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Quite simply, the Saudis want to maintain their market share, but their means to control that are dwindling.

The whole internet is jam-packed with analysis portraying Saudi Arabia and OPEC as villains for the oil price collapse. On a closer look, however, the Saudi’s could have taken no reasonable steps to avert this situation. This is a transformational change that will run its full course, and the major oil producing nations will have to accept and learn to live with lower oil prices for the next few years.

Why the Saudi’s are not to blame

(Click to enlarge)

As seen in the chart above, barring the period during the last supply glut, the Saudi’s have more or less maintained constant oil production, increasing production only modestly at an average of roughly 1 percent per year.

The last time the Saudi’s reduced production, the only objectives they achieved were higher debt and lower market share. It’s no surprise that this time, they were unenthusiastic about following that same path. Had they resorted to any cuts, it would have ended with them losing market share and revenues—nothing more.

U.S. oil production has almost doubled in the last 10 years

When it comes to oil, Saudi Arabia has enjoyed an unopposed leadership position for a long time. When that position was threatened by the U.S. shale oil, it was natural for them to attempt to protect their market share. However, like every other industry, leaders tend to be lax, ignoring competition until it’s too late. The same happened here too—most oil producing nations failed to take corrective measures, and they are facing its consequences now.

Where are we heading

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

Shale Set To Decline Substantially This Year

February 23, 2016

Shale Set To Decline Substantially This Year

The International Energy Agency released its Medium Term Oil Market Report on February 22 at the IHS CERA Week conference in Houston, an annual confab for the elite of the oil industry. In its report, the IEA sees U.S. shale finally capitulating this year, falling by 600,000 barrels per day, plus another contraction of 200,000 barrels per day in 2017. By then, oil prices should rebound as supply and demand converge.

But, it won’t be the end of U.S. shale, the IEA says. “Anybody who believes that we have seen the last of rising LTO production in the United States should think again; by the end of our forecast in 2021,
total U.S. liquids production will have increased by a net 1.3 mb/d compared to 2015,” the IEA wrote decisively. LTO refers to “light, tight, oil,” or light oil from shale.

The near-term prospects don’t look so good, however. The Paris-based energy agency believes that crude oil markets will remain oversupplied throughout 2016, with the glut expected to be around 1.1 million barrels per day (mb/d). The supply overhang will disappear in 2017, but the extraordinary levels of oil currently siting in storage will delay a rise in oil prices.

The pain will be felt far and wide. Shale companies are slashing spending, laying off workers, and forgoing drilling plans in an effort to avoid bankruptcy. Collectively, OPEC has seen oil export revenues fall from a peak of USD$1.2 trillion in 2012 down to USD$500 billion in 2015. Revenues will further decline to just USD$320 billion this year.

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

Collapse Of Shale Gas Production Has Begun

January 31, 2016

Collapse Of Shale Gas Production Has Begun

This is a guest post by Steve St. Angelo of SRSroccoReport.Com. All opinions expressed in this post are his and do not necessarily reflect those of Ron Patterson.

The U.S. Empire is in serious trouble as the collapse of its domestic shale gas production has begun. This is just another nail in a series of nails that have been driven into the U.S. Empire coffin.

Unfortunately, most investors don’t pay attention to what is taking place in the U.S. Energy Industry. Without energy, the U.S. economy would grind to a halt. All the trillions of Dollars in financial assets mean nothing without oil, natural gas or coal. Energy drives the economy and finance steers it. As I stated several times before, the financial industry is driving us over the cliff.

