil in
large oil tankers for several months is expensive. It estimates that the trade will be unviable until
contango conditions reach $10$12 per barrel. Citigroup suggests that if oil prices fall below $30
per barrel, it would be unviable to store crude oil at sea.
Effect on crude oil tankers
However, long-term oversupply and the broader contango market have benefited oil tankers like
Nordic American Tankers (NAT),
Teekay Tankers (TNK), Frontline
(FRO), Euronav (EURN),
DHT Holdings (DHT), and Tsakos
Energy Navigation (TNP).
The steep contango conditions in the ultra-low sulfur diesel market provide opportunity for contango
traders and supertankers. Ultra-low sulfur diesel inventories in the United States have risen more
than total motor gasoline inventories since the middle of June 2014.
ETFs and ETNs like the United States Oil Fund (USO),
the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL),
the VelocityShares 3X Long Crude Oil ETN (UWTI),
and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO)
are also influenced by the rises and falls in crude oil prices.
In the next part of this series, we'll shift our focus to the US crude oil rig count.
"... The trader's life is also made trickier by the volatility in the market, which has seen prices rise and fall by several dollars a barrel in a day. "Over the last two or three years we've seen a huge increase in volatility and that's probably due to moving more from a physical group of companies trading to a financial-based scenario," he says. ..."
"... "It's the momentum of these big hedge funds and financial institutions, which makes the market move by percentage points rather than the 30 or 40 cents you used to get three or four years ago." ..."
"... Those sudden, big movements make it difficult for traders to be off-duty. "You can never leave your position, even if technically you've left it, ie you've gone home," Ms Clubley says. ..."
Oil traders never stop talking to each other. Oil traders have to weigh up a great deal of
information
The most popular software among oil traders is not an oil trading package or even a news service
such as Reuters - it is Yahoo Instant Messenger.
"Trading oil is about getting information and knowing where the market is," says Eivind Lie who
runs the trading desk at the Norwegian oil company StatoilHydro's offices in London.
"So being a trader your life is pretty much either on Yahoo or on the telephone trying to get an
overview of the market."
Keeping in touch
While people trading shares or currencies can get a lot of their information from analysts' notes
and computerised trading systems, the oil trader still relies on chatting to a wide range of
people, ranging from other traders to specialist oil trading journalists, to try to find out what
is going on in the world.
Everything from war or natural disasters to more mundane events such as seasonal changes to
temperatures or elections can affect oil prices, so for the traders it pays to be informed.
Richard Wickham, one of the crude oil traders at Statoil, makes his first call to the office on
the way to the station after he has dropped his children off at the nursery.
Then as soon as he gets to the office he will read price reports and messages from Statoil staff
who have been trading in the US and Asia and talk to the London-based analyst.
After that, the less formal process of talking to people really gets going.
"Collating information is more than half the job," Mr Wickham says.
"Executing trades is almost small in comparison - if you don't have the information you're
blind," he says, staring at the four computer screens on his desk, which display a bewildering
array of graphs, figures, reports and message windows.
There is little else on the desk besides family photographs and a strategically-placed Norwegian
dictionary, for when he is trying to understand messages from the company's head office in
Stavanger.
Distressed cargoes
Statoil is one of the world's largest exporters of oil and, with oil topping $100 a barrel on
supply concerns, its products are in great demand.
Yet it has a relatively small trading desk in London, with just a handful of traders. "If it's a
weak market then we have to go out and sell it more actively, if it's a strong market they come
and buy it from us," Mr Lie says. Currently, demand is strong, though the traders are
nevertheless on the phone, talking to other traders, analysts and brokers.
Everyone in the market for physical oil - as opposed to paper market traders, who do not want to
end up owning any oil - is looking for that precious piece of information that will allow them to
sell oil for more, or buy it for less.
"From our side, as the seller of oil, we want to get to know the buyer's position," Mr Lie says.
"Are they short of oil, do they really need more?" The holy grail for buyers is to find a seller
having difficulty selling a shipment. "If you get too close to the delivery date, when it's taken
aboard a ship in the North Sea, and it's not sold, then the buyers know that we have what's
called a 'distressed cargo', so they will try to get a cheap price for that," he adds.
Volatile market
It may be a good time to be a seller of oil, but the way oil is traded means it can still be
nerve-wracking. "There are a lot of market price contracts where I would sell you oil today, but
we price it the day the ship loads, which might be in three of four weeks time," says Sally
Clubley, an independent oil consultant who trains oil traders.
"So we've done the deal today, but we don't know the price today and there's a lot of oil traded
on that basis."
The trader's life is also made trickier by the volatility in the market, which has seen
prices rise and fall by several dollars a barrel in a day. "Over the last two or three years
we've seen a huge increase in volatility and that's probably due to moving more from a physical
group of companies trading to a financial-based scenario," he says.
"It's the momentum of these big hedge funds and financial institutions, which makes the
market move by percentage points rather than the 30 or 40 cents you used to get three or four
years ago."
Those sudden, big movements make it difficult for traders to be off-duty. "You can never
leave your position, even if technically you've left it, ie you've gone home," Ms Clubley says.
"It really is a 24-hour job because they don't trust anybody else with it."
Mr Lie agrees.
"I think some of the traders always carry their phones, even on vacations," he says. "It's a
lifestyle more than a job so you have to enjoy it."
"... In the years of $100 oil, U.S. oil companies took out half a trillion in risky corporate debt known as junk bonds and leveraged loans, both of which are considered at high risk of default. That money fueled the nation's shale oil bonanza. Since December, some of the same domestic explorers have raised $9.54 billion from equity investors to cover their swelling debt obligations. ..."
"... Tillerson's assessment of the U.S. oil industry likely comes as a disappointment to market observers speculating that Exxon Mobil will make a multibillion-dollar corporate acquisition anytime soon. ..."
"... What's more, companies that would consider selling themselves are still expecting too-high prices, so deal-making has "gotten more difficult, not easier," Tillerson said. ..."
"... "We take a lot of grief when the volumes don't grow," Tillerson said. "It doesn't bother us. We know it's all about the shareholder's money. One of the things that seems to be lost on people is just staying flat when you're running a depleting business, that's quite an accomplishment." ..."
"... He said the company invested about $190 billion over the past decade that's about half its current stock-market value but its production growth has lagged behind wildcatting peers. ..."
"... Exxon Mobil has had a reputation of relentless cost-cutting for more than a century, since the days of J.D. Rockefeller's Standard Oil, its 19th century corporate ancestor, which, unlike many other modern oil companies, started as a margins-based refining business, and gradually entered the oil-production side. ..."
"... "This current environment actually plays to our strengths," Tillerson said. ..."
"... The Exxon Mobil chief said oil prices could go lower than current levels, as producers are still oversupplying a global oil market that doesn't need as much oil at the moment. The global economy isn't "particularly inspiring," with U.S. gross domestic product likely to come in under 3 percent this year and China's transition from a diesel-heavy manufacturing economy. ..."
"... Still, even when oil prices recover, it may not matter for some over-levered companies. "We don't feel compelled to be in a big rush (to transact an acquisition) even if the environment changes for some of these companies, it doesn't necessarily change the value proposition because of the shape they put themselves in," Tillerson said. ..."
The CEO of Exxon Mobil says buying a rival U.S. oil driller would be like
purchasing a home with a big mortgage and a sliver of equity: it's a lot of
debt to pay off, with little to show for it.
For the biggest U.S. oil company, the nation's shale oil and gas resources
look promising, but they've been "encumbered" by smaller independent exploration
and production companies that are struggling to pay off high levels of debt
and that have diluted shareholder value in a recent string of stock sales.
"There's been a fair amount of value destruction in the past year as they
have continued to access capital markets and levered up," Exxon Mobil Chairman
and CEO Rex Tillerson told investors on Wednesday, during an annual investor
update. The big question in weighing today's slate of takeover targets, he said,
is this: "Is it going to add value or has the value just kind of been destroyed?"
In the years of $100 oil, U.S. oil companies took out half a trillion
in risky corporate debt known as junk bonds and leveraged loans, both of which
are considered at high risk of default. That money fueled the nation's shale
oil bonanza. Since December, some of the same domestic explorers have raised
$9.54 billion from equity investors to cover their swelling debt obligations.
Deal or no deal?
Tillerson's assessment of the U.S. oil industry likely comes as a disappointment
to market observers speculating that Exxon Mobil will make a multibillion-dollar
corporate acquisition anytime soon.
It is perhaps the only large integrated oil company with the cash to purchase
a major rival amid the ongoing oil downturn, but even after a year and a half,
it hasn't explicitly telegraphed it will be part of an impending wave of corporate
consolidation in the oil industry an event often predicted by often-frustrated
observers.
What's more, companies that would consider selling themselves are still
expecting too-high prices, so deal-making has "gotten more difficult, not easier,"
Tillerson said.
"It's tough for us because we would like to do something," he said. "We see
there's a lot of quality resources out there, it's just how they've been encumbered.
What we're finding is we're spending more of our time on asset deals."
Borrowing to invest
Exxon Mobil this week announced it would borrow $12 billion in corporate
debt, which could supplement the Irving-based company's war chest of cash if
it wanted to buy another company.
But Tillerson didn't go into detail about what the sum was meant for, only
reemphasizing the company's focus on building value for long-term shareholders,
either through investing in projects or sending the cash it generates back to
investors.
"These projects have returns that are multiples over our borrowing costs,"
he said. "So that's the way I view the borrowing. We're going to put the money
to work. We're not going to borrow to write a check to somebody."
Exxon Mobil is planning to cut its capital spending 25 percent this year
to $23.3 billion, after a rough 2015 in which the company wrung less than half
the cash out of the dollars it spent compared to the last five years.
The company's return on capital employed, one of the most important financial
metrics for Exxon Mobil, sank from an average 18 percent over the past five
years to 7.9 percent in 2015, but it was still 4 percentage points above its
closest rival, French oil company Total.
Depleting business
As it cuts back, the company believes it will produce between 4 million and
4.2 million barrels of oil equivalent a day through the end of the decade, keeping
its production flat, in line as last year's 4.1 million barrels a day. That's
less than the daily 4.3 million barrels it had planned in 2017, but it's doesn't
deter Exxon Mobil from its true goal building shareholder value, Tillerson
said.
"We take a lot of grief when the volumes don't grow," Tillerson said.
"It doesn't bother us. We know it's all about the shareholder's money. One of
the things that seems to be lost on people is just staying flat when you're
running a depleting business, that's quite an accomplishment."
He said the company invested about $190 billion over the past decade
that's about half its current stock-market value but its production growth
has lagged behind wildcatting peers.
"That just tells you how hard it is to hold your own in a depleting business,"
he said. "What we're really trying to do is just deliver the best value. Nothing
has changed about that."
Exxon Mobil has had a reputation of relentless cost-cutting for more
than a century, since the days of J.D. Rockefeller's Standard Oil, its 19th
century corporate ancestor, which, unlike many other modern oil companies, started
as a margins-based refining business, and gradually entered the oil-production
side.
"This current environment actually plays to our strengths," Tillerson
said.
Current environment
The Exxon Mobil chief said oil prices could go lower than current levels,
as producers are still oversupplying a global oil market that doesn't need as
much oil at the moment. The global economy isn't "particularly inspiring," with
U.S. gross domestic product likely to come in under 3 percent this year and
China's transition from a diesel-heavy manufacturing economy.
"I don't think we can look to the market's demand side to necessarily solve
this quickly for us," he said.
Still, even when oil prices recover, it may not matter for some over-levered
companies. "We don't feel compelled to be in a big rush (to transact an acquisition)
even if the environment changes for some of these companies, it doesn't necessarily
change the value proposition because of the shape they put themselves in," Tillerson
said.
"... He points out that his billionaire owner has given him $250 million (quarter of a billion) to buy up worthwhile acquisitions and he can hardly find anything worth buying. Slim pickings indeed. ..."
"... I should add that the company does not deal in LTOconventional only. LTO isn't the only area hurting. ..."
He points out that his billionaire owner has given him $250 million (quarter of a billion)
to buy up worthwhile acquisitions and he can hardly find anything worth buying. Slim pickings
indeed.
That quarter of a billion will be raised to one billion dollars if the new acquisitions justify
it. If there isn't enough available, though, the owner will close the company.
"... These figures are backed up by EIA. There is some horizontal Mississippian production in KS, and it is down significantly, but so are all the larger production conventional counties. This is a 21% decline in under one year. ..."
"... Again, these numbers fairly correspond to EIA. This is decline of 20%. Anecdotal, I agree. Have to wonder if declines this steep have occurred in other parts of the world? I am an American through and through. But, I will admit that, not only do we have very short attention spans, but we tend to hyper focus on things. I have hyper focused on shale like the rest, but I at least realize there are many places where production has absolutely tanked. ..."
"... Many think lower for much longer. It could very well be that once the hype in the US turns, things could go quickly. ..."
"... WTI is up almost 40% since 2/11/15, 15 trading days. ..."
"... IMHO for "things go quickly" we need a trigger event that suddenly becomes a focus of news coverage. Some large bankruptcy. Whatever. May be March 20 meeting in Moscow can serve as a trigger for some short squeeze, despite the measure to be taken is an old news. But just the level of determination of oil producing countries on this meeting might be interpreted as an important market signal. ..."
"... The time lag between rig counts and actual production stands around 2 to 4 years for the general oil production index, which includes conventional and unconventional off- and onshore production (see below chart). In my view the time lag for shale is just six months and for conventional production it is at least 18 months. As an example in 2005 a doubling of the rig count did not raise oil production until 2009. ..."
These figures are backed up by EIA. There is some horizontal Mississippian production in KS,
and it is down significantly, but so are all the larger production conventional counties. This is a 21% decline in under one year.
Per the Utah Department of Natural Resources, Division of Oil, Gas and Mining:
1/15. 110,594 barrels of oil per day, 5,127 producing wells, 772 shut in, 169 T'A.
12/15. 88,469 barrels of oil per day, 4,796 producing wells, 1,157 shut in, 149 T'A.
Again, these numbers fairly correspond to EIA. This is decline of 20%. Anecdotal, I agree. Have to wonder if declines this steep have occurred in other parts of the
world? I am an American through and through. But, I will admit that, not only do we have very short
attention spans, but we tend to hyper focus on things. I have hyper focused on shale like the
rest, but I at least realize there are many places where production has absolutely tanked.
Many think lower for much longer. It could very well be that once the hype in the US turns,
things could go quickly.
WTI is up almost 40% since 2/11/15, 15 trading days.
As AlexS pointed out, there will likely be at least a 6 month lag until US activity pick up.
He thinks longer, and it makes sense. Balance sheets need major repair. Believe me, speaking from
personal experience here.
I do not foresee a straight shot up, but the world has lost a lot of oil due to this crash
IMO.
Many think lower for much longer. It could very well be
that once the hype in the US turns, things could go quickly.
I think Obama administration might object, as they need another 10
months to drive into the sunset
:-)
Dominant (sustained by propaganda machine) myths like "oil glut",
"storage overflow", fight for market share and mass overproduction by oil
producing countries (except, of course, the USA, where shale producers
suffer under brutal attack from Saudi Arabia :-)
have now a life of their own and are difficult to change even when
completely detached from reality.
IMHO for "things go quickly" we need a trigger event that suddenly
becomes a focus of news coverage. Some large bankruptcy. Whatever. May be
March 20 meeting in Moscow can serve as a trigger for some short squeeze,
despite the measure to be taken is an old news. But just the level of
determination of oil producing countries on this meeting might be
interpreted as an important market signal.
The time lag between rig counts and actual production
stands around 2 to 4 years for the general oil production index, which
includes conventional and unconventional off- and onshore production (see
below chart). In my view the time lag for shale is just six months and
for conventional production it is at least 18 months. As an example in
2005 a doubling of the rig count did not raise oil production until 2009.
If rig counts stay low until the end of this year, production is set
for a huge decline over the next year. Some interpret the still high
production at low rig counts as a miracle improvement in rig
productivity. If this is the case, the rig productivity must have been
extremely low about four years ago when a high rig count gave a then
still low production. So where does the huge turnaround come from?
"... There will be no more waving of hands and their always new breakeven price
OCD type of messages from shale crowd but very quiet departure in the sunset. ..."
"... Quantity at some point turns into quality. Now there two ranges of oil
prices that matter for shale: 0-70 and 80- infinity . With "hope" range 70-80 in
between. ..."
"... Strengthening of oil prices within the range 0-70 probably no longer matter
much for indebted shale companies and their production and by extension rig count.
Investment climate changed and will remain generally very cautious in this range,
taking into account the possibility of yet another price slump (for example, if
the price recovery overshoot; or Libya civil war ends). Mad drilling with negative
cash flow is probably the thing of the past. Taking over the companies by lenders
will be a more common practice than rescuing them. ..."
"... I think range 0-$70 now represents "death valley" for shale in which only
the "dead cat bounce" of production is possible. Investors might not return in-full
before the price reach about $80 and stays at this level for a while. Because, those
who were burned and balanced on losses around 60% on their loans (40 cents on a
dollar) probably understand, that it just does not make any economic sense. Any
belief in "shale miracle" if such existed is now busted. ..."
"... What we have now is as Ves said, "a very quiet departure into the sunset".
Of cause, we can play with numeric ranges, but you got the idea. ..."
"... IMHO it does not matter how shale E&P companies behave. Cards are stack
against them and they are in a trap. It's Minsky moment for them, when euphoria
is gone and the harsh reality started to assert itself. So the meaning of the number
of rigs now is very similar to sweating of the patient in the famous anecdote when
a doctor asks the nurse "Did the patient sweat before dying? Oh, yes. Very good,
very good". ..."
"... My point is that for "below $70 range" ( +-$10) shale companies will remain
in a "slow dying" mode. Availability of "sweet spots" does not improve with the
age of the field. Loans availability is either gone or severely cut and cash flow
is either negative or barely enough for the maintenance and for "evergreen" loans
interest payments (speculative mode of production according to Minsky). Most of
them suffer from the high level of existing debt. ..."
"... At $50.28 WTI companies lost record amounts and generally have PV10 all
categories equal to long term debt, with radical reductions in future estimated
production costs and development costs. But all are eager to show they can operate
lower than their peers. Also, the stock market seems to get ahead of itself. Look
at today, for example. ..."
"... Trading $14+ below last year SEC prices, all is not yet well. A DOUBLE
in price is needed, but likely will not occur in 2016. ..."
I think everything is clear. Rigs are going
down regardless of this uptick in the price since bottom of $26 because
it is clear that if there is sustainable price for the majority of world
production, contribution has to come from Opec and non-Opec. There will
be no more waving of hands and their always new breakeven price OCD type
of messages from shale crowd but very quiet departure in the sunset.
Despite strengthening oil prices, U.S. oil and gas rig count is
down 13 units.
Quantity at some point turns into quality. Now there two ranges of
oil prices that matter for shale: 0-70 and 80-infinity. With "hope"
range 70-80 in between.
Strengthening of oil prices within the range 0-70 probably no longer
matter much for indebted shale companies and their production and by extension
rig count. Investment climate changed and will remain generally very cautious
in this range, taking into account the possibility of yet another price
slump (for example, if the price recovery overshoot; or Libya civil war
ends). Mad drilling with negative cash flow is probably the thing of the
past. Taking over the companies by lenders will be a more common practice
than rescuing them.
I think range 0-$70 now represents "death valley" for shale in which
only the "dead cat bounce" of production is possible. Investors might not
return in-full before the price reach about $80 and stays at this level
for a while. Because, those who were burned and balanced on losses around
60% on their loans (40 cents on a dollar) probably understand, that it just
does not make any economic sense. Any belief in "shale miracle" if such
existed is now busted.
What we have now is as Ves said, "a very quiet departure into the
sunset". Of cause, we can play with numeric ranges, but you got the idea.
The E&P companies have set their budgets and placed drilling contracts.
What the price of oil does over the next three to six months won't make
much difference to the rig count. It may influence completions though as
they can be conducted on a faster turn around.
ND has lost three rigs and is likely to lose up to another ten rigs in
the coming weeks as Whiting and Continental shut down drilling, QEP and
Hess reduce to one or two rigs only, and maybe a couple of the smaller private
companies go bust.
The E&P companies have set their budgets and placed drilling contracts.
What the price of oil does over the next three to six months won't make
much difference to the rig count.
IMHO it does not matter how shale E&P companies behave. Cards are
stack against them and they are in a trap. It's Minsky moment for them,
when euphoria is gone and the harsh reality started to assert itself. So
the meaning of the number of rigs now is very similar to sweating of the
patient in the famous anecdote when a doctor asks the nurse "Did the patient
sweat before dying? Oh, yes. Very good, very good".
For conventional oil it is a completely different game and there can
be some Renaissance.
My point is that for "below $70 range" ( +-$10) shale companies will
remain in a "slow dying" mode. Availability of "sweet spots" does not improve
with the age of the field. Loans availability is either gone or severely
cut and cash flow is either negative or barely enough for the maintenance
and for "evergreen" loans interest payments (speculative mode of production
according to Minsky). Most of them suffer from the high level of existing
debt.
Also their costs rise with the rise of oil price if only because they
consume a lot of diesel fuel (if we assume EROEI 5 you need 8 gallons of
diesel per barrel of oil, so effectively your barrel contains only 42-8=34
gallons). Only a fraction of the price rise improves their economic conditions
(a large part of the "increased efficiency", lower cost of production blah-blah-blah
was based on the same effect but acting in the opposite direction). The
problems also might start when investors realize that they have a better
chance to recoup their investments by taking a hold of assets in a rising
oil price environment
AlexS, note that in the 1998-99 price crash, oil rigs did not bottom until
a few months after the OPEC cut.
This time may be different, remains to
be seen.
At $50.28 WTI companies lost record amounts and generally have PV10
all categories equal to long term debt, with radical reductions in future
estimated production costs and development costs. But all are eager to show
they can operate lower than their peers. Also, the stock market seems to
get ahead of itself. Look at today, for example.
Trading $14+ below last year SEC prices, all is not yet well. A DOUBLE
in price is needed, but likely will not occur in 2016.
There will be a "dramatic price movement" when the meeting between OPEC members
and Russia takes place, Nigerian Petroleum Minister Emmanuel Kachikwu said at
a conference in Abuja on Thursday. Saudi Arabia, Russia, Qatar and Venezuela
agreed on Feb. 16 in Doha that they would freeze production, if other producers
followed suit, in an effort to tackle the global oversupply.
"... I wonder if all the bankruptcies might change the culture a bit. It sure will make finding money to burn more difficult and investors may look beyond the investor presentations to the 10k and the bottom line and reward fiscal discipline. ..."
"... Hard to know for sure. The banks may pull back and the bond investors may require very high interest rates and industry behavior might change as a result. ..."
"... If the entire Shale industry goes bankrupt, they will have trouble with financing new wells in my opinion. So increasing output will be difficult without financing. ..."
"... If the assets are bought by companies using there own cash (no bank or bond financing), they will not throw money away on wells that will never break even. ..."
Maybe so. I wonder if all the bankruptcies might change the culture a bit. It sure will
make finding money to burn more difficult and investors may look beyond the investor presentations
to the 10k and the bottom line and reward fiscal discipline.
Hard to know for sure. The banks may pull back and the bond investors may require very
high interest rates and industry behavior might change as a result.
"once the entire U.S. shale space goes bankrupt, it will emerge debtless only to start drilling
and pumping anew prompting the Saudis to continue to ratchet up the pressure in an endless
deflationary merry-go-round."
If the entire Shale industry goes bankrupt, they will have trouble with financing new wells
in my opinion. So increasing output will be difficult without financing.
