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You want $40 oil? Yes, please. But according to the World Energy Outlook 2015 of the International Energy Agency, recently released in London, that would mean 3 mb/d less US tight (shale) oil by 2020. That’s about 4% of global crude production.

Fly less and drive less.

Fig 1: Slide from the WEO 2015 presentation

http://www.worldenergyoutlook.org/media/weowebsite/2015/151110_WEO2015_presentation.pdf

Let’s put that into a graph for the $50 scenario:

Fig 2: US monthly crude production

The graph shows a 4 mb/d increase in US crude oil production, mainly tight oil from Texas (Eagle Ford, Permian), North Dakota (Bakken) and Niobrara (Colorado, Wyoming) between 2011 and 2015. The other States plus the Gulf of Mexico and Alaska remained on an undulating production plateau. The red production line descends by 2.5 mb/d over 5 years to 2020, with an oil price of $50 a barrel (dashed black line)

The EIA data for the above graph are from here:

US crude oil
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=M

WTI oil price
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=rwtc&f=m

The latest drilling productivity report from here
http://www.eia.gov/petroleum/drilling/
shows some details about peaking tight oil production

Bakken

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

OPEC’s Strategy Is Working According To Cartel’s Latest Report

November 16, 2015

OPEC’s Strategy Is Working According To Cartel’s Latest Report

The cartel’s Monthly Market Report, published Thursday, said its 12 members extracted an average of 31.38 million barrels of oil per day last month, down by 256,000 barrels per day in September because of export delays in Iraq and lower production in both Saudi Arabia and Kuwait.

As for next year, the report said low prices are prompting energy companies not affiliated with OPEC to pare back on capital expenses by nearly $200 billion. As a result, non-OPEC output in 2016 will fall by an average of around 130,000 barrels per day, “a gaping supply hole” compared with the average growth of 720,000 barrels per day in 2015.

The report on OPEC’s production decline comes less than a month before the cartel meets on Dec. 4 at its headquarters in Vienna. Some producers have been calling for the group to abandon its price war with rival producers, particularly in the United States, and bolster the price of oil, which has fallen from more than $110 per barrel in June 2014 to below $50 per barrel today.

Yet the report supports the opposing view: that the strategy, masterminded by Saudi Oil Minister Ali al-Naimi, is working precisely because OPEC is not only regaining market share it lost to rival producers, but also forcing those producers to extract less oil. Many of them rely on hydraulic fracturing, or fracking, to extract oil from shale, and can’t make a profit with the global price of oil so low.

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

Bakken Big Decline in September

November 14, 2015

Bakken Big Decline in September

The NDIC has published their monthly update for Bakken Oil Productin and all North Dakota Oil Production.

Bakken production was down 24,424 barrels per day while all North Dakota was down 25,378 bpd.

Here is an amplified version of the last 15 months of North Dakota production. September 2015 production is now below September 2014 production so the 12 month average has now turned negative.

Even though producing rigs in North Dakota declined in September, barrels per day per well declined also from 94 to 92. Bakken bpd per well declined from 112 to 109.

This is a long term view of Bakken and North Dakota barrels per well.

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

The Biggest Threat To Oil Prices: 2-Mile Long Stretch Of Iraq Oil Tankers Headed For The U.S.

November 11, 2015

The Biggest Threat To Oil Prices: 2-Mile Long Stretch Of Iraq Oil Tankers Headed For The U.S.

After some initial excitement, November has seen crude oil prices collapse back towards cycle lows amid demand doubts (e.g. sllumping China oil imports, overflowing Chinese oil capacity, plunging China Industrial Production) and supply concerns (e.g. inventories soaring). However, an even bigger problem looms that few are talking about. As Iraq – the fastest-growing member of OPEC – has unleashed a two-mile long, 3 million metric ton barrage of 19 million barrel excess supply directly to US ports in November.

Crude prices are already falling:

But OPEC has another trick up its sleeve to crush US Shale oil producers. As Bloomberg reports,

Iraq, the fastest-growing producer within the 12-nation group, loaded as many as 10 tankers in the past several weeks to deliver crude to U.S. ports in November, ship-tracking and charters compiled by Bloomberg show.

