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More Job Losses Coming to U.S. Shale
More Job Losses Coming to U.S. Shale
With the recently concluded nuclear deal between Iran and the P5+1 countries, oil prices have already started heading downward on sentiments that Iran’s crude oil supply would further contribute to the already rising global supply glut. The economic crisis in Greece, OPEC’s high production levels and China’s market turmoil have created more pressure on oil prices, making a price rebound look highly unlikely in the near future.
So, with the prices of both Brent and WTI moving towards $50 per barrel, the short to medium-term outlook for oil remains mostly bearish. This is bad news for the U.S. shale sector which is already dealing with rising debt and the ever-increasing risk of default.
A recent Bloomberg report stated that U.S. driller’s debts stood at $235 billion at the end of first quarter of 2015, which is quite worrying. Does this mean that the U.S. oil sector is likely to witness a lot more layoffs than we have seen so far? Surprisingly, a recent IHS study had revealed that the U.S. shale sector has been boosting job creation in addition to supporting around 1.7 million jobs in U.S.
All this as the overall unemployment rate in U.S. has been declining since previous years. But with rising negative sentiment pertaining to oil prices, is U.S. the shale sector prepared to face one of its biggest tests yet? Will the industry be able to sustain another long period of low oil prices or will it once again resort to trimming its workforce?
Related: Shale Industry May Need A Complete Rethink To Survive
Low oil prices will most likely result in more job losses
Since the oil price collapse of last year, we have seen how oil field services and drilling companies have slashed thousands of jobs in order to reduce costs and cut their operational spending. Some of the major oilfield companies like Schlumberger, Halliburton and Weatherford have already announced close to 20,000 layoffs as of February 2015.
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Oil Price Rebound Looking Unlikely
Oil Price Rebound Looking Unlikely
Oil prices may have firmed up a bit this spring, but we could be heading into another protracted period of weak prices.
First there are the demand risks. The Chinese stock market turmoil raises serious concerns over a potential financial crisis, which, needless to say, would be negative for oil prices.
The Greek crisis, again, presents risks to oil markets, not because Greece is a major oil produce or consumer (it is neither), but because of the threat of instability to the euro and to financial markets.
Both of these factors were behind the dramatic fall in oil prices earlier this month, but both are largely baked into the price already. And with an apparent band aid to the Greek crisis (but not a real solution) in hand, and the steadying of the Chinese stock markets over the last few days on the back of heavy intervention by the Chinese government, these two forces could be temporary.
Related: Oil Price Plunge Raises Fears for Indebted Shale Companies
However, there are other dangers ahead for oil prices. The International Energy Agency (IEA) estimated in its monthly oil market report that global demand growth will slow to just 1.2 million barrels per day (mb/d) in 2016, down from 1.4 mb/d this year. Weak demand means consumers won’t be able to soak up the extra supply.
But then there are the supply risks. OPEC revealed in its own monthly report that Saudi Arabia is now producing at its highest level on record. From May to June, Saudi Arabia ramped up output by an additional 230,000 barrels per day to reach a record high of 10.5 mb/d. Iraq also added 303,000 barrels per day in June and Nigeria added 75,000 barrels per day. OPEC continues to flood the market and collectively the cartel is producing well in excess of its 30 million-barrel-per-day target.
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EIA Confirms: Oil Production Peaked
EIA Confirms: Oil Production Peaked
U.S. oil production has peaked…at least for now.
That is the conclusion from a new government report that concludes that U.S. oil production is on the decline. After questions surrounding the resilience of U.S. shale and when low oil prices would finally cut into production, the EIA says the month of April was the turning point.
In its Short-Term Energy Outlook released on July 7, the EIA acknowledged that U.S. oil production peaked in April, hitting 9.7 million barrels per day (mb/d), thehighest level since 1971. In May, production fell by 50,000 barrels per day, and EIA says that it will continue to decline through the early part of next year. Still, the declines won’t be huge, according to the agency’s forecast – production will average 9.5 mb/d in 2015 and 9.3 mb/d in 2016.