If the assets are bought by companies using there own cash (no bank or bond financing),
they will not throw money away on wells that will never break even.
Oil rose to an eight-week high in New York after U.S. production declined
and a weaker dollar boosted the attractiveness of commodities.
Futures rose as much as 1.9 percent. Output fell for a sixth week to 9.08
million barrels a day, the lowest level since November 2014, according to the
Energy Information Administration. Crude inventories rose, keeping supplies
at the highest in more than eight decades. OPEC members will meet with Russia
and other producers in Moscow on March 20 to resume talks on an output cap,
Nigeria's oil minister said.
"The mood has changed in the market and we are a little bit more optimistic
about the future," said Phil Flynn, senior market analyst at the Price Futures
Group in Chicago. "The market is shaking off the big inventories builds that
we saw in recent weeks."
Oil is still down about 5 percent this year on speculation a global glut
will be prolonged amid brimming U.S. stockpiles and the outlook for increased
exports from Iran after the removal of sanctions. Exxon Mobil Corp. scaled back
production targets and said drilling budgets will continue to drop through the
end of next year as the oil market shows no signs of a significant recovery.
West Texas Intermediate for April delivery rose 41 cents to $35.07 a barrel
at 11:19 a.m. Eastern time on the New York Mercantile Exchange, after reaching
$35.32. The contract rose 26 cents to $34.66 on Wednesday, the highest close
since Jan. 5. Total volume traded was about 2 percent above the 100-day average.
Brent for May settlement gained 22 cents to $37.15 a barrel on the London-based
ICE Futures Europe exchange. The global benchmark crude was at a premium of
46 cents to WTI for May.
The Bloomberg Dollar Spot Index fell 0.5 percent, after earlier gaining 0.1
percent.
U.S. crude stockpiles expanded by 10.4 million barrels to 518 million, according
to a report from the EIA Wednesday. Supplies at Cushing, Oklahoma, the delivery
point for WTI and the nation's biggest oil-storage hub, rose for a fifth week
to a record 66.3 million barrels.
The market's saying "You can't ignore fundamentals," said Tariq Zahir, a
New York-based commodity fund manager at Tyche Capital Advisors. "With the massive
amount of supplies that we have, the market should go lower. I think prices
will go back to below $30 in a few weeks."
Others are more optimistic. There will be a "dramatic price movement" when
the meeting between OPEC members and Russia takes place, Nigerian Petroleum
Minister Emmanuel Kachikwu said at a conference in Abuja on Thursday. Saudi
Arabia, Russia, Qatar and Venezuela agreed on Feb. 16 in Doha that they would
freeze production, if other producers followed suit, in an effort to tackle
the global oversupply.
Exxon's output will be the equivalent of 4 million to 4.2 million barrels
a day through 2020, compared with the previous target of 4.3 million as soon
as next year, Chairman and Chief Executive Officer Rex Tillerson said at the
company's annual strategy session in New York on Wednesday. Capital spending
will fall about 25 percent this year to $23.2 billion and will decline again
in 2017.
Brazilian state-owned oil company Petrobras, the most indebted oil company
in the world, could soon lose its status as the top operator in some of the
country's most prolific offshore oil assets.
Petrobras is reeling from a wide-reaching corruption scandal and it is drowning
in a mountain of debt that exceeds $100 billion. It no longer has the funds
to front large-scale drilling in the way that it once did. Petrobras executives
are now trying to manage shrinking the company's footprint.
In order to raise cash it has plans to sell off assets far and wide. But
there are questions surrounding the company's ability to raise the funds that
it needs to since just about every company is unloading oilfields and infrastructure,
asset prices may not be as high as sellers want them to be.
Nevertheless, Brazilian news services reported that Petrobras could take
in $5 to $6 billion by selling off its natural gas pipeline unit in Brazil's
southeast. Canadian, French, and Chinese companies are submitting bids ahead
of a deadline next Tuesday. The sale is part of a plan to raise $14 billion
in cash in asset sales this year, funds that will be used to trim the company's
debt.
"... They say it is because of the low price. They have increased oil production 10% per year in the last years, due to the horizontal wells, but for next year they foresee no production increase. I have seen profiles of their horizontal wells and within 12-18 months their production is 50 % less. ..."
"... Their water injection activity has caused a lot of propery damage in the area, but the government has turned a blind eye. ..."
Bankers Petroleum which operates the biggest on shore oil field in Europe, Patos-Marinza in Albania,
will rest 3 rigs out of 6 in 2015.
They say it is because of the low price. They have increased oil production 10% per year in
the last years, due to the horizontal wells, but for next year they foresee no production increase.
I have seen profiles of their horizontal wells and within 12-18 months their production is 50
% less.
Their water injection activity has caused a lot of propery damage in the area, but the government
has turned a blind eye. A whole village with uninhabitable houses and people having nowhere to
go. If they protest the police arrests them. Local people think Bankers is producing oil through undergroung blasts (could it be?). Maybe this slowdown will spare some houses.
Bankers is also good at manipulating balance sheets looking unprofitable for 5 years now, so
the state budget won't feel much of the slow down. No word of this slow down in the Albanian media.
They only pound thea good news.
ExxonMobil Focuses on Business Fundamentals; Paced, Disciplined Investing
ExxonMobil anticipates capital spending of $23 billion in 2016, down 25 percent from 2015.
The company continues to selectively advance its investment portfolio, building upon attractive
longer-term opportunities.
Either the speed of electrons has slowed down, or Exxon is recycling old news. I first heard
it as breaking news on CNBC, live, not a replay. lol
Looked it up on Noodls, which took me to the Exxon page. Time stamped as Mar 2, 2016 08:11
a.m. EST.
Hedge funds and other money managers held a combined net long position in the three main crude oil
futures and options contracts amounting to 383 million barrels on Feb. 23.
The combined net long
position has increased in eight of the last 11 weeks from a recent low of 230 million barrels on
Dec. 8. (tmsnrt.rs/1XUWJih)
But the increase in hedge fund and other money manager net long positions has been concentrated
in Brent rather than WTI. (tmsnrt.rs/1XUWS5i)
The net long position in Brent futures and options traded on ICE Futures has jumped by more than
100 million barrels to 320 million barrels from 183 million barrels.
The net long position in WTI futures and options traded on ICE and the New York Mercantile Exchange
has risen less than 20 million barrels to 63 million barrels from 47 million barrels. (tmsnrt.rs/1XUWVy1)
Extreme pessimism about the near-term outlook for prices, which reached its height in December
and early January, seems to have dissipated a little.
There is more confidence that the long-awaited rebalancing of supply and demand is now underway in
earnest which could help stabilize stockpiles and prices later in 2016.
U.S. shale producers seem to be finally cracking under the strain from low prices, with more than 100 oil drilling rigs idled over the past month, and many producers now openly talking about producing less in 2016.
"... Id say this crash will pretty well end much hope of conventional onshore in US regaining 2014 levels. Added to the inevitable future declines in GOM, US onshore LTO will have to carry the day. ..."
"... Capital investment was $401 million in 2015 Vs. 2016 capital investment plan of $50 million ..."
"... Approximately 30% of 2016 crude oil production hedged in excess of $50 per barrel ..."
"... I am not critical of CRC, just pointing out what they say their base decline is with no new wells. ..."
California Resources Corporation released earnings today. They disclosed they plan to neither
drill nor complete a well in 2016. They stated that they believe their base decline rate to be
10-15%. They produced 102K barrels in Q4 2015. That is their net. I think gross they produce about
20% of oil produced in California.
Interestingly, Denbury Resources, who has operations in different area, but like CRC, has primarily
secondary and tertiary recovery, but of different kinds (CO2 v steamflood being the major one)
is forecasting 10-15% reduction in production from 2015. Again, forecasting minimal to zero new
wells.
Of course, decline is different than shutting in production.
I'd say this crash will pretty well end much hope of conventional onshore in US regaining
2014 levels. Added to the inevitable future declines in GOM, US onshore LTO will have to carry
the day.
At current prices, CRC expects that available liquidity plus expected operating cash flows
will be sufficient to fund its capital program and 2016 commitments.
The Company recently received 100% approval from its bank group to amend its credit facilities
The amendment requires cash in excess of $150 million be applied to repay outstanding revolving
loans, reduces the revolving commitments to $1.6 billion and imposes certain other restrictions.
"Expect to see us(CRC) demonstrate financial discipline to maintain sufficient liquidity through
2016. We plan to continue building economically viable drilling inventory, while managing our
activity consistent with our principle of living within cash flow."
Capital investment was $401 million in 2015 Vs. 2016 capital investment plan of $50 million
Approximately 30% of 2016 crude oil production hedged in excess of $50 per barrel
The global economy seems to be tottering on the edge even with cheap
oil. If the price had stayed at $110 and these losses had been covered
by OECD consumers where would we be (or well will we be if the price
does recover eventually) I guess even more debt until the bubble really
does pop.
"... Whether this will be enough to affect the world market is an open question, but four or five hundred thousand barrels a day taken off the market would be significant imo. ..."
There is a good chance some they will have to curtail production later
this year due to lack of credit to buy the necessary diluents, spare parts,
etc. Whether this will be enough to affect the world market is an open
question, but four or five hundred thousand barrels a day taken off the
market would be significant imo.
In 2014, by my calculations, 40% of total S&P 500 capital expenditures went to the energy sector.
The shale boom was the biggest thing going, and banks as well as high yield bond funds poured money
down the wells. With oil around $30 shale loses money, and banks are reporting
multi-billion dollar losses. . The high-yield energy sector as a whole now yields 15 percentage
points more than US Treasuries, which means dollar prices in the 70s and 80s. Depending on what lenders
think they can recover from busted shale borrowers, high-yield market prices imply an expected default
rate of 20%-25%. It gives a whole new meaning to the term "horizontal driller."
"... No mention of labor at all. As if they do not form any part of the equation. So, how many workers were suspended and how will that suspension impact the local economy. ..."
"... The local economy is already circling the drain and this is going to make things worse. ..."
"... I know a good number of people who have gone to Williston to work, since the wages are considerably better than the going rate in other parts of Montana, even if you have to live in a man camp [shudder]. Reductions in production means reduction in labor needed, which means that this slow-down will have economic consequences beyond just ND. Montana will be losing remittances from this as well. ..."
"... So, likely outcomes are higher unemployment and fewer resources for the state to confront that problem. ..."
"... While fracking is the poster-child for high-cost oil being whacked, a lot of other production with big fixed costs (which is basically anything other than the stick a straw in the ground and you get oil coming out sources) is also being hit hard. The North Sea is a good example of where they have to keep pumping because the decommissioning costs are immense so it is either lose a moderate amount of money on each barrel that you bring up or loose a huge amount money in a one-time hit by writing off production assets which were supposedly going to have an economic life of decades. ..."
"... Saudi Arabia (and, to a lesser extent, Russia) can stay irrational longer than the high cost producers can stay solvent though. In the end, theyll win. So maybe not so irrational after all. ..."
"... Yes, the key issue is the difference between average cost and marginal cost for production. North Sea Oil was a big money loser throughout the 1990s they pretty much stopped exploration, but with sunk costs and a need to keep turnover, the big production rigs kept going despite making losses for well over a decade. My brother is an off-shore driller and at that time he and nearly all his colleagues ended up travelling from the stan to the Gulf of Mexico to try to earn some money. It wasnt just the loss of jobs everyones wages were cut to the bone with no bonuses, so this has a knock-on effect right through the local economy. ..."
"... can stay irrational longer than the high cost producers can stay solvent though. In the end, theyll win. So maybe not so irrational after all. ..."
"... the bigger the debt you have, the more power you have over your creditors. ..."
"... Whiting has been the top producer in the Bakken, the most productive field outside of Texas in addition, Continental Resources, the # 2 Bakken producer, took the same action moreover, Chesapeake Energy, the 2nd largest US natural gas producer and the operator of more than half of Ohios wells, and has quit drilling here; in fact, it has stopped drilling new wells in both the Marcellus and Utica Shale basins altogether, having released its last two Ohio rigs and its last Pennsylvania rig before the end of 2015 the company is trying to downsize in lieu of bankruptcy, and is planning to sell off its wells and land in a last ditch effort to stay solvent ..."
"... Chesapeake, with their back against the wall with bonds coming due and facing $1 billion in collateral calls, is going to focus on more well completion and less drilling they also expect to sell assets worth between $500 million to $1 billion, and cut overall spending by 57% so theyre in the unenviable position of producing the most gas they can with gas prices at 17 year lows, and trying to sell off their natural gas and oil assets when prices for both commodities are at multi-year lows.. ..."
"... David lays the whole scam bare. Basically, the Pirates taxes are paid through your rates, even taxes that might not need to be paid are collected. ..."
No mention of labor at all. As if they do not form any part of the equation. So, how many
workers were "suspended" and how will that suspension impact the local economy.
See Dayen's note at the beginning of the article. The local economy is already circling
the drain and this is going to make things worse.
I know a good number of people who have gone to Williston to work, since the wages are
considerably better than the going rate in other parts of Montana, even if you have to live in
a "man camp" [shudder]. Reductions in production means reduction in labor needed, which means
that this slow-down will have economic consequences beyond just ND. Montana will be losing "remittances"
from this as well.
More specifically, the affected economies will experience a decrease in demand at
businesses (since there are fewer wages to spend) and a reduction in tax-revenue by the local/state
governments due to lower income, corporate and sales taxes.
So, likely outcomes are higher unemployment and fewer resources for the state to confront
that problem. Double whammy.
Energy around the world is up the creek. China still has 1/3 of it's new nuclear reactors off-line
due to lack of demand on grid. These nuclear units were to help China reduce it's CO2 footprint,
but running all of them would result in even more coal related layoffs, as even more thermal plants
would have to go off line.
Yin said capacity cuts will lead to some layoffs in 2016 but said he was confident of keeping
employment stable this year despite downward pressure on the economy, Reuters reports.
No timeframe was given for the 1.8 million layoffs.
China aims to remove around 500 million tonnes of coal production capacity within the next
three to five years and halt approvals of all new projects.
While fracking is the poster-child for high-cost oil being whacked, a lot of other production
with big fixed costs (which is basically anything other than the "stick a straw in the ground
and you get oil coming out" sources) is also being hit hard. The North Sea is a good example of
where they have to keep pumping because the decommissioning costs are immense so it is either
lose a moderate amount of money on each barrel that you bring up or loose a huge amount money
in a one-time hit by writing off production assets which were supposedly going to have an economic
life of decades.
Saudi Arabia (and, to a lesser extent, Russia) can stay irrational longer than the high
cost producers can stay solvent though. In the end, they'll win. So maybe not so irrational after
all.
Yes, the key issue is the difference between average cost and marginal cost for production.
North Sea Oil was a big money loser throughout the 1990's they pretty much stopped exploration,
but with sunk costs and a need to keep turnover, the big production rigs kept going despite making
losses for well over a decade. My brother is an off-shore driller and at that time he and nearly
all his colleagues ended up travelling from the 'stan to the Gulf of Mexico to try to earn some
money. It wasn't just the loss of jobs everyones wages were cut to the bone with no bonuses,
so this has a knock-on effect right through the local economy.
Fracking is most vulnerable to low prices because of the constant need for capital infusions
to keep production up. A fracked gas well has about 18 months of full production, a fracked oil
well about 2 years. Many of the companies will also have a certain number of drilled but not fracked
wells (non-completed) as back-up. So its hard to tell how long frack production companies can
keep going, but its certainly not long. Oil sands and bitumen sands are significantly less capital
intensive (they are basically just open cast pits with lots of big trucks running around), so
they have more flexibility in ramping up and down production. Of course, Saudi oil is the cheapest
of all to produce its pretty much just the cost of keeping the pumps going (although to prolong
the well life they also need capital investment in fracking and other techniques, but that type
of operation can be postponed. I suspect that nearly all off-shore, especially the pre-salts off
Brazil has been wiped out as a going concern it will take years of sustained high prices to
convince investors to take the risks involved.
So yes, SA can stay irrational longer than most although I suspect the Russians, with a more
diverse economy can stay longer than anyone had guessed. The frackers have lasted longer than
I think anyone in the industry thought they would mostly I think because of a terror among the
financiers of what happens if they start collapsing its the old story of the bigger the debt
you have, the more power you have over your creditors. But I think from other sources the process
has already begun of companies quietly doing debt for equity swaps which will keep the companies
going, although its unlikely we will see a major infusion of investment into fracking for a very
long time.
I mentioned earlier in the year the man I 'sort of knew' who lost his job on an offshore to
Brazil rig last fall. Brazil isn't the only 'marginal' field around. How many of these 'marginal'
fields were sold to the locals as the 'cure' for what economically ailed them? The political fallout
from these broken promises hasn't begun to arrive yet. Expect extra instability in some regions
that can least afford it.
As for knock on effects, an anecdote. This past weekend Phyllis and I cruised around our neck
of the woods visiting garage sales. We found some good stuff. One house, a three bedroom, two
bath brick home on two acres was having an 'inventory reduction sale.' Points to the couple for
humour. They were trying to sell this home because they couldn't afford the mortgage any more.
He had lost his offshore job last year and settled for something related that paid roughly half
of his previous compensation. "I'm now travelling down to the coast five days a week, (about 75
miles one way,) and we found an affordable place to do a lease purchase deal on near there. We
now have to figure out how much of a loss we can afford to take on this place. We've been here
twelve years." Comparable houses in their neigbhourhood are going, if they sell at all, for $150,000
to $200,000 USD. It was a nice area. I spotted fresh deer tracks on the edge of their back yard.
So, as the above will attest, the U.S. can stay irrational for quite a while also.
Whiting has been the top producer in the Bakken, the most productive field outside of Texas in
addition, Continental Resources, the # 2 Bakken producer, took the same action moreover, Chesapeake
Energy, the 2nd largest US natural gas producer and the operator of more than half of Ohio's wells,
and has quit drilling here; in fact, it has stopped drilling new wells in both the Marcellus and
Utica Shale basins altogether, having released its last two Ohio rigs and its last Pennsylvania
rig before the end of 2015 the company is trying to downsize in lieu of bankruptcy, and is planning
to sell off its wells and land in a last ditch effort to stay solvent
in contrast to Whiting and Continental, who are deferring completions while they wait for higher
prices, Chesapeake, with their back against the wall with bonds coming due and facing $1 billion
in collateral calls, is going to focus on more well completion and less drilling they also expect
to sell assets worth between $500 million to $1 billion, and cut overall spending by 57% so they're
in the unenviable position of producing the most gas they can with gas prices at 17 year lows,
and trying to sell off their natural gas and oil assets when prices for both commodities are at
multi-year lows..
Top producer = bagholder of large stranded investment in some of the most expensive petro production
in the market.
Investment equivalent of revolver in mouth
Revolver for whom? A murder is made to look like suicide.
Here is an older explanation of MLP's, from
David Cay Johnston , but highly relevant now.
While you may not have heard about MLPs, readers of Barron's and other publications for
savvy investors have. In approving cover stories, Barron's and other investment journals tout
MLPs as a way for investors to earn returns of 8 percent or more each year while paying little
or no income tax.
In the shadows, business can use government to drill holes into consumer and producer
pockets through inflated prices. Now one industry has applied this to taxes. This column casts
a focused light on such activity to encourage disclosure, integrity, and fairness in taxation.
- All that is needed to expand this tax shifting is a change in federal law - a change so
minor it does not even require a sentence to be added to section 7704 (d)(1)(E), a list of
industries that can be owned through publicly traded partnerships without being subject
to the corporate income tax . As one lawyer deeply involved in the pipeline case told
me: "The electric utilities would be master limited partnerships now except that when the law
was changed, the Edison Electric Institute was uncharacteristically asleep at the switch."
David lays the whole scam bare. Basically, the Pirate's taxes are paid through your rates,
even taxes that might not need to be paid are collected.
MLP's are managed by Pirate Equity and funded by Muppets, and the other day an
interesting link popped up.
. . .Take a midstream gathering asset. It costs $50 million to build and produces $15
million in annual DCF or a 30% return-not bad. At a 10% disposition yield, it is worth $150
million. Sell it to the MLP for $150 million and voila, you have a $100 million gain on sale.
The MLP borrows $150 million on the revolver at 5% and then has $7.5 million in incremental
DCF with no dilution. Talk about successful financial engineering. At the LP level, it looks
like the sponsor has done the LPs a favor by creating extra DCF and the press release can brag
that there has been NO DILUTION, only an increase in the distribution-which makes shareholders
happy-even if a good chunk of that goes back to the sponsor through the IDR.
Now look beneath the numbers a bit, the sponsor has taken all the real gains and the
MLP has taken all the risk. The sponsor got a $100 million gain on sale along with an increase
in the IDR. The MLP got an incremental $7.5 million of DCF with leakage through the IDR and
now has $150 million of additional debt. That's a very un-equal bargain. Meanwhile, in the
20 years that it takes to pay off the debt through DCF, the energy field has probably been
depleted to the point that the midstream asset is stranded and practically worthless. It's
Ponzi-finance at its apex. . .
It looks like a lot of pensions were herded into pipelines, with the Pirates getting all
the profit with pension funds taking the risk, and now gasping for money.
Art Berman thinks that the glut of oil of oil is glut of condensate and light oil. Banks basically
has given shale operator a pass in 2015. At one point analogy with subprime will became too evident
to hide it and then crash starts. Art Berman recommended to watch Big Short to see what is happening
on shale patch.
"... My understanding is that California oil production is characterized by a large number of shallow wells producing small amounts of oil each. Also, many of these advanced fields have been under water flood or steam flood for quite a while. ..."
"... If $30 oil lasts very long, I would think that the decline rate could be as high as 3 percent a month due to high shut-ins and abandonment. I think a somewhat higher price would slow the decline a lot, as you would see normal depletion but would not see wholesale abandonment. ..."
"... USA and international have other similar mature fields with large numbers of wells producing small amounts of oil each. If a number of these fields start seeing a high rate of shut-in and abandonment, there will be substantial declines. ..."
"... From what Ive seen, most production projections seem to be focused on the shale and offshore declines. I think we may see a higher than expected decline in these old fields. The Bakken has become the leading indicator of shale, and California may become the best indicator of how these post mature fields respond. ..."
"... We have shut in quite a bit. Some places around here are pretty bad. One little field I go by sometimes had only one well pumping out of over 20. They all were on in 2014 and prior. ..."
"... The first leg there were 16 producing and 14 idle. The second leg there were 21 producing and 41 idle. Some of the idle ones may be on timers, and I dont have a baseline to compare. Nevertheless, it seems like a lot of idle wells. This is in Kansas, lots of low volume wells. Also, significant differentials. Prices were down to $16 but have moved back to $22-23. ..."
"... Quote from CEO: The other operational point I will make surrounds work overs. We routinely repair our wells across our entire portfolio and based on todays price environment, if a well goes down, we may leave it off a little while because spending money on repair isnt economically justifiable. Accordingly we expect to lose some wells in 2016, predicting that number of wells is nearly impossible ..."
Shallow, I know you have been looking at info on conventional declines as well as shale. California
is the number 3 producing state. According to their weekly notice summaries, they haven;t issued
a drilling permit in the last 3 weeks, and only 41 in 2016. Permits to abandon are now at 246
in 2016. Baker Hughes has them down to 6 rigs. It will be interesting to see how their production
declines, although they are slow to report.
dclonghorn. I am sure CA will decline. California Resources Corporation (the OXY spinoff) is in dire straits. Breitburn is also in dire straits, they are a significant CA producer. They didn't answer questions
on their conference call. I really don't blame them, what is there to say?
Agreed, they will decline. How rapidly they decline is a big question to me. My understanding
is that California oil production is characterized by a large number of shallow wells producing
small amounts of oil each. Also, many of these advanced fields have been under water flood or
steam flood for quite a while.
