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In recent months, pipeline capacity shortage in the Permian has been the center of shale drillers and oil analysts’ attention as much as the surging production from this fastest-growing U.S. oil region that has helped total American crude oil production to exceed 11 million bpd for the first time ever.

Many of the big U.S. companies—including supermajors Exxon and Chevron—boosted their Permian oil production in the third quarter as they have firm capacity commitments and integrate Permian production with downstream operations.

Many smaller drillers, however, are going on a ‘frac holiday’—as Carrizo Oil & Gas said in its Q3 earnings release this week—in some of their Permian acreage by the end of this year, to sit out the worst of the pipeline constraints, and to be ready to return to completions next year.

The majority of company executives and industry analysts expect that the Permian bottlenecks and the wide WTI Midland to Cushing price differential are transitory issues that will go away by the end of 2019, when many of the new pipelines out of the Permian will have started operations.

Until then, some smaller drillers like Carrizo are on a ‘frac holiday’ this month and next. Commenting on the Q3 performance, Carrizo’s President and CEO S.P. “Chip” Johnson said that the company had been drilling more in the Eagle Ford than in the Permian in order to capture higher pricing from the Eagle Ford oil.

“We expect our activity to remain weighted to the Eagle Ford Shale until the second half of 2019, when we plan to begin moving rigs back to the Delaware Basin,” Johnson said. In the earnings call, he noted that the shift to the Eagle Ford “shielded us from the dramatic widening of differentials in the Permian Basin during the quarter.”

…click on the above link to read the rest of the article…

OPEC+ Floats 1 Million Barrel Production Cut After Oil Price Tumbles Into Bear Market

November 11, 2018

With oil prices entering a bear market last week, tumbling 21% from recent highs as it became clear that Trump will significantly water down Iran oil export sanctions by granting waivers to its 8 largest clients even as US inventory stockpiles are once again rising amid almost weekly records in US oil production, OPEC and its non-OPEC allies – which is pretty much everyone except US shale producers – are starting to sweat, and during today’s meeting in Abu Dhabi they hinted that an oil output cut to limit excess production may be coming.

Speaking to reporters, Oman’s Oil Minister Mohammed Al-Rumhy said that “a number of global producers agree they should pump less oil in 2019, and a reduction of 1 million barrels a day would be a good number” according to Bloomberg. Others echoed his sentiment, floating a range of cutbacks, however the most often cited number was a decrease in output by as much as 1 million barrels a day, roughly the amount of Iranian oil production that is expects to continue flowing thanks to the recent sanction waivers.

“I think probably there is support that right now there is too much oil in the market and stock, inventories are building up,” Al-Rumhy told reporters today in the UAE capital.

Oman min says a 1 million cut would be a good start #OOTT #opec

Of course, OPEC can not be seen as responding to every political whim in the White House, especially if it will result in higher gasoline prices and an angry Donald Trump, so a technical committee representing the coalition framed the need for a production cut in the context of its projections according to which the global oil surplus – which hit unprecedented levels in 2015 –

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U.S. Shale Has A Glaring Problem

October 22, 2018

U.S. Shale Has A Glaring Problem

Oil prices are down a bit, but are still close to multi-year highs. That should leave the shale industry flush with cash. However, a long list of U.S. shale companies are still struggling to turn a profit.

A new report from the Institute for Energy Economics and Financial Analysis (IEEFA) and the Sightline Institute detail the “alarming volumes of red ink” within the shale industry.

“Even after two and a half years of rising oil prices and growing expectations for improved financial results, a review of 33 publicly traded oil and gas fracking companies shows the companies posting negative free cash flows through June,” the report’s authors write. The 33 small and medium-sized drillers posted a combined $3.9 billion in negative cash flow in the first half of 2018.

The glaring problem with the poor financial results is that 2018 was supposed to be the year that the shale industry finally turned a corner. Earlier this year, the International Energy Agency painted a rosy portrait of U.S. shale, arguing in a report that “higher prices and operational improvements are putting the US shale sector on track to achieve positive free cash flow in 2018 for the first time ever.”