The EIA figures move a little closer to what some critics have been saying for some time. Data from states like North Dakota and Texas had pointed to slowing production for months while EIA posted weekly gains in production figures for the nation as a whole. Along with several consecutive weeks of inventory drawdowns, EIA figures started to look a little suspect. The latest report is sort of an acknowledgement that those figures were a little optimistic.
Nevertheless, as the EIA affirms peak production in the second quarter of 2015, the fall in output over the next few quarters should bring supply and demand back into balance, or at least close to it. Supply exceeded demand by more than 2.5 mb/d in the second quarter of this year, but that gap will narrow to 1.6 mb/d in the third quarter and just 500,000 barrels per day in 2016.
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Oil Price Plunge Raises Fears for Indebted Shale Companies
Oil Price Plunge Raises Fears for Indebted Shale Companies
The latest fall in oil prices is once again putting pressure on indebted shale companies.
After falling from over $100 per barrel down to $43 per barrel at its lowest point in March of this year, WTI prices rebounded with a 40 percent rise, trading for more or less $60 per barrel for May and June.
The rebound appeared to spell the end to the worst of the glut, with production plateauing, if not falling, and demand starting to rise. Although estimates were all over the map, many saw a strong bounce coming in the oil markets, with some even predicting supply shortages before the end of the year.
A few companies donned a renewed sense of confidence, suggesting that they would start drilling again with oil prices in the $60-per-barrel range.
Related: OPEC Still Holds All The Cards In Oil Price Game
Still, mountains of debt had accumulated across the U.S. shale sector. That didn’t go away but was sort of on hold as drillers, and their financial backers, hoped that further price increases would allow them to pay down debt. To stay afloat, drillers issued new debt and equity.
But the renewed plunge in oil prices is kicking off a fresh round of debt concerns. Bloomberg reported that energy-related junk bonds have lost 3 percent of their value in the last two weeks, after WTI crashed to nearly $51 per barrel and Brent fell below $57. Bond traders are avoiding high-yield, high-risk debt, and yields have jumped to nearly 10 percent, a level normally associated with default risk.
“The energy sector of the high-yield market continues to be a silo of misery,” Margie Patel with Wells Capital Management, told Bloomberg telephone interview. “If we stay near these levels, marginal high-cost producers won’t be able to survive.”
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The Dark Side Of The Shale Bust
The Dark Side Of The Shale Bust
The fallout of the collapse in oil prices has a lot of side effects apart from the decline of rig counts and oil flows.
Oil production in North Dakota has exploded over the last five years, from negligible levels before 2010 to well over a million barrels per day, making North Dakota the second largest oil producing state in the country.
But the bust is leaving towns like Williston, North Dakota stretched extremely thin as it tries to deal with the aftermath. Williston is coping with $300 million in debt after having leveraged itself to buildup infrastructure to deal with the swelling of people and equipment heading for the oil patch. Roads, schools, housing, water-treatment plants and more all cost the city a lot of money, expected to be paid off with revenues from oil production that are suddenly not flowing into local and state coffers the way they once were.
Williams County Commissioner Dan Kalil says that a lot of unemployed people who flocked to North Dakota are left in the wake of the bust, something that the local government has to sort out. “We attracted everyone who had failed in Sacramento, everyone who failed in Phoenix, everyone who failed in Las Vegas, everybody who had failed in Houston, everyone who failed in Florida,” Kalil said in a June 3 interview with WHQR.org. “And they all came here with unrealistic expectations. And it’s really frustrating for those of us left to clean up the mess.”
Output is still only slightly off its all-time high of 1.2 million barrels per day, which it hit in December 2014. But more declines are expected with drillers pulling their rigs and crews from the field. Rig counts in North Dakota have fallen to just 76, as of June 12, far below the 130 or so that state officials believe is needed to keep production flat.
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Saudi Arabia, Russia in No Mood to Cave to US Fracking Boom
Saudi Arabia, Russia in No Mood to Cave to US Fracking Boom
The recently vaunted decline in US crude oil production, supported by granular estimates, has been used in rationalizing the newly sizzling rally in oil prices. Analysts are digging through local details to come up with clues where this might be going. Money is re-pouring into the sector. And folks are already espousing the next stage, that the glut is over and that a shortage will set in soon, or something.
