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Page added on March 18, 2015
Will The Oil Markets Capitulate Before Demand Recovers
Is the U.S. shale industry at a tipping point? Oil prices fell to a six-week low on Friday after the International Energy Agency warned that the U.S. may soon run out of room to store all the oil being pumped out of shale plays across the country. As oil starts to back up, the worry is that prices could fall like a rock. But despite this grave warning, bullish oil traders are keeping their cool. They believe that the low prices will ultimately decimate the U.S. shale industry, removing a large chunk of supply from the market indefinitely, similar to what happened during the last major oil price crash 30 years ago.
But is the shale industry really that vulnerable? Growing production levels in the face of lower prices seems to defy the view that the industry is on the edge of collapse. While oil prices fell nearly 50% from their peak last year in June, production across the seven major shale plays increased by 18% to 5.1 million barrels between June 2014 and February 2015. One reason is that the industry is financially more sophisticated than in the past, giving it greater access to the credit markets.This has allowed producers to remain financially solvent through the downturn and continue pumping despite the weak prices. At the same time, advances in drilling technology and engineering know how has allowed producers to respond quicker to price changes, helping to create both a floor and a ceiling to the oil price.
There remains a great deal of controversy surrounding the reasons why oil prices fell off a cliff last summer. Richard Fisher, the head of the Dallas Federal Reserve, said at the Economic Club of New York last month that he believed the Saudis “engineered” the current oil crisis to drive shale producers out of business. Continental Resources CLR +3.93% Chairman and CEO, Harold Hamm, told Forbes last week he thought the Russians financed the anti-fracking movement in the United States and Europe in an attempt to wipe out shale producers to protect their market share.
But if there were a sinister Saudi or Russian plot to destroy the U.S. shale industry, it doesn’t seem to be working, at least not yet. Only a handful of U.S. shale producers have gone bust since prices fell, like WBH Energy back in January, with the vast majority still operating. They have adapted quickly to the market by almost immediately slashing capital expenditures, negotiating cheaper service contracts and cutting staff. The name of the game has basically gone from “expand as fast as you can” to “liability management”.
However, even if some were to get into trouble, the credit analysts at JP Morgan said there exists a “large and varied toolkit of liability management options,” that could help weather the storm. These include second-lien financings, asset sales as well as debt-for-debt and debt-for-equity exchange offers. Given this, the analysts believe the true cumulative default rate, even under a sustained three-year $50 oil price (WTI) scenario, would be less than 30%.
To be sure, a decrease in capital spending doesn’t necessarily lead to a commensurate decline in production. Indeed, the sharp drop in oil prices has also meant a sharp drop in production costs as operators now have the upper hand in contract negotiations with oil service firms. This has led to as much as a 20% to 30% reduction in oil service costs for many firms who continue to drill, according to a note published by Barclays North America oilfield services and equipment lead analyst, J. David Anderson.
Technology is also playing a role in keeping costs to a minimum. Michael Lynch, an analyst at Strategic Energy and Economic Research, believes that technological improvements, along with offsetting increases in production, are reducing fracking costs for shale producers by around 10% to 20% on an annual basis. Combine that with reduction in oil field service costs and you start see how the shale industry can hold on for quite a while with oil prices down in the dumps.
Demand for oil seems to be on the rise, with the IEA seeing what they call “tentative signs of a demand recovery.” As such they now believe that world oil demand will average around 93.5 million barrels a day, which is up around 300,000 barrels a day from their previously bearish forecast. This should help reduce oil inventories, removing the current downward pressure on the oil price due to the storage crunch.
The oil price has always been tricky to forecast. Pretty much no one saw the collapse from its highs last summer and few, if any, will probably call the bottom this year with any certainty.
I continue to see this market stuck range-bound. In one corner you have the shale industry continuing to produce and supported financially by the credit markets. This will define our cap; but, in the other corner, we have slowly increasing global demand and the ever-present potential for political conflict. From there we establish our floor. Certainly in between there will be volatile days and weeks, but those looking for a capitulation or triple digit pricing in the next few years and fighting some pretty obstinate fundamentals
30 Comments on "Will The Oil Markets Capitulate Before Demand Recovers"
Plantagenet on Wed, 18th Mar 2015 3:51 pm
I think there could well be a capitulation down to the lows of $38/bbl level last seen during the global crisis in 2008-9 price.
