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Page added on December 15, 2015
$30 Oil Will Accelerate Much Needed Rebound
Oil markets are waiting for a much greater supply contraction before prices rebound, and the deeper downturn in prices will test the current pace of adjustment. With WTI dipping to $35 per barrel, it will likely spark deeper cuts to spending and drilling, which could perhaps contribute to an accelerated pace of adjustment.
In other words, a sharper fall from the mid-$40s per barrel to the mid-$30s per barrel could sow the seeds of a faster rebound than we might have otherwise witnessed.
Although to date the pain has been significant in the upstream exploration and production sector, things are about to get much worse. Hedges continue to roll off, removing the last bit of protection that some drillers have had up until now.
“Producers have survived 2015 as they benefited from large reductions in service costs while having a significant amount of production hedged at high prices,” John Arnold, formerly at hedge fund Centaurus Advisors, told Reuters in an interview. “Come Jan. 1, revenues will experience a pronounced decline for many companies, coinciding with a time of severe stress for balance sheets across the industry,” he added.
Reuters surveyed the 30 largest oil producers, and only five of them actually expanded their hedging program during the third quarter of 2015. The rest saw their hedging positions erode as contracts expired. Eight of them had no hedging protection whatsoever for 2016. Reuters noted the “missed opportunity” when few companies added hedging protection when oil prices rebounded to $60 per barrel in the spring, and then again in September and October when prices rose modestly after a downturn in the summer.
According to Reuters, Devon Energy, Whiting Petroleum, Hess and Denbury Resources are a few of the companies that have seen their hedging positions decline the most.
That will subject them to the full savagery of oil prices flirting with 11-year lows. Without hedging, there is a much lower incentive to drill, as any barrels pulled out of the ground will be sold for much less than they would be under a hedged position.
At $35 per barrel, even some of the most efficient shale drillers will struggle to turn a profit. “Nothing is economic at today’s prices,” James West, an analyst with Evercore ISI, told The Houston Chronicle. Drillers have gone to extraordinary lengths to reduce costs since mid-2014 when prices started to fall. That included focusing on the sweet spots, drilling more and longer laterals from a given wellpad, and even squeezing suppliers. Evercore ISI says that a third of the companies in the oilfield services sector may not survive 2016.
While the efficiency gains succeeded in bringing down costs, even some of the best shale companies are in the red at this point. Evercore ISI told The Houston Chronicle that the average breakeven cost for North American shale used to be $65 per barrel. Efficiency gains brought that threshold down to $50 per barrel. That is an impressive achievement over the course of just 12 to 18 months, but it is still higher than current prices. With drilling services unable to discount their offerings any further, upstream producers will have to cut deeper.
As a result, sharper cutbacks in spending are just around the corner. Cowen & Co. expects the oil industry to slash spending by $115 billion next year compared to 2015 levels.
The fall in the rig count has accelerated in recent weeks after several months of remaining level. Baker Hughes says that the rig count fell by 28 last week, the sharpest decline in three months. That trend should continue with oil prices now at such low levels. With a deeper contraction in rig counts and drilling levels, new production will slow to a trickle. At the same time, depletion from wells drilled months and years ago will continue to mount, dragging down overall production.
In recent months, the Permian Basin has been dubbed one of the last shale regions where companies can still turn a profit. But it will be difficult for production to keep growing even in the Permian with oil prices in the mid-$30s.
Deeper cuts and a sharper slowdown in drilling should add up to an acceleration in oil production declines. Only then will oil prices start to rebound.
By Nick Cunningham of Oilprice.com
40 Comments on "$30 Oil Will Accelerate Much Needed Rebound"
makati1 on Tue, 15th Dec 2015 6:10 am
Still dreaming of a significant price increase in a world that is running out of money to purchase. LOL
Revi on Tue, 15th Dec 2015 7:12 am
“Deeper cuts and a sharper slowdown in drilling should add up to an acceleration in oil production declines. Only then will oil prices start to rebound.”
Ya think so? Opec isn’t producing less, so the loss of the shale industry isn’t going to affect prices very much. They will be waiting a while before the price comes back up again. Looking for a bottom? There’s always a bottom below….
rockman on Tue, 15th Dec 2015 7:12 am
mak – And perhaps expecting too quick a rebound. Not that history always repeats itself exactly. But back in the late ’08 price bust the world’s e economies consumed less $58/bbl oil in ’09 then it did $94/bbl oil in ’08. And while prices did eventually recover rather quickly the oil patch had not accumulated as much debt given the shorter pre-’09 boom.
