Oil Prices

[BlackCat]

Huge changes are underfoot in the oil patch. Based on capex announcements by the major shale oil players, I would be very surprised if the drop is a mere 7%. My personal take is that we might possibly see a 50% drop in rig count within the next 3 months => a bloodbath is coming.

The article below provides an alternative view: a decrease in US shale oil production will not occur in 1H15 as:

• The number of wells does not correlate with production. Producers can move their rigs to sweet spots, and increase production due to new techniques. A better (luckier?) operator can drill a well in the same area producing 20% more oil. In a better area, producing 4X the amount.
  
• The major producers have all announced capex cuts but increases in production.
  
• They are mostly hedged in 1H15.
  

http://seekingalpha.com/article/2799335-...es-in-2015

Maybe the drop in production, and the bloodbath, comes later...

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[HitandRun]

Blackcat san

If you interpret what I have written as there would be a 50% drop in shale oil production within 3 months, then I am afraid that you have read wrongly.

The process should be this way: well permitting drops => rig counts fall => well fracturing & completions falls => then shale oil production falls. Given the lead time in each of those steps, I think we might see production fall only at late 3Q or 4Q this year, maybe possibly next year.

Meanwhile, Helmerich & Payne is confirming that besides returning their rigs upon expiry of contract, some customers are opting for early termination. US Steel and other contractors are laying off staff due to drop in demand, etc. In fact, I would even expect non shale oil companies to cut capex too!

One last word on the alleged productivity improvement and drilling in sweet spots. I just cannot understand the sweet spots drilling thingy. Do you mean that as a rational businessman, you would choose to develop only your best assets when the price is at the historical low? Think about it, I suspect people do things like that only when they are desperate. And for companies who are forecasting higher production despite significantly lower capex, it could be just a lagged effect, otherwise maybe I can have some of what they are smoking too.

[swakoo]

Another approach to predicting the bottom...

How far could the oil price fall?

How far the oil price will fall is anyone's guess just as how much it would rise last decade was. However, history tells us that it can fall much further than you think until supply is finally cut back. In the 1980s and 1990s the oil price fell more than 70% before the bottom was hit (see the next chart). More recently oil prices plunged 78% through the GFC but the fall was short lived and supply in recent years has expanded not fallen as a result of the US shale oil revolution.

[Image: clip_image007.png]
Source: Bloomberg, AMP Capital

So a fall back to around $US40 a barrel or just below, ie a roughly 75% fall from the 2008 is reasonably likely. This level should start to force supply cutbacks amongst more marginal producers but, as we saw in the 1980s and 1990s, once prices bottom its likely to be followed by a period of base building rather than a quick surge back up.

- See more at: http://media.amp.com.au/phoenix.zhtml?c=...mwhGN.dpuf

[CityFarmer]

The article adds further input to our fun of oil price forecasting ...

Exclusive: New U.S. well permits rise slightly after crude oil plunge

HOUSTON - New oil and gas well permits issued across the United States rose slightly in December and surged 72 percent in Colorado and Wyoming after falling sharply in November on tumbling crude prices.

Permit counts provided exclusively to Reuters by data firm Drilling Info showed 4,551 new well permits were approved last month, up less than 1 percent from November's count of 4,523.

New permits plunged nearly 40 percent in November compared to October, signaling a potential slowdown in the shale oil and gas boom that brought the United States head to head with Saudi Arabia as the world's top crude producer.

Allen Gilmer, chief executive officer of Drilling Info, said the December counts were equivalent to December 2013 and January and February last year.

"What has been lost is the 2014 adds," he said.

New permit counts help indicate what drilling rigs will do several months in the future.

But they do not capture what many analysts consider better predictors of output: the length of new wells being drilled, and the number of points along each well being hydraulically fractured to coax oil out of tight rock.

Baker Hughes Inc's average December U.S. land rig count was 1684, down 60 rigs, or 3.4 percent from November, but up 0.4 percent from a year earlier.

Among major U.S. oilfields, new permits issued in the Permian Basin in Texas and New Mexico rose 0.3 percent in December to 638, after having fallen 38 percent in November. Permian output is expected to reach 1.87 million barrels per day this month, according to the U.S. Energy Information Administration.

The Eagle Ford shale in South Texas saw new permits rise 2 percent to 382 after November's decline of 28 percent. And new permits issued in North Dakota's Bakken shale rose 5.4 percent to 252 last month after declining 29 percent in November.

The EIA said Eagle Ford production would reach 1.68 million bpd this month, and Bakken output would be 1.25 million bpd.

The most stark reversal among the 13 individual fields tracked by Drilling Info was in the Niobrara shale in Colorado and Wyoming, where new permits issued rose 72 percent in December to 541 after having fallen 32 percent in November. The EIA projects Niobrara output to reach 382,000 bpd this month. REUTERS
http://www.todayonline.com/business/excl...y-december

[CityFarmer]

More input from Canada side...