Time will tell.
Brent on Wed, 18th Mar 2015 4:34 pm
https://www.youtube.com/watch?v=FQkPIeK-tik
shortonoil on Wed, 18th Mar 2015 5:28 pm
Very interesting article, not for what is said, but for what is not mentioned! Any retard who even vaguely follows the industry knows that shale production has not collapsed to date because of the 1500 yet to be completed oil wells in the Bakken, and the Eagle Ford. Drilling has fallen off a cliff, and reviewing recent HY energy bond issuance makes times ahead look hard indeed. Producers who are desperate, in this low price environment for cash, to service over $1 trillion in debt are pumping every barrel they can find. This is not likely to change until the back log has been used, or the sheriff shows up to padlock the place.
Shale which is energy negative, and thus can not be economically positive without creative accounting, has displayed one of the greatest disingenuous PR campaigns in history. Forbes has been one of their biggest bought, and paid for cheerleaders. Perhaps Forbes is getting concerned its reputation, and readership will not easily forget a $1 trillion fleecing. The problem with sleeping with pigs is that the odor has a tendency to linger.
http://www.thehillsgroup.org/
fred1 on Thu, 19th Mar 2015 2:13 am
Great post short pretty much sums up all the shale B.S !
rockman on Thu, 19th Mar 2015 7:47 am
Great post by shorty as usual. But I think he’s being a bit too positive. I don’t know where everyone is pulling production data from but I would bet the majority comes from services like Drilling Info…the Rockman’s data base. I just pulled up the EFS production on DI: the latest production data posted is Jan 2015. Just a guess but given the time lag between the point when the rig moves off the well until it begins producing is 3 to 6 months. During that time the well is frac’d, production equipment is installed and the well is initially tested. And then there’s the additional lag between first production and reporting to the state….could be several weeks.
Bottom line: I suspect most of the current reports of shale production are from wells drilled between July and Sept, 2014. IOW we are a long way from seeing the effects of the drill rig count fall on production. Some operators may be waiting to frac beyond the typically lag time for a variety of reasons such as capex preservation and holding out for higher oil prices. OTOH frac’ng has suddenly gotten much cheaper. And the monies spent to drill a well are sunk so the only economics involved in the frac decision process is that cost and its ROR. IOW the ROR going forward is much higher than the expectation used to drill the well initially.
Example: a new frac’d well might come in at 800 bopd but given those high decline rates let’s use 400 bopd average for the first 12 months. Backing out royalty and production costs and using $45/bbl this wells would net about $4.6 million during the first year. If the now cheaper frac price tag is $3.5 million the well would recover 100% of the cost in about 6 months or so. As oil patch investments go that’s considered a home run: ROR exceeds 100%. The well might have cost an additional $5 million to drill but that is not a factor in the go-forward economic analysis.
And for the pubcos, which dominate the shale plays, it also allows them to book those reserves as PDP…Proved Developed Producing. It also allows them to book up to 4 offset locations as PUD…Proved UnDeveloped. Those are critical metrics used to evaluate the value of a pubco’s stock.
Bottom line: there may not be a lot of wells sitting unfrac’d for an extended period of time. But if there are that will only make the drop off in EFS even more dramatic once the lag time catches up on the rig decline: not only are a lot of new wells not being drilled but a number that were drilled aren’t coming on line which would mimic an even earlier fall in the rig count. Like the tree falling in the forest when there’s no one there to hear it: if an EFS well is drilled and not frac’d was it really “drilled”?
As of last Friday there were 152 rigs drilling horizontal wells in the EFS. Previously the rig count had stabilized around 200. Thanks to pad drilling the bopd/rig had increased. But at the same time the bopd per well has been steadily decreasing since its peak in Jan 2012. Or more clearly: Average rig productivity has almost tripled since early 2012. Average well productivity has decreased by one-third over the same period. IOW new production from the EFS has become very dependent upon the number of rigs drilling.