The Great U.S. Shale Gas Boom Is Likely Over For Good

Very few Americans noticed that the top four shale gas fields combined production peaked back in July 2015. Total shale gas production from the Barnett, Eagle Ford, Haynesville and Marcellus peaked at 27.9 billion cubic feet per day (Bcf/d) in July and fell to 26.7 Bcf/d by December 2015:

Steve 1

As we can see from the chart, the Barnett and Haynesville peaked four years ago at the end of 2011. Here are the production profiles for each shale gas field:

Steve 2

According to the U.S. Energy Information Agency (EIA), the Barnett shale gas production peaked on November 2011 and is down 32% from its high. The Barnett produced a record 5 Bcf/d of shale gas in 2011 and is currently producing only 3.4 Bcf/d. Furthermore, the drilling rig count in the Barnett is down a stunning 84% in over the past year.

Steve 3

The Haynesville was the second to peak on Jan 2012 at 7.2 Bcf/d per day and is currently producing 3.6 Bcf/d. This was a huge 50% decline from its peak.

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

Schlumberger’s Terrifying Moment Of Truth About The US Energy Sector

January 22, 2016

Schlumberger’s Terrifying Moment Of Truth About The US Energy Sector

Having laid off 10,000 employees (and boosted his share buyback program by $10 billion – because that has worked out so well in the past), it appears Schlumberger CEO Paal Kibsgaard unleashes some very uncomfortable truthiness on his audience this morning during the earnings call, in which he revealed what likely was a wake up moment of truth for the US energy sector:

For many of our customers, available cash and annual budgets were exhausted well before the halfway point for the fourth quarter… as pricing levels for frackers has dropped into unsustainable territory.

Kibsgaard started by explaining why his firm has unveiled the massive layoffs and cost cuts:

we have faced the most severe industry downturn in 30 years

Then explained that this situation is unsustainable for American frackers…

On land in both the U.S. and Canada, the weakening activity resulted in additional commercial pressure for all product lines, and in particular in pressure pumping, where pricing levels dropped further into unsustainable territory for both operating margins and cash flow.

Which means, the pain has already started…

The burgeoning market conditions added to the pressure to the deep financial crisis throughout the oil and gas value chain and prompted operators to make further cuts to the already low EMP investment levels.

For many of our customers, available cash and annual budgets were exhausted well before the halfway point for the fourth quarter, leading to unscheduled and abrupt activity cancellations, creating an operating environment that is increasingly complex to navigate, and where the traditional year-end product and multi-client site mix sales were largely muted.

While not ready to call a bottom in the oil market for this year, Kibsgaard said he didn’t think 2017 would be worse… but then again he said that at the start of 2015 too?

Still who cares the stock price is higher… which is all that matters…

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

A Glimpse Of Things To Come: Bankrupt Shale Producers “Can’t Give Their Assets Away”

January 20, 2016

A Glimpse Of Things To Come: Bankrupt Shale Producers “Can’t Give Their Assets Away”

Over the course of the last several weeks, we’ve spent quite a bit of time sounding the alarm bells on America’s growing list of bankrupt oil and gas drillers.

We’ve also been keen to point out that the long list of cash flow negative US producers has only managed to stay in business this long because Wall Street has thus far been willing to plug the sector’s funding gap with cheap financing thanks to ZIRP and investors’ insatiable demand for anything that looks like it might offer some semblance of yield.

It is not a matter of “if” but rather a matter of “when” the entire complex goes under and when that happens, the relatively paltry sums banks have set aside against losses in their energy books will balloon as everyone on Wall Street simultaneously pulls a BOK Financial.

Indeed, we’re already hearing the not-so-distant rumblings of this oncoming default freight train as JP Morgan raises its net loan loss reserves for the first time in 22 quarters, Wells Fargo discloses $17 billion in “mostly” junk energy exposure, and Citi dodges questions about the reserves it’s holding against a $58 billion energy book that the bank may or may not be marking to market depending on what the Dallas Fed “didn’t” tell banksearlier this month.

M2M or no, higher provisions or not, the end of America’s oil “miracle” is coming and there’s nothing Wall Street can do to stop it. At this point in the game, no one is going to finance these companies’ cash flow deficits and the fundamentals in the oil market are laughably bad. Storage is overflowing, demand is withering, and supply is, well, “drowning” us all, to quote the IEA.