Assuming they arrive as scheduled, the 19 million barrels being hauled would mark the biggest monthly influx from Iraq since June 2012, according to Energy Information Administration figures.

The cargoes show how competition for sales among members of the Organization of Petroleum Exporting Countries is spilling out into global markets, intensifying competition with U.S. producers whose own output has retreated since summer. For tanker owners, it means rates for their ships are headed for the best quarter in seven years, fueled partly by the surge in one of the industry’s longest trade routes.

Worst still, they are slashing prices…

Iraq, pumping the most since at least 1962 amid competition among OPEC nations to find buyers, is discounting prices to woo customers.

The Middle East country sells its crude at premiums or discounts to global benchmarks, competing for buyers with suppliers such as Saudi Arabia, the world’s biggest exporter.Iraq sold its Heavy grade at a discount of $5.85 a barrel to the appropriate benchmark for November, the biggest discount since it split the grade from Iraqi Light in May. Saudi Arabia sold at $1.25 below benchmark for November, cutting by a further 20 cents in December.

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

IEA Sees No Oil Price Rebound For Years

November 11, 2015

IEA Sees No Oil Price Rebound For Years

Oil prices are likely to stay below $80 per barrel for another five years, according to a closely watched energy report.

The International Energy Agency released its 2015 World Energy Outlook (WEO), with predictions for energy markets out to 2040. Although there are no shortage of caveats, the IEA projects that oil prices will only rebound slowly and intermittently, and the supply overhang will slowly ease through the rest of the decade. In its “central” scenario, it sees oil prices rebalancing in 2020 at $80 per barrel, with increases in the years following.

At issue, as always, is supply and demand dynamics. The IEA estimates that the oil industry will slash upstream investment by 20 percent in 2015, which will cut into long-term supply figures. Non-OPEC supply will peak before 2020 as a result of much lower investment, topping off at 55 million barrels per day.

U.S. shale will recover as prices rebound, but the IEA still sees it as a passing fad. As the sweet spots get played out in the U.S., and costs remain elevated compared to other sources of production from around the world, shale will not be around for the long haul. The IEA sees U.S. shale output plateauing in the early 2020s at 5 million barrels per day. Thereafter, it declines.

The IEA weighs a scenario in which oil prices don’t actually rebound in the medium to long-term, however. In this scenario, OPEC continues to pursue market share, U.S. shale remains resilient, and the global economy doesn’t perform as well as expected. All of that adds up to oil prices remaining at $50 per barrel through the remainder of the decade and only rising to $85 per barrel by 2040.

Of course, there is a flip side to that coin. Persistently low prices gut investment in new sources of supply, which sow the seeds for a supply shortage in the years ahead. As a result, prices could spike.

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

U.S. Shale Drillers Running Out Of Options, Fast

October 22, 2015

U.S. Shale Drillers Running Out Of Options, Fast

Much has been made about the impressive gains in efficiency and productivity in the shale patch, as new drilling techniques squeeze ever more oil and gas out of new wells. But the limits to such an approach are becoming increasingly visible. The U.S. shale revolution is running out of steam.

The collapse of oil prices has forced drillers to become more efficient, adding more wells per well pad, drilling longer laterals, adding more sand per frac job, etc. That allowed companies to continue to post gains in output despite using fewer and fewer rigs.

However, the efficiency gains may have been illusory, or at best, incremental progress instead of revolutionary change. Rather than huge innovations in drilling performance, companies were likely just trimming down on staff, squeezing suppliers, and drilling in the best spots – perhaps all sensible stuff for companies dealing with shrinking revenues, but nothing to suggest that drilling has leaped to a new level of efficiency. Reuters outlined this phenomenon in detail in a great October 21 article.

For evidence that the productivity gains have run their course, take a look at the latest Drilling Productivity Report from the EIA. Production gains from new rigs – which have increased steadily over the past three years – have run into a wall in the major U.S. shale basins. Drillers are starting to run out of ways to squeeze more oil out of wells from their rigs. Take a look at the below charts, which show drilling productivity flat lining in the Bakken, the Eagle Ford, and the Permian.

For oil companies to add new production at this point it would require hiring new workers and new rigs and simply expanding the drilling footprint. That is something that few companies are doing because of low prices. In fact, most exploration companies are doing the opposite – rig counts continue to decline and the layoffs continue to mount.