Bottom line: by this summer we should be seeing clear signs of the net effect of the decline of rig activity in the EFS as well as the other shale plays. Much of the current high rate of EFS production is coming from wells drilled in 2014…wells that will exhibit the well-known high decline rate during 2015. Add that to the significant decrease in the number of wells drilling and IMHO it’s only a questions of how much and not if EFS will fall.
buddavis on Thu, 19th Mar 2015 8:19 am
Averaging about a 35% loss in HZ rigs in all of the shale plays from the 2014 highs. And the later the stages of development of a play, the more pronounced that becomes as the quality of locations declines.
Once we are through this, it will be interesting to see if they can recapture their production highs.
rockman on Thu, 19th Mar 2015 9:30 am
Bud – “Once we are through this…” And that’s the key question: what is “this” we’re going thru? And then understanding what “this” is maybe we can make a guess as to what will change “this” and see us trying to recapture production highs.
Too much production? Too little demand? Demand destruction catching up to the high prices of the last 6 years?
Or is it that the world has just returned to the equilibrium it had attained Once we are through this prices (adjusted for inflation) were the same as they are today? Should one ask the same question about the dynamics just 10 years ago: Too much production? Too little demand? Obviously not demand destruction catching up to high prices because the price in 2004 had more than doubled from the level just 3 years earlier?
So there’s the contrast: in 2004 the price of oil doubled to $45/bbl in a short period of time. And in 2015 the price of oil fell 50% to $45/bbl in a short period of time. So what’s different about the dynamics now compared to 10 years ago?
Davy on Thu, 19th Mar 2015 9:35 am
Rock one nasty, ugly, lying word “finance”
rockman on Thu, 19th Mar 2015 12:19 pm
Davy – So true. And the Rockman is thankful to be working for a company that spent more than 1/4 $billion in the last several years and never borrowed a penny of it. Handling operations (and thus paying invoices) it’s nice to not have to take calls from anyone looking for payment. A lot of such calls being made out there daily.
Apneaman on Thu, 19th Mar 2015 1:45 pm
Bragging about extracting fossil carbon while we are in the first stages of catastrophic climate disruption is fucking sick.
zoidberg on Thu, 19th Mar 2015 2:23 pm
Sure the planets climate only responds to burning hydrocarbons. Lol. How many climate scientists does it take To forecast the future climate?
answer all of them guessing everything.
Apneaman on Thu, 19th Mar 2015 2:37 pm
Thanks for your FoxNews explanation of physics and chemistry.
Apneaman on Thu, 19th Mar 2015 2:53 pm
Stupid people do not know they are stupid.
Dunning–Kruger effect
http://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect
zoidberg on Thu, 19th Mar 2015 3:48 pm
I love climate zealots
Backatcha
Apneaman on Thu, 19th Mar 2015 5:00 pm
More Foxsplaining from the paranoid and stupid who love the the technological benefits courtesy of a few hundred years of science, but not when it challenges their in-groups worldview. You will be praying for a scientific “Hail Mary” soon enough…. but it won’t come. I predict that in the not to distant future people like you will be like Peter. You will deny that you were ever a denier.
Apneaman on Thu, 19th Mar 2015 5:23 pm
I love this one from the climate denier state of Florida. A climate denier Republican governor, who won’t even allow the term “climate change” to be spoken or written is spending tax dollars on pumps to pump out sea water from sea level rise from climate change. They are also spending on mitigation strategies, but can’t say it. What is the explanation for the sea level rise from the denier community that disproves the science? Calling it a conspiracy? A snowball? How this could happen in the 21st century is something I never would have believed a few decades ago. I guess there is no upper limit on human stupidity. This Florida SLR is but one example of how absurd and surreal life has become.
“By 2020, Miami Beach plans to complete 80 new storm pumps that will collect and banish up to 14,000 gallons of seawater per minute back into Biscayne Bay.”
http://www.washingtonpost.com/news/storyline/wp/2014/12/22/miamis-climate-catch-22-building-luxury-condos-to-pay-for-protection-against-the-rising-sea/
Miami Beach approves tentative hike in storm water fees to combat rising seas; sets property tax rate
If the measures passes on a second vote, property owners would pay $16.67 a month in storm-water fees. Currently, the monthly fee is $9.06.
http://www.miamiherald.com/news/local/community/miami-dade/miami-beach/article1976735.html
Paying for new sand too, because it gets washed away from sea level rise.