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

Why We May Never See $100-a-Barrel Oil Again

January 16, 2016

Why We May Never See $100-a-Barrel Oil Again

‘Race for What’s Left’ author surveys geopolitical fortunes in aftermath of a pricequake.

Oil-Barrels

Pricequake: Recent turmoil could spell doom — not just for ‘tough oil’ projects now underway — but for some over-extended companies (and governments) that own them. Oil barrel photo via Shutterstock.

As 2015 drew to a close, many in the global energy industry were praying that the price of oil would bounce back from the abyss, restoring the petroleum-centric world of the past half-century. All evidence, however, points to a continuing depression in oil prices in 2016 — one that may, in fact, stretch into the 2020s and beyond. Given the centrality of oil (and oil revenues) in the global power equation, this is bound to translate into a profound shakeup in the political order, with petroleum-producing states from Saudi Arabia to Russia losing both prominence and geopolitical clout.

To put things in perspective, it was not so long ago — in June 2014, to be exact — that Brent crude, the global benchmark for oil, was selling at $115 per barrel. Energy analysts then generally assumed that the price of oil would remain well over $100 deep into the future and might gradually rise to even more stratospheric levels. Such predictions inspired the giant energy companies to invest hundreds of billions of dollars in what were then termed “unconventional” reserves: Arctic oil, Canadian tar sands, deep offshore reserves, and dense shale formations. It seemed obvious then that whatever the problems with, and the cost of extracting, such energy reserves, sooner or later handsome profits would be made. It mattered little that the cost of exploiting such reserves might reach $50 or more a barrel.

As of this moment, however, Brent crude is selling at $33 per barrel, one-third of its price 18 months ago and way below the break-even price for most unconventional “tough oil” endeavours [Editor’s note: Since this story first appeared, prices fell below $30 per barrel].

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

You Can Either Surf, or You Can Fight

January 15, 2016

You Can Either Surf, or You Can Fight

Kilgore:	Smell that? You smell that?
Lance:	What?
Kilgore:	Napalm, son. Nothing else in the world smells like that.

– “Apocalypse Now” (1979)

Hello, hello, hello, how low? [x3]
– Nirvana, “Smells Like Teen Spirit” (1991)

Outside the bus the smell of sulfur hit Bond with sickening force. It was a horrible smell, from somewhere down in the stomach of the world.
– Ian Fleming, “Diamonds Are Forever” (1956)

There’s more than a whiff of 2008 in the air. The sources of systemic financial sector risk are different this time (they always are), but China and the global industrial/commodity complex are even larger tectonic plates than the US housing market, and their shifts are no less destructive. There’s also more than a whiff of 1938 in the air (hat tip to Ray Dalio), as we have a Fed that is apparently hell-bent on raising rates even as a Category 5 deflationary hurricane heads our way, even as the yield curve continues to flatten.

What really stinks of 2008 to me is the dismissive, condescending manner of our market Missionaries (to use the game theory lingo), who insist that the US energy and manufacturing sectors are somehow a separate animal from the US economy, who proclaim that China and its monetary policy are “well contained” and pose little risk to US markets. Unfortunately, the role and influence of Missionaries is even greater today in this policy-driven market, and profoundly misleading media Narratives reverberate everywhere.

For example, we all know that it’s the overwhelming oil “glut” that’s driving oil prices down and wreaking havoc in capital markets, right? It’s all about OPEC versus US frackers, right?

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

As Rig Count Plunges, Has U.S. Oil Reached Its Capitulation Point?

January 12, 2016

As Rig Count Plunges, Has U.S. Oil Reached Its Capitulation Point?

The big drop in rig count for the week that ended last Friday points to capitulation by U.S. shale drillers.

The total land rig count fell by 37 rigs and the horizontal rig count fell by 30 rigs (Figure 1).