If $30 oil lasts very long, I would think that the decline rate could be as high as 3 percent
a month due to high shut-ins and abandonment. I think a somewhat higher price would slow the decline
a lot, as you would see normal depletion but would not see wholesale abandonment.
USA and international have other similar mature fields with large numbers of wells producing
small amounts of oil each. If a number of these fields start seeing a high rate of shut-in and
abandonment, there will be substantial declines.
From what I've seen, most production projections seem to be focused on the shale and offshore
declines. I think we may see a higher than expected decline in these old fields. The Bakken has
become the leading indicator of shale, and California may become the best indicator of how these
post mature fields respond.
If I am not mistaken, Denbury, Legacy Reserves and Breitburn all reported in conference calls
they that have shut in not an insignificant amount of oil production.
We have shut in quite a bit. Some places around here are pretty bad. One little field I go
by sometimes had only one well pumping out of over 20. They all were on in 2014 and prior.
I did some deliveries yesterday. I've recently been counting producing and idle pumps. The first
leg there were 16 producing and 14 idle. The second leg there were 21 producing and 41 idle. Some
of the idle ones may be on timers, and I don't have a baseline to compare. Nevertheless, it seems
like a lot of idle wells. This is in Kansas, lots of low volume wells. Also, significant differentials.
Prices were down to $16 but have moved back to $22-23.
Denbury press release. 2015 production, 72,861 boepd, down 2% from 2014. Q4 shut in 1,700 boepd.
Forecast 2016 64-68K boepd.
Breitburn. 55.3K boepd in 2015. Guidance 46.5-54K boepd. Shut in 650 boepd Q4 2015.
Legacy Reserves. 2015 45,135 boepd. No 2016 guidance.
Quote from CEO: "The other operational point I will make surrounds work overs. We routinely repair our wells
across our entire portfolio and based on today's price environment, if a well goes down, we may
leave it off a little while because spending money on repair isn't economically justifiable. Accordingly
we expect to lose some wells in 2016, predicting that number of wells is nearly impossible"
Man, this stuff isn't good at all. I have nothing against these guys, they are in the same
boat as us, just have debt because they grew a lot prior to 2015.
"... Those bonds must be cumulative mustnt they i.e. rolled over each year. Otherwise that is about $1.3 trillion total. At (say) 5,000,000 bpd for 7 years at as high as $100 per barrel the companies would only be getting $1.25 trillion total. Or am I missing something. ..."
"... .Credit analysts at UBS say there are $1.2 trillion outstanding in loans to the U.S. oil industry! A third of this debt is owed by exploration and production companies. And UBS predicts the default rate on these loans could end up being in the low-teens .. ..."
"... I think $1.2 trillion is total debt owed by the US oil and gas industry, not just loans. 1/3 of $1.2 trillion = $400 billion owed by the E P companies. This includes bonds and bank loans. Bonds include junk bonds and investment grade bonds. So $260 billion in junk bonds is the right number. ..."
Those bonds must be cumulative mustn't they i.e. rolled over each year. Otherwise that is about
$1.3 trillion total. At (say) 5,000,000 bpd for 7 years at as high as $100 per barrel the companies
would only be getting $1.25 trillion total. Or am I missing something.
I'm going to predict a lot of bankruptcies in late 2017 as oil prices start to rise because the
lender's will suddenly see a lot more money in taking over the resource base than by keeping the
bond's rolling over.
.Credit analysts at UBS say there are $1.2 trillion outstanding in loans to the U.S. oil industry!
A third of this debt is owed by exploration and production companies. And UBS predicts the default
rate on these loans could end up being in the low-teens ..
The oil industry also includes pipelines and infrastructure, refineries
In the above diagram it is also clearly stated:
The amount of bonds US energy companies below investment grade need to pay back each year .
So, it is clear that the total amount of debt maturing over the next 7 years stands at 1.2
trillion.
"Credit analysts at UBS say there are $1.2 trillion outstanding in loans to the U.S. oil industry!
A third of this debt is owed by exploration and production companies"
I think $1.2 trillion is total debt owed by the US oil and gas industry, not just loans.
1/3 of $1.2 trillion = $400 billion owed by the E&P companies.
This includes bonds and bank loans.
Bonds include junk bonds and investment grade bonds.
So $260 billion in junk bonds is the right number.
Besides, I have seen in various sources a similar number
Heinrich I think I agree with Alex. The caption is wrong in the "per year" bit, but correct
in "below investment grade" that is junk, which is not the total debt to the oil industry by
a long way (let's hope).
"... Credit analysts at UBS say there are $1.2 trillion outstanding in loans to the U.S. oil industry! A third of this debt is owed by exploration and production companies. And UBS predicts the default rate on these loans could end up being in the low-teens. ..."
"... Fitch, a credit rating agency, said actual defaults should have begun happening nine to 12 months after oil prices started to fall. ..."
Credit analysts at UBS say there are $1.2 trillion outstanding in loans to the U.S. oil industry!
A third of this debt is owed by exploration and production companies. And UBS predicts the default
rate on these loans could end up being in the low-teens.
The latest survey of bank loan officers by the Federal Reserve found there is a higher expectation
that shale firms will have trouble meeting the terms of the loans. The survey also found that banks
were cutting credit lines to energy companies and asking shale firms for more collateral.
Fitch, a credit rating agency, said actual defaults should have begun happening nine to 12
months after oil prices started to fall.
But, judging by the stock performances of most of the companies involved, everything is great.
Why has nothing happened yet?
The answer is hedges. Many shale oil firms hedged their production this year. Chesapeake Energy (CHK),
for example, will have $1.2 billion added to its cash flow this year thanks to hedges on its production. But this protection declines and even disappears entirely in 2016 for some companies, leaving
them wide open to finally be hurt by low oil and gas prices.
Plus, companies can't add any more hedges at this late date because, in most cases, it would be
too costly.
Maybe that's why companies
targeted by David Einhorn as vulnerable, such as EOG and Pioneer, are so anxious to increase
their production as soon as possible. They need to generate cash.
"... Einhorn called much of the industry "frack addicts" who were wasting money on wells that'll never pay off. He said some companies are currently getting a negative return on their invested capital. And that, in some cases, that was true even when oil was trading at $100 per barrel! ..."
"... Since 2006, the U.S. oil exploration and production industry has spent $80 billion more in capital than it made selling oil. Einhorn says companies were only kept alive by the constant inflows of capital from bankers (also known as loans) and investors alike. ..."
"... Moody's said its LSI (Liquidity Stress Index) for these companies more than doubled in March to 9.8% from 4.4%. But keep in mind, this Index hit 26% in March 2009 when oil prices plunged due to the financial crisis. ..."
In November 2007, the relatively unknown hedge fund manager David Einhorn raised major concerns about
the accounting at Lehman Brothers. It led him to bet against the company, and short the stock.
No one paid much attention until Lehman Brothers collapsed. Einhorn's reputation was made, and his firm, Greenlight Capital, became one of
the hedge
funds to watch. Now, Einhorn has found another prominent target: the frackers,
U.S.-based oil exploration and production (E&P) companies.
Zeroing In
Einhorn called much of the industry "frack addicts" who were wasting money on wells that'll never
pay off. He said some companies are currently getting a negative return on their invested capital. And
that, in some cases, that was true even when oil was trading at $100 per barrel!
Einhorn added, "When someone doesn't want you to look at traditional (financial) metrics, it is
a good time to look at traditional metrics." By "someone," he means exploration and production companies.
Einhorn dislikes how these firms report their earnings through methods like EBITDAX, which means
earnings before interest, taxes, depreciation, amortization, and exploration expenses. He said this
measure "stands for earnings before a lot of stuff." In particular, Einhorn targeted five companies:
Pioneer Natural Resources (PXD),
EOG Resources (EOG),
Continental Resources (CLR),
Whiting Petroleum (WLL),
and Concho Resources (CXO). Pioneer seems to be his No. 1 target, since he dubbed it "the motherfracker." "A business that burns cash and doesn't grow isn't worth anything," said Einhorn about Pioneer.
Instead, Einhorn encouraged investors to focus on cash as a guide to the health of the industry.
Since 2006, the U.S. oil exploration and production industry has spent $80 billion more in capital
than it made selling oil. Einhorn says companies were only kept alive by the constant inflows of
capital from bankers (also known as loans) and investors alike.
David Einhorn is a well-known poker player. (He won $4.4 million at the 2012 World Series
of Poker tournament.) But is he bluffing here?
On the Money, Sort Of
There is no denying the massive cash burn of these E&P companies. Many of them have debt problems,
which I have spoken about
before.
Moody's said its LSI (Liquidity Stress Index) for these companies more than doubled in March to
9.8% from 4.4%. But keep in mind, this Index hit 26% in March 2009 when oil prices plunged due to
the financial crisis.
This year Chesapeake's
stock market valuation has
suffered phenomenally. A year ago it was around $20 billion. By mid-February this year, it was around
$1 billion, and had been trading at under $2 a share until Wednesday, having shed more than $18 per
share over last year.
This has sparked fears that Chesapeake
was facing bankruptcy, but those fears seem to have been allayed if the 23 percent share price
jump is any indication. But the company still has $500 million in debt that is coming due in March-and
this is where the asset sale to FourPoint comes in handy.
There has been much investor concern about whether Chesapeake would be able to cover its debts
with planned asset sales and bond repurchasing. The plan was to purchase $240 million of the 3.25
percent senior notes due in March at discount rates,
according to Bloomberg. The news agency also noted that Chesapeake had been buying up bonds that
mature next year for 45 percent less than their value. The markets responded positively, but not
all analysts agree.
"We still believe it is burdened by too much leverage and by legacy transportation agreements,
and that if the strip (prices) were to hold true, that the stock has no equity value,"
Doug Leggate, a Bank of America Merill Lynch analyst,
wrote on Wednesday.
"... By Irina Shav, a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice ..."
"... nearly 35 percent of pure-play E P companies listed worldwide, or about 175 companies, are in the high risk quadrant, Deloitte noted, adding that the situation is precarious for 50 of these companies due to negative equity or leverage ratio above 100. ..."
"... More than 80 percent of U.S. E P companies who filed for bankruptcy since July 2014 are still operating (Chapter 11) under the control of lenders or the supervision of bankruptcy judges, according to Deloitte. ..."
"... However, the majority of these Chapter 11 debt restructuring plans were approved by lenders in early 2015, when oil prices were $55-60/bbl. Since then, prices have fallen to $30/bbl, and hedges at favorable prices have largely expired, making it tough for existing Chapter 11 bankruptcy filers to meet lenders earlier stipulations and increasing the probability of US E P company bankruptcies surpassing the Great Recession levels in 2016. ..."
"... According to AlixPartners, these debts totaled $353 billion for U.S. and Canadian energy companies at end-2015. To compare, Deloitte puts the combined debt of those 175 bankruptcy-threatened companies at more than $150 billion, nearly half of the total for US and Canada. ..."
"... Then there are the banks, which used to have a soft spot for energy companies when oil was selling for over $100 a barrel. Now that it is hovering around $30, the soft spot is gone and lenders are trimming their energy investment portfolios. ..."
"... Cost for shale oil production $15 a barrel? Thats roughly the cost of pumping light sweet crude in Saudi Arabia, the lowest cost producer out there. Sounds like nonsense to me. ..."
"... Consolidation likely, but only after bankruptcy. Which banks are most at risk? ..."
"... Secondary indirect effects are also of concern. Related exposures of the TBTFs and large shadow banks to the oil and gas sector, including derivatives, are opaque. Couple these developments with volatile price fluctuations in major currencies, declining prices of many other commodities, and the interconnected nature of these systemically important financial institutions, and one hopes their risk management and internal controls are adequate. ..."
"... In the good old days the Texas Railroad Commission set world oil prices. Now its being done by players that are solely focused on their own self interests and players that are very short sighted. ..."
"... President Obama wants an oil tax, then give him one. Impose a windfall tax on imported oil at $60 a barrel. This will cause higher gasoline prices now, but will forestall much higher gasoline prices in the future. ..."
"... Some of this misery, is self inflicted along with the complicit of Fed encouraging animal spirits of wildcatters with cheap credit expansion since 09! Lot of mal-investments are made all over just like in China. Karma is getting back its bite! ..."
"... The U.S. shale boom was fueled by junk debt. Companies spent more on drilling than they earned selling oil and gas, plugging the difference with other peoples money. Drillers piled up a staggering $237 billion of borrowings at the end of September, according to data compiled on the 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. U.S. crude production soared to its highest in more than three decades ..."
"... actually the undesirable aspects of fracking have been IGNORED, until now when it may affect the wealthy and the banks we utilize products and transportation that is heavy on petroleum because that make banks and oligarchs a lot of money, and theyll kill public transportation to get moar. ..."
"... trees dont grow to the sky. There is a maximum volume of humans that the planet will tolerate, and we seem to be fixated on finding out what that number is. ..."
By Irina Shav, a writer for the U.S.-based Divergente LLC consulting firm with over
a decade of experience writing on the oil and gas industry. Originally published at
OilPrice
More than one-third of public oil companies globally face bankruptcy, according to a new Deloitte
report that paints a fairly gloomy picture of the U.S. shale patch as it struggles to survive under
mountains of debt.
The Deloitte report -the first high-profile report on the current financial situation of global
oil and gas companies-surveyed 500 companies and found that 175 are facing "a combination of high
leverage and low debt service coverage ratios".
"[ ] nearly 35 percent of pure-play E&P companies listed worldwide, or about 175 companies,
are in the high risk quadrant," Deloitte noted, adding that the situation is "precarious" for 50
of these companies due to negative equity or leverage ratio above 100.
"Stock prices of some of these has already dipped below $5, making them penny stocks. The probability
of these companies slipping into bankruptcy is high in 2016, unless oil prices recover sharply, a
large part of their debt is converted into equity, or big investors infuse liquidity into these companies."
Reports about the growing numbers of bankruptcies among U.S. shale producers
aren't new, but the Deloitte findings reinforce the picture.
"More than 80 percent of U.S. E&P companies who filed for bankruptcy since July 2014 are still
operating (Chapter 11) under the control of lenders or the supervision of bankruptcy judges," according
to Deloitte.
"However, the majority of these Chapter 11 debt restructuring plans were approved by lenders in
early 2015, when oil prices were $55-60/bbl. Since then, prices have fallen to $30/bbl, and hedges
at favorable prices have largely expired, making it tough for existing Chapter 11 bankruptcy filers
to meet lenders' earlier stipulations and increasing the probability of US E&P company bankruptcies
surpassing the Great Recession levels in 2016."
Shale producers amassed huge debts that they are now struggling to service in the oil price downturn.
According to AlixPartners, these
debts totaled $353 billion for U.S. and Canadian energy companies at end-2015. To compare, Deloitte
puts the combined debt of those 175 bankruptcy-threatened companies at more than $150 billion, nearly
half of the total for US and Canada.
That's a lot of debt that needs servicing or restructuring. Unfortunately, things in the industry
are so bad that the usual solutions don't work as effectively as they normally would. For starters,
demand for E&P assets is at best moderate. Then there are the banks, which used to have a soft spot
for energy companies when oil was selling for over $100 a barrel. Now that it is hovering around
$30, the soft spot is gone and lenders are trimming their energy investment portfolios.
Private equity firms are one alternative source of finance for the troubled industry players.
Deep capex cuts are another. The efficiency of both options, however, is questionable. Banks, the
IEA, and the IMF have warned that oil prices could reach $20. Iran is back on the international market
and planning to raise
production to pre-sanction levels (around 4 million bpd in 2011.). The world's number one and
two producers, Russia and Saudi Arabia, have made a deal to freeze output at current levels, but
these levels are record-highs for both countries, so a freeze is unlikely to take care of the glut
quickly enough. And it's not going to happen anyway.
All this spells doom for that unfortunate one-third of producers. There is one alternative to
bankruptcy-sector consolidation-although the problems with consolidation are similar to the problems
with asset sales. Few energy companies are in a position to make acquisitions right now.
What's left? Continuing the optimization of everyday operations. Operating efficiencies are constantly
being improved, mainly in the shale patch but also outside it. Costs for 95 percent of U.S. output
have fallen below $15 a barrel, says Deloitte. It seems all that is left for the troubled E&Ps is
to continue pumping and keep hoping the storm will eventually subside. Not a fascinating prospect,
by all means, but the most realistic one.
Cost for shale oil production $15 a barrel? That's roughly the cost of pumping light sweet
crude in Saudi Arabia, the lowest cost producer out there. Sounds like nonsense to me.
They are waiting for the big bailout after the election, just like the S&L crooks, but this
time without 600 of them going to jail and the rest taking the haircut of the century.
I'm wondering what the impact on these new nat gas terminals will be with a decimated fracking
industry. I got a laugh out of NBR last night, they said it was good news that less inventory
came into storage last month, um when the tank is full you can't put any more in there
I agree
with you that oil won't go to zero, one of the industry analysts referenced the Deloitte report
and based on it called the bottom 18. Cheapest gas in sd 2.29, most expensive by airport 3.49!
Also, I don't see Iran not putting their oil on the market, they need the dough, too
Most likely. And because the drilling, fracking and exploring was debt financed the producers
have to keep pumping as long as the price is above their marginal cost because they have to make
those monthly payments. So all these debt financed drillers are going to flood the market trying
to stay solvent until they all go bust.
Since the fossil fuel industry are big backers of the Republicans, this should present an opening
to the Democrats to do something significant about global warming. If they actually gave a damn
and weren't in the tank themselves.
Secondary indirect effects are also of concern. Related exposures of the TBTFs and large shadow
banks to the oil and gas sector, including derivatives, are opaque. Couple these developments
with volatile price fluctuations in major currencies, declining prices of many other commodities,
and the interconnected nature of these systemically important financial institutions, and one
hopes their risk management and internal controls are adequate.
The $15 per barrel operating cost doesn't matter, even if it is true the core analysis is
the decline curve for Shale is very steep more than 90% decline after 40 months by the time
the price recovers the active reserve assets remaining no matter what the asset discount for
bankruptcy leaves little for a prize. Once these wells are put on a pump the deeper the well
the more operating cost with low volumes to cover the cost.
The losses will be catastrophic to include the banks.
In 86′ oil went from $42 at the top to $9.60 / Bbl. at the bottom the see thru buildings
from Tulsa to Houston lasted for a long time since there were no tenants for the space even
the law firms went off the air --
The problem in this current situation is that we are a capitalistic country trying to function
in a cartel world. In the good old days the Texas Railroad Commission set world oil prices. Now
it's being done by players that are solely focused on their own self interests and players that
are very short sighted.
OPEC tripled the price of oil between 2000 and 2010. They then held the price level. The marginal
price for oil was low and the additional portion of the price was essentially a kicker for their
government revenues. The problem was they got too greedy and set the price too high (had they
set the world price at $85 instead of $100, we likely would have avoided the latest boom/bust
cycle).
The capitalistic market saw these high prices and realized that they could make money at the
prices that OPEC was charging the market. In other words, the marginal cost for new oil prospects
was less than the artificial press levels that OPEC was setting. The result was predictable, though
partly driven by technology and fracking.
Marginal players, like the oil sands and deep and remote large scale oil and gas projects were
put into motion. The oil shale players were also put into motion, and they added about 3 million
barrels of oil per day out of about 92 million bopd. Other players, like Iraq also increased their
production.
When OPEC started feeling squeezed, they threw the kitchen wrench in and tried to hurt all
the other players in the market. In economics, this behavior is often either referred to as "dumping"
or "predatory pricing".
So, our domestic oil and gas production industry, to include a lot of US manufacturing jobs,
is being directly attacked by foreign countries that are trying to hurt our U.S. industry so they
can jack world prices up to higher levels.
So, those of you that are reveling in the current tough circumstances of our oil and gas industry
at these price levels, please realize a few things.
(1) OPEC really wants prices back at the high levels they have enjoyed recently. These low prices
will not last.
(2) OPEC has already managed to disrupt the longer term pipeline of oil projects meaning that
the future oil supply over the next five years will be less than it would have been which will
likely have a negative impact on world GDP.
(3) Our oil industry has made great strides in lowering costs and making unconventional oil shale
projects more competitive.
(4) Our government has done very little to support our cause of maintaining U.S. oil production.
We currently produce about 9 million barrels a day (down from about 9.5 million bopd recently)
at a time when we consume 19 million bopd as a country. While these extra imports we're now being
asked to cough up are cheap now, they will not be so cheap when OPEC jacks world oil prices higher
again.
Here's how we can fight back. President Obama wants an oil tax, then give him one. Impose a
windfall tax on imported oil at $60 a barrel. This will cause higher gasoline prices now, but
will forestall much higher gasoline prices in the future. Domestic producers will immediately
get a $60 oil price for their output. This will stop the Saudi's and Russians from being able
to deliberately destroy an industry in our country and allow us to create some employment stability
for a home grown industrial sector. The additional production in the U.S. will also make it more
difficult for OPEC to screw us later when oil prices soar again.
Some of this misery, is self inflicted along with the complicit of Fed encouraging animal spirits
of 'wildcatters' with cheap credit expansion since '09! Lot of mal-investments are made all over
just like in China. Karma is getting back it's bite!
Debt-Fueled Boom
The U.S. shale boom was fueled by junk debt. Companies spent more on drilling than they earned
selling oil and gas, plugging the difference with other peoples' money. Drillers piled up a staggering
$237 billion of borrowings at the end of September, according to data compiled on the 61 companies
in the Bloomberg Intelligence index of North American independent oil and gas producers. U.S.
crude production soared to its highest in more than three decades
to paraphrase B. Dylan; 'who don't we all throw stones'
Everybody doin their 2 minute hate am I right ?? we're all stuck in this energy quagmire, and
yes, the undesirable effects of fracking are now being felt, but we all utilize products or transportation
that relies on petroleum, like it or not !! Getting away from that energy source basically means
living a much reduced lifestyle !! who's willing to give up even, say 50%, of their energy usage
to eliminate petroleum use completely, because wind and solar currently do not scale, if they
ever will !!
actually the undesirable aspects of fracking have been IGNORED, until now when it may affect
the wealthy and the banks we utilize products and transportation that is heavy on petroleum because
that make banks and oligarchs a lot of money, and they'll kill public transportation to get moar.
I do not plan to have another car and the GFC reduced my consumption significantly, probably more
than 50% because my truck was a '56 GMC half ton, and rather than the ACA I just plan to go die
when the time comes, and live the best life I can until then.
trees don't grow to the sky. There is a maximum volume of humans that the planet will tolerate,
and we seem to be fixated on finding out what that number is.
and not to be too much in your face sorry but it's probably easy to knock off 50% of petroleum
usage in the same way that I have for most people, and I agree petroleum serves a mighty purpose
in our situation as it is
Actions of the company in cutting drilling and capex contradict rozy projections
Notable quotes:
"... Specifically, EOG has identified a decade of premium unconventional oil drilling inventory that will generate double digit returns at $30 oil. ..."
"... EOG expects to complete approximately 270 net wells in 2016, compared to 470 net wells in 2015, with total company crude oil production expected to decline only 5 percent versus 2015. ..."
"... For 2 yrs in a row, EOG has now cut its capital budget by more than 40%. 2016 spending will be $2.4-$2.6bn, down 45% to 50% year-over-year. ..."
"... EOG wont be fooled again by a temporary oil price uptick like in spring-2015, so the company plans to wait on any activity increase until it is convinced any future increase in oil price is sustainable. ..."