The improved outlook came after years of mounting debt and negative cash flow. The IEA estimates that the U.S. shale industry generated cumulative negative free cash flow of over $200 billion between 2010 and 2014. The oil market downturn that began in 2014 was supposed to have changed profligate spending, pushing out inefficient companies and leaving the sector as a whole much leaner and healthier.

“Current trends suggest that the shale industry as a whole may finally turn a profit in 2018, although downside risks remain,” the IEA wrote in July.

…click on the above link to read the rest of the article…

U.S. Shale’s Glory Days Are Numbered

October 17, 2018

U.S. Shale’s Glory Days Are Numbered

There are some early signs that the U.S. shale industry is starting to show its age, with depletion rates on the rise.

A study from Wood Mackenzie found that some wells in the Permian Wolfcamp were suffering from decline rates at or above 15 percent after five years, much higher than the 5 to 10 percent originally anticipated. “If you were expecting a well to hit the normal 6 or 8 percent after five years, and you start seeing a 12 percent decline, this becomes more of a reserves issue than an economics issue,” said R.T. Dukes, a director at industry consultant Wood Mackenzie Ltd., according to Bloomberg. As a result, “you have to grow activity year over year, or it gets harder and harder to offset declines.”

Moreover, shale wells fizzle out much faster than major offshore oil fields, which is significant because the boom in shale drilling over the past few years means that there is more depletion in absolute terms than ever before. A slowdown in drilling will mean that depletion starts to become a serious problem.

A separate study from Goldman Sachs takes a deep look at whether or not the shale industry is starting to see the effects of age. The investment bank says the average life span for “the most transformative areas of global oil supply” is between 7 and 15 years.

Examples of these rapid growth periods include the USSR in the 1960s-1970s, Mexico and the North Sea in the late 1970s-1980s, Venezuela’s heavy oil production in the 1990s, Brazil in the early 2000s, and U.S. shale and Canada’s oil sands in the 2010s. Each had their period in the limelight, but ultimately many of them plateaued and entered an extended period of decline, though some suffering steeper declines than others. Supply Soars

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$100 Oil Is A Distinct Possibility

September 25, 2018

$100 Oil Is A Distinct Possibility

An oil price spike is starting to look increasingly possible, with a rerun of 2008 not entirely out of the question, according to a new report.

The outages from Iran are worse than most analysts expected, and bottlenecks in the U.S. shale patch could prevent non-OPEC supply from plugging the gap. To top it off, new regulations from the International Maritime Organization set to take effect in 2020 could significantly tighten supplies.

Put it all together, and “the likelihood of an oil spike and crash scenario akin to the one observed in 2008 has increased,” Bank of America Merrill Lynch wrote in a note. BofAML has a price target for Brent at $95 per barrel by the end of the second quarter 2019. In 2008, Brent spiked to nearly $150 per barrel.

The supply picture is looking increasingly worrying, with Venezuela and Iran the two principal factors driving up oil prices in the fourth quarter. Notably, the bank increased its estimate of supply losses from Iran 1 million barrels per day (mb/d), up from 500,000 bpd previously.

U.S. shale can partially make up the difference, but the explosive growth from shale drillers is starting to slowdown, in part because of pipeline bottlenecks. BofAML sees U.S. supply growth of 1.4 mb/d in 2018 but only 1 mb/d of growth in 2019.

That means that there isn’t the same upward pressure on WTI as there is on Brent, largely because infrastructure bottlenecks in the shale patch keep supplies somewhat stuck within the United States. And it isn’t just in West Texas where the constraints are causing problems. “[B]ottlenecks in the Permian basin could well extend to other areas such as the Bakken or the Niobrara, and we do not even rule out temporary export capacity constraints in the Gulf Coast as domestic output overwhelms logistics,” BofAML said in a note.

…click on the above link to read the rest of the article…

Is The Shale Slowdown Overblown?

September 18, 2018

Is The Shale Slowdown Overblown?

The shale industry has hit a bit of a rough patch, with pipeline bottlenecks, cost inflation and a crowded field contributing to a drilling and production slowdown. But many in the industry are confident that the lull will be temporary.

