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Page added on October 6, 2015
A Key Oil Trend That Everyone Is Missing
My friend Rick Rule likes to say, “The cure for low prices is low prices.”
Here’s what’s supposed to happen…
Marginal producers can’t make money at today’s prices. Therefore they shut in wells (turn them off). As supplies get tighter, prices move higher.
But that hasn’t happened. Prices and drilling activity have both continued to move lower… until now.
U.S. crude futures got a major boost on Friday, closing almost 2% higher than where they stood when the market opened. Meanwhile, the number of oil rigs has continued to slip, narrowing our domestic supply-demand gap.
Back in February, I spoke about the future course of oil prices with John Hofmeister. (You can listen to the interview by clicking here or on the image below.)
John is the former president of Shell Oil. It was his prediction that WTI production would begin to tail off during Q3 2015. Then, starting slowly at first, it would accelerate.
The reason? Well depletion rates would begin to reduce production as the number of wells coming online decreased.
Eight months later, it’s happening. Right on cue.
Once again, allow me to refer you to my favorite chart…
As you can see, WTI crude production fell by 40,000 barrels per day the week of September 25, 2015. That’s a level not seen since November 2014.
And note that the above graph does not show the rise in the price of WTI crude (the data is a week old). But as of Monday’s close, crude was $46.26 per barrel – up more than 1.5% since Friday.
It looks as though prices might just be starting to respond to lower production numbers.
Rig counts have been dropping, too. Last week’s count, according to Baker Hughes (NYSE: BHI), dropped by 26 to 614. That was the fifth straight weekly drop – and the sharpest since late April 2015.
U.S. oil rigs are now at their lowest since August 2010. Last October, they peaked at 1,609. Which means there are almost 1,000 fewer rigs drilling today than a year ago.
It took a while, but U.S. production is finally starting to slow.
And, at the same time, oil prices are starting to rise.
So is John’s prediction finally becoming a reality? Is supply and demand really starting to equalize domestically? The chart above surely supports his thesis.
The important takeaway here? Industry analysts… the mainstream media… and even the dozens of oil and gas industry rags I scan daily… they almost never mention production.
Instead, they’re fascinated with oil storage numbers. The amount of oil in storage is important for short-term commodity traders, sure. But it has almost no bearing on long-term crude prices. Other indicators – like dwindling production – suggest we are at or near a bottom in U.S. WTI pricing.
And with mergers and acquisitions activity on the upswing – marginal players are throwing in the towel and teaming up with stronger ones – now is the perfect time to go bargain hunting.
I’m looking at strong exploration and production companies as well as midstream pipeline master limited partnerships.
All the signs point to a continued drop in U.S. unconventional crude production. This can’t help but lead to higher crude prices and, more importantly, higher share prices for those with the patience to wait.
Good investing,
Dave
19 Comments on "A Key Oil Trend That Everyone Is Missing"
BobInget on Tue, 6th Oct 2015 6:31 pm
“API: stocks dropped by 1.2mm bls
After 4.6mm bls rise last week. As I posted earlier today larded on imports likely offset lower utilization rates. We’ll see exact rates tomorrow in EIA report.
Cushing stocks dropped very small 100K bls, but still continued falling.
2-3 more weeks of refinery maintenance period left, then refinery utilization will rise above 90%.
Winter grade gas uses more components with higher RVP, or Reid Vapor Pressure like butane, so we should see more demand and higher NGL prices sometime in November or December.”
Poster’s note: I snagged this from another energy board. NGL’s or ‘natural gas liquids’ are often classed a barrels of oil.
here’s where a person can find last weeks
EIA Repore on storage, imports, refinery utilization, best of all, consumption;
http://www.eia.gov/petroleum/supply/weekly/
10:30 AM Eastern
Boat on Tue, 6th Oct 2015 6:48 pm
One reason storage is important because you didn’t mention the 1,000+ wells that have shut down internationally. Oil is a global commodity.
apneaman on Tue, 6th Oct 2015 6:49 pm
Who gives a fuck about another useless fucking day of barrel counting and stock watching?
BobInget on Tue, 6th Oct 2015 6:55 pm
“Dave” is crowd following. In the past few months I sold off GE. A stock I’ve held since 2008, in order to raise cash. Instead of safe GE, I loaded up on top notch, beat down Canadian ‘conventional’ oily companies. My buying finished Friday.
When “Energy East” pipeline goes into service in 2016, two things happen.
1) Canada becomes oil independent.
East Coast imports become East Coast exports.
2) Quantities of oil once destined for US exports
travel East… Not South. Keystone, redundant.
Apart from Norway (peaked 2005) only Canada
remains conflict free, democratic, oil exporting zone.
BobInget on Tue, 6th Oct 2015 7:02 pm
Boat makes an important point.
Thousands of stripper wells have indeed shut in.