For EOG, $40 is becoming the new $70. This morning, the company discussed a new strategy to make
unconventional oil development in US plays like the Eagle Ford and the Permian Basin competitive
on a global scale at current oil prices. Specifically, EOG has identified a decade of premium unconventional
oil drilling inventory that will generate double digit returns at $30 oil.
Backed into a corner
by lower cost producers in a global price war, EOG essentially just yelled a battle cry at OPEC on
behalf of US shale, implying they will make unconventional oil just as cost effective as OPEC barrels.
EOG Resources is light years ahead of its peers in shale science and acreage quality, and its
ambitions may not be repeatable industry-wide, although others will certainly try. EOG is to shale
what Saudi is to OPEC - uniquely advantaged relative to other peers/members.
... ... ...
EOG has identified more than 2 billion barrels of oil equivalent resource, and over a decade
of drilling inventory (3,200 wells) that can generate returns of 10% at $30 oil, 30%+ at $40 oil,
and 100%+ at $60 oil. The company is shifting into premium drilling mode, concentrating on the
core-of-the-core in top plays.
... ... ...
In addition to the new strategy, some key takeaways from EOG's 2016 plan:
EOG expects to complete approximately 270 net wells in 2016, compared to 470 net wells
in 2015, with total company crude oil production expected to decline only 5 percent versus 2015.
For 2 yrs in a row, EOG has now cut its capital budget by more than 40%. 2016 spending
will be $2.4-$2.6bn, down 45% to 50% year-over-year.
Non-premium inventory is still high quality. A large portion will be converted to premium
through technology over time. What can't be converted will be part of property sales or trades.
EOG is delaying the work schedule on some frac spreads from 7 to 5 days a week in order to
maintain more fleets so they will have the ability to ramp in the future.
EOG won't be fooled again by a temporary oil price uptick like in spring-2015, so the
company plans to wait on any activity increase until it is convinced any future increase in oil
price is sustainable.
"... As much as 15 percent of the face value of high-yield bonds owed by U.S. oil producers and service companies could go into default this year, according to BCA Research. ..."
"... Trouble could radiate outward if banks, their balance sheets weakened by defaults in the oil industry, cut back lending to other enterprises. Says Nicholas Sargen, chief economist at Fort Washington Investment Advisors: "There are some people beginning to worry that this thing could spread like the subprime crisis. People said then that it was too small to matter, and then you find out there are linkages you didn't know about." ..."
"... In any case, oil prices this low aren't likely to last long. The market for crude is driven increasingly by high-frequency, computer-based momentum trading. In July, the CME Group-formerly the Chicago Mercantile Exchange-ended the 167-year history of actual humans trading commodity futures in open pits in Chicago and New York. Computer trading has proved more efficient, but not always better. "There was a governing quality of human input that's been lost in the market, that sort of prevented this kind of lunacy," says Dan Dicker, a former oil trader on the Nymex and president of MercBloc, a wealth-management firm. "People could only move but so fast." ..."
"... At the moment, says Kopits of Princeton Energy Advisors, "there's a weird disconnect between any kind of long-term fundamentals and current market values." Fundamentals tend to win out in the long run. Supply will be curbed as drillers drop projects that are unprofitable at $30 a barrel. And demand will accelerate; people are already driving more miles, albeit in more fuel-efficient vehicles. (A 2015 Ford F-150 pickup gets 30 percent better gas mileage on the highway than the 2005 model.) Oil traders spent most of 2015 increasing their bets that oil prices would fall. Since mid-January they have slightly pared their short positions and bought more contracts that gain value when oil rises. ..."
The market turmoil is shaking up companies as far afield as St. Louis-based
Emerson Electric, headed since 2000 by Chief Executive Officer David Farr. Emerson
makes products ranging from oil-production instruments to closet organizers.
"The last 30 days have been what I would call the most unusual in my time at
Emerson. I've never seen a marketplace go so volatile," Farr told analysts on
Feb. 2.
ExxonMobil is facing a potential
credit downgrade for the first time since the Great Depression. ConocoPhillips
is
cutting its dividend for the first time in a quarter-century. Energy stocks
account for 6.6 percent of the S&P 500's market value. While that's only half
their share of five years ago, it's still big enough for them to drag down the
overall index on bad days.
In 2014 the energy industry accounted for nearly one-third of S&P 500 companies'
capital expenditures, according to data compiled by Bloomberg. At least $1 trillion
in spending is getting canceled, says Steven Kopits, president of Princeton
Energy Advisors. When energy companies cut back, pipe makers, truckers, railroads,
and businesses in other industries suffer.
Goldman Sachs puts the chance of a recession in the
next year at 18 percent
Then there's the financial sector. Oil drillers borrowed heavily to expand
production, and many can't make money at today's superlow prices. As much
as 15 percent of the face value of high-yield bonds owed by U.S. oil producers
and service companies could go into default this year, according to BCA Research.
"The major risk banks have isn't to their normal retail-oriented stuff,
it's to the oil space," says Andrew Brenner, head of international fixed income
at National Alliance Capital Markets in New York. Markets were rattled on Feb.
8 after the Debtwire news service reported that Chesapeake Energy, the No. 2
U.S. natural gas producer, had hired a law firm to restructure a $9.8 billion
debt load. The company issued a statement saying it has no plans to pursue bankruptcy.
Trouble could radiate outward if banks, their balance sheets weakened
by defaults in the oil industry, cut back lending to other enterprises. Says
Nicholas Sargen, chief economist at Fort Washington Investment Advisors: "There
are some people beginning to worry that this thing could spread like the subprime
crisis. People said then that it was too small to matter, and then you find
out there are linkages you didn't know about."
How long will oil and stocks continue their doomed embrace? No one knows
for sure, but there are signs that emotion has gotten the better of investors.
Once things calm down, the underlying strengths of the U.S. economy could start
to become clearer. At that point, stocks could start to rebound even if-or because!-the
global glut of crude keeps oil prices low.
... ... ...
Synchronized plunges this extreme in stocks and oil usually indicate that
investors are expecting a U.S. recession, which would kill corporate profits
and demand for crude. But
how likely is a recession over the next year or so? Not impossible, but
not probable.
The most important indicator of economic health is employment. The U.S. created
151,000 jobs in January, less than in previous months but more than enough to
absorb the normal flow of entrants into the labor force. The unemployment rate
dropped to 4.9 percent, which the Federal Reserve considers full employment.
Average hourly earnings rose 2.5 percent from the year before. That's a real
pay raise for American workers, since it's above the inflation rate, yet it's
not so high as to get the Fed worried about an incipient wage-price inflationary
spiral. Meanwhile, companies show no sign of retrenching on employment: In December
listed job openings were the highest as a share of all jobs, filled and unfilled,
since record keeping began in 2000, according to data released by the Bureau
of Labor Statistics on Feb. 9.
Cheap oil, supposedly an economic threat, has done one good thing for the
U.S. economy and stocks. It's kept the overall increase in consumer prices through
December to just 0.7 percent. That could help persuade the Fed to throttle back
its plans to raise rates. On Feb. 10, Fed Chair Janet Yellen suggested that
further rate hikes would depend on whether the market turmoil persists. "Monetary
policy is by no means on a preset course," she
told Congress. Low rates are good for both the economy and Wall Street,
because stocks become a more enticing alternative when rates are low.
The bears are right that cheap oil is damaging high-cost producers around
the world, and some of those are in the U.S.
... ... ...
...The
bad parts of the oil plunge are hitting now: the credit downgrades, the
defaults, the
investment cutbacks, the layoffs of roughnecks. They're making news and
rattling people's confidence. "We've taken the big hit upfront," says Chris
Varvares, co-founder of St. Louis-based Macroeconomic Advisers. Eventually,
the money freed up by cheap oil will leak into other parts of the economy. When
oil prices crashed in 1986 and gasoline suddenly got cheap, it didn't show up
in the consumption numbers for more than a year, says David Rosenberg, chief
economist at Gluskin Sheff.
In any case, oil prices this low aren't likely to last long. The market
for crude is driven increasingly by high-frequency, computer-based momentum
trading. In July, the CME Group-formerly the Chicago Mercantile Exchange-ended
the 167-year history of actual humans trading commodity futures in open pits
in Chicago and New York. Computer trading has proved more efficient, but not
always better. "There was a governing quality of human input that's been lost
in the market, that sort of prevented this kind of lunacy," says Dan Dicker,
a former oil trader on the Nymex and president of MercBloc, a wealth-management
firm. "People could only move but so fast."
At the moment, says Kopits of Princeton Energy Advisors, "there's a weird
disconnect between any kind of long-term fundamentals and current market values."
Fundamentals tend to win out in the long run. Supply will be curbed as drillers
drop projects that are unprofitable at $30 a barrel. And demand will accelerate;
people are already driving more miles, albeit in more fuel-efficient vehicles.
(A 2015 Ford F-150 pickup gets 30 percent
better gas mileage on the highway than the 2005 model.) Oil traders spent
most of 2015 increasing their bets that oil prices would fall. Since mid-January
they have slightly pared their short positions and bought more contracts that
gain value when oil rises.
Barry White began
Can't
Get Enough of Your Love, Babe by saying, "I've heard people say that
too much of anything is not good for you, baby." Cheap oil is kind of like that
for the stock market. But with any luck, their dysfunctional dynamic won't last
much longer.
As many as 74 North American producers face significant difficulties in sustaining
debt, according to credit rating firm Moody's Investors Service. Shale explorers
from Texas to North Dakota will be "decimated" in coming months amid a wave
of restructurings and bankruptcies, said Mark Papa, the former EOG Resources
Inc. chief executive officer who helped create the shale industry more than
a decade ago. The survivors will be more conservative, Papa, who is now a partner
at private-equity firm Riverstone Holdings LLC, said during a panel discussion
on Tuesday.
In any case, oil prices this low aren't likely to last long. The market for crude is driven increasingly
by high-frequency, computer-based momentum trading. In July, the CME Group-formerly the Chicago Mercantile
Exchange-ended the 167-year history of actual humans trading commodity futures in open pits in Chicago
and New York. Computer trading has proved more efficient, but not always better. "There was a governing
quality of human input that's been lost in the market, that sort of prevented this kind of lunacy,"
says Dan Dicker, a former oil trader on the Nymex and president of MercBloc, a wealth-management
firm. "People could only move but so fast."
I think unrevealing of the weakest shale is coming. Peace agreement
in Syria is signed today and it is huge and there is no need to keep War
party (from all sides) shackled with low prices any longer by keeping shale
on life support.
I think in the next few weeks or months certain things will be iron out
in terms of actual cuts from the major producers. No doubt that US production
is already in decline and could be even more than what EIA numbers are showing,
and it will be incorporated as official "cut" by US. But Saudis and Russians
will cut too. The first sign was that "freeze" negotiation a week ago in
Doha and it was building block.
Yeah Niami is still cooing "No cuts" but he is just bargaining. Last
week I thought it would be by summer but it could happen earlier.
No orders were unfilled at $100 either. It depends on level of production
unless it is coupled with major producers start prancing around refineries
and offering discounts like Saudis did and then everybody follows offering
discount. And once ball start rolling you end up with price from 1990's.
"The balance sheets of shale producers are in disrepair," said
Mr Hess"
and
"Opec launched a price war against US shale and other high-cost producers,
including Canadian oil sands and Brazilian deep-water oilfields, in
November 2014 by not reducing output despite a global oversupply. Since
then, oil prices have plunged by more than half, hitting a 12-year low
of about $26 on February 11.
In a rare admission that the policy hasn't worked out as planned,
Mr El-Badri said that Opec didn't expect oil prices to drop this much
when it decided to keep pumping near flat-out.
Opec's strategy began to shift last week, when the oil ministers
of Saudi Arabia and Russia agreed to freeze their output at the January
level, provided other oil-rich countries joined. Mr El-Badri said the
new policy will be evaluated in three to four months before deciding
whether to take other steps.
"This is the first step to see what we can achieve," he said. "If
this is successful, we will take other steps in the future." He refused
to explain what steps Opec could take."
Note they are the first I have seen to report PV10 with hedges, which
moves PV10 to $2.3 billion.
I wish they would disclose PV10 at various price points too.
Probably more note worthy, SM Energy's Q4 2015 oil production was down
14% from Q4 2014.
Also, their netback, pre hedges, was just $6 per BOE. That means Q1 netback,
pre hedges will be negative in all likelihood. They don't have a lot hedged
in 2016 compared to 2015.
"The world's second-largest oilfield services provider said last month it
cut nearly 4,000 jobs in the final three months of 2015. With the latest layoffs,
the company will have let go of nearly 29,000 workers, or more than a quarter
of its headcount since staffing reached its peak in late 2014."
"... Go back to 2007. The total amount of subprime and Alt-A loans was about US$1 trillion. The losses in that sector ticked well above 20%. There, you had a US$1 trillion market with $200 billion of losses. ..."
"... Here we're talking about a US$5 trillion market with US$1 trillion of losses from unpaid debt - not counting derivatives. ..."
"... Some other companies are going to be fine because they bought the derivatives. But then, the question is: Where did those derivatives go? Think back to the housing bust. We now know that a lot of the derivatives ended up at AIG. ..."
The drop in the
price of oil
from approximately $100 a barrel to the
$4060 range roughly constitutes a 40% decline or more.
That's extreme.
That's only happened three times in the past 70 years.
Oil
and other
commodities
are
volatile, but don't think for one minute that this is a normal fluctuation.
It's not. This would be like an 8,000 point drop on the Dow.
When the
oil price
dropped it came as a shock. No one expected it, other than maybe a
handful of people who were plotting it behind the scenes.
When the price of oil goes from US$100 to US$60, which as I said is extreme,
people say, 'Now it's going to go to US$50, then it's going to go to US$40 and then,
soon after, to US$30.'
You can't rule anything out, but it does look as if oil is going to oscillate
around US$60. It will go above that and below, but it will gravitate towards US$60.
That's still a big deal and will cause a lot of damage.
... ... ...
Oil below US$60 is more than low enough to do an enormous amount of damage in
financial markets.
Losses are already all over the place. We're only starting to learn about them
right now.
But I guarantee there are major losers out there and they're going to start to
merge and crop up in unexpected places.
The first place losses will appear are in junk bonds. There are about US$5.4
trillion - that's
trillion
- of costs incurred in the last five years for
exploration drilling and infrastructure in the alternative energy sector.
When I say alternative I mean in the fracking sector.
A lot of it's in the Bakken and North Dakota but also in Texas and Pennsylvania.
That's a lot of money. It's been largely financed with corporate and bank debt.
When many oil producers went for loans, the industry's models showed oil prices
between US$80 and US$150.
US$80 is the low end for maybe the most efficient projects, and US$150 is of
course the high end.
But no oil company went out and borrowed money on the assumption that they could
make money at US$50 a barrel.
So suddenly, there's a bunch of debt out there that producers will not be able to
pay back with the money they make at US$50 a barrel. That means those debts will need
to be written off. How much? That's a little bit more speculative. I think maybe 50%
of it has to be written off. But let's be conservative and assume only 20% will be
written-off.
That's a trillion dollars of losses that have not been absorbed or been priced
into the market.
Go back to 2007. The total amount of subprime and Alt-A loans was about US$1
trillion. The losses in that sector ticked well above 20%. There, you had a US$1
trillion market with $200 billion of losses.
Here we're talking about a US$5 trillion market with US$1 trillion of losses
from unpaid debt - not counting derivatives.
This fiasco is bigger than the subprime crisis that took down the economy in
2007. I'm not saying we're going to have another panic of that magnitude tomorrow;
I'm just trying to make the point that the losses are already out there.
Even at US$60 per barrel the losses are significantly larger than the subprime
meltdown of 2007. We're looking at a disaster.
On top of those bad loans, there are derivatives
Some of these fracking companies are going to go bankrupt. That means you may have
equity losses on some of the companies if they didn't hedge. Then, many frackers
issued debt which is going to default. That debt, whether it's bank debt or junk bond
debt, is going to default.
Some other companies are going to be fine because they bought the derivatives.
But then, the question is: Where did those derivatives go? Think back to the housing
bust. We now know that a lot of the derivatives ended up at AIG.
AIG was a 100-year-old traditional insurance company who knew that they were
betting that house prices would not go down. Goldman Sachs and a lot of other
institutions were taking opposite bet. When house prices did go down, everyone turned
to AIG and said: 'Hey, pay me.'
But AIG of course couldn't pay and had to be bailed out by the US government to
the tune of over US$100 billion. That's the kind of thing we're looking at now. These
bets are all over the place, because nobody thought oil was going to go to US$60 or
lower.
The losses are going to start to roll in, but they'll come in slowly. I'm not
suggesting that tomorrow morning we're going to wake up and find the financial system
collapsed. This is just the beginning of a disaster. The first companies to be
hardest hit will be second tier or mid-tier drilling and exploration companies.
Don't worry about the big companies. Exxon Mobil is not going go bankrupt. But
the smaller, higher cost producers with lots of debt will. With oil in the US$4555
per barrel range, those projects are no longer profitable and that debt will begin to
default in late 2015 or early 2016.
"... JPMorgan said it will increase its reserves for oil and gas loans by 60%
in Q1 . ..."
"... As you can see from the following slide, provisions will rise by $500 million
from $815 million the bank had set aside as of the end of last year. Metals and
mining reserves will also rise, by $100 million. ..."
"... As is apparent from the chart, Dimon's "fortress" balance sheet includes
some $19 billion in HY O&G exposure. We're anxious to see if the vaunted billionaire
will dismiss the enormous writedowns that are invariably coming in the next few
quarters as a "tempest in a teapot." ..."
"... Take the case of Gusher National Bank. Gusher was very aggressive in making
loans to oil and natural gas companies that had no problem repaying their loans
when energy prices were high. The loans spelled big profits for Gusher, and everyone
agreed that Gusher's executives were smart business people who really knew how to
make money. ..."
"... Then the economy slowed down, and the demand for energy fell. Factories
burned less oil and natural gas. Truck drivers, commuters, and vacationers drove
fewer miles and burned less fuel. As a result, energy prices dropped sharply, and
many energy companies fell behind on their loan payments. Some even stopped making
payments altogether. ..."
"... Months passed, oil prices remained low, and more energy companies fell
behind on their payments. Finally, Gusher lost so much money to bad loans that government
regulators had to step in and close the bank. Gusher had fallen victim to changing
economic conditions-falling energy prices and a high concentration of loans to energy
companies. ..."
"... I work in the oil patch. Everyone is running with skeleton crews and the
effect on the greater economy- real estate, retail, construction etc is devastating.
I think the banks are fucked. If they do the prudent thing and cut off funding they'll
still be fucked. Therefore they continue to loan money. One day the dam will break.
..."
Most importantly, we said, are these follow up questions:
"How long before the impairments and charges currently targeting smaller
firms finally shift to the bigger ones? And how underreserved is
JPM for that eventuality? "
Today, just over a month later, we got the answer ahead of JPM's investor
day, when JPMorgan said it will increase its reserves for
oil and gas loans by 60% in Q1 .
As you can see from the following slide, provisions will rise by $500
million from $815 million the bank had set aside as of the end of last year.
Metals and mining reserves will also rise, by $100 million.
Note also that the bank says it may be forced to provision another $1.5 billion
should crude prices stay at or near $25 for an extended period of time.
As is apparent from the chart, Dimon's "fortress" balance sheet includes
some $19 billion in HY O&G exposure. We're anxious to see if the vaunted billionaire
will dismiss the enormous writedowns that are invariably coming in the next
few quarters as a "tempest in a teapot."
Page 31 has a section called 'Why Do Banks Fail" and tells a story of
a bank that invested highly in oil and gas assets and got destroyed when
the prices of oil dropped.
Gusher National Bank Slips on Falling Oil Prices
Falling energy prices mean cheaper gasoline and lower home heating
bills. So, falling oil prices must be good, right?
Not for everyone! Take the case of Gusher National Bank. Gusher
was very aggressive in making loans to oil and natural gas companies
that had no problem repaying their loans when energy prices were high.
The loans spelled big profits for Gusher, and everyone agreed that Gusher's
executives were smart business people who really knew how to make money.
Then the economy slowed down, and the demand for energy fell.
Factories burned less oil and natural gas. Truck drivers, commuters,
and vacationers drove fewer miles and burned less fuel. As a result,
energy prices dropped sharply, and many energy companies fell behind
on their loan payments. Some even stopped making payments altogether.
Months passed, oil prices remained low, and more energy companies
fell behind on their payments. Finally, Gusher lost so much money to
bad loans that government regulators had to step in and close the bank.
Gusher had fallen victim to changing economic conditions-falling energy
prices and a high concentration of loans to energy companies.
Are we absolutely sure we can't just package these loans up, break them
into tranches, stamp them "AAA" and sell them off to "investors"? Oh, and
let's get some CDSs going on these things, too. I'm sure we can find some
insurance company somewhere who's willing to take on that risk while holding
zero reserves against it.
Yes, and they can get Jon Corzine to head the Fund. I know he is available
to build a bridge to acquiring the financial and governmental backing to
get this thing done...
That's what's nice about being a loan officer; bag your commissions on
house loans, O&G loans, etc no matter how risky they are. By the time they
fail you are long gone, usually promoted up the ladder based on all your
great loan creations.
Wait till those mortgages in energy cities start defaulting as the robust
recovery in oil ripples out. The banks/loan companies will get a double
whammy::
Real Estate Prices in Dallas, Denver and Houston Set For a Fall
I work in the oil patch. Everyone is running with skeleton crews
and the effect on the greater economy- real estate, retail, construction
etc is devastating. I think the banks are fucked. If they do the prudent
thing and cut off funding they'll still be fucked. Therefore they continue
to loan money. One day the dam will break.
Banks with energy exposure are doing the same thing China is doing on
a larger scale... Papering over bad loans with more loans and hoping for
a hail mary surge in oil prices before carcasses start hitting the floor.
Little Johnny owes $100,000 for his liberal arts degree. He also purchased
a new Jetta with a 7 year auto loan and has racked up $15,000 in credit
card debt while looking for a job, which he has no luck finding so far.
He is now several months behind on payments. Seems like a good idea to
lend Little Johnny another $50,000 to keep up on his payments, right..?
I mean he's gonna find a job eventually. What could go wrong..?
"... In less than a month, the U.S. oil bust could claim two of its biggest
victims yet. ..."
"... SandRidge is likely to file for bankruptcy, analysts at junk bond research
firm KDP Investment Advisors Inc. wrote in a report last week. ..."
"... Since the start of 2015, 48 North American oil and gas producers have gone
bankrupt with a total of $17.3 billion in debt, according to law firm Haynes and
Boone. The largest was Samson Resources Corp., which entered Chapter 11 in September
owing more than $4 billion. ..."
"... Others are probably coming. The number of U.S. companies that have the
highest risk of defaulting on their debt is nearing a peak not seen since the height
of the financial crisis, according to a report by Moodys Investors Service earlier
this month. The oil and gas sector took up the biggest share, accounting for 28
percent, or 74 borrowers. ..."
"... Most of the shale industrys debt is in the form of bonds, according to
data compiled for the Bloomberg Intelligence index. Of those $197 billion of securities,
$101 billion is junk-rated. ..."
"... We are at the very beginning of the next wave of energy defaults, said
Paul Halpern, chief investment officer at Versa Capital Management, which manages
about $1.5 billion of distressed debt. ..."
"... For U.S. global investment banks such as Bank of America Corp., Citigroup
Inc. and JPMorgan Chase, funded exposures to the oil and gas industry range from
1.5 percent to 5 percent and average 2.3 percent of total loans, according to Moodys.
The ratings company also underscored risks for banks in energy-exporting regions
from the Middle East and Russia to Africa and Latin America. ..."
"... Goldman Sachs Group Inc. said about 40 percent of its oil and gas loans
and lending commitments are to junk-rated firms. ..."