There are several strategies that shale companies are starting to pursue, such as pivoting to other shale plays, curtailing drilling activity, or drilling wells but deferring completions. According to Halliburton’s CEO Jeff Miller, as reported by Argus Media, these strategies are actually relieving a bit of pressure on the Permian basin and the cost inflation that has come with the concentration of drilling and the associated bottlenecks.

As the Permian runs into trouble, shale companies are pivoting to the Eagle Ford, the Bakken, the Niobrara and even Wyoming’s Powder River Basin, according to comments from executives at a recent conference hosted by Barclays.

In fact, a flurry of research reports from top investment banks recently also back up the notion that the shale industry will continue to press forward, despite significant headwinds. In June, the latest month for which solid production data is available, the EIA said that U.S. output rose by 230,000 bpd, and about 165,000 bpd of that total came from Texas – evidence that the Permian has not been suffering from a slowdown, at least as of June.

Goldman Sachs says that the growth will continue, and the bank pointed to the fact that the shale industry has increased spending over the course of this year, above original guidance. “[W]e maintain our outlook for 1.3 mn bpd of US oil production growth in 2018, though with producers increasing FY18 budgets by ~7% in aggregate, there could be potential for upside to our 1.1 mn bpd growth estimate in 2019 as capital spend in 2H18 translates into higher growth into 2019,” Goldman analysts wrote in a note earlier this month. “The impact of these capex increases plus Permian bottlenecks in 2019 are likely to be key.”

…click on the above link to read the rest of the article…

America’s Oil Boom Is a Fraud

September 11, 2018

America’s Oil Boom Is a Fraud

PARIS – We promised to end the week with a bang!

You’ll recall that Fed policy always consists of the same three mistakes… 1) Keeping interest rates too low for too long, resulting in too much debt; 2) Raising interest rates to try to gently deflate the debt bubble; and 3) Cutting rates in a panic when stocks fall and the economy goes into recession.

Well, here comes the Big Bang: Mistake #4 – rarely seen, but always regretted.

Mistake #4 is what the feds do when their backs are to the wall… when they’ve run out of Mistakes 1 through 3.

It’s a typical political trade-off. The future is sacrificed for the present. And the welfare of the public is tossed aside to buy money, power, and influence for the elite.

Apocalypse Now!

Every debt expansion ends in a debt contraction. Stocks crash. Jobs are lost. The economy goes into reverse, correcting the mistakes of the previous boom.

Investors see their money entombed. Householders await foreclosures. The authorities scream: Apocalypse Now!

The more the feds falsify price signals in the boom, the more mistakes there are to correct. For example, this week, a report in The New York Times described the big mistake in the shale oil boom.

You’ll recall that it turned America from a big importer of oil to a major exporter… and revived much of the heartland with big fracking projects in woebegone regions of Texas and North Dakota.

The shale oil boom was even credited with having scuttled the oil market, which dropped from a high of around $130 a barrel in mid-2008 to under $30 in late 2016, thanks to so much new supply.

But guess what? The whole boom was fake. It didn’t add to wealth; it subtracted from it. Accumulated losses over the last five years tote to more than $200 billion, with $36 billion lost in the Bakken shale fields in North Dakota alone.

…click on the above link to read the rest of the article…

Shale Won’t Trigger The Next Financial Crisis

September 6, 2018

Shale Won’t Trigger The Next Financial Crisis

Many think that debt and negative cash flow by U.S. shale companies will crash the global financial system. I believe the opposite is more likely, that a developing financial crisis may crash oil prices and test the survival of shale plays.

In The Next Financial Crisis Lurks Underground, Bethany McLean argues that the U.S. energy boom is on shaky ground because of excessive debt and failure to show profits after a decade of drilling. This thoughtful op-ed raises concerns that many have expressed since the advent of tight oil production.

The problem with her thesis is that debt from the U.S. oil sector is just not big enough to crash the global financial system. Losses and bankruptcies in that sector in 2015-16 were substantial and yet, did not threaten the stability of world financial markets. In the improbable worst case scenario, the U.S. government would step in as it did for the auto industry in 2009.