Alas, the decline in US oil production is, let’s say, relative. The EIA estimated that in the week ended May 1, producers pumped 9.369 million barrels per day. So that’s down from the crazy peak set during week ended March 20 of 9.422 MMbpd. Halleluiah, production is back where it was on March 6! And it’s up 12.2% from a year ago!
Note the circled areas in the chart: these weekly estimates are inherently volatile. In 2014, there were several periods of much sharper declines, even before the oil bust began in early July. Compared to those declines, the recent levelling off – and that’s all it is at this point – seems mild.
With US crude oil production on a weekly basis just a smidgen off its crazy peak in March, the other two of the world’s top three producers aren’t cutting back either.
Russia pumped 10.71 MMbpd in April, same as in March. Both months beat last year’s post-Soviet record average of 10.58 MMbpd.
And Saudi Arabia produced a record 10.31 MMbpd in April, after having already set a record in March of 10.29 MMbpd, “a Gulf industry source” told Reuters today. Production in both months beat the prior record going back to the early 1980s of 10.2 MMbpd set in August 2013.
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What Happens To US Shale When The Easy Money Runs Out?
What Happens To US Shale When The Easy Money Runs Out?
Today we will take a look at both Whiting Petroleum (WLL) and Continental Resources (CLR) as far as their Bakken economics. Overall the numbers will show that, despite claims of low cash costs per MBOE ($16 or so for CLR) and high IRRs on $60 WTI, the facts say otherwise. In addition, the analysis will show how very high depletion rates combined with falling rig counts spells trouble for Bakken production growth despite better efficiencies per well. The analysis will be based on April presentations of both companies from which the graphs below are taken. I should note these economics are not much different from Eagle Ford, the second most prolific addition to US production growth in past years.
Firstly one must understand that the easy money via QE from the Fed and zero interest rates allowed many shale players to burn free cash flow while showing operationally net of capital expenditures (which were funded by cheap flowing monies via FED) cash generation. To be clear, that model is now broken as the era of free Fed money appears to waning as both QE, and soon, zero rates become a thing of the past. The cost of capital is no longer falling but is now rising through higher bond yields and/or lower stock prices.
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Saudi Arabia’s Oil-Price War Is With Stupid Money
Saudi Arabia’s Oil-Price War Is With Stupid Money
Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible.
Saudi Arabia intends to keep oil prices low for as long as possible. Its oil production increased to 10.3 million barrels per day in March 2015. That is 700,000 barrels per day more than in December 2014 and the highest level since the Joint Organizations Data Initiative began compiling production data in 2002 (Figure 1 below). And Saudi Arabia’s rig count has never been higher.
Figure 1. Saudi Arabian crude oil production and Brent crude oil price in 2015 U.S. dollars. Source: U.S. Bureau of Labor Statistics, EIA and Labyrinth Consulting Services, Inc.
Market share is an important part of the motive but Saudi Minister of Petroleum and Mineral Resources Ali al-Naimi recently emphasized that “The challenge is to restore the supply-demand balance and reach price stability.” Saudi Arabia’s need for market share and long-term demand is best met with a growing global economy and lower oil prices.
That means ending the over-production from tight oil and other expensive plays (oil sands and ultra-deep water) and reviving global demand by keeping oil prices low for some extended period of time. Demand has been weak since the run-up in debt and oil prices that culminated in the Financial Collapse of 2008 (Figure 2 below).
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Is Saudi Arabia Setting The World Up For Major Oil Price Spike?
Is Saudi Arabia Setting The World Up For Major Oil Price Spike?
In order to maintain a grip on market share by pushing U.S. shale producers out of the market, Saudi Arabia (and OPEC) is willing to use up its spare capacity. That could lead to a price spike.