So it took just a few years for oil prices to recover significantly from the ’08 bust and the over 25 years from the 1980 price bust.
There you go: got the price recovery narrowed down to 3 to 25 years. Enough of a range to match everyone’s predictions. LOL.
Davy on Tue, 15th Dec 2015 7:20 am
The $30’s is very dangerous territory for our global system. Oil producers are greatly exposed to this price level. Even Russia who has adjusted well enough to lower prices will squirm. Other Mideast producers will likewise be locked in a survival of the fittest. The US shale patch is decimated at this number. Oil majors at this price are forced to scramble to stem the hemorrhaging. Markets will feel the knock on effect of oil and commodities along with their junk debt. Countries like China will further bleed from loss of export markets from a declining global economy.
Once this blood bath ends we will surely see supply and demand damaged together preventing any kind of recovery to some “pie in the sky” picture we see from main stream media. You can scream all you like that growth is happening now but is that real growth or a little good growth along with “mucho” bad debt growth. When bubbles deflate they leave tears of pain not happiness?
We see mal-investment, overcapacity, and wasted physical development in a brew of bad debt. We have oil maybe going to the $30’s for a while at the same time the Fed sucks liquidity out of the system with an inconceivably small rate hike from historical perspectives. All this will combine to lay waste to the last big bubble we call Wall Street/Fed.
Folks, this may be the end game. This economy that brings food to our table has never been so destabilized. If this were the only issue we could buckle down for a 1930’s style depression but unfortunately we are in a vastly different world. We are in the type of world that is beset by predicaments and catch 22 at every vista. We are condemned to pain and suffering but instead laugh at any notion of it like the bar on the titanic must have been.
shortonoil on Tue, 15th Dec 2015 8:08 am
“Deeper cuts and a sharper slowdown in drilling should add up to an acceleration in oil production declines. Only then will oil prices start to rebound”
The economists at OilPrice.com still believe that it is the Kepler Elves that turn the cranks to produce oil. They don’t. They stick to the cookie department. It takes energy to produce oil and it products. That comes from the petroleum energy budget, and adds to the petroleum energy demand. When production declines so also does the demand for oil. The total energy to produce oil and its products is now a little over half of the energy in the oil. Cutting production by 2 mb/d reduces demand by 1 mb/d, and results in a net decline of 1 mb/d. It will take a lot of cuts to bring the market back into balance. Maybe they can get the Elves to help build storage tanks. There will be a lot more demand for those than there will be oil.
http://www.thehillsgroup.org/
marmico on Tue, 15th Dec 2015 8:38 am
Cutting production by 2 mb/d reduces demand by 1 mb/d, and results in a net decline of 1 mb/d
Bullshit.
penury on Tue, 15th Dec 2015 8:51 am
I do not think that the economies of the world can afford even 30 dollar oil for any amount of time. one example price of gasoline over the weekend was 2 dollars and 17 cents a gallon. However, State, Local and Fed taxes are 1.47 per gallon. I am certain that this will lead to a rapid revival of our economy,
JuanP on Tue, 15th Dec 2015 9:13 am
https://www.rt.com/business/325962-opec-oil-nigeria-prices/
https://www.rt.com/op-edge/325984-ruble-economy-oil-prices-/
shortonoil on Tue, 15th Dec 2015 9:56 am
“The latest such forecast came from Maxim Oreshkin, Russia’s deputy finance minister, who says he expects oil to sell for no more than $40 to $60 per barrel for the next seven years,”
The Russians are catching on, even though Marmico apparently still isn’t? We think that the long term trend for pricing is even worse than Russia’s FinMin is admitting to:
http://www.thehillsgroup.org/depletion2_022.htm
The integrated global petroleum production system is now failing.
rockman on Tue, 15th Dec 2015 10:17 am
“Cutting production by 2 mb/d reduces demand by 1 mb/d, and results in a net decline of 1 mb/d”. Bullshit.
For a rare change I have to go with marm with this. I can’t begin to understand that statement. Maybe they don’t understand that demand isn’t what consumer want to buy but what they can afford to buy…assuming the oil is available. Or maybe they think dropping production 2 mm bopd will increase prices enough to remove 1 mmbopd because it’s no longer affordable. Which is still difficult to see the “logic” of IMHO.
GregT on Tue, 15th Dec 2015 10:48 am
“It takes energy to produce oil and it products. That comes from the petroleum energy budget, and adds to the petroleum energy demand.”