Higher oil prices are inevitable at some time sooner than later because of under-investment over the last several years of low prices. This is compounded by lack of big discoveries and ever-present geopolitical supply interruptions and outages.

Ms. McClean correctly identifies the link between near-zero interest rates and the rise of tight oil financing. She fails, however, to acknowledge the 2004-2008 plateau of world production at the same time that demand from China greatly increased. This pushed oil prices to more than $100/barrel–the main factor that made tight oil development feasible. Because that price trend continued for 4 years, supply overshoot led to the oil-price collapse of late 2014.

The two price cycles since then are shown in Figure 1 as a cross plot of oil price vs comparative inventory (current oil + product stock levels minus the 5-year average of those stock levels).

(Click to enlarge)

…click on the above link to read the rest of the article…

Say Goodbye To Cheap Oil… For Now

September 5, 2018

Say Goodbye To Cheap Oil… For Now

Oil prices will be much higher over the next few years than previously thought, according to a new report from Barclays.

The investment bank significantly raised its pricing forecast for 2020 and 2025 in its annual medium-term oil report. Barclays expects Brent to average $75 per barrel in 2020, up from a previous estimate of $55, while prices may average $80 in 2025, up from $70 previously.

The bank noted that the market is dramatically different than it was at this point last year when it issued its previous medium-term report. U.S. shale drillers are maintaining capital discipline, which could lead to lower than expected production levels. OPEC and Russia have demonstrated resolve and laid the groundwork for long-term market management, which could keep supply off the market for years to come.

Also, the U.S. has deployed an aggressive sanctions campaign against Iran and even Venezuela, measures that should translate into more than a million barrels of per day of supply losses. And finally, “several key OPEC producers are at risk of being failed states,” Barclays concluded.

But that does not mean that the world is set to suffer from supply shortages. “Prices could reach $80 and higher in the short term, but these price levels have reawakened the industry’s animal spirits,” Barclays said. “In our view we are not on the cusp of another boom cycle in oil prices because of an impending ‘supply gap.’”

Any near-term price spike will be driven by sentiment and temporary rallies, rather than a fundamental gap in supply. “Though we expect that a price range above $80 will become the new norm next decade, our market balances do not justify those price levels in the next one to two years,” Barclays argued. “There are many other possible reasons to be bullish during that time frame, but the ‘supply gap’ is not one of them.”

…click on the above link to read the rest of the article…

No Fracking Way: Debt-Laden Shale Producers May Unleash The Next Financial Crisis

September 4, 2018

No Fracking Way: Debt-Laden Shale Producers May Unleash The Next Financial Crisis

After nearly two decades of horizontal drilling, fracking – as it is commonly known, has “turned the energy world upside down,” according to Journalist Bethany McLean, a former Goldman Sachs analyst-turned-journalist.

And according to a new op-ed in the New York Times, McLean has a warning for anyone betting the farm on the shale industry; beware.

In a nutshell, the fracking industry – which “could not have taken off so dramatically were it not for record low interest rates after the 2008 financial crisis,” is setting up for a spectacular fall without rising oil prices and global demand. Fracking companies have largely survived, according to McLean, because “plenty of people on Wall Street are willing to keep feeding them capital and taking their fees.”

From 2001 to 2012, Chesapeake Energy, a pioneering fracking firm, sold $16.4 billion of stock and $15.5 billion of debt, and paid Wall Street more than $1.1 billion in fees, according to Thomson Reuters Deals Intelligence. That’s what was public. In less obvious ways, Chesapeake raised at least another $30 billion by selling assets and doing Enron-esque deals in which the company got what were, in effect, loans repaid with future sales of natural gas.

But Chesapeake bled cash. From 2002 to the end of 2012, Chesapeake never managed to report positive free cash flow, before asset sales. –NYT

Columbia University Center on Global Energy Policy fellow, Amir Azar, calculates that the fracking industry’s net debt in 2015 was $200 billion, a 300% increase from a decade earlier, however interest expense increased at half the rate debt did due to falling interest rates.