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

Oil Market Showdown: Can Russia Outlast The Saudis?

October 19, 2015

Oil Market Showdown: Can Russia Outlast The Saudis?

“Two men enter, one man leaves, two men enter, one man leaves, two men enter…”

Mad Max: Beyond Thunderdome

November 27, oil consuming countries will celebrate the first anniversary of the Saudi decision to let market forces determine prices. This decision set crude prices on a downward path. Subsequently, to defend market share, the Saudis increased production, which exacerbated market oversupply and further pressured prices.

While the sharp decline in crude prices has saved crude consuming nations hundreds of billions of dollars, the loss in revenues has caused crude exporting countries intense economic and financial pain. Their suffering has led some to call for a change in strategy to “balance” the market and boost prices. Venezuela, an OPEC member, has even proposed an emergency summit meeting.

In practice, the call for a change is a call for Saudi Arabia and Russia, the two dominant global crude exporters, which each daily export over seven-plus mmbbls (including condensates and NGLs) and which each see the other as the key to any “balancing” moves, to bear the brunt of any production cuts.

Both, it would seem, have incentive to do so, as each has lost over $100 billion in crude revenues in 2015—and Russia bears the extra burden of U.S. and EU Ukraine-related economic and financial sanctions. Yet, while both publicly profess willingness to discuss market conditions, neither has shown any real inclination to reduce output—in fact, both countries seem committed to keeping their feet pressed to their crude output pedals. In the course of 2015, both have raised output and exports over 2014 levels—Saudi Arabia by ~500 and 550~ mbbls/day respectively and Russia by ~100 and ~150. The Saudis have repeatedly cut pricing to undercut competitors to maintain market share in the critical U.S. and China markets, while the Russian Finance Ministry recently backed away from a tax proposal which Russian crude producers said would reduce their output.

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

Goldilocks and the three prices of oil

October 19, 2015

Goldilocks and the three prices of oil

We all know Goldilocks from the story of Goldilocks and the Three Bears in which the young maiden wanders into the home of the bears and samples some porridge that happens to be sitting on the dinner table. The first bowl is too hot, the second is too cold and the third is just right.

Like a corporate version of Goldilocks, the oil industry has been wandering into the world marketplace in recent years often finding an oil price that is either too high such as in 2008 and therefore puts the brakes on economic growth undermining demand and ultimately crashing the price as it did in 2009. Or it finds the price too low as it is today therefore making it impossible to earn profits necessary for exploiting the high-cost oil that remains to be extracted from the Earth’s crust. Oil that hovered around $100 per barrel from 2011 through much of 2014 seemed to be just right. But those prices are now long gone.

Violent swings in the price of oil in the last decade have made it difficult for the industry to plan long term to produce consistent supplies at moderate prices. This has important implications for future supplies which I will discuss later.

The great political power of the oil industry has led many to conclude erroneously that the industry must also somehow control the price of oil. If the industry has such power, it is doing a really lousy job of using it.

It is true that in times of robust demand, OPEC can maintain high prices by limiting oil production in member countries. But when demand softens, OPEC rarely exhibits the necessary discipline as a group to cut production. Typically, Saudi Arabia shoulders most of the burden of reduced production under such circumstances.

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

Is The Oil And Gas Fire Sale About To Start?

October 16, 2015

Is The Oil And Gas Fire Sale About To Start?

Much has been written about the mounting pile of debt for U.S. oil companies (not to mention the well-known Brazilian oil giant).

Not that long ago, many oil and gas companies secured at least a part of their revenue by hedging contracts. Bloomberg already reported in June that many of these companies saw their artificial safety nets vanishing as oil prices failed to recover. One month later, we heard such morale boosting terms as ‘frack now, pay later,’ which were merely a bold move by struggling oil services companies to encourage cash strapped oil and gas companies to continue operations.

Simultaneously, we witnessed the bankruptcies of companies such as Samson Resources, Hercules Offshore and Sabine Oil & Gas Corp. These bankruptcies put the industry on notice. The cash flow situation for the entire oil and gas sector looks outright grim. Credit rating agency Moody’s expects a sector wide negative cash flow of $80 billion and is expecting spending cuts to continue next year. See figure 1 below for an overview of industry income and spending.