Hard not to see the logic behind this statement, while again counterintuitive, Short makes complete sense. The entire process demands energy, not just the end consumer.
marmico on Tue, 15th Dec 2015 10:51 am
Short makes complete sense
The quart shy of oil is a fuctard. The statement italicized is the obverse of EROI. The fuctard maintains that the EROI of the petroleum system from well to wheel is 2. Absolute bullshit.
GregT on Tue, 15th Dec 2015 11:04 am
Another reason why the modern school of economics is a failed ideology. Unable to see the forests through the trees. Not only is oil the predominate energy source that fuels our economies, it is the predominate energy source that produces the oil.
beammeup on Tue, 15th Dec 2015 11:41 am
It would be interesting to see a simple breakdown from Short, detailing the reduction in demand associated with a given reduction in production. For example, the US is down about 500K bpd. About 250K workers in the industry have been laid off, reducing income to themselves and their families. Say 1M people affected. The loss of demand associated with that production drop could be broken out as follows:
1. X bpd less energy used by not refining the lost production
2. Y bpd of decreased energy use due to 1M people affected by oil worker layoffs
3. Z bpd less energy used because of lower drilling and fracking activity
4. K bpd less energy used by not transporting the lost production
5. etc.
I understand that Short has a pay-per-view mathematical model that forms the basis for his belief in a 2-to-1 EROEI, but perhaps he could translate it into a simple breakdown for the recent case of lost US production, such as what I’ve listed above.
I personally believe that conventional EROEI computation methods are misleading when we only look at energy use directly involved in drilling and other wellhead activities. But until I see a more detailed breakdown, it’s hard to gauge whether any given claim is reasonable
shortonoil on Tue, 15th Dec 2015 11:55 am
“Another reason why the modern school of economics is a failed ideology. Unable to see the forests through the trees. Not only is oil the predominate energy source that fuels our economies, it is the predominate energy source that produces the oil.”
It is obvious that it requires energy to produce petroleum, and its produces. It is not supplied by some magical process. It requires a lot of energy. The total energy to just pump it out of the ground requires about 580,000 BTU/ barrel (14,000 BTU/ gal). To heat up one (1) barrel of petroleum at the refinery to its distillation temperature takes 1.3 million BTU (302 lbs/barrel * 0.51 BTU/ lb * °R – its specific heat). Those two processes alone consume 32% of the total 5.88 million BTU in a barrel. The remaining 12% is lost to additional required processing, and distribution. The average 302 lb barrel of oil travels almost 4000 miles from the well head to the end user. That is analogous to pushing a grand piano from the east coast to the west coast.
It requires a tremendous amount of energy to produce petroleum and its products, and it is not supplied by elves!
marmico on Tue, 15th Dec 2015 12:16 pm
Well head EROI is 15. The quart shy of oil maintains that it is 8.5.
Refinery EROI is 10. The quart shy of oil maintains that it is 3.5.
Distribution (well to refinery & refinery to wheel) is 20. I’ll agree.
Do some arithmetic.
GregT on Tue, 15th Dec 2015 12:31 pm
“But until I see a more detailed breakdown, it’s hard to gauge whether any given claim is reasonable”
The question is: How far down the rabbit hole would you like to go? The further the problem is broken down, the larger the problem becomes. Is the line drawn at the wellhead? Like some seem to believe. Or is the energy required to extract the resources and manufacture the equipment used in the production process included. What about the energy required to feed the workers that extract those same said resources? Or the transportation of that equipment to the well site, or the rubber used on the tires of that transportation equipment? There is energy embedded in every single process along the way, and when the production process goes into decline, so does the energy demand for all of those other processes.
shortonoil on Tue, 15th Dec 2015 12:33 pm
“I personally believe that conventional EROEI computation methods are misleading when we only look at energy use directly involved in drilling and other wellhead activities.”
Conventional ERoEI estimates are notoriously inaccurate. That is why we don’t use them. The Etp Model is the solution to an equation. The “Entropy rate balance equation for control volumes”; a Second Law Statement. ERoEI is derived from the Model, not the other way around. Since the Model is driven by established, well documented, time tested thermodynamic values its output results are best case estimates. The world will be very fortunate to reach its determinations.
shortonoil on Tue, 15th Dec 2015 12:46 pm
“Well head EROI is 15. The quart shy of oil maintains that it is 8.5.”
What a cheap SOB! Too stingy to buy a new Ouija Board! He wore the 8 and 3 off until he can’t tell the difference. No wonder those proclamations are so absurd.
marmico on Tue, 15th Dec 2015 12:55 pm
Conventional ERoEI estimates are notoriously inaccurate. That is why we don’t use them. The Etp Model is the solution to an equation.