Dr. Azar recently called the post-2008 era of super-low interest rates the “real catalyst of the shale revolution.” –NYT

…click on the above link to read the rest of the article…

The Coming Collapse Of U.S. Shale Oil Production

September 4, 2018

The Coming Collapse Of U.S. Shale Oil Production

The death of U.S. Energy Independence will occur when the collapse of shale oil production begins. And when U.S. shale oil production finally peaks and declines, it could fall much more rapidly than we realize. The rate at which U.S. shale oil production declines in the future is based on two key factors, remaining reserves, and the oil price.

Before I get into the remaining shale oil reserves, let’s first consider the price. When the oil price collapsed from mid-2014 to a low at the beginning of 2016, frackers cut drilling considerably. From March 2015 to September 2016, total U.S. shale oil production fell approximately 600,000 barrels per day (info Shaleprofile.com). However, this decline was not due to the peak in production, but rather, because the low oil price made drilling shale oil uneconomical.

What happens when U.S. shale oil production finally peaks along with much lower oil prices? Well, that will be the PERFECT STORM for the U.S. shale oil industry. As I have mentioned in several articles and videos, when the current economic market cycle of 9-years finally rolls over, we are going to have one heck of a market correction. When the broader markets crack lower in a big way, they will most certainly pull down the oil price along with it.

To get an idea of the total U.S. shale oil production, here is a chart from Enno Peters at ShaleProfile.com:

This chart shows U.S. shale oil production as of April this year. Total U.S. shale oil production is shown to be a little bit more than 5 million barrels per day. Each color in the chart represents a year’s worth of oil production. What is interesting about the chart above, is the huge decline rate of domestic shale oil production. And as each year passes, the degree of decline steepens.

…click on the above link to read the rest of the article…

The Productivity Problem In The Permian

August 16, 2018

The Productivity Problem In The Permian

The multi-year campaign to boost efficiency and productivity in the U.S. shale patch could be nearing its limits.

Output in the Permian basin is already starting to slowdown, largely due to pipeline constraints. However, there is also a series of other data points that suggests that shale drillers are bumping up against a ceiling in terms of productivity and efficiency.

New data from the EIA shows a rather startling slowdown in the amount of oil that the average rig can produce from a new well in the Permian. In September, the EIA expects new-well production per rig to fall by 10,000 barrels per day (bpd) in the Permian, compared to August levels. That means that when a company deploys a rig to drill a new well, that rig will produce a little less oil than it did compared to the average rig did a month earlier.

(Click to enlarge)

New-well productivity has seesawed a bit over the years, spiking in 2016 when the industry scrapped inefficient rigs during the market downturn. Indeed, some of the recent decline in new-well productivity can be chalked up to the industry rushing to drill more. In this sense, it isn’t that the rigs are necessarily less productive, just that there are so many of them out there in the Permian, that the productivity figures fall because the denominator is larger.

But it’s also a reflection of the fact that drillers are being forced into less desirable locations with the field so crowded.

“We believe that the short-cycle nature of shale exploitation and the intensity of activity in the Permian means that production from Tier 1 geological locations (e.g., those with the best pay, the optimum pressure) is starting to move to Tier 2, which is unable to achieve the same rates of productivity,” Standard Chartered wrote in a note.

…click on the above link to read the rest of the article…

Top U.S. Shale Oil Fields Decline Rate Reaches New Record…. Half Million Barrels Per Day

July 26, 2018

Top U.S. Shale Oil Fields Decline Rate Reaches New Record…. Half Million Barrels Per Day

While the U.S. reached a new record of 11 million barrels of oil production per day last week, the top five shale oil fields also suffered the highest monthly decline rate ever. This is bad news for the U.S. shale industry as it must produce more and more oil each month, to keep oil production from falling.

According to the newest EIA Drilling Productivity Report, the top five U.S. Shale Oil fields monthly oil decline rate is set to surpass a half million barrels per day in August. Thus, the companies will have to produce at last 500,000 barrels of new oil next month just to keep production flat.

