Oil Prices

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After having read (& listen) through XX (lost count) 2Q15 reports of E&P companies in the US (with several more to go this week but I do not expect surprises), I have arrived at the following conclusions:

1. Capex has peaked out around 4Q/1Q15, with significant cuts to follow through the rest of the year => which is lagging rig count by around 1Q.
2. Production has also peaked (lagging capex by 1Q) in 2Q15, with flat to (mostly) down guidance for rest of the year.
3. No US player reported any profits for their 2Q15 upstream ops, and their cash burn rate is really eye-watering. I would expect worse results for 3Q15 with the recent fall in prices.

Therefore, my prediction is that oil prices will hit a low in 3Q15 with a gradual recovery as oil supplies start to tighten. Cool
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(04-08-2015, 11:09 AM)HitandRun Wrote: After having read (& listen) through XX (lost count) 2Q15 reports of E&P companies in the US (with several more to go this week but I do not expect surprises), I have arrived at the following conclusions:

1. Capex has peaked out around 4Q/1Q15, with significant cuts to follow through the rest of the year => which is lagging rig count by around 1Q.
2. Production has also peaked (lagging capex by 1Q) in 2Q15, with flat to (mostly) down guidance for rest of the year.
3. No US player reported any profits for their 2Q15 upstream ops, and their cash burn rate is really eye-watering. I would expect worse results for 3Q15 with the recent fall in prices.

Therefore, my prediction is that oil prices will hit a low in 3Q15 with a gradual recovery as oil supplies start to tighten. Cool

you do realise a lot depends on Iran too, once they really start dumping their big stash of crude and kickstart their dormant pumps, supply is really gonna flood in.
Virtual currencies are worth virtually nothing.
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(04-08-2015, 02:03 PM)BlueKelah Wrote: you do realise a lot depends on Iran too, once they really start dumping their big stash of crude and kickstart their dormant pumps, supply is really gonna flood in.

The number you quoted was 20 million barrels. How much is that? To put that in perspective, US consumes almost that much in 1 day. There are almost 700 million barrels in the American strategic petroleum reserve. Based on the latest EIA, there are approximately 460 million barrels of crude oil stocks in the system. So I don't think 20 million amounts to anything more than a blip, that might cause a ripple for just a few days. As for the ability to ramp up quickly, I have my reservations but we can check back in 6 months.
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http://www.telegraph.co.uk/finance/oilpr...ckles.html

Saudi Arabia may go broke before the US oil industry buckles

It is too late for OPEC to stop the shale revolution. The cartel faces the prospect of surging US output whenever oil prices rise

King Salman bin Abdulaziz Al Saud Photo: AFP/Getty
Ambrose Evans-Pritchard By Ambrose Evans-Pritchard9:59PM BST 05 Aug 2015

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.
The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.
The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.
Bank of America says OPEC is now "effectively dissolved". The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. "It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run," said the Saudi central bank in its latest stability report.
"The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience," it said.
One Saudi expert was blunter. "The policy hasn't worked and it will never work," he said.
By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.
Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.
The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year - and not only by switching tactically to high-yielding wells.
Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. "We've driven down drilling costs by 50pc, and we can see another 30pc ahead," said John Hess, head of the Hess Corporation.
It was the same story from Scott Sheffield, head of Pioneer Natural Resources. "We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days," he said.
The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. "The freight train of North American tight oil has kept on coming," said Rex Tillerson, head of Exxon Mobil.

He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.
Until now, shale drillers have been cushioned by hedging contracts. The stress test will come over coming months as these expire. But even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good.
The wells will still be there. The technology and infrastructure will still be there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 - since the threshold keeps falling - they will crank up production almost instantly.
OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for "clean fracking" in China as plasma pulse technology cuts water needs.
Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia's giant Ghawar field, the biggest in the world.
Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.

Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.
The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The 'fiscal break-even price' is $106.

Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.
He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up - entirely reliant on imported weapons - that will propel Saudi Arabia to fifth place in the world defence ranking.
The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. "Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon," said Jim Woolsey, the former head of the US Central Intelligence Agency.

Money began to leak out of Saudi Arabia after the Arab Spring, with net capital outflows reaching 8pc of GDP annually even before the oil price crash. The country has since been burning through its foreign reserves at a vertiginous pace.
The reserves peaked at $737bn in August of 2014. They dropped to $672 in May. At current prices they are falling by at least $12bn a month.

Khalid Alsweilem, a former official at the Saudi central bank and now at Harvard University, said the fiscal deficit must be covered almost dollar for dollar by drawing down reserves.
The Saudi buffer is not particularly large given the country's fixed exchange system. Kuwait, Qatar, and Abu Dhabi all have three times greater reserves per capita. "We are much more vulnerable. That is why we are the fourth rated sovereign in the Gulf at AA-. We cannot afford to lose our cushion over the next two years," he said.
Standard & Poor's lowered its outlook to "negative" in February. "We view Saudi Arabia's economy as undiversified and vulnerable to a steep and sustained decline in oil prices," it said.
Mr Alsweilem wrote in a Harvard report that Saudi Arabia would have an extra trillion of assets by now if it had adopted the Norwegian model of a sovereign wealth fund to recyle the money instead of treating it as a piggy bank for the finance ministry. The report has caused storm in Riyadh.
"We were lucky before because the oil price recovered in time. But we can't count on that again," he said.
OPEC have left matters too late, though perhaps there is little they could have done to combat the advances of American technology.
In hindsight, it was a strategic error to hold prices so high, for so long, allowing shale frackers - and the solar industry - to come of age. The genie cannot be put back in the bottle.
The Saudis are now trapped. Even if they could do a deal with Russia and orchestrate a cut in output to boost prices - far from clear - they might merely gain a few more years of high income at the cost of bringing forward more shale production later on.
Yet on the current course their reserves may be down to $200bn by the end of 2018. The markets will react long before this, seeing the writing on the wall. Capital flight will accelerate.
The government can slash investment spending for a while - as it did in the mid-1980s - but in the end it must face draconian austerity. It cannot afford to prop up Egypt and maintain an exorbitant political patronage machine across the Sunni world.
Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen.
Diplomatic spending is what underpins the Saudi sphere of influence in a Middle East suffering its own version of Europe's Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.
We may yet find that the US oil industry has greater staying power than the rickety political edifice behind OPEC.
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Shale producers face financial reality in cheap oil era
Date
August 7, 2015 - 10:02AM
Read later
Matthew Philips Asjylyn Loder Bradley Olson