………………………………………….
Where Sand Is Gold, the Reserves Are Running Dry
http://www.nytimes.com/2013/08/25/us/where-sand-is-gold-the-coffers-are-running-dry-in-florida.html
Views You Can Use: Florida Muffles Climate Change Talk
Florida Department of Environmental Protection officials were reportedly banned from using the term.
http://www.usnews.com/opinion/articles/2015/03/09/florida-allegedly-bans-climate-change-talk-in-official-writings
Apneaman on Thu, 19th Mar 2015 5:55 pm
Oh look – another record broken. It is becoming a daily occurrence.
………………………………
Arctic sea ice is smallest size on record this winter
http://www.reuters.com/article/2015/03/19/us-climatechange-arctic-idUSKBN0MF28A20150319
Will this summer be our “Blue Ocean Event”?
……………………………………
Accelerating Towards an Arctic Blue Ocean Event
http://collapseofindustrialcivilization.com/2014/12/08/accelerating-towards-an-arctic-blue-ocean-event/
Apneaman on Thu, 19th Mar 2015 6:17 pm
Look zoidberg Sea Level Rise caught on video. Or is just a zealous CGI masterpiece so some scientist can get a grant?
Miami Beach Sea Level Rise, Paradise Lost!.wmv
https://www.youtube.com/watch?v=H4UueAile5A
zoidberg on Thu, 19th Mar 2015 6:33 pm
Hey no one is saying the climate can’t change. In fact the historical record is clear it has changed a lot well before people could’ve made any impact. The question is to what, if any, extent burning fossil fuels alters the climate.
Shouting down the question calling people stupid only shows the dogmatic and weakness of your position.
For instance given that the sun supplies virtually all energy to our planet I would look there first to try to understand the climate. You know logically speaking.
There’s also considerable doubt about the data used to show climate change as well. Maybe that makes me a denier, but to me it makes me a pragmatic skeptic. After all who benefits if hydrocarbon energy gets a climate tax? Hint: it’s not polar bears or climate scientists. They’re cheap to buy.
Bandits on Thu, 19th Mar 2015 7:23 pm
“For instance given that the sun supplies virtually all energy to our planet I would look there first to try to understand the climate. You know logically speaking.”
You idiot, you are going to get torn to ribbons over that ignorance.
zoidberg on Thu, 19th Mar 2015 8:20 pm
At the risk of being astounded what am I ignorant about?
Apneaman on Thu, 19th Mar 2015 8:33 pm
Last year we humans put 40 BILLION TONS of heat trapping CO2 into the atmosphere along with other gasses too (like methane). Does it sound logical that, 40 BILLION TONS might have some effect on the planets atmosphere since we started our unintended Geo engineering experiment 250 years ago? We have know about the greenhouse gases for over a hundred years. Ask the U.S. Air Force or anyone who knows about missile technology and they will tell you all about it. Their stuff does not work without knowing the chemistry and temperature of the atmosphere and after WWII they did tons of work on atmospheric chemistry. That’s why the military is just concerned about climate change as scientists…maybe more so. Oh and if “they” want to “tax” you they will just do it. They need no grand conspiracy to take your money. Obviously your not paying attention, because if you were you would have noticed that the government stopped working for the people (the little they did) 30 years ago and stopped pretending a decade ago. They do what they want-they watch and record everyone and they will take all your shit and/or destroy you if they want to.
History of the greenhouse effect and global warming
http://www.lenntech.com/greenhouse-effect/global-warming-history.htm
How do we know more CO2 is causing warming?
http://www.skepticalscience.com/empirical-evidence-for-co2-enhanced-greenhouse-effect.htm
Want to play follow the Money?