Saudi Arabia produced 10.3 million barrels per day in the month of March, a 658,000 barrel-per-day increase over the previous month. That is the highest level of production in three decades for the leading OPEC member. On top of the Saudi increase, Iraq boosted output by 556,000 barrels per day, and Libya succeeded in bringing 183,000 barrels per day back online. OPEC is now collectively producing nearly 31.5 million barrels per day, well above the cartel’s stated quota of just 30 million barrels per day.
Related: Latest EIA Predictions Should Be Taken With More Than A Pinch Of Salt
The enormous increase in production comes into a market that is still dealing with extraordinarily low prices. The move could be interpreted as a stepped up effort on behalf of Saudi Arabia to maintain market share at all costs. More output will prolong the slump in oil prices, which will force even more U.S. shale production out of the market. The signs of success are already showing – the U.S. is set to lose 57,000 barrels per day in production in May, and rig counts are still falling.
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How Much Longer Can OPEC Hold Out?
How Much Longer Can OPEC Hold Out?
OPEC has been the most talked about international organization among investors, analysts and international political lobbies in the last few months.
When OPEC speaks, the world listens in rapt attention as it accounts for nearly 40 % of the world’s total crude output. With its headquarters in Vienna, Austria, one of the mandates of 12- member OPEC is to “ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.” (Source: opec.org).
However, OPEC has been in the line of fire from the western world in light of its stance of not reducing the production levels of its member nations (excluding Iran). Most view this as a strategy to squeeze the American shale production and other non OPEC nations.
All is not well for OPEC
Simply put, the world has too much oil at the moment which has resulted in the reduction of price levels from approximately $100 to $50 a barrel, and OPEC (as well as US shale producers) has a major role to play in this supply glut. With the decline of average annual crude prices, OPEC earned around $730 billion in net oil export revenues in 2014 (Source: EIA), a big decline of 11% from its previous year. The EIA even predicts that OPEC’s net oil exports (excluding Iran) could fall to as low as $380 billion in 2015.
Related: Media Spin On Oil Prices Running Out Of Fuel
With the huge reduction in its revenues and growing discomfort among its members such as Venezuela, Libya and Nigeria over its current production levels, is OPEC really getting weaker?
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Saudi Exec Expects $1 Trillion Drop In Energy Investments
Saudi Exec Expects $1 Trillion Drop In Energy Investments
A high-ranking Saudi Aramco executive says the plunge in energy prices already has caused many in the industry to cut spending on oil and gas projects, and the trend probably will continue for a few years, perhaps reaching a cut of $1 trillion in investments.
“Challenges during down cycles are more complicated today than before,” Amin Nasser, a senior vice president for exploration and development at Saudi Aramco,told the Middle East Oil and Gas Show on March 9 in Manama, Bahrain.
“At this moment the global industry is poised to potentially cancel about $1 trillion in capital funding,” Nasser said.
Later Nasser told reporters on the sidelines of the conference that the $1 trillion amount included initiatives that might be delayed, not merely those that would be canceled altogether. “What we’ve heard from the industry is that there is $1 trillion of planned projects that will be dropped or deferred over the next couple of years because of what’s happening,” he said, without identifying his source.
Related: OPEC Boasts About Pain In U.S. Shale
The price of oil has plunged since late June from around $115 per barrel to around $60 today because of an oversupply caused by increased US production of shale oil and weaker demand for oil, especially in China and Europe.
This has eaten into the profits of both big and small energy companies, leading them to cut costs in many ways, including employee layoffs. But the largest hits are being felt in capital expenditures in companies ranging from Exxon Mobil Corp. of the United States, Norway’s Statoil and Britain’s BP.
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Oil Prices Don’t Change Because of Rig Count
Oil Prices Don’t Change Because of Rig Count
Oil prices don’t change based on weekly rig count reports.
Yet every week, there are proclamations by analysts that oil prices are poised to recover because of some change in the Baker Hughes North American rig count. Others state that U.S. tight oil production will continue to rise despite falling rig counts because of the miracle of shale rig efficiency.
What this really means is that nobody has any idea about when oil prices will rebound. As I have previously written, that is because nothing has happened so far to cause a change in oil prices.