Image source: Reuters

(Click to enlarge)

Summing it up, debt, negative cash flows and the outlook for oil prices have led weak companies with balance sheets to a divest in a big way.

Although we have witnessed a couple of noteworthy acquisitions in the last months, which put 2015 in the books as a year with high volume takeovers, we cannot yet speak about an absolute M&A boom.

One of the most important reasons holding back takeovers of entire companies is the oil price volatility we have seen in the last few weeks. Financially stronger oil and gas companies seem to have postponed takeover plans and are now focusing on the acquisition of promising land holdings. Nonetheless, it seems that both buyers and sellers are preparing themselves for what could turn out to be a fire sale.

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

US shale oil too expensive, peaks 1H 2015

September 30, 2015

US shale oil too expensive, peaks 1H 2015

According to EIA data, monthly US crude oil production peaked in April 2015 at 9.6 mb/d.

Fig 1: US crude oil production to June 2015

http://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_m.htm

The above graph shows that US crude production increased by around 4 mb/d between mid 2011 and mid 2015, mostly from shale oil which took off – with a delay – when oil prices exceeded US$ 80-90. That stellar growth has come to an end, also with a delay, after oil prices plummeted.

Let’s zoom into the period starting with January 2014:

Fig 2: US incremental crude production Jan 2014 – Jun 2015

The April 2015 peak was caused by higher GOM production resulting from production start-ups after lifting the drilling moratorium in 2010. Shale oil peaked one month earlier, after the winter drop. However, month by month production can change and future revisions of data are likely due to reporting delays. What is more important than the month of peaking is the fact that US oil production stopped growing.

(Note: Incremental production is calculated as production minus the minimum production in the period under consideration. The sum of the minimum production is the base production)

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

Bakken Flat but the EIA Predicts Decline

September 16, 2015

Bakken Flat but the EIA Predicts Decline

The North Dakota Industrial Commission has published the July production data forThe Bakken and for all North Dakota.

Bakken production was down 5,430 barrels per day while all North Dakota was down 9,410 bpd.

Here is a more amplified view of what has happened during the last 12 months.

Bakken barrels per day per well has been falling faster than for all North Dakota. This is because a lot of very low producing conventional wells are being shut down.

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

The Shale Delusion: Why The Party’s Over For U.S. Tight Oil

September 15, 2015

The Shale Delusion: Why The Party’s Over For U.S. Tight Oil

The party is over for tight oil.

Despite brash statements by U.S. producers and misleading analysis by Raymond James, low oil prices are killing tight oil companies.

Reports this week from IEA and EIA paint a bleak picture for oil prices as the world production surplus continues.

EIA said that U.S. production will fall by 1 million barrels per day over the next year and that, “expected crude oil production declines from May 2015 through mid-2016 are largely attributable to unattractive economic returns.”

IEA made the point more strongly.

“..the latest price rout could stop US growth in its tracks.”

In other words, outside of the very best areas of the Eagle Ford, Bakken and Permian, the tight oil party is over because companies will lose money at forecasted oil prices for the next year.

Global Supply and Demand Fundamentals Continue to Worsen

IEA data shows that the current second-quarter 2015 production surplus of 2.6 million barrels per day is the greatest since the oil-price collapse began in 2014 (Figure 1).

Figure 1. World liquids production surplus or deficit by quarter. Source: IEA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

EIA monthly data for August also indicates a 2.6 million barrel per day production surplus, an increase of 270,000 barrels per day compared to July (Figure 2).

Figure 2. World liquids production, consumption and relative surplus or deficit by month.

Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

It further suggests that the August production surplus is because of both a production (supply) increase of 85,000 barrels per day and a consumption (demand) decrease of 182,000 barrels per day compared to July.

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

The Biggest Red Herring In U.S. Shale

September 8, 2015

The Biggest Red Herring In U.S. Shale

Rig productivity and drilling efficiency are red herrings.

A red herring is something that takes attention away from a more important subject. Rig productivity and drilling efficiency distract from the truth that tight oil producers are losing money at low oil prices.

