Oil

[pmbug]

His forecasting generally relies upon some assumptions that variables in the equation won't change. For example:

Technology improves - it becomes possible to extract shale oil at a cheaper cost than current methods

Capital costs decline - equipment and materials become cheaper (I doubt labor costs will decline)

Market dynamics - the price of oil might rise well above the "shale industry’s very own breakeven prices"

Govco - they might change the rules/regulations making it cheaper to the industry to work or offering them some sweetheart financing deal(s).

That said, it possible that none of the variables in the equation change enough to significantly alter the timeline for Steve's projection. As it stands now, it appears that the wells have a pretty short half life on profitability. From the initial drilling onwards, it appears that production declines while costs increase (for each well).

 

[11C1P]

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The Wall Street Journal - In Oil's Huge Drop, All Signs Say Made in the U.S.A.

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"The downward spiral in oil prices is accelerating as a surge in crude production from a turbocharged U.S. petroleum industry runs into weaker global economic growth.

Crude prices slid 7.7% Friday, their largest one-day drop since July 2015, and are now down by nearly a third since the start of October. The U.S. benchmark, West Texas Intermediate futures, closed at $50.42 a barrel—its lowest level in over a year.

Oil traders pointed to a mix of factors for Friday’s selloff. Economic growth outside the U.S. has flagged, raising fears that demand for crude will also decline. In export-dependent Germany, a purchasing managers index hit a four-year low, well below the level economists were expecting.

Saudi Arabia and the Organization of the Petroleum Exporting Countries are inching toward a plan to cut production that would retain official output targets, first set in 2016, but would imply a production pullback because Saudi Arabia is overproducing by nearly 1 million barrels a day, The Wall Street Journal reported Friday.

Investors remain skeptical that the OPEC meeting in Vienna on Dec. 6 will be able to turn the tide on oil supply enough to support prices.

A big reason why: the emergence of the U.S. oil industry as one of the world’s most important players. Ballooning shale production—American output has nearly doubled since the start of 2012—has made the U.S. a key supplier and exacerbated worries about a global glut of crude.

“I never thought I would hear these kinds of numbers coming out of the U.S.,” said Bob Yawger, director of the futures division at Mizuho Securities USA. “This is going to force OPEC’s hand.”

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This summer, the U.S. surpassed Saudi Arabia and Russia as the largest crude-oil producer—a title it hasn’t held since 1973, according to the International Energy Agency. Monthly output in the U.S. was a record 11.65 million barrels a day in September and nearly the same amount in October, according to energy consulting firm Wood Mackenzie, while Saudi Arabia’s supply was nearly 11 million barrels a day last month and Russian production stood at 11.4 million a day.

“It used to be the world was divided into OPEC and non-OPEC,” said Daniel Yergin, vice chairman of IHS Markit, which projects the U.S. will be a net exporter of petroleum in the early 2020s. “Now it’s the world of the big three.”

In recent weeks, that has shown up in a bumper amount of oil in storage. U.S. crude stockpiles have climbed for nine consecutive weeks. Inventories advanced by 4.9 million barrels in the week ended Nov. 16, and rose more than 10 million barrels the week before, the largest one-week increase since February 2017.

Bottlenecks in getting oil out of the prolific Permian basin in Texas have led to a big divergence in the benchmark prices of oil. The global benchmark, Brent crude, trades for roughly $9 more than West Texas Intermediate, which is harder to get to global markets.

However, the U.S. has continued to pump oil and many expect those hurdles to be cleared next year as new pipelines are built, unleashing even more crude on the rest of the world.

Uncertainty on the geopolitical front has also exacerbated worries about oversupply.

President Trump has signaled a willingness to look past the killing of a prominent U.S.-based journalist in his relations with Saudi Arabia. And the U.S., after months touting strict enforcement of sanctions on Iran, granted more generous waivers than expected for eight governments to buy Iranian oil. This could lead to higher-than-expected supply from the Islamic Republic.

Saudi officials said Mr. Trump pressured the country into ramping up oil production to record levels ahead of the sanctions on Iran’s petroleum industry, The Wall Street Journal has reported.

“They are trying to be as cooperative with us as possible,“ said Douglas Hepworth, chief operating officer at Gresham Investment Management LLC, a $7 billion commodities firm with about one-third of its assets in energy. “What triggered the whole thing was everybody in the world moving to full capacity to try and make the world safe for Iranian sanctions.”

The strength of global production now threatens to overwhelm demand. This could pressure OPEC and its allies such as Russia to cut back when the group meets next month in hopes of regaining more direct control of global supply.