What can we learn from rig counts? The weekly U.S. rig count is another data point that, along with other data points, can help us to see potential trends while we wait for something meaningful to happen that causes oil prices to rise…or to fall farther. But we have to do some work with the data before we can hope to get anything from the rig count and, even then, we must not read too much into it.
First, the total North American or U.S. rig count is a practically meaningless number. Rig counts rise and fall all the time whether prices are rising or falling. In the chart below, the rig count shown in red changed weekly whether oil prices were rising or falling.
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The Fracking Bust Exacts its Pound of Flesh
The Fracking Bust Exacts its Pound of Flesh
Breath-taking booms and obliterating busts have made the oil and gas business. Booms draw money, which begets more money, which allows for technologies to be invented or perfected, and it builds enthusiasm that turns into blind faith among investors, and they throw more money at it. The money gets drilled into the ground. The debt remains on the balance sheet. Production soars. Demand doesn’t keep up. Storage levels rise. The price begins to plunge. And all heck breaks loose.
The fracking bust didn’t start last summer when the price of oil began to skid. It started in October and has progressed with phenomenal rapidity. In the latest week, according to Baker Hughes, which publishes the data every Friday, drillers idled an additional 33 oil rigs. Only 986 rigs were still active, down 38.7% from October, when they’d peaked at 1,609. In a period of 20 weeks, drillers have cut the number of rigs drilling for oil by 623, the steepest, deepest rig-count nose dive in the data series:
The result should be lower oil production.
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OPEC’s Strategy Is Working Claims Saudi Oil Minister
OPEC’s Strategy Is Working Claims Saudi Oil Minister
Saudi Oil Minister Ali al-Naimi, the architect of OPEC’s strategy to regain market share by causing the price of crude oil to plunge, says his plan is working, and data from petroleum research firms seem to back him up.
Making his first public comments in two months, al-Naimi told reporters in the southwestern Saudi city of Jazan that the markets have cooled off, and cited Brent crude, the global benchmark, as an example, noting that its price has stabilized at about $60 per barrel.
He also pointed to data that inexpensive oil is driving up demand, notably in China and the United States, which eventually could lead to price stability or to a price rebound.
But Al-Naimi warned naysayers not to upset this new balance. “Why do you want to rock the markets?” he asked. “The markets are calm. … Demand is growing.”
Related: OPEC Considers Emergency Meeting On Oil Prices
If al-Naimi is right, then his strategy was correct, and it acted quickly. It was only three months ago at OPEC’s headquarters in Vienna that the Saudi ministerpushed through a plan to maintain oil production at 30 million barrels a day, declaring a price war with US shale oil producers who rely on costly hydraulic fracturing, or fracking, to extract oil embedded tightly in underground rock.
The US shale producers had not only created a global oil glut, which was depressing the price of oil, but they also had turned their country from OPEC’s biggest customer to a nation headed towards energy independence.
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Russia’s Complicated Relationship With OPEC
Russia’s Complicated Relationship With OPEC
Russia, Saudi Arabia, and the United States are the world’s most important oil producers. While there has been a lot of discussion about Saudi Arabia’s move to crush U.S. shale by flooding international markets with oil, the relationship between Saudi Arabia and Russia is much less understood.
Saudi Arabia and Russia have a lot in common. Both depend on oil exports for an overwhelming portion of their budget revenues. Both put energy issues at the heart of their foreign policy and use oil (and in Russia’s case, natural gas) as tools to achieve political objectives.
But Russia is not a member of OPEC, and has suffered enormously as a result of Saudi Arabia’s decision to seek contractions in oil production from abroad. The head of Rosneft, Russia’s state-owned oil company, harangued OPEC (and by implication, the Saudi kingdom) at a London Conference on February 10. Rosneft’s Igor Sechin, who has been personally targeted by western sanctions, said that OPEC “has lost its teeth” as a result of its decision to keep oil production at elevated levels, a move that has led to market “destabilization.”
The verbal barrage suggests that Russia, more so than OPEC (or at least Saudi Arabia), is the one that is suffering under Saudi Arabia’s decision.
OPEC has sought Russian cooperation on oil output levels in the past, offers that Russia has thus far declined.
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