"... The total exposure jumps $1.9 billion counting derivatives and other receivables,
which were primarily to investment-grade firms, Goldman Sachs said. The banks market
exposure to oil and gas firms was negative $677 million compared with $805 million
a year earlier. ..."
"... Goldman Sachss total is less than of its biggest competitors. Citigroup
Inc.s funded and unfunded commitments amounted to $58 billion, analysts at Susquehanna
Financial Group LLP wrote in a note last week. Most of Wells Fargo Co.s $17 billion
in outstanding energy loans is for companies that arent investment grade, Chief
Financial Officer John Shrewsberry said last month. ..."
"... Credit analysts at UBS say there are $1.2 trillion outstanding in loans
to the U.S. oil industry! A third of this debt is owed by exploration and production
companies. ..."
"... The oil industry also includes pipelines and infrastructure, refineries
..."
"... So, it is clear that the total amount of debt maturing over the next 7
years stands at 1.2 trillion. ..."
"... I think $1.2 trillion is total debt owed by the US oil and gas industry,
not just loans. 1/3 of $1.2 trillion = $400 billion owed by the E P companies. This
includes bonds and bank loans. Bonds include junk bonds and investment grade bonds.
So $260 billion in junk bonds is the right number. ..."
SandRidge, Energy XXI missed interest payments due Feb. 16
Face $7.6 billion default if interest isn't paid by mid-March
In less than a month, the U.S. oil bust could claim two of its biggest
victims yet.
Energy XXI Ltd. and SandRidge Energy Inc., oil and gas drillers with
a combined $7.6 billion of debt, didn't pay interest on their bonds last
week. They have until the middle of next month to either pay the interest,
work out a deal with their creditors or face a default that could tip them
into bankruptcy.
If the two companies fail in March, it would be the biggest cluster of oil
and gas defaults in a month since energy prices plunged in early 2015.
"We're just beginning to see how bad 2016 is going to be," said Becky Roof,
managing director for turnaround and restructuring with consulting firm
AlixPartners.
The U.S. shale boom was fueled by junk debt. Companies spent more on
drilling than they earned selling oil and gas, plugging the difference with
other peoples' money. Drillers piled up a staggering $237 billion of borrowings
at the end of September, according to data compiled on the 61 companies
in the Bloomberg Intelligence index of North American independent oil and
gas producers. Oil prices have now fallen more than 70 percent from a 2014
peak, and banks and bondholders are fighting for scraps. U.S. high yield
energy debt lost 24 percent last year, the biggest fall since 2008, according
to Bank of America Merrill Lynch U.S. High Yield Indexes.
Both Energy XXI and SandRidge could still reach an agreement with creditors
that will give them time to turn their businesses around. SandRidge said
last week that it missed a $21.7 million interest payment. The company owes
$4.2 billion, including a fully-drawn $500 million credit line. Energy XXI,
which owes $3.4 billion, said in a filing last week that it missed an $8.8
million interest payment.
David Kimmel, a spokesman for SandRidge, said it has the money to make
interest payments due in February, March and April. He wouldn't comment
on SandRidge's options if it doesn't make the interest payments by the end
of the grace period.
The companies' failing to pay interest on their bonds may be a way to
help motivate creditors to renegotiate debt, said Jason Wangler, an energy
analyst with Wunderlich Securities in Houston.
"It's a negotiating tool," Wangler said. "They say, 'I'm not going to
pay you. Now what are you going to do?'"
Energy XXI owes $150 million to banks including Royal Bank of Scotland
Group Plc, UBS Group AG and BNP Paribas SA, among others. SandRidge has
fully drawn its credit line with banks including Barclays Plc, Royal Bank
of Canada and Morgan Stanley, according to data compiled by Bloomberg.
SandRidge is likely to file for bankruptcy, analysts at junk bond
research firm KDP Investment Advisors Inc. wrote in a report last week.
S&P wrote in a separate report that Energy XXI is probably going to file.
Since the start of 2015, 48 North American oil and gas producers have
gone bankrupt with a total of $17.3 billion in debt, according to law firm
Haynes and Boone. The largest was Samson Resources Corp., which entered
Chapter 11 in September owing more than $4 billion.
Others are probably coming. The number of U.S. companies that have
the highest risk of defaulting on their debt is nearing a peak not seen
since the height of the financial crisis, according to a report by Moody's
Investors Service earlier this month. The oil and gas sector took up the
biggest share, accounting for 28 percent, or 74 borrowers.
Most of the shale industry's debt is in the form of bonds, according
to data compiled for the Bloomberg Intelligence index. Of those $197 billion
of securities, $101 billion is junk-rated.
Bond investors aren't likely to recover much money from oil and gas companies
that default. Standard & Poor's estimates, for example, that Energy XXI's
and SandRidge's unsecured noteholders will receive, at most, 10 cents on
the dollar.
Banks are setting aside more money to cover potential losses on souring
energy loans. S&P estimates that credit lines to these companies could be
cut by 30 percent by April, when banks conduct one of their twice-yearly
evaluations of their loans.
"We are at the very beginning of the next wave of energy defaults,"
said Paul Halpern, chief investment officer at Versa Capital Management,
which manages about $1.5 billion of distressed debt.
Revenue generated by U.S. investment banks through their capital markets
businesses may "suffer" if oil and commodity prices stay low and the global
economy slows further, Moody's Investors Service has warned.
While direct energy loan exposures for the largest U.S. banks look "manageable
relative to earnings" and most of their exposures are to investment-grade
borrowers, additional loss provisions will be necessary in some cases should
oil remain subdued for an extended period, the credit assessor said in a
report dated Feb. 24. Moody's also warned that "lower-for-longer" oil prices
presented a rising threat for lenders around the world.
JPMorgan Chase & Co. said this week its reserves for impaired energy
loans would increase by about $500 million in the first quarter and it would
have to add an additional $1.5 billion to the set-aside if oil prices held
at $25 a barrel for about 18 months. Wells Fargo & Co., the world's largest
bank by market value, said Wednesday in a filing soured energy loans climbed
49 percent in the last three months of 2015, while higher oil-and-gas provisions
at Royal Bank of Canada crimped quarterly earnings.
"Oil price volatility has contributed to increased market volatility,
which could help boost trading activity and returns," Moody's said. "However,
current weak sentiment in global equity and credit markets could work in
the opposite direction, reducing trading volumes and banks' related revenues."
For U.S. global investment banks such as Bank of America Corp., Citigroup
Inc. and JPMorgan Chase, funded exposures to the oil and gas industry range
from 1.5 percent to 5 percent and average 2.3 percent of total loans, according
to Moody's. The ratings company also underscored risks for banks in energy-exporting
regions from the Middle East and Russia to Africa and Latin America.
"Banks' direct and indirect exposures to the drop in oil prices pose
the potential for deterioration in asset quality, particularly in net oil-exporting
countries," Moody's said. "While direct exposures appear broadly manageable
from both a solvency and earnings perspective, low oil prices could still
test the credit profiles of banks across our global rated portfolio."
Goldman Sachs Group Inc. said about 40 percent of its oil and gas
loans and lending commitments are to junk-rated firms.
The figure, which counts both loans made and future promises to lend,
accounted for $4.2 billion of a total $10.6 billion as of the end of December,
the New York-based bank said Monday in its annual regulatory filing. Goldman
Sachs has $1.5 billion in loans to energy companies rated below investment
grade and $2.7 billion in unfunded commitments.
The total exposure jumps $1.9 billion counting derivatives and other
receivables, which were "primarily" to investment-grade firms, Goldman Sachs
said. The bank's market exposure to oil and gas firms was negative $677
million compared with $805 million a year earlier.
Goldman Sachs's total is less than of its biggest competitors. Citigroup
Inc.'s funded and unfunded commitments amounted to $58 billion, analysts
at Susquehanna Financial Group LLP wrote in a note last week. Most of Wells
Fargo & Co.'s $17 billion in outstanding energy loans is for companies that
aren't investment grade, Chief Financial Officer John Shrewsberry said last
month.
Those bonds must be cumulative mustn't they i.e. rolled over each year.
Otherwise that is about $1.3 trillion total. At (say) 5,000,000 bpd for
7 years at as high as $100 per barrel the companies would only be getting
$1.25 trillion total. Or am I missing something.
I'm going to predict a lot of bankruptcies in late 2017 as oil prices start
to rise because the lender's will suddenly see a lot more money in taking
over the resource base than by keeping the bond's rolling over.
.Credit analysts at UBS say there are $1.2 trillion outstanding
in loans to the U.S. oil industry! A third of this debt is owed by exploration
and production companies. And UBS predicts the default rate on these
loans could end up being in the low-teens ..
The oil industry also includes pipelines and infrastructure, refineries
In the above diagram it is also clearly stated:
The amount of bonds US energy companies below investment grade need to
pay back each year .
So, it is clear that the total amount of debt maturing over the next
7 years stands at 1.2 trillion.
"Credit analysts at UBS say there are $1.2 trillion outstanding in
loans to the U.S. oil industry! A third of this debt is owed by exploration
and production companies"
I think $1.2 trillion is total debt owed by the US oil and gas industry,
not just loans. 1/3 of $1.2 trillion = $400 billion owed by the E&P companies.
This includes bonds and bank loans. Bonds include junk bonds and investment
grade bonds. So $260 billion in junk bonds is the right number.
Besides, I have seen in various sources a similar number
Heinrich I think I agree with Alex. The caption is wrong in the "per year"
bit, but correct in "below investment grade" that is junk, which is not
the total debt to the oil industry by a long way (let's hope).
"... Citing swaps data from the Depository Trust Clearing Corp., Reuters noted
that trading volume in over-the-counter oil swaps was more than five times higher
than the past three days combined. ..."
"... By the end of March, the U.S. shale industry will have a combined interest
bill due of $1.2 billion-some 50 percent of that owed by companies that have junk-rated
credit, according to Bloomberg . By the end of this year, $9.8 billion in interest
payments will come due for the shale industry. ..."
According to
Reuters, last Thursday, U.S. crude for December 2017 delivery fell more
than 2 percent to $43.47 per barrel, partly due to producer hedging. WTI for
2017 rose up to $43.55 per barrel, compared to January's record low of $37.38
per barrel.
Citing swaps data from the Depository Trust & Clearing Corp.,
Reuters noted that trading volume in over-the-counter oil swaps was more
than five times higher than the past three days combined.
The renewed hedging comes as shale interest payments are due in March, and
producers are under tough pressure to ensure they will be able to make good
on their debts.
By the end of March, the U.S. shale industry will have a combined interest
bill due of $1.2 billion-some 50 percent of that owed by companies that have
junk-rated credit,
according to Bloomberg. By the end of this year, $9.8 billion in interest
payments will come due for the shale industry.
Some have already missed their payments, including a $21.7 million interest
payment by
SandRidge Energy Inc., and an $8.8 million payment by Energy XXI Ltd. SandRidge
can apparently make the payment, but chose to make use of the 30-day grace period.
A total of 48 oil and gas producers have declared bankruptcy in North America
since January last year, leaving unpaid debts of some $17 billion,
according to HaynesBoone law firm.
As of the beginning of this year, we're looking at $325 billion in debt for
American's cash-flow negative producers,
according to ZeroHedge.
And banks are
getting a bit nervous because of all the pressure coming from investors
who aren't keen on the emerging default picture in the oil and gas industry-despite
the fact that most banks' overall portfolios only have 2-3 percent lending to
this sector. The KBW Bank Index has fallen 16.7 percent since the 1 January
2016.
According to the
Financial Times, America's 60 leading oil and gas companies have $200 billion
in debt-and counting.
"... If oil prices remain under $40/b for the remainder of 2016, we might see more significant decline in LTO output than 600 kb/d, my more optimistic forecasts for LTO were based on an assumption of an oil price recovery in 2016, which is looking less likely due to continued oversupply of oil. ..."
"... At some point a "Minsky moment" may occur in the LTO sector and as all the investors head for the exit at once, we might see a sharp drop in LTO output as companies go bankrupt and financial chaos ensues. ..."
"... The scenario of a 'Minsky' moment in the shale industry is exactly what I think is necessary to bring oil prices up again. Some call it capitulation. ..."
"... As the shale industry is still fighting to keep production up, the situation gets more tense and more painful by the day. ..."
I don't have access to the report is there a reference oil price scenario?
If oil prices remain under $40/b for the remainder of 2016, we might see more significant decline
in LTO output than 600 kb/d, my more optimistic forecasts for LTO were based on an assumption
of an oil price recovery in 2016, which is looking less likely due to continued oversupply of
oil.
At some point a "Minsky moment" may occur in the LTO sector and as all the investors head for
the exit at once, we might see a sharp drop in LTO output as companies go bankrupt and financial
chaos ensues. I don't think this is high probability, but don't think it highly unlikely either,
maybe a 1/3 chance that a major crisis in the LTO sector is in the cards.
The scenario of a 'Minsky' moment in the shale industry is exactly what I think is necessary
to bring oil prices up again. Some call it capitulation.
There are still many people invested hoping for a turnaround without capitulation. Yet this
will take a lot of time and will be painful. A sudden capitulation is much more likely and will
be at the end less painful.
As the shale industry is still fighting to keep production up, the situation gets more tense
and more painful by the day.
"... The total exposure jumps $1.9 billion counting derivatives and other receivables,
which were primarily to investment-grade firms, Goldman Sachs said. ..."
Goldman Sachs Group Inc. (GS) said about 40 percent of its loans and lending
commitments to oil and gas companies are to junk-rated firms.
The figure, which counts both loans made and future promises to lend, accounted
for $4.2 billion of a total $10.6 billion as of the end of December, the New
York-based bank said Monday in its annual regulatory filing. Goldman Sachs has
$1.5 billion in loans to energy companies rated below investment grade and $2.7
billion in unfunded commitments.
The total exposure jumps $1.9 billion counting derivatives and other
receivables, which were "primarily" to investment-grade firms, Goldman Sachs
said.
Concerns about banks' energy loans have helped spur share declines for lenders
after the price of oil fell 42 percent in the past 12 months through Friday.
The Standard & Poor's 500 Financials Index slumped 13 percent in the same period.
Goldman Sachs's total is below some of its biggest competitors. Citigroup
Inc.'s (C) funded and unfunded commitments amounted to $58 billion, analysts
at Susquehanna Financial Group LLP wrote in a note last week. Most of Wells
Fargo & Co.'s (WFC) $17 billion in outstanding energy loans is for companies
that aren't investment grade, Chief Financial Officer John Shrewsberry last
month.
Of course, with PXD, long term debt of $3.2 billion = PV10 of $3.2 billion.
At $50 WTI.
They have a high percentage of 2016 oil hedged, but considerable amount
with three way collars.
Who wants to bet that the aggregate PV10 of all US based non integrated
E & P public companies is less than their aggregate long term debt at $50
WTI? And we are at $30 WTI.
Maybe I will try to add it up in about a month or so, once the 10K are
out.
If that is true, how many billions of market cap is purely a bet that
oil prices are headed well north of $50 before debt cannot be extended?
Can you explain to me if PXD, PV10 is =or< long term debt, why is not
PXD declared insolvent, and suspended from trading, as they would be technically
bankrupt.
Toolpush. Per their Q4 press release, it appears all categories PV 10 is
$3.2 billion. From another press release the same day (2/10/16), it appears
long term debt is $3.2 billion.
They are not insolvent if they can make debt and expense payments. They
have hedges, which definitely helps them. Keep in mind, however, PV10 was
calculated at $50 WTI and $2.65 HH.
Looked at Denbury, who has about 70K bopd, about half CO2 flood. Long
term debt $3.3 billion, PV10 at $50 WTI $2.3 billion.
PXD stock at $122. Denbury stock at $1.
I guess that is why they call it a casino, the stock market thing we
put our 401k's in and W wanted to invest SS money in. LOL.
I have been running some numbers at $30 WTI and $2 natural gas. Just
plugging in numbers, not specific to any company. Assuming $25 well head
oil and $1.50 wellhead gas. But I am including interest and G & A in addition
to OPEX, transport, P & A.
There really isn't any significant value, even with $8 OPEX, which is
really pretty low for oil weighted companies.
For a company with OPEX like Denbury, the assets are not, they are liabilities,
because they are cash flow negative now at those prices.
Note: I escalate OPEX at 3% per annum, which I have found is fairly common,
at least for five years or so. Shale has almost no PV10 when you do that
as it becomes CF negative in year 2-3 due to steep decline. I'm using 25%
decline in the shale reference, per PXD saying ceasing activity in EFS will
result in 25% decline in 2016, then tapering off 5% per year till getting
to 5% annual, then holding at 5%.
Texas Crude and condensate are basically holding flat, yet associate or
casing head gas is on the increase. An indication of a rising GOR, similar
to the Bakken.
Depending on which side of the fence you are sitting, It could be drilling
more gassy parts of the reservoir, or those damn chokes, that keep vibrating
open!
I'm curious what are low decline vertical waterflood properties selling
for in this environment? Aren't these in general better in a lower priced
environment (say $50ish) than the shale plays? I can't really figure out
why horizontal permian gets so much hype in this environment. I've found
2 permian players that seem to make money at 50 and below, RSP permian and
Callon Petroleum, but they are valued as if oil is +80 trading at over $100k
per flowing barrel. The lowest cost producers I've found are all vertical
producers and MLPs. MCEP is probably the lowest cost producer in the U.S.
and they do pure low decline waterfloods. They have quite a bit of debt
but even with that they're trading at $40k per flowing barrel including
all debt.
Kelly b. Right now, unhedged, 2/16 price looks to be $16-$26 depending on
location.
I sincerely doubt there are many secondary projects will all in costs
(excluding interest) under $20. Just look at MCEP.
How do you price assets that are barely making money, breaking even,
or losing money?
Likewise, re shale. PXD values PUD PV10 at about $350 million. It isn't
too economic. They are saying that, not me. Some 600,000 acres in the Permian
with PUD PV 10 of $350 million at $50 WTI.
The only value in lower 48 onshore is that prices rise substantially
in 2016. It is practically all an option at current levels. The PV10 values
tell us that.
What happens to GM, for example, if they can suddenly only sell new vehicles
for $5-15K?
One company you mention is Mid-Con. In 2014 PV10 was $664 million. But
look at costs. LOE $22.93, production taxes $5.56, G & A $12.58. LT debt
$205 million.
Granted, in Q3 2015 they had hammered costs down to $19.60 LOE, $.46
production taxes and $5.04 G & A. At $25 wellhead there is $0 PV.
Yes, Mid-Con is hedged. Only way they may survive. I'd say almost secondary
and tertiary projects are underwater at $30 WTI in lower 48, when G & A
is included.
Shale oil LOE is only low due to a high number of new wells. I think
5+ year old wells have LOE $15-$30 for the most part, with outliers of course.
In light of the recent declines, financial services firm Raymond James
& Associates Inc. further reduced its forecast US rig counts for 2016-18
in its most recent industry brief.
RJA now projects an average 2016 count of 500, down from the 620 the
firm projected just last month and down nearly half compared with the 2015
average. The new bottom is expected occur in April at 400 units, compared
with RJA's previous projection of 550 in June. [The most recent rig count
is 514 AlexS].
A drilling rebound isn't seen until late 2016, the firm says, as many
E&P firms are likely to first focus on drawing down their uncompleted well
inventories and improving their balance sheets, while waiting for consistently
higher crude oil prices and a labor force recovery.
The count is forecast to end 2016 at 700 units, adding just 300 during
the second half.
the lower activity this year should still lead to even more robust
growth in 2017-18," the firm said.
RJA expects the average count to jump 106% year-over-year in 2017 to
1,030, and rise 32% year-over-year to 1,358 in 2018.
"Despite the strong growth expected in 2017-18, we don't see the rig
count reaching the heights of 2014 levels again, as rig efficiencies continue
to advance at a solid clip," the firm added.
I think their forecast is based on the belief that the US government
will somehow (may be indirectly via OPEC June meeting) help to rotate the
existing debt in 2008 banks bail-out fashion.
"... A pretty typical story. The true cost of the extraordinarily low rates
and availability of cheap credit since 2008 is the misallocation of resources up
to and including emergence of a class of Ponzi borrowers (see below). In other words
stability of 2010-2014 in oil sector was highly destabilizing. ..."
"... These companies are outspending what they earn by a dollar more today than
they were a year ago during the first half of 2014. Anyone who believes that decreased
service costs and drilling efficiency will allow tight oil companies to make a profit
at $50-60 oil prices needs to think again." ..."
"... As soon as the use of Ponzi financing of operations became widespread the
bubble is ripe for popping. When for some reason the asset prices stop increasing
and start doing down, Ponzi borrowers go down with some time lag. ..."
"... That changes attitude of lenders dramatically and they start tightening
the conditions of borrowing and make it more difficult to roll over the debt even
if interests payments were paid on time. ..."
"... Dominoes start falling. That means that speculative borrowers follow Ponzi
borrowers as they can no longer refinance (roll over) the principal even if they
are able to cover interest payments. ..."
"... Collapse of the speculative borrowers can then bring down even hedge borrowers,
who are unable to find loans despite the apparent soundness of the underlying investments.
..."
"... I hope the government will provide some lifeline at least by allowing refinancing
of the loans so that the complete collapse of shale/tight oil bubble will be avoided.
..."
Look at Denbury Resources. They have shut in 2,300 barrels of
oil production per day. Their operating costs, plus severance taxes,
general and administrative expenses and interest are more than what
they can sell their current production for. And they have $3.3 billion
of debt. This is a 70,000 bopd company.
A pretty typical story. The true cost of the extraordinarily low
rates and availability of cheap credit since 2008 is the misallocation of
resources up to and including emergence of a class of Ponzi borrowers (see
below). In other words stability of 2010-2014 in oil sector was highly destabilizing.
" For the first half of 2015, the tight oil-weighted E&P companies
that I follow spent about $2.20 in capital expenditures for every dollar
they earned from operations (Figure 5) These companies are outspending
what they earn by a dollar more today than they were a year ago during
the first half of 2014. Anyone who believes that decreased service costs
and drilling efficiency will allow tight oil companies to make a profit
at $50-60 oil prices needs to think again."
Essentially he described what Minsky called "Ponzi borrowers". Following
Minsky the key mechanism that pushes a given sector towards a crisis is
the accumulation of Ponzi debt.
He identified three types of borrowers that contribute to the accumulation
of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi
borrowers.
The "hedge borrower" can make debt payments (covering
interest and principal) from current cash flows from investments.
For the "speculative borrower", the cash flow from investments
can service the debt, i.e., cover only the interest due, but the
borrower must regularly roll over, or re-borrow, the principal.
The "Ponzi borrower" (named for Charles Ponzi, see also
Ponzi scheme) borrows based on the belief that the appreciation
of the value of the asset will be sufficient to refinance the debt
but could not make sufficient payments on interest or principal
with the cash flow from investments; only the appreciating asset
value can keep the Ponzi borrower afloat.
As soon as the use of Ponzi financing of operations became widespread
the bubble is ripe for popping. When for some reason the asset prices stop
increasing and start doing down, Ponzi borrowers go down with some time
lag.
That changes attitude of lenders dramatically and they start tightening
the conditions of borrowing and make it more difficult to roll over the
debt even if interests payments were paid on time.
Dominoes start falling. That means that speculative borrowers follow
Ponzi borrowers as they can no longer refinance (roll over) the principal
even if they are able to cover interest payments.
Collapse of the speculative borrowers can then bring down even hedge
borrowers, who are unable to find loans despite the apparent soundness of
the underlying investments.
I hope the government will provide some lifeline at least by allowing
refinancing of the loans so that the complete collapse of shale/tight oil
bubble will be avoided.