Stripper Well For tax purposes, a stripper well is defined as any oil or natural gas well property whose maximum daily average oil production does not exceed 15 bbls of oil, or any natural gas well whose maximum daily average gas production does not exceed 90 Mcf, per day, during any 12-month consecutive time period. Often used interchangeably with the term “marginal well” although they are not the same thing.
Marginal Well A producing well that requires a higher price per barrel of oil or Mcf of natural gas to be worth operating because of low production rates, and/or high production costs from its location, and/or its high co-production of substances that must be separated out and disposed of (like salt water and non-combustible gases mixed with natural gas). On land, this is often, but not always, a stripper well. A marginal well becomes unprofitable to operate whenever oil and gas prices drop below its critical profit point.
Interstate Oil and Gas Compact Commission
Temporary Abandonment ‘Cessation of work on a well pending determination of whether it should be completed as a producer or permanently abandoned.’ (Williams & Meyers)
Since 2002, marginal wells have contributed $295 billion to overall U.S. production in the form of 2.9 billion barrels of oil and 18.8 Mcf of natural gas.
The United States has an estimated 771,000 marginal wells in production – about 410,000 oil and 361,000 natural gas wells. Combined these wells make up almost 20% of the total of all oil and natural gas produced domestically. (11.3% oil / 8.3% natural gas)
If all marginal oil & gas wells were plugged and abandoned, IOGCC estimates the lost output in direct production and indirect and induced economic effects would total $52.4 billion, with 241,733 jobs lost.
Close to 160,000 American jobs are dependent on stripper well production activities—approximately 10 jobs per $1 million of production.
Over the past decade a cumulative total of more than 131,000 oil wells and 48,000 natural gas wells have been plugged and abandoned with a total market value of lost annual production estimated at $6.1 billion in the year production ceased.
BC on Tue, 6th Oct 2015 7:34 pm
Bob, which Canadian oily companies? I’ll give you a free technical snapshot, just between cyber-friends. 😀
makati1 on Tue, 6th Oct 2015 8:51 pm
The author is just another oily pimp for the Wall Street Casino. The ‘investor’ rats are jumping off of the sinking USS Petrotanic and they are getting worried. Panic is next. Getting interesting, NO? Do any of those windows still open on the floors above the Stock Market?
BobInget on Tue, 6th Oct 2015 9:15 pm
COSWF, my smallest position. SU takeover.
CNQ still underwater, 2nd smallest hold.
BTE I kept doubling down digging deeper holes. I’ve owned Baytex since $48 bucks a share. Closed today $4.25 up 15%
ECA LT hold waiting for a Godot with gas.
POT fertilizer commodity LT hold down 29%
once a star in my portfolio, now on Miracle
Grow .
ERF has US exposure, making huge holes in my pants.
CPG up 7% today. Another 30% and I’ll breakeven.
My star performer Ta Da— Penn West.. I rode this dog from the Maritimes to BC. Down 71%.
It would be higher but for my ten thousand share buy @ 0.48 CENTS. PWE closed up today
at 0.96 centavos. I’m obviously hoping for the take-over fairy to get me closer to break-even.
Taxes permit me to sell off early buys at a loss
balancing out three of four ‘winners’ picked up in 2008, sold this year to stay with loser energy.
I’m always early and never day trade. If I buy anything, it’s for a year or longer. All my stocks pay dividends (or did before oil collapsed).
For years I paid more taxes in Canada then USA. Did they send me even a single moose?
They did not. I did get a lovely card from Sargent Preston requesting payment for eight parking tickets picked up in 1975 Toronto.
(i’ll keep Suncor for another year and higher oil prices or healthier loonie).
rockman on Wed, 7th Oct 2015 6:02 am
“Marginal producers can’t make money at today’s prices. Therefore they shut in wells (turn them off). As supplies get tighter, prices move higher.” apparently another person with no appreciation of just how slowly the important dynamics change. As Apneaman implies most of the folks that focus only daily/weekly/monthly changes probably do so because the get paid to keep publishing even though they have little new to add. IMHO at the minimum we should focus on y-o-y changes. And even those will not necessarily reveal long term trends.
electrorail on Wed, 7th Oct 2015 6:20 am
BobInget said:
When “Energy East” pipeline goes into service in 2016, two things happen.
1) Canada becomes oil independent.
East Coast imports become East Coast exports.
2) Quantities of oil once destined for US exports
travel East… Not South. Keystone, redundant.
Apart from Norway (peaked 2005) only Canada
remains conflict free, democratic, oil exporting zone.
What if the TC Energy East can’t get approved because a better, faster cheaper NON-One Trick Pony Railway/Railroad is built to fill TAPS > Pacific tidewater at Valdez, Alaska?
Would Canada still be Conflict-free if the USA didn’t allow a railway to Alaska built because Canadian oil would flow at 45 mph fast to 20 + Million bpd Asian markets?