Large oil companies are reporting their worst results in years.
Not long ago the oil industry looked like it had dodged a bullet. After the worst bust in a generation cut crude prices from $US100 ($136) a barrel last summer to $US43 in March, the oil market rallied. By June, prices were up 40 per cent, passing $US60 for the first time since December.

Oil companies that had cut costs began planning to deploy more rigs and drill more wells. "We didn't think we'd be quite this good," Stephen Chazen, chief executive officer of Occidental Petroleum, told analysts in May.

The runup was short-lived. Fears over weak demand from China, along with rising production in the US, Saudi Arabia, and Iraq pushed prices back below $US50. In July, even as the summer driving season boosted US gasoline demand close to record highs, oil posted its biggest monthly drop since October 2008.

"The much feared double-dip is here," Francisco Blanch, head of global commodity research at Bank of America, wrote in a July 28 report.

The largest oil companies are reporting their worst results in years. ExxonMobil's second-quarter net income fell 52 per cent; Chevron's fell 90 per cent. ConocoPhillips lost $US180 million. Billions of dollars in capital spending have been cut, and more layoffs are likely. Part of the problem facing the majors is that they're producing in some of the most expensive places on earth: deep water and the Arctic.

With their healthy cash reserves the majors can hold out for higher prices, even if they're years away. The same can't be said for many of the smaller companies drilling in the US shale patch. Shale producers had bought themselves time by cutting costs, locking in higher prices with oil derivatives, and raising billions from big banks and investors. Many cut drilling costs by as much as 30 per cent, fired thousands of workers, and renegotiated contracts with oilfield service companies.

"That postponed the day of reckoning," says Carl Tricoli, co-founder of private equity firm Denham Capital Management.

But it's not clear what's left to cut. The futures contracts and other swaps and options they bought last year as insurance against falling prices are beginning to expire. During the first quarter, US producers earned $US3.7 billion from these hedges, crucial revenue for companies that often outspend their cash flow.

"A year ago, you could hedge at $US85 to $US90, and now it's in the low $US60s," says Chris Lang, a senior vice president with Asset Risk Management, a hedging adviser for oil companies. "Next year it's really going to come to a head."

Over the first half of 2015, US shale producers were able to raise about $US44 billion in debt and equity, according to UBS. As oil prices keep falling, investors are losing their appetite for risky shale debt.

Bonds have become more expensive and are laden with more onerous terms, including liens against drillers' oil and gas assets. More than $US24 billion of the $US235 billion in debt owed by 62 North American independent oil companies is trading at distressed levels, meaning their yields are more than 10 percentage points above US Treasuries.

Regulators have warned of the risks of lending to US shale drillers, threatening a cash crunch in an industry that's more dependent than ever on other people's money. In October, as they do twice every year, banks will reevaulate drillers' lines of credit, which are often based on the value of reserves. If prices stay where they are, many companies could be cut off from crucial funding.

"For the weaker companies, it could be very, very painful," says Jimmy Vallee, a partner in the energy mergers and acquisitions practice at law firm Paul Hastings in Houston. "Some of them are essentially running on fumes."

Over the past year, shale producers have lowered their costs so much that the average break-even price for a barrel of US crude is now in the upper $US40s, down from $US60, according to research from IHS Energy. That's allowed them to keep producing, feeding the glut that continues to weigh down prices. At some point, though, they may have to pull back.

The bottom line: The renewed decline in oil prices has made it hard for shale producers to issue stock or sell bonds.

Bloomberg Businessweek
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EOG CEO Expects 2H15 production to decline

Great minds think alike? Tongue

"CEO Bill Thomas said U.S. crude production is bound to decline substantially in the second half of the year starting in July and August. That’ll start to become evident in September and October when updated and more accurate federal data on domestic oil output is released. He expects U.S. production this year to grow at half the rate it did last year."
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Looks like Reuters probably got much better O&G journalists than Bloomberg.

US Shale Drillers Struggle

"The shale sector's problem resembles the difficulties which airlines had until recently, growing capacity without making a profit. The airlines eventually learned to prioritise profits over capacity, but only after years of pain. The shale sector appears to be at the start of a similar learning curve."
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iran-hoarding-oil
http://money.cnn.com/2015/08/13/investin...-stack-dom
You can find more of my postings in http://investideas.net/forum/
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(14-08-2015, 08:33 AM)Behappyalways Wrote: iran-hoarding-oil
http://money.cnn.com/2015/08/13/investin...-stack-dom

Bad news for the energy sector, oil prices are going to take a huge dump once the sanctions on Iran are lifted, maybe to $30, but I don't see it staying there for long, virtually no shale driller is going to stay afloat at that price.
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Solar energy is the one to watch.

Last year if I remember correctly solar energy supply went up by double digits. Unless demand for energy goes up by a lot, with all these alternative energy supply coming up, oil demand will definitely be hit
You can find more of my postings in http://investideas.net/forum/
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