88% of Congress On Gas Industry Payroll As Campaign Donations Hit Record Level
http://www.occupy.com/article/88-congress-gas-industry-payroll-campaign-donations-hit-record-level
https://www.youtube.com/watch?v=A5GVHqlnPAc
zoidberg on Thu, 19th Mar 2015 9:11 pm
So how much heating is due to the 40 billion tons per annum?
The total atmosphere weighs about 6 quadrillion tons of which about 3.3 trillion tons is co2. So if my math is right we’re adding 1.2 percent per year of co2.
(Pulled those numbers off Google, looked reasonable to me)
Now here’s my question to you, what percentage temp increased should be expected given 1.2 per annum increase in c02?
It would also be interesting to know how extra c02 promotes greater plant growth increasing carbon sinks, you know a non linear view. It’s not just co2 piling up and everything else remains constant.
And I agree us little people have no protection against them looking to tax us. However there are different them factions and they do battle each other for supremacy. As global wealth shrinks the poor helpless peasantry will present less of a target than other weaker ruling class factions. I waste no sympathy on them but the world isn’t the 99 percent vs the one percent only.energy companies make lovely wealthy targets for the bigger sharks. Just ask all those nationalized oil companies.
Bloomer on Fri, 20th Mar 2015 12:22 am
Oil is what oil does. The biggest issue of our lifetime is global warming. Its’ a game changer and will impact our lives much more than a fluctuation in oil prices. Hey look squirrel.
Davy on Fri, 20th Mar 2015 6:01 am
AGW’ers need to realize some things that are important to a responsible message. A BAU without carbon is not BAU. A global population of 7BIL will be reduced rather quickly from that number without a global BAU. We are likely already into the beginnings of a runaway climate event IOW a runaway train with a brick wall of I would guestimate is 3 Degrees. 3 degrees is when the dreaded feedbacks likely begin.
We likely still have time to go with AGW. We just don’t know but in all likelihood AGW is coming with climate instability now. Adaptation is now for climate instability. With all the other predicaments adaptation will be the most that can be dealt with forget fancy carbonless strategies. There is no time, no money, no scaling, and not enough public support. AGW’ers you are pissing in the wind for grand strategies.
What we should be worrying about is not stopping AGW because we can’t. The runaway train of BAU is not stoppable. If it jumps the track you still have billions of hungry desperate and exposed people who will be scouring the land for food, shelter, and energy. That locust event will damage the environment pretty bad in itself and we will likely still be brown and very carbon destructive.
We need to be adapting and mitigating this climate instability because the first effects will be with decreasing food productivity, storm related damage, and the beginnings of sea level rise damage. AGW folks need to quit their hype that we have to significantly reduce carbon unless they are also going to say this will mean 200MIL year excess deaths over births for a generation on average but likely in a jagged volatile reduction.
IOW AGW folks need to be honest lower carbon means lower growth which means the end of BAU which means significant excess deaths over births. This means the greenies will have to accept the end of BAU will mean a browning. AltE’ers need to be honest there is no breakout and self-replicating and scalable AltE world. The end of BAU means the end of AltE efforts also. We are done and we are roasted. We are ready to be feasted upon by a whole host of meat eating black swans.
Folks at this point all predicaments have no solution let alone a happy ending. Maybe we can reduce that pain, suffering, and death. Maybe we can give some locals a chance. Many locals won’t have a chance but shouldn’t all “we” locals agree “we” are entering the darkness of the unknown and “we” should try to increase the chance of some of “we” surviving?
Global cooperation is what we should do but we won’t at the top. At the top it will be a global mad maxathon of nation against nation and peoples against people at least until significant BAU damage. A destructive conflict hot or cold will kill BAU then the top may try cooperation but no until significant damage is wrought.
So let’s shift to the local and hope at the local and community level within the global mad maxathon we can cooperate. We or some of us may have an optimistic 10 years. Probably it will depend on where and what income bracket your local has. It will matter what survivability your local will have per descent parameters. If you are in the heart of an unsupportable local you are likely to be hit first. If you are in an overshoot local then global food insecurity will be deadly.
If we have 10 years either enjoy BAU comforts and thrills now or prep for longer term. Prep to build seeds of a post BAU. There is really no guarantee of comfort and thrills attitudes or prep and build a post BAU future attitudes. It is a big game of chance now.