David W. Morris on Wed, 7th Oct 2015 8:29 am
The Saudis have 100 year supply of oil. If they are smart, they will keep pumping as fast as possible. Technology is moving fast and in 5 to 10 years oil will become a dinosaur, and Musk will have us driving electric cars. The only thing the Saudis can do is slow the progress of tech down by keeping prices low. They have over populated the dessert.
Kenz300 on Wed, 7th Oct 2015 9:44 am
Electric vehicles and bicycles are the future………
Fossil fuels are killing the planet…..
rockman on Wed, 7th Oct 2015 10:48 am
“The only thing the Saudis can do is slow the progress of tech down by keeping prices low.” Virtually all the tech used to develop the US shales existed in 1998 when oil was selling for less than $20/bbl. The only thing the KSA is accomplishing by producing so much is to keep prices lower. While that cuts into US shale drilling it will also cost the KSA to lose 100’s of $BILLIONS in future revenue.
Doesn’t rally seem like a very good trade off IMHO. If oil again goes to $90-$100 per bbl the US shales will again boom. It might be done by companies not in existence today and financed by a new group of investors. But if the economics are there it will be done.
BC on Wed, 7th Oct 2015 11:43 am
https://app.box.com/s/8f0rm31psk7thwtd5j3gwgrtx8acmo8t
https://app.box.com/s/ys8ijadj4b57nb95ka0b3ilph38ga7fm
https://app.box.com/s/x61sqtg4c3vp1ubo67k8715ulapw35me
https://app.box.com/s/894h3w9iool3d07cnadqa21tmg89xu8n
Oil is “cheaper”, but it still ain’t “cheap” WRT to the US economy’s capacity to grow at current oil prices and supply.
https://app.box.com/s/s0wyvm4xh7kvd4fxcwyxx3mfevtf8yub
And US oil is still being depleted per capita at a steady, log-linear rate (falling 50% per capita by no later than the early 2020s).
https://app.box.com/s/dt2c8mz6vgrq11q8p8i5tbkn3oqlckcb
https://app.box.com/s/6aju2cctaq9wxck2y6xwxdfbqidq95op
https://app.box.com/s/u3icgvx6wbcddnijynhx257dshzm1dyr
Rigs are contracting with the oil cycle, and production will eventually follow.
BobInget on Wed, 7th Oct 2015 11:48 am
David W. Morris, first of all thanks for using a real name, there are so many of you.
Don’t believe that 100 year supply propaganda.
That may have been true in 1939, not today.
If Saudis keep pumping 10+ million barrels p/d
they will be lucky to last out 2016. Using CO/2
water-cut, as KSA has been forced to do is not indicative of anything approaching 100 years.
The big story in the ME: Iran, Iraq, Russia, Venezuela will overthrow Saudi Arabia if they
persist in overproducing. The four mentioned, a dozen other oil producers simply cannot
carry-on another year at oil prices below $90 or $100. It’s that simple.
BobInget on Wed, 7th Oct 2015 12:13 pm
Believe me Rockman, $100 Oil prices will return
and soon. What I can’t offer are promises of stability. The next decade offers only violence on top of more violence.
When governments are in grave danger of collapse, there’s a tendency towards irrational behavior. Africa; oil producers Libya, Sudan, Nigeria, are in such disarray all the Kings horses and all the Kings men can’t agree.
Oil may still be exported for a time from embattled nations but as Rockman knows full well, with profits going to power brokers, gangs of IS wanna-bees, crooked military, politicians and not oil companies, the future is dark indeed. Where are these gangsters going to find oil workers with cast iron throats?
IS can’t force oil out of the ground with threats.
While Iran and Russia won’t permit IS access to Iraqi oil fields in the south, what if IS actually
captures those wells? Good luck shipping or producing oil.
BobInget on Wed, 7th Oct 2015 12:46 pm
Electrolrail,
Canada is now and forever will be America’s most dependable imported crude oil resource. It’s just gonna cost more, that’s for sure.
The two economies are tied together at hips.
As a loyal subject, I doubt Electrolrail cares
how oil-sands crude is transported East as long as it’s cheap, safe and dependable.
Natural gas Pipelines that are already in place are a better bet then a 100 year old rail bed desperately in need of replacement. It’s one thing if a grain car tips over, quite another if a tanker filled with NGL’s overturns.
Goodmongo on Wed, 7th Oct 2015 3:07 pm
Well the EIA report that came out on 7th October shows an INCREASE in production of 76K bpd for the US with 58K in the lower 48. Looking at YoY data the EIA shows 296K bpd HIGHER production than this time last year. So is the EIA lying?
rockman on Wed, 7th Oct 2015 3:16 pm
Bob – “Believe me Rockman, $100 Oil prices will return”. I do you believe you. Adjusted for inflation the price of oil busted the $115/bbl ceiling three times in the last 50+ years. Of course it was stable at those times for very short periods compared to the decade long periods when it held at or under the current price. Whether I’m still alive at that distant time is questionable. LOL.