While MatlinPatterson's Portfolio Manager Michael Lipsky can't wait to enter
the distressed junk bond space, thanks to "$74 billion in debt trading at
under 25 cents on the dollar, and $205 billion trading at under 70 cents on
the dollar", he agrees with BofA's Michael Contopoulos
that it is still far too soon to buy. The question, according to Lipsky,
is what capital structure works in the aftermath of several recent "bombs" such
as Magnum Hunter which are trying to emerge from bankruptcy with negative EBITDA,
and as a result both secured debt and the DIP are getting equitized.
The punchline
of Lipsky's speech was that due to the persistent collapse of oil prices, the
bankruptcy process has been turned on its head: "we always assume that secured
lenders would roll into the bankruptcy become the DIP lenders, emerge from bankruptcy
as the new secured debt of the company. But they don't want to be there,
so you are buying the debt behind them and you could find yourself
in a situation where you could lose 100% of your money."
Which brings us to Lipsky's moment of zen: "all these derivatives
bets on oil, let's just own oil; and on the other side we are
actually short, focused more on the EM oil exposure."
Give and take between the Comptroller of the Currency and the
Fed generated stories of big banks being a bit more lenient rather than
swamping regional banks with failures. E&P companies had their
borrowing bases upheld, for now, but were told to generate additional liquidity
or have those bases cut in the spring.
What this means is that what we reported one month ago about the Dallas Fed
"advising" banks to "not to force energy bankruptcies", something which also
spilled over in the Fed advising banks to limit mark-to-market on energy exposure
and to use a generous strip pricing, was spot on.
Rumor Houston office of Dallas Fed met with banks,
told them not to force energy bankruptcies; demand asset sales instead
Now, thanks to Credit Suisse and Lipsky we have the full story: the
meetings between the Dallas Fed and the banks did indeed happen, however, as
we suspected, the Fed used a neat loophole.
Fast forward to 2:17 into the clip for the answer on what it was (which is
also the reason why banks don't want to be at the top of the capital structure
of energy companies any longer):
"The OCC is breathing down the neck of the large commercial banks
to limit their energy exposure."
Full clip below:
And there you have it: when the Fed responded that there was no truth to
our story with the curious explainer that "the Fed does not issue such guidance
to banks", even as it did everything else we disclosed, it was actually telling
the truth: because between Credit Suisse and MatlinPatterson we now know that
the explicit guidance actually came from the Office of the Currency Comtroller,
the regulator operating under the US Treasury umbrella which however is completely
useless without Fed input.
The OCC charters, regulates, and supervises all national banks and federal
savings associations as well as federal branches and agencies of foreign
banks. The OCC is an independent bureau of the U.S. Department of the Treasury.
So here is what happened: everything we said about the Dallas Fed meeting
with banks, going through bank loan books, and urging to limit bankruptcies,
demand asset sales, as well as suspend mark to market in explicit circumstances,
was true, however the explicit "guidance", precisely for FOIA
avoidance purposes, came not from the Fed but from the OCC.
Needless to say, we are immediately submitting a FOIA to the OCC next, demanding
to know whether it was the Office of the Comptroller of the Currencywhich was
the US government entity that advised US banks to do all those things which
we revealed back in mid-January, and which the Fed desperately tried to deny.
Finally, we are certainly looking forward to the Dallas Fed follow up response
to this post.
"... When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done. ..."
"... The implication of Keynes comment, and therefore of the title that Strange appropriated, is that speculation and efficient investment - capital development - are inversely related. ..."
"... Economists, especially those who are comfortable wearing the blinders of neoclassical theory, tend to believe that the evolution of markets and institutions results mainly from the utility and profit seeking behavior of units . ..."
"... economic evolution leads to shifts in the balance of power between markets and [ oil producing - likbez] states. [ read OPEC - likbez] ..."
"... This insight helps explain how the Bretton Woods system broke down [and petrodollars emerged]. The chaos that Strange now finds in the international monetary regime is imputed to key decisions and nondecisions, mainly by the United States ..."
"... The term [ Minsky Moment ] was coined by Paul McCulley of PIMCO in 1998, to describe the 1998 Russian financial crisis, and was named after economist Dr. Hyman Minsky, who noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Minsky opposed the deregulation that characterized the 1980s. ..."
While Marion King Hubbert was a revolutionary in oil industry, forecasting that American oil production
would peak surprisingly soon and decline steadily thereafter, Hyman Minsky was a similar revolutionary
in economics pointing out inherent instability of casino capitalism.
He advanced so called "Minsky
financial instability hypothesis" which postulates that the booms and busts are inevitable under
neoliberalism (aka "free market economy") due to the nature of financial system (
https://en.wikipedia.org/wiki/Hyman_Minsky
):
Minsky proposed theories linking financial market fragility, in the normal life cycle
of an economy, with speculative investment bubbles endogenous to financial markets. Minsky
claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay
off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers
can pay off from their incoming revenues , which in turn produces a financial crisis. As
a result of such speculative borrowing bubbles, banks and lenders tighten credit availability,
even to companies that can afford loans , and the economy subsequently contracts.
This slow movement of the financial system from stability to fragility, followed by crisis,
is something for which Minsky is best known, and the phrase "Minsky moment" refers to this
aspect of Minsky's academic work .
What we experienced in July 2014 can probably be called "Minsky moment" for oil industry (although
it is not the exact meaning of the term).
The flavor of concerns that should have been central to Strange's volume was captured by
Keynes in a passage in The General Theory that is part of the currency of every economist:
Speculators may do no harm on a steady stream of enterprise. But the position is serious
when enterprise becomes a bubble on a whirlpool of speculation. When the capital development
of a country becomes a by-product of the activities of a casino, the job is likely to be
ill done.(p. 159)
The implication of Keynes' comment, and therefore of the title that Strange appropriated,
is that speculation and efficient investment - capital development - are inversely related.
It follows that a volume on Casino Capitalism needs to begin with a serious consideration
of the determinants of investment in capitalist economies with sophisticated and ever evolving
financial structures. Although in the beginning of the book some awareness of the relation
between speculation and efficient investment is evident, Strange does not examine closely how
the capital development of capitalist economies was affected by the financial evolution of
the past decades. What she does do is present in a discursive and somewhat journalistic fashion
the development of the international financial structure in recent years as well as a partial
review of some interpretations of the import of financial arrangements.
In spite of her approach the volume is useful. Economists, especially those who are
comfortable wearing the blinders of neoclassical theory, tend to believe that the evolution
of markets and institutions results mainly from the utility and profit seeking behavior of
units. To this Strange offers the useful antidote that "a monetary system cannot work effectively unless
there is a political authority . . ." , i.e., contracts need to be enforced. Therefore the
outcomes in both the short and the longer runs are the joint result of decisions by market
participants and authorities. Furthermore, economic evolution leads to shifts in the balance
of power between markets and [ oil producing - likbez]
states. [ read OPEC - likbez]
This insight helps explain how the Bretton Woods system broke down [and petrodollars emerged].
The "chaos" that Strange now finds in the international monetary regime is imputed to key decisions
and nondecisions, mainly by the United States, both early on in the postwar period and after
1971. Her main point is that domestic concerns dominated decisions in the United States both
when the United States acted and when it did not. As a result havoc was played with the
order [ including oil price - likbez ] needed for world
economic stability.
"Marvin[Hyman] Minsky was a similar revolutionary in economics pointing
out inherent instability of casino capitalism." ~ likbez
"The term [Minsky
Moment] was coined by Paul McCulley of PIMCO in 1998, to describe
the 1998 Russian financial crisis, and was named after economist Dr. Hyman Minsky,
who noted that bankers, traders, and other financiers periodically played the role of arsonists,
setting the entire economy ablaze. Minsky opposed the deregulation that characterized the
1980s." ~ Wikipedia
"... Following on from a sharp downward revision in its benchmark crude and natural gas price assumptions in January, S&P also lowered the ratings on 25 speculative-grade companies after reviewing 45. ..."
"... S&P on January 12 slashed its Brent and WTI crude price assumptions to $40/barrel each (from $55 and $50 respectively) and Henry Hub natural gas price assumption to $2.50/MMBtu (from $3). ..."
"... S&P flagged the "liquidity risks" faced by the smaller E&P companies, "particularly with respect to the April 2016 revolving credit facility bank borrowing base redeterminations." ..."
"... S&P expects the companies' borrowing bases will have shrunk by 20-30% at the next re-determination in April, as the cutback in drilling activity in 2015 has hobbled their reserves replacement. ..."
"... The US Energy Information Administration in its short-term market outlook released Feb 9 said it expects US production to fall to an average 8.69 million b/d this year from an average of 9.43 million b/d in 2015. And slip further to 8.46 million b/d in 2017. ..."
US E&P sector sucking wind: Is oil's equilibrium closer than we think?
How long does the world have to wait before all the surplus oil sloshing
around gets mopped up and prices find an equilibrium point that represents balanced
supply and demand? Would you believe it if someone said that might be just a
quarter and a bit away?
On the supply side, all bets are on shale to bail: there is no hope of output
cuts from OPEC, let alone a coordinated action with other major producers such
as Russia, amid a stubborn quest for market share.
If anything, most OPEC members are pumping full tilt and some such as Kuwait
and Iraq are eying a production boost this year. A sanctions-free Iran is preparing
to offload an additional 0.5-1.0 million b/d on an already oversupplied market,
though the pace of that return is highly uncertain.
The question then arises, how long before more US producers buckle under
and how sharp might the drop in output be?
Standard & Poors Ratings earlier this month downgraded big names in shale
including Chevron, Apache, EOG Resources, Devon, Hess, Marathon and Murphy.
Of the 20 "investment-grade" companies the agency reviewed, three were placed
on Creditwatch with negative implications, and the outlook on another three
revised to negative.
Until now, such actions had mostly affected the speculative-grade companies,
S&P noted.
Following on from a sharp downward revision in its benchmark crude and
natural gas price assumptions in January, S&P also lowered the ratings on 25
speculative-grade companies after reviewing 45.
S&P on January 12 slashed its Brent and WTI crude price assumptions to
$40/barrel each (from $55 and $50 respectively) and Henry Hub natural gas price
assumption to $2.50/MMBtu (from $3).
S&P flagged the "liquidity risks" faced by the smaller E&P companies,
"particularly with respect to the April 2016 revolving credit facility bank
borrowing base redeterminations."
A borrowing base is the maximum amount of money a bank will lend to an energy
company based on the value of its reserves at current market prices.
S&P expects the companies' borrowing bases will have shrunk by 20-30%
at the next re-determination in April, as the cutback in drilling activity in
2015 has hobbled their reserves replacement.
Also, more hedges will roll off this year, and the values on the futures
curve are below many bank borrowing base prices, S&P credit analysts noted.
As they hunker down, S&P expects many of the companies to continue lowering
capital spending and focus on efficiencies and drilling core properties. However,
the analysts say, "these actions, for the most part, are insufficient to stem
the meaningful deterioration expected in credit measures over the next few years."
The US Energy Information Administration in its short-term market outlook
released Feb 9 said it expects US production to fall to an average 8.69 million
b/d this year from an average of 9.43 million b/d in 2015. And slip further
to 8.46 million b/d in 2017.
But like any forecast, this year's figure could be revised down further.
Exactly a year ago, in its February 2015 report, the EIA had estimated 2016
US production at 9.52 million b/d. The agency has progressively whittled down
the figure since October last year.
Meanwhile, a total of 67 US oil and gas companies filed for bankruptcy in
2015, according to consultants Gavin/Solmonese, a whopping 379% spike on 2014,
CNN reported last week.
Might the other big shadow looming on the markets - Iran - turn out to be
a teddy bear?
Iranian businesses continued to be hobbled by the sanctions fallout. Some
US clearing banks have warned banks in Europe, Asia and the Middle East that
their US-based dollar accounts will face close scrutiny if they do business
with Iran.
This has prevented banking transactions with Iran starting up again despite
the removal of sanctions, the Financial Times said in this
report Feb 14.
Not surprisingly, expectations on the pace of Iran's incremental barrels
flowing into the market are taking a more conservative turn. As Platts reporter
Robert Perkins highlights in this
analysis published Feb 8, a 500,000 b/d immediate rise and 1 million b/d
within six months is seen as "wildly optimistic."
Platts calculations based on current market consensus point to a far sober
200,000 b/d rise in the first quarter, growing to 450,000 b/d by year-end.
Excluding Iranian supply, global oil balances are now seen returning to equilibrium
by the third quarter of 2016, according to implied market outlooks from the
International Energy Agency, the EIA and OPEC.
That brings us to the "dread discount" on oil because of the wider global
financial markets panic since the start of the year, triggered in large part
by fears over Chinese economic growth.
While impossible to quantify, could the discount evaporate if the global
economy performs much better than the doomsday scenarios currently preying on
nerves?
To paraphrase Mark Twain, it ain't what the oil markets don't know that will
get them into trouble. It's what they know for sure that just ain't so.
"... Following on from a sharp downward revision in its benchmark crude and natural gas price assumptions in January, S&P also lowered the ratings on 25 speculative-grade companies after reviewing 45. ..."
"... S&P on January 12 slashed its Brent and WTI crude price assumptions to $40/barrel each (from $55 and $50 respectively) and Henry Hub natural gas price assumption to $2.50/MMBtu (from $3). ..."
"... S&P flagged the "liquidity risks" faced by the smaller E&P companies, "particularly with respect to the April 2016 revolving credit facility bank borrowing base redeterminations." ..."
"... S&P expects the companies' borrowing bases will have shrunk by 20-30% at the next re-determination in April, as the cutback in drilling activity in 2015 has hobbled their reserves replacement. ..."
"... The US Energy Information Administration in its short-term market outlook released Feb 9 said it expects US production to fall to an average 8.69 million b/d this year from an average of 9.43 million b/d in 2015. And slip further to 8.46 million b/d in 2017. ..."
US E&P sector sucking wind: Is oil's equilibrium closer than we think?
How long does the world have to wait before all the surplus oil sloshing
around gets mopped up and prices find an equilibrium point that represents balanced
supply and demand? Would you believe it if someone said that might be just a
quarter and a bit away?
On the supply side, all bets are on shale to bail: there is no hope of output
cuts from OPEC, let alone a coordinated action with other major producers such
as Russia, amid a stubborn quest for market share.
If anything, most OPEC members are pumping full tilt and some such as Kuwait
and Iraq are eying a production boost this year. A sanctions-free Iran is preparing
to offload an additional 0.5-1.0 million b/d on an already oversupplied market,
though the pace of that return is highly uncertain.
The question then arises, how long before more US producers buckle under
and how sharp might the drop in output be?
Standard & Poors Ratings earlier this month downgraded big names in shale
including Chevron, Apache, EOG Resources, Devon, Hess, Marathon and Murphy.
Of the 20 "investment-grade" companies the agency reviewed, three were placed
on Creditwatch with negative implications, and the outlook on another three
revised to negative.
Until now, such actions had mostly affected the speculative-grade companies,
S&P noted.
Following on from a sharp downward revision in its benchmark crude and
natural gas price assumptions in January, S&P also lowered the ratings on 25
speculative-grade companies after reviewing 45.
S&P on January 12 slashed its Brent and WTI crude price assumptions to
$40/barrel each (from $55 and $50 respectively) and Henry Hub natural gas price
assumption to $2.50/MMBtu (from $3).
S&P flagged the "liquidity risks" faced by the smaller E&P companies,
"particularly with respect to the April 2016 revolving credit facility bank
borrowing base redeterminations."
A borrowing base is the maximum amount of money a bank will lend to an energy
company based on the value of its reserves at current market prices.
S&P expects the companies' borrowing bases will have shrunk by 20-30%
at the next re-determination in April, as the cutback in drilling activity in
2015 has hobbled their reserves replacement.
Also, more hedges will roll off this year, and the values on the futures
curve are below many bank borrowing base prices, S&P credit analysts noted.
As they hunker down, S&P expects many of the companies to continue lowering
capital spending and focus on efficiencies and drilling core properties. However,
the analysts say, "these actions, for the most part, are insufficient to stem
the meaningful deterioration expected in credit measures over the next few years."
The US Energy Information Administration in its short-term market outlook
released Feb 9 said it expects US production to fall to an average 8.69 million
b/d this year from an average of 9.43 million b/d in 2015. And slip further
to 8.46 million b/d in 2017.
But like any forecast, this year's figure could be revised down further.
Exactly a year ago, in its February 2015 report, the EIA had estimated 2016
US production at 9.52 million b/d. The agency has progressively whittled down
the figure since October last year.
Meanwhile, a total of 67 US oil and gas companies filed for bankruptcy in
2015, according to consultants Gavin/Solmonese, a whopping 379% spike on 2014,
CNN reported last week.
Might the other big shadow looming on the markets - Iran - turn out to be
a teddy bear?
Iranian businesses continued to be hobbled by the sanctions fallout. Some
US clearing banks have warned banks in Europe, Asia and the Middle East that
their US-based dollar accounts will face close scrutiny if they do business
with Iran.
This has prevented banking transactions with Iran starting up again despite
the removal of sanctions, the Financial Times said in this
report Feb 14.
Not surprisingly, expectations on the pace of Iran's incremental barrels
flowing into the market are taking a more conservative turn. As Platts reporter
Robert Perkins highlights in this
analysis published Feb 8, a 500,000 b/d immediate rise and 1 million b/d
within six months is seen as "wildly optimistic."
Platts calculations based on current market consensus point to a far sober
200,000 b/d rise in the first quarter, growing to 450,000 b/d by year-end.
Excluding Iranian supply, global oil balances are now seen returning to equilibrium
by the third quarter of 2016, according to implied market outlooks from the
International Energy Agency, the EIA and OPEC.
That brings us to the "dread discount" on oil because of the wider global
financial markets panic since the start of the year, triggered in large part
by fears over Chinese economic growth.
While impossible to quantify, could the discount evaporate if the global
economy performs much better than the doomsday scenarios currently preying on
nerves?
To paraphrase Mark Twain, it ain't what the oil markets don't know that will
get them into trouble. It's what they know for sure that just ain't so.
The Center on Global Energy Policy hosted a presentation and discussion with
Steven Kopits, Managing Director, Douglas-Westwood, on the different approaches
to global oil market forecasting. Mr. Kopits' remarks focused on both supply and demand-based methodologies,
including how these models result in different assumptions and implications for oil supply (OPEC
and non-OPEC), total oil demand and oil price. He also reviewed other key drivers such as changes
in the transport sector and overall economic growth and discussed how these variables can further
impact oil demand and supply.
"... I see this debt cliff as a yet another blowback of neoliberalism, which automatically generates bubble after bubble. Not that different in nature from dot-com bubble of subprime bubble. You see, all an effective CEO does is juicing shareholder value , often measured quarterly. So, with low or no profits, many chose to borrow money to increase shareholder value by carpet bombing fields with wells thereby increasing share price. Or they chose to juice dividends. Those easy money is what created and sustained shale boom. After all they used to have huge hopes for the future. ..."
"... Now Wall Street is keeping them by the balls as the level of debt does not allow to cut production which would rebalance the market. So this downtrend proved to be sticky. They need all the money they can make to service the debt or they are gone with the wind. In other words they are hostages of their own debt and financial companies which provide it and cant cut production without severe adverse effects. That actually include not only shale players but such conventional players as Rosneft. ..."
It is a foolish argument to think that financial manipulations or trading vehicles can change
the value of the underlying (a barrel of oil or a british pound) for more than a short timeframe,
if the the market for the underlying is a wide open high volume one.
So, to think that Soros caused the British Pound to fall is faulty thinking. He and his partners
just saw the writing on the wall earlier and more clearly than others, and had the balls to take
a big risk that they had the timeframe right. Regardless of his trades, that pound was way overvalued
relative to other currencies and the market would have worked it down just same (likely more slowly).
Today, the most over-valued big currency is the Chinese renimbi. I just don't have the sophistication
to put a big bet on it, or I would.
"It is a foolish argument to think that financial manipulations or trading vehicles can change
the value of the underlying (a barrel of oil or a british pound) for more than a short timeframe,
if the market for the underlying is a wide open high volume one."
I like your faith in the innocuous nature of neoliberal marketplace. As reflected in your statement
above. Yes we can. Keep the faith brother --
Another consideration is that there is no market as we used to understand it. Instead there
is a financial casino in which due to commodities modernization act the trend down can be fed
with dollars and acquire its own momentum like snow avalanche and crush everybody and everything
on its way. Amount of dollars that can participate is the amplifying the downtrend ("paper oil")
is much larger then the amount of ""real oil" so it a way it does not matter. Add HFT to the picture
(which really can drive the prices down as was confirmed by GS during Aleynikov trial) and you
have more or less complete image of the modern "marketplace" were most trades are executed by
robots not by people.
Still if "a short timeframe" is 18-36 month you are probably right. But it can be longer, especially
if you add some help from Saudis (predatory pricing). I doubt that this situation can last till
the end of 2017.
I see this debt cliff as a yet another blowback of neoliberalism, which automatically generates
bubble after bubble. Not that different in nature from dot-com bubble of subprime bubble. You
see, all an effective CEO does is juicing "shareholder value", often measured quarterly. So, with
low or no profits, many chose to borrow money to increase shareholder value by "carpet bombing"
fields with wells thereby increasing share price. Or they chose to juice dividends. Those easy
money is what created and sustained shale boom. After all they used to have huge hopes for the
future.
Now Wall Street is keeping them by the balls as the level of debt does not allow to cut
production which would rebalance the market. So this downtrend proved to be sticky. They need
all the money they can make to service the debt or they are gone with the wind. In other words
they are hostages of their own debt and financial companies which provide it and can't cut production
without severe adverse effects. That actually include not only shale players but such conventional
players as Rosneft.
In other words they are no longer independent players capable of making their own decisions.
Negative cash flow can do wonders with the management worrying about managing their own debt.
Which explains
"masters of the universe" mentality better then my post:
John S. I agree but many of the financial people do not.
A friend of mine who is a financial person predicted $20s oil in 2013. I told him he was
nuts, explained to him costs. He said he could care less about costs, said price has to revert
to historical norms.
He now says oil will average below $35 for at least the next five years. I tell him that
will bankrupt almost
all US producers and many nations. He says doesn't matter, that stuff is not relevant, not
even a part of the equation.
I would say he is full of it except he predicted $20s. He says oil producers in no way determine
oil prices, that prices are all determined by traders. He says traders do not care about anything
concerning the upstream industry.
I do not agree with him, but this is the way financial folks think. And they are the ones
trading the oil futures.
Ron, you were in the financial industry. I assume you agree my friend is full of crap?
"... To wit, the industry propaganda machine convinced Wall St et al that it could produce virtually unlimited quantities of oil and profits at ever lower numbers: $80/bbl, then $60/bbl, then $40/bbl. ..."
"... Until this emperor is shown to have no clothes (and that will likely take a few years and a significant extended oil shortage), the oil price will rise very slowly. This is on top of the Saudi myth that they will also flood the market if there is too much fracked oil on the market. ..."
"... Stories drive the market, just like our lives, methinks. ..."
As a writer, it is very interesting to me how the myth-making of the fracking industry as it ramped
up is now coming to bite itself on the ass. To wit, the industry propaganda machine convinced
Wall St et al that it could produce virtually unlimited quantities of oil and profits at ever
lower numbers: $80/bbl, then $60/bbl, then $40/bbl.
Whether it is all true or not I am not one to say, although it does seem unlikely. But the
myth is out there, and has effectively put a ceiling on the price, because all the traders are
telling themselves that if oil goes up too high, all the frackers will ramp everything back up
again and then there will be another glut.