Figure 1. U.S. shale play horizontal rig count. Source: Baker Hughes & Labyrinth Consulting Services, Inc.

(Click image to enlarge)

That’s the biggest drop since March 2015 and it suggests that drillers are out of cash. Until now, companies have been rationing dwindling funds from secondary share and bond offerings as well as equity capital.

Related: Rig Count: Capitulation?

But those sources largely dried up after October when WTI futures prices began their fall from nearly $50 per barrel to their present value of $32.50 per barrel. Investors have finally stopped believing the claims by Daniel Yergin and Andy Hall that prices would rebound, and started paying attention to the reality that I have been pointing out since May 2015.

If companies must finally pay for new wells out of cash flow, we might expect drilling to plummet in 2016 because tight oil companies have been spending other people’s money to pay for half their drilling as late as the third quarter of this year (Figure 2).

Figure 2. Third quarter 2015 tight oil-weighted exploration and production company negative cash flow. Source: Google Finance & Labyrinth Consulting Services, Inc.

(Click image to enlarge)

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

The Financial Crisis Of 2016 Rolls On – China, Oil, Copper And Junk Bonds All Continue To Crash

January 12, 2016

The Financial Crisis Of 2016 Rolls On – China, Oil, Copper And Junk Bonds All Continue To Crash

Never before have we seen a year start like this. On Monday, Chinese stocks crashed once again. The Shanghai Composite Index plummeted another 5.29 percent, and this comes on the heels of two historic single day crashes last week. All of this chaos over in China is one of the factors that continues to push commodity prices even lower. Today the price of copper fell another 2.40 percent to $1.97, and the price of oil continued to implode. At one point the price of U.S. oil plunged all the way down to $30.99 a barrel before rebounding just a little bit. As I write this article, oil is down a total of 6.12 percent for the day and is currently sitting at $31.13. U.S. stocks were mixed on Monday, but it is important to note that the Russell 2000 did officially enter bear market territory. This is yet another confirmation of what I was talking about yesterday. And junk bonds continue to plummet. As I write this, JNK is down to 33.42. All of these numbers are huge red flags that are screaming that big trouble is ahead. Unfortunately, the mainstream media continues to insist that there is absolutely nothing to be concerned about.

A little over a year ago, I wrote an article that explained that anyone that believed that low oil prices were good for the economy was “crazy“. At the time, many people really didn’t understand what I was trying to communicate, but now it is becoming exceedingly clear. On Monday, one veteran oil and gas analyst told CNBC that “half of U.S. shale oil producers could go bankrupt” over the next couple of years…

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

Why The U.S. Can’t Be Called A ‘Swing Producer’

January 7, 2016

Why The U.S. Can’t Be Called A ‘Swing Producer’

They are wrong. It is preposterous to say that the world’s largest oil importer is also its swing producer.

There are two types of oil producers in the world: those who have the will and the means to affect market prices, and those who react to them. In other words, the swing producer and everyone else.

A swing producer must meet the following criteria:

• A swing producer must be a net exporter of oil.

• A swing producer must have enough daily production, spare capacity and reserves to influence market prices by balancing supply and demand through increasing or decreasing output.

• A swing producer must be able to act authoritatively and quickly to increase or decrease output.

• In the real world, a swing producer is a euphemism for a cartel. No single producer has enough oil leverage to balance the market and influence prices by itself. That includes Saudi Arabia, Russia, and the United States, the top 3 producers in the world. Obviously, it also includes U.S. tight oil.

• A swing producer must have low production costs and have the financial reserves to withstand reduced cash flow when restricting or increasing supply is necessary to balance the market.

So, let’s go down the list for OPEC and U.S. tight oil.

OPEC’s net exports for 2014 were 23 million barrels per day (mmbpd) (Figure 1). U.S. net exports were -7 mmbpd. In other words, the U.S. is a net importer of crude oil. A net importer of oil cannot be a swing producer.