Pad drilling allows many wells to be drilled from the same location by a single rig.Rig productivity reflects the increased volume of oil and gas thus produced by each of a decreasing number of rigs. It does not account for the number of producing wells that continues to increase in all tight oil plays.

In other words, although the barrels produced per rig is increasing, the barrels per average producing well is decreasing (Figure 1).

Figure 1. Bakken oil production per rig vs. production per well.

Source: EIA, Drilling Info and Labyrinth Consulting Services, Inc.

(Click image to enlarge)

Rig productivity is a potentially deceptive measurement because it does not consider cost and apparently it always increases. It gives a best of all possible worlds outcome that seems to defy the laws of physics. Drilling productivity gives the false impression that as the rig count approaches zero, production approaches infinity.

Barrels per rig is interesting but the cost to produce a barrel of oil is what matters.

Similarly, drilling efficiency measures the decrease in the number of days to drill a certain number of feet. This is also interesting but, unless we know how it affects the cost to produce a barrel of oil, it is not useful.

The data contained in 10-Q and 10-K SEC forms provides a continuing view of a company’s financial position during the year. This allows us to determine a company’s cost per barrel and its components that rig productivity and drilling efficiency do not provide.

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

Fallout From Petrodollar Demise Continues As Qatar Borrows $4 Billion Amid Crude Slump

September 4, 2015

Fallout From Petrodollar Demise Continues As Qatar Borrows $4 Billion Amid Crude Slump

Early last month in “Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed’s Blessing,” we noted the irony inherent in the fact that Saudi Arabia, whose effort to bankrupt the US shale space has blown a giant hole in the country’s fiscal account, was set to tap the debt market in an effort to offset a painful petrodollar reserve burn.

“Saudi Arabia is returning to the bond market with a plan to raise $27bn by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the world’s largest oil exporter,” FT reportedat the time.

The reason this is so ironic is that at various times, we’ve characterized persistently low crude prices as essentially a battle between the Fed and the Saudis. Many struggling US producers would likely have been out of business months ago were it not for the fact that ZIRP has kept capital markets wide open, allowing otherwise insolvent drillers to stay afloat. Obviously, that works at cross purposes with Riyadh’s efforts to “preserve market share”, and so ultimately, the Saudis are betting their FX reserves can outlast ZIRP.

There are other factors at play here that weigh on Saudi Arabia’s financial situation including two proxy wars and the defense of the riyal peg which is why turning to the bond market is an attractive option especially considering that capital markets are so favorable thanks to – and here’s the irony – the very same Fed policies that are keeping US shale producers in business.

But Saudi Arabia’s “war” with the US shale space isn’t unfolding in a vacuum and now Qatar is looking to borrow to alleviate the financial strain. Here’s more from Bloomberg:

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

The “Great Accumulation” Is Over: The Biggest Risk Facing The World’s Central Banks Has Arrived

September 1, 2015

The “Great Accumulation” Is Over: The Biggest Risk Facing The World’s Central Banks Has Arrived

To be sure, there’s been no shortage of media coverage regarding the collapse in crude prices that’s unfolded over the course of the past year. Similarly, it’s no secret that commodity prices in general are sitting near their lowest levels of the 21st century.

When Saudi Arabia, in an effort to bankrupt the US shale space and tighten the screws on a recalcitrant Moscow, endeavored late last year to keep oil prices suppressed, the kingdom killed the petrodollar, a move we argued would put pressure on USD assets and suck hundreds of billions in liquidity from global markets.

Thanks to the fanfare surrounding China’s stepped up UST liquidation in support of the yuan, the world is beginning to understand what we meant. The accumulation of USD assets held as FX reserves across the emerging world served as a source of liquidity and kept a bid under things like US Treasurys. Now that commodity prices have fallen off a cliff thanks to lackluster global demand and trade, the accumulation of those assets slowed, and as a looming Fed hike along with fears about the stability of commodity currencies conspired to put pressure on EM FX, the great EM reserve accumulation reversed itself. This is the environment into which China is now dumping its own reserves and indeed, the PBoC’s rapid liquidation of USTs over the past two weeks has added fuel to the fire and effectively boxed the Fed in.

On Tuesday, Deutsche Bank is out extending their “quantitative tightening” (QT) analysis with a look at what’s ahead now that the so-called “Great Accumulation” is over.

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

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