Until this emperor is shown to have no clothes (and that will likely take a few years and
a significant extended oil shortage), the oil price will rise very slowly. This is on top of the
Saudi myth that they will also flood the market if there is too much fracked oil on the market.
Stories drive the market, just like our lives, methinks.
Thanks a lot for your post. We need more critical thinkers like you. Mythology is an important
tool in human societies and a very powerful force. I agree with your point:
Until this emperor is shown to have no clothes (and that will likely take a few years
and a significant extended oil shortage), the oil price will rise very slowly
It resonates with my thinking.
The whole neoclassical supply-demand model for oil is highly questionable. I think oil should
be thought for civilization much like water is for plants. So increased supply of oil (up to a
limit) is beneficial to the economy growth and, if you wish, GDP growth (and please note that
GDP is a very questionable measure of economy growth).
IMHO excessive supply within several percent of total volume (let's say 3-5%) is seamlessly
absorbed, so for this range of excessive supply the whole idea of "oil glut" is open to review.
The illusion of glut can be created by exogenous factors like "Great Condensate Con" hypothesis
suggests or by action of particular countries (Watcher idea of predatory pricing used by Saudi
Arabia to decimate oil price for purely political motives) .
For example, none of oil producers in the USA other then those with high sulfur oil have any
difficulties selling all what they can produce and actually can sell more.
Iran magically found the possibility to supple Western Europe with at least 0.3 Mb/d of additional
oil despite all those fairy tales of "oil glut".
To me all those talks is just the game of market speculators to increase their profits via
creating an artificial trend from which they can extract their rent. And they control media (contrary
to Ron's thinking they do). As low oil price are beneficial to the US economy and geopolitical
interests, EIA (which is at least 50% a propaganda agency and only 50% statistical agency) is
on board. So they have a field day now. IEA is more or less a US lapdog too.
So the question now is not a balance (calculated on data with high error margin that agencies
provide) but a severe, undeniable shortage which can ruin the myth. The myth which obtained its
staying power due to constant repetition (brainwashing effect). It confines itself to a few points
and repeat them over and over." As Joseph Goebbels aptly noted
"It would not be impossible to prove with sufficient repetition and a psychological understanding
of the people concerned that a square is in fact a circle. They are mere words, and words can
be molded until they clothe ideas and disguise."
― Joseph Goebbels
"Stories drive the market, just like our lives, methinks."
I will go along with this generalization to a certain extent, because the human species really
does live by the narrative. Group think rules, to a substantial extent, in the lives of men.
But in the end, people buy as much oil, and as many services dependent on oil, as they want
and can afford.
I find it just about impossible to believe that the people running the nationalized oil companies
in the Middle East, or the oil companies in Russia, or Mexico, or China or Venezuela, believe
that traders can control the price of oil. Traders can BET on what they think the price of oil
will be, and they can thus exert great influence on oil companies that are independently owned
and operated, in terms of how much they will invest in future production.
But just because the futures market says REAL physical barrels will be available at a X per
barrel on a certain date is no assurance at all that such barrels WILL be available. Who ever
has the REAL barrels might be able to sell them for considerably more, or might have to sell them
for considerably less. The folks holding contracts for paper barrels will either win or lose.
Producers who have hedged will know how much they will get for their oil,guaranteed, after settling
up their wins or losses on their hedges. That will be the price at which they hedged, minus the
actual cost of hedging.
So far, other than arguing that the actions of Wall Street have a big or controlling influence
on the ENTIRE world economy, I have not seen any rational argument made concerning just how traders
can control the DEMAND FOR OIL. If the demand is there, it will be produced, if it can be produced
at a profit.
The low price expectation could vanish like fog in bright morning sun, just like the high
price expectation vanished.
Nor have I seen any rational argument to the effect that they can control the investment decisions
of Saudi Aramco, etc.
We simply don't know how fast production might drop off as depletion bites, and as BUSINESS
oriented oil companies shut in marginal production, and scale back upstream spending in the face
of low prices. We don't have any RELIABLE way to predict whether the world economy will have a
heart attack, or soldier on, for the next two or three years, maybe even perking up a little,
or soldier on , just gradually contracting a little.
I must assume that the people who run such oil companies as Saudi Aramco have superb access
to the actual DATA involving the geological situation, via their business muscle, and via industrial
spying operations. This data access would extend to just about the entire world, so far as the
data actually exists.
So they will have a pretty good idea how much oil can be produced at how much cost, and where,
barring new technological developments, which usually take a good while to be debugged and widely
adopted.
So -If the Saudis for example think oil will be worth eighty or ninety bucks again within the
next few years, a straight up business decision on their part would be to continue upstream investment.
Of course geopolitical power struggle considerations might trump the business decision, at least
temporarily.
If anybody at all has a TRULY RELIABLE crystal ball when it comes to predicting the behavior
of the economy, I have not yet heard who they are.
The futures market might be way off. Futures are a win / lose game.
So far I have never run across a convincing example of anybody being able to control the price
of any good or service, unless by means of either controlling demand for it, or controlling the
supply of it. Gasoline would get to be dirt cheap indeed if getting caught in possession of a
gallon of it meant paying a thousand dollar fine. This absurd example is merely intended to illustrate
that demand CAN be controlled, if the controlling agency has power enough.
Why should I believe that Wall Street can control demand for oil, specifically ?
Why should I believe that Wall Street can control the behavior of oil producers, especially
producers that are not in need of Wall Street money, or controlled by yankee regulatory departments
or agencies?
Why should I believe that Wall Street can control the behavior of oil producers, especially
producers that are not in need of Wall Street money, or controlled by Yankee regulatory departments
or agencies?
They do not control producers directly. Their control is indirect due to the fact that moneywise
physical oil now dwarf paper oil and futures contracts and options are allowed to settle in dollars
without any commodity changing hands. In other words oil became just another currency and its
price is driven up or down using all the dirty tricks of the currency games (See Soros attack
on British pound).
Typical USA volume is about one million contracts a day. One contract is 1000 barrels. So one
billion barrels of paper oil changes hands daily only in the USA. Add London and other European
exchanges and ratio of 1:200 of "real" to "paper" oil is not unrealistic.
Susan Strange was probably the first to analyze this new "casino capitalism" model for oil
boom and bust. Here is a relevant quote from her book (1997):
As with interest rates, the problem with oil prices is not so much that they have been
high, but rather that they have also been so unpredictable and so unstable. Again the instability
has engendered a new game in the great financial casino oil futures.
This evolved in the following way. In the 1980s as OPEC's command over the oil market
weakened, with some producers desperate for foreign exchange ready to undercut the agreed
price with secret, under the-counter deals, more and more oil cargoes came to be traded
on what is rather misleadingly called the Rotterdam spot market .
But this is not a market in the ordinary sense in which buyers and sellers are identifiable
and prices known to everyone. It is just a network of about a hundred oil traders and brokers,
connected with each other by long distance intercontinental telephone and telex. Like other
brokers in grain or porkbellies or frozen orange-juice, they are often tempted to increase
their profits by talking the market price up or down.
As late as 1978, the spot market deals still accounted for only 5 per cent of all trade
in oil. They now account for 40 per cent or more.
Inevitably, because of the close connection between oil prices, generally denominated
in dollars, and the price of the dollar in foreign exchange markets, there has grown up
in London and New York a futures market in 'paper barrels' to match the forward and futures
markets in dollars and dollar assets.
These 'paper barrel' contracts can change hands as many as 50 times, and do not need
to be based on barrels of real oil. Futures contracts on the British Brent blend of North
Sea oil are thought to add up to as much as eight times the total annual output of the Brent
field (Hooper, 1985).
In short, while there is little doubt that the instability of exchange rates has helped
to destabilize the oil market, the oil market is now adding its own gambling game to all
the others.
The picture so far is one of an international financial system in which the gamblers
in the casino have got out of hand, almost beyond, it sometimes seems, the control of governments.
The question has occurred already to a good many people whether it is the governments
that have got weaker over the past 15 years, or whether it is a fortuitous coincidence of
economic forces that have combined to make the markets more powerful. It is an important
question, for the answer will dictate what has to be done to control, to moderate, or to
close down the great financial gambling game.
That question is linked with a second one: have all states weakened in relation to markets,
or only one, or perhaps just a few of the more important governments? Those who think that
all governments have weakened tend to find rather broad general explanations of how this
has come about. If they offer solutions they are apt to be of the most vague and general
kind. In contrast, those who think the explanation lies with the few, or even just with
the USA as the dominant power in the international financial system as all the figures
show it to be tend to be much more specific both in the explanations they put forward
and in the solutions they suggest.
I think in 1997 the term "neoliberalism" was not yet common and "casino capitalism" was
used as a substitute for depiction of essentially the same phenomenon. She "feels the pain"
but did not understand that it was a "quite coup" that installed neoliberalism as a dominant
social system all over the world, displacing both New Deal Capitalism and Socialism. Kind of
global coup detat of financial oligarchy. So governments were already captured and can't serve
as a countervailing force for gambling.
Quote above is cited from
Casino Capitalism Reprint Edition, by Susan Strange. Paperback: 224 pages. Publisher: Manchester
University Press; Reprint edition (October 16, 1997)http://www.amazon.com/gp/product/0719052351?keywords=Susan%20Strange%20Casino%20capitalism
In other words "paper oil" radically changed the game.
"... There are over $1.8 trillion of US junk bonds outstanding. It's the lifeblood of over-indebted corporate America. When yields began to soar over a year ago, and liquidity began to dry up at the bottom of the scale, it was "contained." ..."
"... The average yield of CCC or lower-rated junk bonds hit the 20% mark a week ago. The last time yields had jumped to that level was on September 20, 2008, in the panic after the Lehman bankruptcy, as we pointed out . Today, that average yield is nearly 22%! ..."
"... Today the scenario is punctuated by defaults, debt restructurings with big haircuts, and bankruptcy filings. These risks had been there all along. But "consensual hallucination," as we've come to call the phenomenon, blinded investors, among them hedge funds, private equity firms, bond mutual funds for retail investors, and other honorable members of the "smart money." ..."
"... The M&A-related bond issue by Endurance International Group couldn't be syndicated and ended up on the balance sheets of the underwriters. ..."
"... The market was hit hard again this week amid solid volume trading as oil prices plunged anew. There was a meager attempt at stability on Wednesday, but some participants described it as similar to the calm at the eye of a hurricane. ..."
"... And retail investors are catching on. Over the past three sessions alone, they pulled $488 million out of the largest high-yield ETF, the iShares HYG, which on Thursday closed at 75.59, down 21% from its high in June 2014, and the lowest level since May 2009. ..."
"... All grades of junk bonds have been losing ground: the S&P High-Yield Index is down 3.9% year-to-date. But it's in the CCC-and-lower category where real bloodletting is occurring. ..."
"... It's not just energy. The category includes all kinds of companies, among them brick-and-mortar retailers and restaurants, hit hard by excessive debt, slack demand, consumer preference for online shopping, and other scourges. Unlike oil and gas drillers, these companies have no assets to sell. Standard & Poor's "believes these trends will accelerate in the coming year and lead to further retail defaults." ..."
"... All the Central Bank stimulus programs have been Neo-Keynesian, in line with the new economics. The money is pushed into the top of the economic pyramid, the banks, and according to the new economics it should trickle down. ..."
"... I see a storm brewing. A huge economic tsunami will occur when the financial sector collapses. The question is not if this will occur but when and how bad it will be. The severity is bound to be intense and long term as Congress is hidebound by ideological stances that are the origination of the Tsunami. The Fed has run out of strategies that actually have any positive effect. ..."
"... Not to diminish the concerns Wolf has expressed here or the related causal factors, but staff at the Atlanta Fed is forecasting sharply improving economic activity this quarter. ..."
"... But "consensual hallucination," as we've come to call the phenomenon, blinded investors, among them hedge funds, private equity firms, bond mutual funds for retail investors, and other honorable members of the "smart money." ..."
"... Please explain how "smart money" is losing on this "hallucination." Oh, maybe you mean the Private Equity LPs or the retail investors in the Mutual Funds, or the investors in the hedge funds. They aren't the smart money. The smart money is playing this game for all it is worth and is not losing out. ..."
Posted on
February 13, 2016 by
Yves
Smith By Wolf Richter, a San Francisco based executive, entrepreneur, start
up specialist, and author, with extensive international work experience. Originally
published at
Wolf Street
It's not contained.
There are over $1.8 trillion of US junk bonds outstanding. It's the lifeblood
of over-indebted corporate America. When yields began to soar over a year ago,
and liquidity began to dry up at the bottom of the scale, it was "contained."
Yet contagion has spread from energy, metals, and mining to other industries
and up the scale. According to UBS, about $1 trillion of these junk bonds are
now "stressed" or "distressed." And the entire corporate bond market, which
is far larger than the stock market, is getting antsy.
The average yield of CCC or lower-rated junk bonds hit the 20% mark a
week ago. The last time yields had jumped to that level was on September 20,
2008, in the panic after the Lehman bankruptcy,
as we pointed out . Today, that average yield is nearly 22%!
Today even the average yield spread between those bonds and US Treasuries
has breached the 20% mark. Last time this happened was on October 6, 2008, during
the post-Lehman panic:
At this cost of capital, companies can no longer borrow. Since they're cash-flow
negative, they'll run out of liquidity sooner or later. When that happens, defaults
jump, which blows out spreads even further, which is what happened during the
Financial Crisis. The market seizes. Financial chaos ensues.
It didn't help that Standard & Poor's just went on a "down-grade binge,"
as S&P Capital IQ LCD called it, hammering 25 energy companies deeper into junk,
11 of them into the "substantial-risk" category of CCC+ or below.
Back in the summer of 2014, during the peak of the wild credit bubble beautifully
conjured up by the Fed, companies in this category had no problems issuing new
debt in order to service existing debt, fill cash-flow holes, blow it on special
dividends to their private-equity owners, and what not. The average yield of
CCC or lower rated bonds at the time was around 8%.
Today the scenario is punctuated by defaults, debt restructurings with
big haircuts, and bankruptcy filings. These risks had been there all along.
But "consensual hallucination," as we've come to call the phenomenon, blinded
investors, among them hedge funds, private equity firms, bond mutual funds for
retail investors, and other honorable members of the "smart money."
But now that they've opened their eyes, they're running away. And so the
market for new issuance is grinding down.
"Another tough week," S&P Capital IQ LCD said on Thursday in its
HY Weekly . There was one small deal earlier this week: Manitowoc Cranes'
$260 million B+ rated second-lien notes that mature in 2021 sold at a yield
of 14%!
The M&A-related bond issue by Endurance International Group couldn't
be syndicated and ended up on the balance sheets of the underwriters. LeasePlan
has a $500 million deal on the calendar. If it goes today, it will bring the
total this week to a measly $760 million, down 90% from the four-year average
for the second week in February. According to S&P Capital IQ LCD, it would be
"the lowest amount of early-February issuance since the credit crisis in 2009."
In the secondary market, where the high-yield bonds are traded, it's equally
gloomy. S&P Capital IQ LCD:
The market was hit hard again this week amid solid volume trading
as oil prices plunged anew. There was a meager attempt at stability on Wednesday,
but some participants described it as similar to the calm at the eye of
a hurricane.
That proved true today, as markets fell further. There was red across
the board with losses in dollar terms ranging 15 points, depending on the
credit and sector. The huge U.S. Treasury market rally gave no technical
support, even as the yield on the 10-year note, for one, pierced 1.6%, a
4.5-year low.
And retail investors are catching on. Over the past three sessions alone,
they pulled $488 million out of the largest high-yield ETF, the iShares HYG,
which on Thursday closed at 75.59, down 21% from its high in June 2014, and
the lowest level since May 2009.
On a broader scale, investors
yanked $5.6 billion out of that asset class in January, the fourth month
in a row of outflows.
All grades of junk bonds have been losing ground: the S&P High-Yield
Index is down 3.9% year-to-date. But it's in the CCC-and-lower category where
real bloodletting is occurring.
This chart shows the return from interest payments and price changes of that
category. Since June 2014, the index has lost 28%. During the panic of the Financial
Crisis, it plunged 48%. But now the volume of junk bonds outstanding is twice
as large and the credit bubble is far bigger than it had been before the Financial
Crisis. So this might just be the beginning:
It's not just energy. The category includes all kinds of companies, among
them brick-and-mortar retailers and restaurants, hit hard by excessive debt,
slack demand, consumer preference for online shopping, and other scourges. Unlike
oil and gas drillers, these companies have no assets to sell. Standard & Poor's
"believes these trends will accelerate in the coming year and lead to further
retail defaults."
S&P now expects the overall default rate to reach 3.9% by the end of 2016.
But it may be the rosy scenario; last March, S&P still thought the default rate
at the end of 2016 would be 2.8%. Credits are deteriorating fast.
Among these CCC-rated retailers and restaurants are Claire's Stores, Logan's
Roadhouse, and the Bon-Ton Department Stores. Others, at B-, are just a downgrade
away, such as Toys "R" Us, 99 Cents Only Stores, or P.F. Chang's China Bistro.
Some are rated B, such as Men's Wearhouse and Neiman Marcus. If these companies
need money, it's going to get very expensive.
And contagion is spreading to high-grade bonds: issuance so far in February
plunged 90% to just $5 billion, from the same period a year ago. Year-to-date
issuance was inflated by one monster deal carried over from last year, the $46-billion
M&A-driven trade for Anheuser-Busch InBev, bringing the total to $126.5 billion,
still down 13%. S&P Capital IQ LCD:
Severe broad market volatility shuttered the investment-grade primary
market for a fifth consecutive session Thursday, as secondary-market spreads
continued to widen.
If policy makers wanted to understand the irrelevance of ZIRP or NIRP
in the world where real businesses and people live, they only have to read
this article.
And don't forget the risk that's posed by the sovereign debt issued by
the EU PIIGS:
Are The EU PIIGS About To Start Squealing?
As the migrant crisis in Europe worsens serious steps to address it are
being considered.
One proposal is for passports to be required in order to cross from one
EU country to another.
Would such a drastic move spell the beginning of the end for the Eurozone
as a viable entity?
And if so what will happen to the piles of sovereign debt that's been
issued by the economically vulnerable EU PIIGS, and to the investors who
have been pouring money into them at what appear to be ridiculously low
yields?
Bring in nonsense economics globally and let it destroy everything.
Today's nonsense economics:
1) Ignores the true nature of money and debt
Debt is just taking money from the future to spend today.
The loan/mortgage is taken out and spent; the repayments come in the
future.
Today's boom is tomorrow's penury and tomorrow is here.
One of the fundamental flaws in the economists' models is the way they
treat money, they do not understand the very nature of this most basic of
fundamentals.
They see it as a medium enabling trade that exists in steady state without
being created, destroyed or hoarded by the wealthy.
They see banks as intermediaries where the money of savers is leant out
to borrowers.
When you know how money is created and destroyed on bank balance sheets,
you can immediately see the problems of banks lending into asset bubbles
and how massive amounts of fictitious, asset bubble wealth can disappear
over-night.
When you take into account debt and compound interest, you quickly realise
how debt can over-whelm the system especially as debt accumulates with those
that can least afford it.
a) Those with excess capital invest it and collect interest, dividends
and rent.
b) Those with insufficient capital borrow money and pay interest and rent.
Add to this the fact that new money can only be created from new debt
and the picture gets worse again.
With this ignorance at the heart of today's economics, bankers worked
out how they could create more
and more debt whilst taking no responsibility for it. They invented securitisation
and complex financial instruments to package up their debt and sell it on
to other suckers (the heart of 2008).
2) Doesn't differentiate between "earned" and "unearned" wealth
Adam Smith:
"The Labour and time of the poor is in civilised countries sacrificed
to the maintaining of the rich in ease and luxury. The Landlord is maintained
in idleness and luxury by the labour of his tenants. The moneyed man is
supported by his extractions from the industrious merchant and the needy
who are obliged to support him in ease by a return for the use of his money.
But every savage has the full fruits of his own labours; there are no landlords,
no usurers and no tax gatherers."
Like most classical economists he differentiated between "earned" and
"unearned" wealth and noted how the wealthy maintained themselves in idleness
and luxury via "unearned", rentier income from their land and capital.
We can no longer see the difference between the productive side of the
economy and the unproductive, parasitic, rentier side.
The FIRE (finance, insurance and real estate) sectors now dominate the
UK economy and these are actually parasites on the real economy.
Constant rent seeking, parasitic activity from the financial sector.
Siphoning off the "earned" wealth of generation rent to provide "unearned"
income for those with more Capital, via BTL.
Housing booms across the world sucking purchasing power from the real
economy through high rents and mortgage payments.
Michael Hudson "Killing the Host"
3) Today's ideal is unregulated, trickledown Capitalism.
We had un-regulated, trickledown Capitalism in the UK in the 19th Century.
We know what it looks like.
1) Those at the top were very wealthy
2) Those lower down lived in grinding poverty, paid just enough to keep
them alive to work with as little time off as possible.
3) Slavery
4) Child Labour
Immense wealth at the top with nothing trickling down, just like today.
This is what Capitalism maximized for profit looks like.
Labour costs are reduced to the absolute minimum to maximise profit.
(The majority got a larger slice of the pie through organised Labour
movements.)
The beginnings of regulation to deal with the wealthy UK businessman
seeking to maximise profit, the abolition of slavery and child labour.
Where regulation is lax today?
Apple factories with suicide nets in China.
The modern business person chases around the world to find the poorest
nation with the laxest regulations so they can exploit these people in the
same way they used to exploit the citizens of their own nations two hundred
years ago.
Labour costs are reduced to the absolute minimum to maximise profit.
Capitalism in its natural state sucks everything up to the top.
Capitalism in its natural state doesn't create much demand.
There is more than one version of Capitalism, and today's version is
an upside down version of the one we had 40 years ago that produced the
lowest levels of inequality in history within the developed world.
40 years ago most economists and almost everyone else believed the economy
was demand driven and the system naturally trickled up.
Now most economists and almost everyone else believes the economy is
supply driven and the system naturally trickles down.
Economics has been turned upside down in the last 40 years.
All the Central Bank stimulus programs have been Neo-Keynesian, in
line with the new economics. The money is pushed into the top of the economic
pyramid, the banks, and according to the new economics it should trickle
down.
What we have seen is that the money stays at the top inflating asset
bubbles in stocks, fine art, classic cars and top end property.
Businessmen believe in the new economics when it comes to keeping all
the rewards for themselves and shareholders.
Businessmen believe in the old economics when it come to investing and
won't invest until demand rises.
The new economics has taken us back to a disastrous past.
1920s/2000s high inequality, high banker pay, low regulation,
low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation
phase
1929/2008 Wall Street crash
1930s/2010s Global recession, currency wars, rising nationalism
and extremism
I see a storm brewing. A huge economic tsunami will occur when the
financial sector collapses. The question is not if this will occur but when
and how bad it will be. The severity is bound to be intense and long term
as Congress is hidebound by ideological stances that are the origination
of the Tsunami. The Fed has run out of strategies that actually have any
positive effect.
Not to diminish the concerns Wolf has expressed here or the related
causal factors, but staff at the Atlanta Fed is forecasting sharply improving
economic activity this quarter.
Although I only began tracking their work during the past year, I have
been impressed by the accuracy of their recent GDP forecasts:
But "consensual hallucination," as we've come to call the phenomenon,
blinded investors, among them hedge funds, private equity firms, bond
mutual funds for retail investors, and other honorable members of the
"smart money."
Please explain how "smart money" is losing on this "hallucination."
Oh, maybe you mean the Private Equity LPs or the retail investors in the
Mutual Funds, or the investors in the hedge funds. They aren't the smart
money. The smart money is playing this game for all it is worth and is not
losing out.