Figure 1. OPEC and U.S. 2014 net crude oil exports.
Source: OPEC & Labyrinth Consulting Services, Inc.

(Click image to enlarge)

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

The Shale Defaults Begin Here: Banks Quietly Shrink These 25 Companies’ Credit Facilities

January 5, 2016

The Shale Defaults Begin Here: Banks Quietly Shrink These 25 Companies’ Credit Facilities

Everyone knows that at $35/barrel oil, virtually every US shale company is cash flow negative and is therefore burning through cash and other forms of liquidity such as bank revolvers and term loans, just as everyone knows that should oil remain at these prices, the US shale sector is facing an avalanche of defaults.

What is less known is who will be the next round of companies to default.

One good place to get an answer is to find which companies’ bankers are quietly tightening the liquidity noose (because they don’t want to be stuck holding worthless assets in bankruptcy or for whatever other reason), by quietly reducing the borrowing base on existing credit facilities.

It is these companies which find themselves inside this toxic feedback loop of declining liquidity, which forces them to utilize assets even faster, thus even further shrinking the borrowing base against which their banks have lent them money, that will be at the forefront of the epic bankruptcy wave that is waiting to be unleashed across the US, leading to tens of billions of defaults junk bonds over the next 12-18 months.

So, without further ado here are 25 deeply distressed companies, whose banks we found have quietly shrunk the borrowing base of their credit facilities anywhere from 6% in the case of Black Ridge Oil and Gas to a whopping 51% for soon to be insolvent New Source Energy Partners.

Source: Bloomberg

What Comes After The Commodities Bust?

January 5, 2016

What Comes After The Commodities Bust?

The days of E&P companies using external debt financing to fuel growth have most likely come to a close.

The one thing executives should have learned in 2015 is that Wall Street can for long periods of time remain disconnected from fundamentals and can swing to extremes. Another lesson from 2015 is that OPEC can no longer be relied upon to set prices.

Thus, the debt fueled financing boom in the shale space will most likely never return.

As a result, the industry will likely move to self-funding capital expenditures through free cash flow generation in an attempt to significantly reduce its reliance on leverage. Debt levels will initially have to be reduced, significantly fueling a cycle of dramatically lower capital expenditures and consolidation. This process is already underway, but still has a long way to go.

When the internet bubble burst in 2001, only the business models that generated cash vs subscriber growth and cash burn survived and continued to get funded. Furthermore, larger companies survived and thrived as the smaller ones got starved for cash, died or dramatically scaled back subscriber acquisition to achieve a positive cash flow. We are about to experience the same consequences of misguided investments from a Federal Reserve-inspired bubble.

The toxic combination of lower capital expenditures and constrained output will result in another spike in prices, one that few will anticipate. The current Federal Reserve policy, which isn’t conducive to higher commodity prices, will also make the price spike more difficult to see ahead of time. However, in the interim, until policy changes at the Fed or OPEC are enacted, prices will remain below the marginal cost to maintain production.

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

Shale Gas Rig Count Could Implode Here If Prices Don’t Rebound

November 24, 2015

Shale Gas Rig Count Could Implode Here If Prices Don’t Rebound

The Haynesville Shale play needs $6.50 gas prices to break even. With natural gas prices just above $2/Mcf (thousand cubic feet), we question the shale gas business model that has 31 rigs drilling wells in that play that cost $8-10 million each to sell gas at a loss into an over-supplied market.

We first evaluated the Haynesville Shale in 2009 and the conclusion then was the same as it is today: the average well by top operators will produce about 4 Bcf and is not commercial at gas prices below $6 or $7 per Mcf. The play has two insurmountable geological problems. First, the shale is not brittle and, therefore, does not respond well to hydraulic fracturing. Second, the reservoir is over-pressured and compacts when gas is produced.