You use them fuctard. Your 11:55 am post is proof positive.
shortonoil on Tue, 15th Dec 2015 1:20 pm
“You use them fuctard. Your 11:55 am post is proof positive.”
When is the last time you had your eyes checked? Or, are you totally losing it?
marmico on Tue, 15th Dec 2015 1:34 pm
The total energy to just pump it out of the ground requires about 580,000 BTU/ barrel (14,000 BTU/ gal).
Okay, so you have increased your well head EROI from 8.5 to 10. 16,500 Btu —> 14,000 Btu. I stand corrected.
Now once you figure out the refinery EROI, you will be pissing gold for the nutter doomers.
Outcast_Searcher on Tue, 15th Dec 2015 1:59 pm
You just have to love these clowns. I notice when I try to go to the site this came from, I immediately get hit with marketing.
If the forecasts, projections, charts, etc. of such clowns were worth ANYTHING meaningful, they’d simply make so much money trading what they claim to be experts on that they’d no longer need to sell “investment’ advice.
Outcast_Searcher on Tue, 15th Dec 2015 2:04 pm
makati1 said: “Still dreaming of a significant price increase in a world that is running out of money to purchase. LOL”
Ah, the doomers, still dreaming of short term economic doom, and spouting nonsense to support it.
If oil is running out of money, why does economic growth globally continue apace, just as it did the four years prior to the fall of 2014, when oil averaged nearly $100 a barrel? Why could people afford it at $90ish, but they can’t afford it below $40? Why does the US, which consumes more oil than any country, have solid job growth and a growing economy and rapidly rising rents signalling a strong housing market?
The more you ignore objective economic facts, the less credibility you have.
Hint: It’s not 2008 every year.
shortonoil on Tue, 15th Dec 2015 2:12 pm
“If oil is running out of money, why does economic growth globally continue apace, just as it did the four years prior to the fall of 2014, when oil averaged nearly $100 a barrel?
You missed the DBI. It just hit its lowest level in history. World trade is shutting down. When you get your economic news from MAD magazine anything is possible!
marmico on Tue, 15th Dec 2015 2:30 pm
You missed the DBI
Whatever the fuck that means.
When are going to produce evidence that refinery EROI is 3.5, fuctard?
Apneaman on Tue, 15th Dec 2015 2:32 pm
Outcast_Searcher says
“It’s not 2008 every year.”
No it’s not, but it’s ZIRP every year since 2008. Yeah that’s an indicator of a strong economy fer sure. Suggestion of a mere 1/4% has the markets in a panic.
Oh and all those bartender jobs make everything look so awesome, especially when you don’t count a shit load of people. Even better news is that you don’t actually need a job to get a car loan on 7 year terms – only a pulse is required (sound familiar?). If only y’all doomers had the faith in .gov economic numbers like outhouse searcher, the skies would be blue all day everyday. Everything is awesome!
Why Has the Labor Participation Rate Plunged?
http://charleshughsmith.blogspot.ca/2015/12/why-has-labor-participation-rate-plunged.html
And don’t forget, debt no longer counts at all.
“By falling for the false materialistic narrative of having it all today, millions of Americans have enslaved themselves in trillions of debt. The totals are breathtaking to behold:”
Total mortgage debt – $13.6 trillion ($9.9 trillion residential)
Total credit card debt – $924 billion
Total auto loan debt – $1.0 trillion
Total student loan debt – $1.3 trillion
Other consumer debt – $300 billion
The mass delusion is clearly evident in the comparative consumer debt data from 1971:
US population in 1971 – 208 million
Total credit card debt 1971 – $8.5 billion ($41 per capita)
Total auto loan debt 1971 – $40.5 billion ($195 per capita)
US population in 2015 – 320 million
Total credit card debt 2015 – $890 billion ($2,781 per capita)
Total auto loan debt 2015 – $1.03 trillion ($3,219 per capita)
The population of the US has grown by 54% since 1971, but the amount of credit card debt per person has grown by 6,782%, and the amount of auto loan debt has grown by 1,650%. Meanwhile, real median household income has grown by 8% since 1971. Replacing income with debt in order to give the appearance of wealth is nothing but a lie. It requires an ever larger amount of debt to generate an additional dollar of GDP. The exponential increase in debt became unsustainable and the Wall Street lies resulted in a global conflagration in 2008. The desperate effort by the Fed to re-inflate the debt bubble through ZIRP and QE has resulted in pathetic economic growth, while leaving willfully ignorant consumers with a record level of debt.”
more
http://www.theburningplatform.com/2015/12/11/living-a-lie/
Apneaman on Tue, 15th Dec 2015 2:42 pm
marmitard says fuctard squawk squawk marmi want a fuctard squawk squawk fuctard fuctard squawk squawk marmi want a fuctard squawk squawk fuctard squawk squawk …………….
marmico on Tue, 15th Dec 2015 2:59 pm
Apie, the household renter EROI moron.