"... The money crunch is hitting just as U.S. production is starting to decline. On Tuesday, the Energy Information Administration estimated that production is down 600,000 barrels per day since April; the agency expects production to fall at least that much again by the end of the year. Without a cash infusion, those declines will only accelerate. ..."
"... If production is falling, does that mean oil prices are going to go back up? Maybe. A popular argument in the oil patch is that the pullback in investment is sowing the seeds for the next surge in prices; oil companies won't be able to boost production quickly enough when it's needed, leading to higher prices. But even if that argument is right, it could take years for such a rebalancing to occur. And besides, as I've argued before, the conventional wisdom on oil is (almost) always wrong . ..."
Oil companies have survived low prices this long because banks and investors
were willing to lend them billions of dollars on the assumption that the price
plunge would be short-lived. But as experts become
increasingly convinced that prices will
stay low for years, Wall Street is turning off the money spigot. (It doesn't
help that the global economic slowdown is making banks more cautious, while
the Fed's decision to raise interest rates is making borrowing more expensive.)
The money crunch is hitting just as U.S. production is starting to decline.
On Tuesday, the Energy Information Administration
estimated that production is down 600,000 barrels per day since April; the
agency expects production to fall at least that much again by the end of the
year. Without a cash infusion, those declines will only accelerate.
If production is falling, does that mean oil prices are going to go back
up? Maybe. A
popular argument in the oil patch is that the pullback in investment is
sowing the seeds for the next surge in prices; oil companies won't be able to
boost production quickly enough when it's needed, leading to higher prices.
But even if that argument is right, it could take years for such a rebalancing
to occur. And besides, as I've argued before, the conventional wisdom on oil
is
(almost) always wrong.
"... At the beginning of 2014, the world was marveling in surprise as the US returned as a petroleum superpower, a role it had relinquished in the early 1970s. It was pumping so much oil and gas that experts foresaw a new American industrial renaissance, with trillions of dollars in investment and millions of new jobs. wo years later, faces are aghast as the same oil has instead unleashed world-class havoc: Just a month into the new year, the Dow Jones Industrial Average is down 5.5%. Japan's Nikkei has dropped 8%, and the Stoxx Europe 600 is 6.4% lower. ..."
"... that companies would put on hold $380 billion (and counting) in oil and natural gas field investment, and fire 250,000 industry workers around the world last year (including around 90,000 in the US). ..."
"... A lot of Americans bought houses based on confidence in the boom, and now can't make their payments -Texas has seen a 15% rise in foreclosures, and Oklahoma a whopping 36% increase, according to estimates from RealtyTrac. Morningstar, the rating agency, has put a third of some $340 million in mortgage-backed securities tied to North Dakota apartment buildings and other commercial properties on its watch list for possible default. ..."
At the beginning of 2014, the world was marveling in surprise as the
US returned as a petroleum superpower, a role it had relinquished in the early
1970s. It was pumping so much oil and gas that experts foresaw a new American
industrial renaissance, with trillions of dollars in investment and millions
of new jobs. wo years later, faces are aghast as the same oil has instead unleashed
world-class havoc: Just a month into the new year, the Dow Jones Industrial
Average is down 5.5%. Japan's Nikkei has dropped 8%, and the Stoxx Europe 600
is 6.4% lower. The blood on the floor even includes fuel-dependent industries
that logic suggests should be prospering,
such as airlines.
... ... ...
The analysts defend themselves by noting that they got this and that aspect
of oil's trajectory right, which is fair enough. But it seems all missed the
big picture: First, they failed to see that from 2011 to 2014, a surge in shale
oil production was going to become a big factor in global supplies; then, they
did not anticipate that the same oil would create the mayhem before us now.
In fact, in the case of the current turmoil, most forecast the precise opposite-economic
nirvana. Interviews with the main institutions that made the bad calls reveal
no crisis of confidence, and they are busy putting out analyses of the latest
developments.
... ... ...
Consumers have been big winners-gasoline prices have plummeted. That part
has happened. But analysts failed to anticipate that the Saudis would refuse
to cooperate with the shale gale, as it's been dubbed, and in fact would declare
war on it, even though Riyadh did precisely the same thing in the 1980s. The
analysts did not foretell that, if shale oil production rose as they projected,
it could drive down prices not only to the $80-a-barrel average that many forecast,
but much lower-so low, for so long (see chart below), that companies would
put on hold $380 billion (and counting) in oil and natural gas field investment,
and fire 250,000 industry workers around the world last year (including around
90,000 in the US).
... ... ...
Nor did they foresee that many of the companies themselves would be
at risk of bankruptcy (42
already filed as of last year). Of 155 US oil and gas companies studied
by Standard & Poor's, one third are rated B- or less, meaning they are a high
risk of default. These companies' debt is selling at just 56 cents on the dollar,
below even the level during the financial crash. As a measure of this vulnerability,
the 60 leading US independent oil and gas companies have accumulated
$200 billion in debt.
... ... ...
With the collapse in oil prices came the crash of employment in US cities
across Louisiana, North Dakota, and Texas, and in Canadian towns reliant on
the oil sands boom in Alberta. North Dakota has
lost an estimated 13,500 roughnecks and oil engineers, not to mention drivers,
restaurant cooks, barbers, and grocery store cashiers in service businesses
that sprouted up around them. The Canadian province of Alberta has
lost some 20,000 jobs, the most in any industry downturn since the early
1980s.
A lot of Americans bought houses based on confidence in the boom, and
now
can't make their payments-Texas has seen a 15% rise in foreclosures, and
Oklahoma a whopping 36% increase, according to
estimates from RealtyTrac. Morningstar, the rating agency, has
put a third of some $340 million in mortgage-backed securities tied to North
Dakota apartment buildings and other commercial properties on its watch list
for possible default.
But the echo has also been heard far from the US shale
patch. In the once-booming, toughly run petro-state of Azerbaijan, for instance,
people have
been in the streets to protest higher prices and lost jobs; the International
Monetary Fund, worried about Azerbaijan's possible collapse, is speaking with
government officials about a
$3 billion bailout.
Soup kitchens are
surfacing in Moscow, notwithstanding Russian president Vladimir Putin's
assertions that the country is coping fine, and that
things will improve
this year. African producers also have felt the pain. Like stock bourses around
the world, Nigeria's has tanked along with oil prices.
It is clear that US shale industry now does not matter that much in this game anymore. Even if
we believe absurd extrapolation of breakeven cost that now are propagated by MSM and "Fuser law"
of breakeven price for LTO. "The Moor has done his duty, the Moor can go." (
http://canadafreepress.com/article/the-moors-can-go
). Revolutions tend to eat its own children.
What measures such counties will be able to take take outside of growing of own refining and
petrochemical sector is difficult to say, but I suspect that such measures will be taken by most
oil producing countries other then completely dysfunctional or in the state of civil war (Libya,
Iraq). Barter deals and direct swaps of currencies which avoid using dollars might became more
common. If I were Russia I would dump Western Europe market in favor of Asia and watch how they
would scramble to adjust using Saudis and Iran to compensate for those losses. Such a swap of
customers with Saudis and Iran might be a sufficient shock to change market dynamics. For example,
using "sanctions" as a justification ( by adopting the law that prohibit to sale of Russian oil
to countries that implemented sanctions against Russia ). It' a gamble but possible losses might
well be compensated by jump in global oil prices due to this shock therapy.
I suspect that the second half of this year and the next year probably will be much more interesting
and provide more surprises for linear extrapolation lovers then the second half of 2014 and 2015.
The current "glut theory" (aka "Great condensate con") is still promoted by EIA (aptly named
here "Energy Disinformation Agency"), IEA and thier friends in MSM by all means including tossing
biofuels in the mix and reporting "bloated" inventories". Until some "the last straw that broke
the camel back" moment arrives (aka "tipping point"
http://www.amazon.com/The-Tipping-Point-Little-Difference/dp/0316346624 ). At which moment
panic might start.
I doubt that in such a destabilized system we can avoid the tipping point.
One unexpected blowback of "Operation Oil Glut" is that deflation of "shale bubble" might well
take some "Internet economy" companies with it. LinkedIn today skids 40%, erases $10B in market
cap.
It is clear that US shale industry now does not matter that much in this game anymore. Even if
we believe absurd extrapolation of breakeven cost that now are propagated by MSM and "Fuser law"
of breakeven price for LTO. "The Moor has done his duty, the Moor can go." (
http://canadafreepress.com/article/the-moors-can-go
). Revolutions tend to eat its own children.
What measures such counties will be able to take take outside of growing of own refining and
petrochemical sector is difficult to say, but I suspect that such measures will be taken by most
oil producing countries other then completely dysfunctional or in the state of civil war (Libya,
Iraq). Barter deals and direct swaps of currencies which avoid using dollars might became more
common. If I were Russia I would dump Western Europe market in favor of Asia and watch how they
would scramble to adjust using Saudis and Iran to compensate for those losses. Such a swap of
customers with Saudis and Iran might be a sufficient shock to change market dynamics. For example,
using "sanctions" as a justification ( by adopting the law that prohibit to sale of Russian oil
to countries that implemented sanctions against Russia ). It' a gamble but possible losses might
well be compensated by jump in global oil prices due to this shock therapy.
I suspect that the second half of this year and the next year probably will be much more interesting
and provide more surprises for linear extrapolation lovers then the second half of 2014 and 2015.
The current "glut theory" (aka "Great condensate con") is still promoted by EIA (aptly named
here "Energy Disinformation Agency"), IEA and thier friends in MSM by all means including tossing
biofuels in the mix and reporting "bloated" inventories". Until some "the last straw that broke
the camel back" moment arrives (aka "tipping point"
http://www.amazon.com/The-Tipping-Point-Little-Difference/dp/0316346624 ). At which moment
panic might start.
I doubt that in such a destabilized system we can avoid the tipping point.
One unexpected blowback of "Operation Oil Glut" is that deflation of "shale bubble" might well
take some "Internet economy" companies with it. LinkedIn today skids 40%, erases $10B in market
cap.
Susan Strange was probably the first to analyze this new "casino capitalism" model for oil boom
and bust. Here is a relevant quote from her book (1997):
As with interest rates, the problem with oil prices is not so much that they have been high,
but rather that they have also been so unpredictable and so unstable. Again the instability
has engendered a new game in the great financial casino oil futures.
This evolved in the following way. In the 1980s as OPEC's command over the oil market weakened,
with some producers desperate for foreign exchange ready to undercut the agreed price with
secret, under the-counter deals, more and more oil cargoes came to be traded on what is rather
misleadingly called the Rotterdam spot market.
But this is not a market in the ordinary sense in which buyers and sellers are identifiable
and prices known to everyone. It is just a network of about a hundred oil traders and brokers,
connected with each other by long distance intercontinental telephone and telex. Like other
brokers in grain or porkbellies or frozen orange-
juice, they are often tempted to increase their profits by talking the market price up or down.
As late as 1978, the spot market deals still accounted for only 5 per cent of all trade
in oil. They now account for 40 per cent or more.
Inevitably, because of the close connection between oil prices, generally denominated in
dollars, and the price of the dollar in foreign exchange markets, there has grown up in London
and New York a futures market in 'paper barrels' to match the forward and futures markets in
dollars and dollar assets.
These 'paper barrel' contracts can change hands as many as 50 times, and do not need to
be based on barrels of real oil. Futures contracts on the British Brent blend of North Sea
oil are thought to add up to as much as eight times the total annual output of the Brent field
(Hooper, 1985).
In short, while there is little doubt that the instability of exchange rates has helped
to destabilize the oil market, the oil market is now adding its own gambling game to all the
others.
The picture so far is one of an international financial system in which the gamblers in
the casino have got out of hand, almost beyond, it sometimes seems, the control of governments.
The question has occurred already to a good many people whether it is the governments that
have got weaker over the past 15 years, or whether it is a fortuitous coincidence of economic
forces that have combined to make the markets more powerful. It is an important question, for
the answer will dictate what has to be done to control, to moderate, or to close down the great
financial gambling game.
That question is linked with a second one: have all states weakened in relation to markets,
or only one, or perhaps just a few of the more important governments? Those who think that
all governments have weakened tend to find rather broad general explanations of how this has
come about. If they offer solutions they are apt to be of the most vague and general kind.
In contrast, those who think the explanation lies with the few, or even just with the USA as
the dominant power in the international financial system as all the figures show it to be
tend to be much more specific both in the explanations they put forward and in the solutions
they suggest.
I think in 1997 the term "neoliberalism" was not yet common and "casino capitalism" was used
as a substitute for depiction of essentially the same phenomenon. She "feels the pain" but did
not understand that it was a "quite coup" that installed neoliberalism as a dominant social system
all over the world, displacing both New Deal Capitalism and Socialism. Kind of global coup
detat of financial oligarchy. So governments were already captured and can't serve as a countervailing
force for gambling.
Quote above is cited from
Casino Capitalism Reprint Edition, by Susan Strange. Paperback: 224 pages. Publisher: Manchester
University Press; Reprint edition (October 16, 1997)http://www.amazon.com/gp/product/0719052351?keywords=Susan%20Strange%20Casino%20capitalism
I wonder who writes this stuff? "3.4 million b/d of oil production is cash negative, which equates
to 3.5% of global supply (96.1 million b/d)." Which I would instead identify as "more than twice
as much as the current oversupply."
And, a comedian could not do better than this: "Being cash
negative simply means that production costs are higher than the price that the producer receives."
WTF!! Tell every company that has ever filed for bankruptcy that you "simply" spent more money
than you received. [And, so you "simply" committed financial suicide. Nothing to see here, move
along.]
"Being cash negative simply means that production costs are higher than the price that the
producer receives and does not necessarily mean that production will be halted altogether. .."
"Given the cost of restarting production, many producers will continue to take the loss in the
hope of a rebound in prices."
Shutting and then restarting wells is not as easy as to turn off and again turn on the tap
in your bathroom. It may be costly and it can damage the reservoir. It many cases it is easier
and less costly to continue producing at loss for several months
"To abandon one of the North Sea's bigger platforms, and plug up to 30 wells, can cost more
than £700m. As a result, even at $30 a barrel, some operators may prefer to keep pumping."
The posted oil price here is around $16 bbl now. On a drive I took earlier this week, I counted
9 pump jacks that were idle, and 6 pumping. I know that some of the idle pumps may be on a timer
where they pump intermittently, but it seems likely to me that many of the wells have been shut-in.
There isn't a lot of production in this area, and whats here is mostly old conventional stripper
production.
The Woodmac report references $35 oil so we don't know exactly when it was prepared. With the
declines of January , and high differentials, many areas are now at $15 to $20 oil. At that price
a lot of these wells will be producing revenue of much less than cash costs. I would think that
operators would be forced into reducing their production if prices stay this low for a while.
But, if Woodmac says they aren't shutting in, maybe they are not.
Since the dramatic drop in prices from late 2014, there have been few halts in production-with
around 100,000 bpd shut-in globally to date.
Only 100,000 barrels per day has been shut
in so far. Yet according to the EIA, Non-OPEC C+C production peaked in December 2015 at 47,207
and as of October, stood at 46,444 bpd, a drop of 763,000 barrels per day.
Obviously, production growth has stopped and the decline has begun, regardless of Wood Mackenzie's
figures.
100 kb/d mentioned by Woodmac is production shut-in due to high oil prices. This does not include
the effects of natural declines, lower drilling activity and delayed projects.
"... I would use $17 billion as outstandings for energy loans. And for securities, I would use, call it, $2.5 billion which is the sum of AFS securities and non-marketable securities. ..."
"... We're focused on the whole thing. Half of those customers - half of those balances represent E&P companies, upstream companies. A quarter of them represent oilfield services companies, and a quarter of them represent pipelines and storage and other midstream activity. And it excludes what I would describe as investment grade sort of diversified larger cap companies where we don't view the credit exposure as quite the same. ..."
"... <Q - Mike L. Mayo> ..."
"... To summarize: $17 billion in oil and energy exposure, which has a $1.2 billion, or 7%, loss reserve assigned to it already, and which is made up "mostly" of junk bonds. ..."
First: how big is Wells' loan loss allowance for energy:
We've considered the challenges within the energy sector and our allowance
process throughout 2015 and approximately $1.2 billion of the allowance
was allocated to our oil and gas portfolio. It's important to note that
the entire allowance is available to absorb credit losses inherent in the
total loan portfolio.
Then, from the Q&A, how much is Wells' total loan exposure, its fixed income
and equity exposure toward energy:
I would use $17 billion as outstandings for energy loans. And for
securities, I would use, call it, $2.5 billion which is the sum of AFS securities
and non-marketable securities.
In other words, a 7% loan loss reserve toward energy, perhaps the highest
on all of Wall Street.
Then, here is the breakdown by services:
We're focused on the whole thing. Half of those customers - half
of those balances represent E&P companies, upstream companies. A quarter
of them represent oilfield services companies, and a quarter of them represent
pipelines and storage and other midstream activity. And it excludes what
I would describe as investment grade sort of diversified larger cap companies
where we don't view the credit exposure as quite the same.
But the punchline in the problem category was the following exchange with
Mike Mayo:
<Q - Mike L. Mayo>: What percent of the $17 billion is not investment
grade?
<A - John R. Shrewsberry>: I would say most of it. Most of it.
<Q - Mike L. Mayo>: So most of the $17 billion is non-investment
grade.
<A - John R. Shrewsberry>: Correct.
To summarize: $17 billion in oil and energy exposure, which has a $1.2
billion, or 7%, loss reserve assigned to it already, and which is made up "mostly"
of junk bonds.
"... Tempted by big returns, shale companies have borrowed more than $200 billion in bonds and loans, from Wall Street and London, to cover development and projects that may not even come to fruition. Oil producers' debt since 2010 has increased more than 55 percent, and revenues have slowed, rising only 36 percent from September 2014, compared to 2010, according to the Wall Street Journal. ..."
"... On Sunday, the first shale company filed for bankruptcy. WBH Energy LP, a private Texas-based drilling group, filed for bankruptcy after saying that their lender was no longer willing to advance money. The company estimates their debt between $10-50 million. There are hundreds more in the US alone. ..."
"... Analysts believe North American shale needs to sell at $60-100 per barrel to break even on the billions of debt accrued by the energy companies. Indebted companies, fearing bankruptcy, may therefore be forced to keep selling oil, even at a loss. ..."
"... Energy companies that can afford it will cut production, but this will prove more difficult for smaller companies with larger debt hanging over their balance sheets. ..."
"... "It begins in one place like fracking in North Dakota or Texas, but it very quickly engulfs the rest of the world. In that way, its very similar to what happened in 2008 when billions of dollars were lent to people to buy homes they couldn't pay off," economist Richard Wolff told RT. ..."
"... The industry expanded rapidly, as the method proved capable of extracting oil and gas faster and easier than before, albeit with a certain environmental cost. Fracking can increase seismic activity, as well as penetrate water systems. Many states in the US have followed European nations in banning the oil extraction method. ..."
Plummeting Brent oil prices are putting pressure on North American shale,
which has sunk hundreds of billions of dollars into investment, and could soon
come crashing down.
Tempted by big returns, shale companies have borrowed more than $200
billion in bonds and loans, from Wall Street and London, to cover development
and projects that may not even come to fruition. Oil producers' debt since 2010
has increased more than 55 percent, and revenues have slowed, rising only 36
percent from September 2014, compared to 2010, according to the Wall Street
Journal.
Fracking, the process of hydraulic fracturing and horizontal drilling on
land is much more expensive than the average water-based oilrig. However, over
the past years, it has become relatively cheap and fast. Energy companies, eager
to get in on the riches of the American oil boom, have been borrowing money
faster than they have been earning it.
On Sunday, the first shale company filed for bankruptcy. WBH Energy LP,
a private Texas-based drilling group, filed for bankruptcy after saying that
their lender was no longer willing to advance money. The company estimates their
debt between $10-50 million. There are hundreds more in the US alone.
Analysts believe North American shale needs to sell at $60-100 per barrel
to break even on the billions of debt accrued by the energy companies. Indebted
companies, fearing bankruptcy, may therefore be forced to keep selling oil,
even at a loss.
One way to avoid going bust is to merge, which is what many companies already
have on the negotiation bloc.
"We've already seen Baker Hughes and Halliburton agree to merger, and
these were two titans that used to compete head to head," Ed Hirs, managing
director independent oil and gas company Hillhouse Resources, told RT. "They've
decided they can't survive separately, they need to combine," Hirs said.
The Texas-based driller believes that lower prices and major mergers will
hinder progress in the industry.
"We will see a loss of tech. innovation and a loss of competition in the
oil service business," Hirs said.
Energy companies that can afford it will cut production, but this will
prove more difficult for smaller companies with larger debt hanging over their
balance sheets.
Oil prices lost more than 50 percent in 2014, and have already dropped 10
percent in 2015. Futures dramatically dipped when the Organization of Petroleum
Exporting Countries decided not to curb production at their November meeting.
Some experts believe the decision not to cut production, which would have
alleviated oil prices, was a direct strategic move by the cartel to reduce the
profitability of North American oil fields, from Alberta to Oklahoma. In the
past five years, the US has moved from being one of the world's biggest oil
customers to the largest producer, even overtaking Saudi Arabia.
Bubble burst?
This 'bubble' of debt could come crashing down on oil companies, as the housing
bubble did on the sub-prime mortgage industry in 2008, which sparked a crisis
in global financial markets.
"It begins in one place like fracking in North Dakota or Texas, but it
very quickly engulfs the rest of the world. In that way, its very similar to
what happened in 2008 when billions of dollars were lent to people to buy homes
they couldn't pay off," economist Richard Wolff told RT.
The industry expanded rapidly, as the method proved capable of extracting
oil and gas faster and easier than before, albeit with a certain environmental
cost. Fracking can increase seismic activity, as well as penetrate water systems.
Many states in the US have
followed
European nations in banning the oil extraction method.
The Last but not LeastTechnology is dominated by
two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt.
Ph.D
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Interesting post. Presumably "Expectations" = Crude Oil Futures Contracts. If so, who controls the price of Oil futures contracts and made the decision to throw the Bakken under the bus, along with more than a few sovereign nations who rely to a significant degree on oil exports economically and to maintain domestic political stability?
Role of demand suppression from high levels of consumer debt, China's economic slowdown, ongoing fallout from the 2008 financial collapse, neoliberal government austerity policies, improvement in energy efficiency, emergence of renewables, and other factors were understated here IMO.
In the past here has also been a variable time lag between low oil prices and rising levels of economic activity.
But maybe this development is overall not such a bad thing given global warming considerations.
CG, I was thinking something similar, that "expectations" is the euphemism for speculation in the futures markets, which, as most know from this site, is now dominated by investor-speculators. The model they used refers to Killian who is one of the handful of academics who try to refute anyone who argues speculators have influenced oil (and other commodity) prices.
My own take (anyone interested can read it here) is there was a series of bubbles generated from the futures market that created the belief higher oil prices were here to stay.
Interesting blog post. Thanks, TiPS.
Noted your article was written before the Central Banks-Primary Dealer cartel renewed pumping equities on February 11 IMHO. Jury is out on whether they've jumped the shark. Also, whether they care.
'The observed drop in oil prices should have a slightly positive impact on the EU economy.'
Probably true. But likely there's a "J-curve effect."
That is, the initial deflationary shock hikes corporate bond spreads (driven by the energy sector) and feeds recession fears. Such fears encourage investors to seek the safe haven of government bonds, at the expense of stocks and credit bonds.
Later as confidence returns, the beneficial effect of lower energy costs (including bolstered consumer demand) can actually be realized.
Arguably, Jan-Feb 2016 constituted the bottom of the "J." We'll see.