We have heard fairy tales from operators over the years about how they will improve the miserable performance of Haynesville Shale wells. These included choking back production, re-fracking old wells and, recently, drilling 10,000 foot laterals. None of these approaches worked because bad geology cannot be improved with expensive technology.
We evaluated well performance for the 5 biggest producers in the play based on cumulative gas production and the number of producing wells
(Table 1).

Table 1. Key operators in the Haynesville Shale play based on number of producing wells and cumulative gas production. Source: Drilling Info and Labyrinth Consulting Services, Inc.

We did standard rate vs. time decline-curve analysis by operator and by year of first production to forecast average well reserves (an example is shown in Figure 1).

Figure 1. Example of Haynesville Shale decline-curve analysis showing standard log of rate vs. time, rate vs. cumulative production and log of rate vs. log of time plots for a group of XTO Energy wells with first production in 2011. Source: Drilling Info and Labyrinth Consulting Services, Inc. (click image to enlarge)

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

Oil Prices Testing August Lows As Inventories Swell

November 21, 2015

Oil Prices Testing August Lows As Inventories Swell

There has been little in the way of economic data out overnight, leaving comments from European Central Bank President Mario Draghi to clobber the euro, propel the dollar higher. As the prospect of a US rate hike in December sits around ~70%, the WTI December contract is charging lower ahead of its contract expiry today.

The chart below shows the combined rising production from two leading sources since 2012, the US and Iraq, plotted versus OECD oil inventories. Production from the two has risen nearly 60% over the near-four year time-frame, with them currently pumping the equivalent of 4.88 billion barrels a year. In comparison, OECD inventories have only risen 10%, or 314 million barrels, as stronger demand and weaker supply elsewhere have offset the rampant additions from the two nations.

Looking ahead to next year, we are set to see aggregate production from the two countries drop, as modest rising supply from Iraq will not be enough to offset falling US production.

Below is another nifty graphic from the folks over at Bloomberg, which shows the share of deepwater oil fields for various African governments. Six out of the ten largest global oil discoveries in 2013 were made in Africa, but the drop in oil prices over the last year and a half means two out of three investment projects on the continent are not viable at a price below $50. African production is already 19% below its peak in 2008 at 10.2 million bpd, and is set for a third consecutive drop this year.

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

Presenting BofA’s “Number One Black Swan Event For The Global Oil Market In 2016”

November 20, 2015

Presenting BofA’s “Number One Black Swan Event For The Global Oil Market In 2016”

We’ve spent quite a bit of time this year talking about Saudi Arabia’s rather precarious financial situation.

To be sure, the move to artificially suppress crude prices has at least partly served the kingdom’s interests in terms of market share and geopolitics. The US shale space has felt the screws tighten and even as wide open capital markets have helped even the weakest players stay in business, production is falling and for the most uneconomic producers, it does indeed appear that the music may finally be about to stop.

As for the “ancillary diplomatic benefits” (i.e. the geopolitical angle) of collapsing crude, the Russians have undoubtedly felt the squeeze and when considered in tandem with Western economic sanctions, one has to believe that the pain from low energy prices has been very real indeed for Moscow.

On balance though, it looks like this was a bad gamble for Riyadh. ZIRP has kept the US shale space in business far longer than the Saudis probably imagined would be possible and instead of forcing Putin to give up Assad, Russia instead built an air base at Latakia and plunged headlong into Syria’s civil war on behalf of the President.

Meanwhile, the fallout from “lower for longer” has been a disaster for the kingdom’s finances. Saudi Arabia’s budget deficit is expected to come in between 16% and 20% and for the first time in ages, the country faces a deficit on the current account as well.

The pressure is exacerbated by the necessity of preserving the societal status quo. Put Here’s what we mean (via Deutsche Bank):

The largest energy subsidy beneficiary is the end-consumer in the form of fuel (petrol) subsidies. Bringing up the price of petrol to levels in the UAE, which earlier this year eliminated the petrol subsidy, could provide the government with USD27bn incremental revenues, or 20% of the budget deficit.

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

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