Shell to cut 5 to 10 percent of jobs at Canada oil sands project

CALGARY, Alberta - Royal Dutch Shell will cut from 5 to 10 percent of the about 3,000 jobs at its Albian Sands mining project in northern Alberta, a company spokesman said on Friday, but refrained from connecting the move to plunging oil prices.

Spokesman Cameron Yost said the actual number of job reductions at the Canadian operation had not yet been finalized, adding it would be "well below" 10 percent.

The cuts were announced to Shell employees internally on Thursday.

"It's not layoffs in the traditional sense of the word," Yost said. "It's adjustments to the organizational structure."
...
http://www.todayonline.com/business/shel...ds-project

[BlueKelah]

Sub-$50 Oil Has U.S. Shale Producers Cutting Rigs Loose Early

U.S. oil producers are bailing out of long-term contracts for drilling rigs as crude prices sink below $50, another signal that the nation’s shale boom is slowing.

Helmerich & Payne Inc. (HP), the biggest rig operator in the U.S., this week said it had received early termination notices for four contracts. Yesterday, a second contract driller, Pioneer Energy Services Corp. (PES), said four rigs had been canceled early. Producers may cut short another 50 to 60 agreements, according to Bloomberg Intelligence analyst Andrew Cosgrove.

Companies are paying to cancel rigs rather than keep drilling in the face of a 55 percent plunge in prices. Mounting rig cutbacks imperil the unprecedented boom in U.S. output that’s contributed to a global glut of oil and helped sustain a price war among the world’s largest suppliers.

“This is just the beginning,” R.T. Dukes, an upstream analyst at Wood Mackenzie Ltd., said by telephone from Houston. “Even the best of the best who continue drilling have balance sheet constraints when you get oil this low. It might make sense to just terminate these contracts and not do anything and wait for a better day.”

U.S. benchmark West Texas Intermediate oil rose 36 cents, or 0.7 percent, to $49.15 a barrel in electronic trading on the New York Mercantile Exchange at 1:14 p.m. Singapore time. Brent, the global benchmark grade, added 27 cents to $51.23.
New Rigs

Contracts for the 190 rigs that on-land drillers were expected to add this year, known as newbuilds, have the highest risk of being terminated, Cosgrove said by telephone from Princeton, New Jersey. Helmerich & Payne had contracts for 37 newly built rigs terminated early after the last oil rout in 2008, he said.

“Looking back at what happened in 2008 and 2009, I’d feel comfortable saying there’s definitely going to be upwards of 50 to 60 early cancellations,” Cosgrove said.

Terminations aside, less than half of land drillers’ rigs are on term contracts through 2015, data compiled by Bloomberg Intelligence show. Pioneer may be the most exposed, with 75 percent of its fleet up for renewal in the next three quarters, according to the data.

Ensign Energy Services Inc. (ESI) may lay off as many as 700 workers across Kern County and Long Beach, California, after an “early and unexpected termination” of drilling contracts, the company said in a Dec. 18 letter to the state’s Employment Development Department. The Calgary-based field services company was forced to halt production on a number of drilling rigs in California, according to the letter.
Terminations Cheaper

Helmerich & Payne, based in Tulsa, Oklahoma, said in a presentation Jan. 7 that spot pricing for its FlexRig is down 10 percent and the company expects to see 40 to 50 of the rigs idled in the next 30 days. San Antonio-based Pioneer Energy Services said yesterday it would receive about $17 million in termination payments for the four rigs being canceled effective this quarter.

“In a lot of the long, horizontal plays, oftentimes a rig termination clause is equal to the cost of one well,” Dukes said. “Terminating these contracts is really relatively cheap compared to drilling these $10 million wells over and over and over again.”

Sub-$50 Oil Has U.S. Shale Producers Cutting Rigs Loose Early

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Story is getting interesting...

[HitandRun]

Great minds think alike?

oil-drillers-bail-on-u-s-boom-idle-most-rigs-since-1991

[BlueKelah]

As more rigs get idled it will be interesting to see if oil price stabilizes. Also will be interesting to see how the credit boom for shale oil plays out as more and more debt sours.

In which case Janet Yellen will have to start scratching her head and think about QE4.

[yewkim]

I would like to apologise to the moderators of this forum for the offensive posts.


I am truly sorry for the offensive words use, hope your forgiveness. Thanks.


I got this article to share. And i think oil has just bottom, and with so many countries in recession or near one, i think low oil price may be here for quite sometimes.

http://www.marketwatch.com/story/heres-w...beforebell


Does this article means to say that oil need to be below 40$ before it hurts most non OPEC countries? Am I right?

[BlackCat]

The process should be this way: well permitting drops => rig counts fall => well fracturing & completions falls => then shale oil production falls. Given the lead time in each of those steps, I think we might see production fall only at late 3Q or 4Q this year, maybe possibly next year.

Thanks for the clarification HitandRun, I agree with this time frame. Best guess is that oil prices start rising 6-12 in months, assuming no bad surprises on the demand side.

Still searching for a ways to invest in oil - its one of the hardest industries to understand. Cant just go and buy some barrels to store in my flat....