Here are the individual shale oil field charts from the EIA’s July Drilling Productivity Report:

The figures that are shown above the UP arrow denote the forecasted new production added next month while the figures above the DOWN arrow provide the monthly legacy decline rate. For example, the chart on the bottom right-hand side is for the Permian Region. The EIA forecasts that the Permian will add 296,000 barrels per day (bpd) of new shale oil production in August, while the existing wells in the field will decline by 223,000 bpd.

If we add up these top five shale oil fields monthly decline rate for August will be 503,000 bpd. Thus, the shale oil companies must produce at least 503,000 bpd of new oil supply next month just to keep production from falling. And, we must remember, this decline rate will continue to increase as shale oil production rises.

We can see this in the following chart below. Again, according to the EIA’s figures, the top five U.S. shale oil fields monthly legacy decline rate increased from 398,000 bpd in January to 503,000 bpd for August:

…click on the above link to read the rest of the article…

OPEC production increase shows it’s still fighting U.S. shale oil

June 25, 2018

OPEC production increase shows it’s still fighting U.S. shale oil

It felt like opposite day as traders bid up the price of oil last week even as OPEC announced an increase in oil production that should have sent prices downward. The cartel decided it had room to move because of outages in Venezuela, Libya and Angola amounting to 2.8 million barrels per day (mbpd). The increase apparently wasn’t as much as traders had expected.

Even though oil prices have drifted upward from the punishing levels of three years ago, OPEC is still interested in undermining the shale oil industry (properly called “tight oil”) in the United States which it perceives as a threat to OPEC’s ability to control prices. So, it is no surprise that OPEC has chosen to increase output in the wake of lost production elsewhere. OPEC does not want prices to reach levels that would actually make the tight oil industry’s cash flow positive.

You read that correctly. The industry as a whole has been free cash flow negative even when oil was over $100 per barrel. Free cash flow equals cash flow from operations minus capital expenditures required for operations. This means that tight oil drillers are not generating enough cash from selling the oil they’re currently producing to pay for exploration and development of new reserves. The only thing allowing continued exploitation of U.S. tight oil deposits has been a continuous influx of investment capital seeking relatively high returns in an era of zero interest rate policies. Tight oil drillers aren’t building value; they are merely consuming capital as they lure investors with unrealistic claims about potential reserves. (Some analysts have likened the situation to a Ponzi scheme.)

To demonstrate how unrealistic the industry’s claims are, David Hughes, in his latest Shale Reality Check, explains that expectations for recovery NOT of proven reserves, but of UNPROVEN resources are exceedingly overblown.

…click on the above link to read the rest of the article…

IEA: Oil Prices Could Rise Further As Shale Can’t Fill The Gap

June 14, 2018

IEA: Oil Prices Could Rise Further As Shale Can’t Fill The Gap

U.S. shale will continue its breakneck growth rate into 2019, despite bottlenecks, but the oil market still faces serious supply risks from the potential losses from Venezuela and Iran, the International Energy Agency (IEA) said in a new report.

The IEA said that the run up in oil prices in the last few months dampened oil demand growth, although the agency left its forecast for oil demand growth unchanged at 1.4 million barrels per day, after downgrading that estimate last month. Subsidies and price regulation in a growing number of countries, intended to blunt the impact of rising fuel prices, could keep demand growth on track, despite oil prices trading significantly higher than, say, a year ago.

Looking ahead to 2019, the IEA thinks that oil demand growth will expand by yet another 1.4 mb/d, this time with the help of the petrochemical sector. A number of projects are coming online earlier than expected, adding more consumption to the mix. The demand estimate is a rather strong one, given substantial expansion in demand over the past few years.

There are risks to that forecast, including “a weakening of economic confidence, trade protectionism and a potential further strengthening of the US dollar,” the IEA said. Those factors should not be overlooked. Indeed, strong demand does not stand independent of the price variable, for instance. How this plays out is unclear, but with the oil market now much tighter than at any point in the last few years, strong demand going forward will start to drive up prices much more than it did in the past.

The supply side of the equation is much more interesting. On the positive side of the ledger, the IEA sees non-OPEC supply growing by 2 mb/d in 2018, followed by another jump of 1.7 mb/d in 2019. The U.S. makes up three quarters of both of those figures.

…click on the above link to read the rest of the article…

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