AGW’ers need to admit there is no future regardless of AGW. AGW may mean species suicide but does that abstract thought matter to an individual faced with pain, suffering, and death now? No. Death is death species or individual. All good agenda’s like AGW’ers, AltE’ers, Greenies, and BAUTranies (transitionalist) should have one common theme and that is mitigation, adaptation, and promotion of less with less. We need less bad attitudes and lifestyles. We need to live with a “less” attitudes as our only hope. This less attitude accept the direction of less IOW descent strategies. All this because there are no solutions to the end of BAU all are bad. There is no happy endings some may be less bad. Above all reject denial and embrace reality. Truth is our highest human value. All else is secondary. All higher powers that are valid involve truth.
zoidberg on Fri, 20th Mar 2015 8:20 am
Thank you for the considered post.
Heres my final two cents
it strains credulity to believe official numbers regarding agw. We can’t believe anything officials say regarding the economy international politics or aanything really but when NASA or the UN or media celebrities say agw is real heres our numbers now everyone needs to change and those who dont deserve death I simply don’t trust it. I don’t purport to have a global network of satellites or weather stations but my observations from where I live everything is still within normal bounds.
The truth is a rare commodity. I volunteer the notion that we haven’t invested our natural capital towards productive investment and that’s our biggest problem and why things are headding downhill. Peak oil is a manifestation of it. Agw is a fraud.
Northwest Resident on Fri, 20th Mar 2015 11:08 am
zoidberg — I applaud your deep mistrust of official statistics. One thing to consider however is that many if not most of the scientists raising the alarm about global warming are not employed by or beholden to the financial/political global machine that is generating all the false statistics. The false statistics are meant to deceive the masses. In fact, statistics frequently generated by the financial/political global machine seek to discredit the idea of global warming, not to promote it. Those scientists and others sounding the warning about global warming tend to be grass-roots concerned citizens. And just because things seem within normal bounds where you’re at now doesn’t really mean anything, if you read the science. Just something to consider.
Davy on Fri, 20th Mar 2015 11:24 am
Zoid, I am with NR, too many scientist have shown too much data to show we have a problem. You can debate their projections but the data collected thus far and the understanding of past climates points to a very serious destabilization ahead. What that destabilization will be is highly debatable. I find so many AGW predictions suspect because they are BAUtopian. Just like food, energy, and population projections. Most are BAUtopian nonsense without basis in reality. They are goal seeking growth that ensures a BaU future for their denialist myths. IOW they believe BAU as the default system now and 20 years from now. This is likely not the case. BAU will likely be in some kind of collapse situation or collapsed into something post BAU especially on the longer term time frames like 20years. So I agree to be suspect of official predictions and policy but I disagree on your disregard for the data collected by scientist thus far. That evidence is overwhelming.
GregT on Fri, 20th Mar 2015 12:48 pm
“my observations from where I live everything is still within normal bounds”
You are fortunate to live where you do then zoid. Here in the Pacific Northwest we continue to smash all time high temperature records. We don’t get winters anymore, and spring continues to come earlier every year. We have always been able to ski in the mountains until the last week in May. This year our local ski hills only opened for a few weeks, and the snow was mostly all gone by February. The water temperatures in our local rivers have been so much higher than normal, that the salmon refuse to migrate upstream. Warmer than normal historical temperatures are also responsible for the decimation of 25 million hectares of pine forests in BC.
If anything, the official numbers are downplaying the effects of AGW. Here in Canada, our Prime Minister has even gone to great lengths to shut down the scientific community.
Foreign scientists call on Stephen Harper to restore science funding, freedom
Open letter warns about effects of Canadian science policy on international collaboration
http://www.cbc.ca/news/technology/foreign-scientists-call-on-stephen-harper-to-restore-science-funding-freedom-1.2806571
Kenz300 on Sat, 21st Mar 2015 3:07 pm
Forbes — spokesman for the top 1% and the fossil fuel industry……
Always have to know who wrote the article and what their agenda is…….
Banks that are stuck with loans from the oil patch that they can not get rid of……. they are not happy..