U.S. household net worth.
Burning Platform Quinn is more of a moron than the quart shy of oil. If you believe.
You nutter doomer fuctards don’t know the difference between a stock and a flow.
Apneaman on Tue, 15th Dec 2015 3:17 pm
net worth?
Debt worthless
peakyeast on Tue, 15th Dec 2015 3:38 pm
@marmico: If you are so interested in disproving shortonoils arguments I suggest you purchase the CD with the numbers and equations and work a little on it.
Or are you too poor to support your ugly vice: Trying to demean and badmouth other people?
Lets see if you are a serious person and not just a big shitty mouthy infested crack whore.
I think the biggest chance is that you cant make the purchase and will come up with some pathetic excuse – like its not worth the money, or childish like: shortonoil is stupid or perhaps you are just plain cheap and will just resort to bad mouthing me and removing focus as well as you can.
Apneaman on Tue, 15th Dec 2015 3:55 pm
peakyeast, it wouldn’t make any difference if we passed the hat and bought marmi a copy. He does not posses the math skills to understand it. He’s really good at the use of fuctard and linking to graphs that more times than not have nothing to do with the point being debated. I think he gets them from some neoliberal econ 101 professor’s personal blog. I’m sure he wanted to be in the economic 101 priesthood but did not possess the academic prerequisites. Doesn’t even have his own blog since he knows there would be no traffic. Yes, it’s a real sad story.
shortonoil on Tue, 15th Dec 2015 4:51 pm
“Oh and all those bartender jobs make everything look so awesome,”
Except in marm’s case (which was obviously a brain transplant that didn’t go very well) people appear to be floating between fear and avoidance. The modern world allowed them to carve out a niche, and ignore most of what the remainder of the world was doing. Now that D day is getting very close they will be hitting the beaches without a clue as to which direction to go. Expect a lot of dumb remarks, and even stupider questions. People who have dedicated a life time to learning nothing, are likely to end it knowing the same.
Boat on Tue, 15th Dec 2015 7:15 pm
All these arguments with short and most of the boomers will end soon enough. If oil goes below $30 and the world economy collapses and most of trade with it, short and his doomer following will be right. If oil prices go up when demand catches production short and the gang will have been wrong and a couple of us that think that is how supply and demand work will be exonerated and obviously the smartest in the room.
Apneaman on Tue, 15th Dec 2015 7:24 pm
boat, If I win the Canadian national lottery 6/49 tomorrow, I’ll be the richest in the room.
GregT on Tue, 15th Dec 2015 7:37 pm
Another brilliant post by the board moron.
If oil prices stay low and the world economy crashes and most of trade with it, Short and the boomers will be right. If oil prices go up the board moron will obviously be the smartest in the room.
Unbelievable. You just can’t make this shit up.
GregT on Tue, 15th Dec 2015 7:45 pm
Your not firing on all cylinders Boat.
makati1 on Wed, 16th Dec 2015 6:06 am
gregT, as I keep sayin’, none of the retarded here actually understand TOTAL systems. ALL oil recovery starts in the mines, goes thru thousands of people and hundreds of machines and then ends up at the local pumps. Energy input every step of the way. I bet the totals would be way over 60% of oil’s total energy if all the requirements were included. We are running on the leftovers.
Ore mined/refined for steel for drilling rigs, pipe, storage tanks, ships, etc. Not to mention the ores mined/refined to make the machines that mine/refine the ores and make the drilling rigs, etc.
But then, America is no longer known for it’s excellent education system or high intelligence. Those are ancient history. Nothing useful is taught in the US school systems anymore. Especially not how to think or reason.
godq3 on Wed, 16th Dec 2015 6:59 am
makati1 – You forgot about universities that teach oil engineers. And what about paved roads? What about power plants that produce electricity which is used in computers that are needed to extract oil? What about insurance companies which insure oil cargoes? And finally what about whole economy that creates demand for oil?
It’s one giantic system which only purpose is to acquire as much(fast) energy from the environment as possible. This system figured out that capitalism will be the best way to achieve this.
Sissyfuss on Wed, 16th Dec 2015 3:28 pm
Marmi dearest, if adhomyinm(sic?) attacks are a sign of a defeat in an argument,then you sir are a total loser.