Such a combination helped rein in the last oil price rout two years ago—defying skeptics who previously warned OPEC’s grip on world markets had slipped thanks to U.S. shale. In 2016, the cartel teamed up with Russia and a group of like-minded, non-OPEC oil producers. They throttled back hard and stayed disciplined, slowly draining the world of the buildup of inventory that now is starting to slosh around the world again. The big question is whether they can pull off the same sort of deal now, and how long it might take to drain supply again.

Adding to the pressure on oil is a stronger U.S. dollar. Since crude is priced in dollars, it becomes more expensive for foreign buyers when the U.S. currency rises. On Nov. 12, the dollar jumped to its highest level since March 2017, bolstered by expectations of higher interest rates. This could start to hinder global demand, one of the initial drivers that underpinned the recovery in crude.

If the price of oil drops too far, too fast, that could also hurt U.S. producers, especially in the shale patch. Most shale drillers now maintain they can break even at $50 or lower. But the falling prices have begun to eat into their profitability, and some may be forced to curtail spending next year and reduce ambitious growth plans if prices decline much more.

Mr. Trump has expressed hope that oil prices will fall lower in tweets and comments this week. His remarks have upset some shale drillers, who say continued drops could hurt the U.S. fracking industry, and the Trump administration’s stated goals of American “energy dominance,” at a time when the country’s oil output is at all-time highs.

The U.S. broadly is reaping benefits. Consumers are already enjoying lower prices at the gasoline pump. Higher oil production helped the U.S. lower its merchandise trade deficit by nearly $250 billion in 2017 from a decade earlier, according to a recent report from IHS Markit.

As the U.S. has exported more oil and natural gas, the country’s energy trade balance swung into surplus in October, according to data from Bank of America Merrill Lynch.

The fact that the U.S. is exporting more than it imports helps insulate the country from global price swings and raises the stakes for OPEC in its decision whether or not to cut production, analysts said.

“We’re rewriting the rules about how we think about global trade competition and market share,” said Michael Tran, energy strategist at RBC Capital Markets. “There’s no playbook or context given how quick growth has been in the U.S.”

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[pmbug]

... This summer, the U.S. surpassed Saudi Arabia and Russia as the largest crude-oil producer—a title it hasn’t held since 1973, according to the International Energy Agency. ...

That sentence really stood out to me. '73 was the year Nixon made the deal with Saudi Arabia that essentially created the petrodollar system. The public isn't always told the real reasons that drive govco strategic policy. I have to wonder if the the push to develop the shale oil industry might have been driven in part by an expectation of waning strength with our relationship to Saudi Arabia. Perhaps even a direct response to their involvement in 9/11. If so, I can only hope the strategists have a plan for the dollar in a world where the middle east no longer sells oil to the world in dollars.

 

[11C1P]

That sentence really stood out to me. '73 was the year Nixon made the deal with Saudi Arabia that essentially created the petrodollar system. The public isn't always told the real reasons that drive govco strategic policy. I have to wonder if the the push to develop the shale oil industry might have been driven in part by an expectation of waning strength with our relationship to Saudi Arabia. Perhaps even a direct response to their involvement in 9/11. If so, I can only hope the strategists have a plan for the dollar in a world where the middle east no longer sells oil to the world in dollars.

You also have to remember though that U.S. oil companies were restricted on how much & who they could ship oil to. The restraints were only taken off a couple years ago, so I wasn't shocked, but still slightly surprised.

 

[pmbug]

... energy analyst Art Berman also puts the shale oil industry into proper perspective. In one of his recent charts, he showed how only 33% of the companies producing shale oil made positive free cash flow. The data in this chart was based on the average oil price of $67.95 in the third quarter of 2018:

I added my own line with the new current $47.50 oil price. Any company above that line is now losing money. Which means the 33% of companies making money are now more like 15% or 3-4 companies at the most. Or, it could be even worse than that. So, I imagine Mr. Berman will probably update that chart showing a lot more RED BARS. Furthermore, the situation for the companies in the Bakken will be hit much harder due to the huge reduction of the Williston Sweet oil price versus the West Texas Oil price.
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https://srsroccoreport.com/the-u-s-...bath-spreads-as-oil-price-meltdown-continues/

 

[rblong2us]

And many have to sell tight oil at significant discounts due to restrictions in pipeline availability for shipping and because these oils do not easily mix with the heavier oils to produce what the world currently wants ....

Possibly none of these companies have positive cash flow but in order to keep the up the pretence that US oil is awesome, loans are extended and discretely underwritten by US taxpayers.
I think I am in favour of this as I get cheap fuel ( for the moment )