Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on August 12, 2015
Producers are boiling in cheap oil
For oil producing companies and states struggling under the burden of low prices, it is hard to think of any news that could have been worse. Early last month, the number of rigs drilling for oil in America started to increase.
The rise was small compared with the steep declines over the previous seven months, and the rig count is still down 58 per cent from its peak last October. The recovery is quite likely to be reversed after oil’s latest falls.
Even so, the fact that a modest rebound in US crude to about $60 for a couple of months could prompt a pick-up in activity is the most telling indicator yet of how the world oil order has changed.
The implication for other producing countries is ominous. If prices rise again above that $60 threshold, then another revival in drilling is likely, too, bringing more US production on to the market. The levels of about $100 per barrel reached only a little over a year ago seem unlikely to return for the foreseeable future.
The difficult outlook for oil producers has been highlighted in the past couple of months, as crude prices have surrendered most of the gains they made in the first half of the year, dropping by almost a quarter.
As the International Energy Agency pointed out on Wednesday , world oil demand is growing strongly but supplies are growing even faster. In part, that has reflected a surge in production from Saudi Arabia and other Opec members, including Iraq.
It also reflects the US shale industry’s failure to collapse the way some analysts expected. Shale producers have cut their costs and increased their productivity to meet the challenge. And while their latest financial results showed an alarming sea of red ink, total US output appears to be easing off only very slightly.
Shale oil has changed the dynamics of the global market, and rival producers from the Middle East to Venezuela, Norway to Angola, must adjust as best they can.
Saudi Arabia, for example, last month disclosed that it had sold bonds for the first time in eight years, and last week indicated that it planned to raise $27bn from debt issuance by the end of the year. The kingdom is still a long way from crisis. Its foreign exchange reserves remain very large at about $664bn, albeit down from a peak of $746bn a year ago. Even so, if its finances continue down that track for a few more years, its position will become increasingly uncomfortable.
Russia, which vies with Saudi Arabia to be the world’s largest oil producer, faces more immediate problems, compounded by the international sanctions imposed as a result of its intervention in Ukraine. The economy is in recession, and the rouble has been sliding. For oil consumers, there is some easy schadenfreude in the difficulties facing producing countries. Certainly there may be some benefits to global security if countries that might use oil revenues for destabilising their rivals are starved of funds.
It would be unwise for the consuming countries to gloat, however. As examples including the Iranian revolution of 1979 and the Venezuelan election of 1998 show, there is no market that can translate financial volatility into political instability as effectively as oil. Countries in dire financial straits may feel forced into aggressive responses.
Periods when the global balance of power is changing are also times when international tensions can flare up. We are perhaps in just such an era today. Policymakers around the world need to be on the alert for the conflicts and upheavals that may yet result.
8 Comments on "Producers are boiling in cheap oil"
Boat on Wed, 12th Aug 2015 5:22 pm
All oil producers would have to do is drop production about 6 mbpd and let tar sands, frackers and deep water rigs make their money. But their to greedy to work together and collude to make real money with less production. They should just hire me to explain the details. I am available for a couple billion.
Davy on Wed, 12th Aug 2015 6:43 pm
Boat, I have some farm work for food. I realize I can’t afford $1Bil but I would recommend you take up the offer so you are prepped for the big kahuna coming soon to a neighborhood near you.
Boat on Wed, 12th Aug 2015 7:55 pm
I used to live in Georgia and dropped many truck loads of food from my garden. Now I live in Houston and support the local growers as much as I can. I need no help from you. You’re to close to that nuke plant. I dont want to glow after the crash.
Nony on Wed, 12th Aug 2015 8:36 pm
Good article. Yeah, the market noticed rigs picking up at 60 and crashed us back to 45 and worse, crashed the futures price significantly (look at the DEC16 or DEC19 contracts…worse than in January). WSJ had a great diagram on this.
http://www.wsj.com/articles/oil-futures-signal-weak-prices-could-last-years-1439159387
Nony on Wed, 12th Aug 2015 8:45 pm
Here’s a similar point, but nice article by Zeits with ideas on what it takes price wise to maintain production in US. He sees some operators doing better than others but about 65-70 needed for the industry overall. Best companies would survive at 60. Worst companies have issues at greater than 70. Even the very best companies will have major problems at 45-50.
http://seekingalpha.com/article/3421446-continental-resources-cash-flow-positive-in-2016-at-60-oil
Sort of implies either a recovery in price to ~65 or carnage with US producers at 45-50 (but the market supplied by barrels from Iran, etc.)
————–
In Conclusion…
Continental’s Q2 report and production guidance provides the following growth/contraction crossover point estimates for commodity prices (Nymex WTI/Henry Hub).
•Looking ahead to 2016, a flat $50 oil / $3.00 gas price environment would represents a business contraction environment for Continental, despite the company’s low-cost operation, excellent execution and formidable asset base.
•A flat $60 oil / $3.00 gas price environment in 2016 would represent an economic breakeven environment at the corporate level (including the company’s cost of capital), and would enable modest organic growth.
•A flat $70 oil / $3.00 gas commodity price environment in 2016 would provide a major uplift to cash flow (EBITDA may exceed $3 billion), and should enable external financing on attractive terms. Continental should be able to resume sustainable growth at a mid-teens rate or higher.
Please note that these estimates reflect returns at the corporate level, and effectively define environments that enable or prohibit long-term sustainable growth. However, it is important to remember that operators make decisions using marginal (well-level) economics, as many costs are effectively sunk. Therefore, in the near term, operators’ collective behavior may reflect somewhat lower crossover points than described above. Therefore, in the near term, access to capital is the most important driver of industry-wide growth or contraction.
Obviously, Continental is one of the industry’s leaders, benefiting from an extensive, high-quality asset base and very lean cost structure. However, it is not the only industry leader. A significant number of other companies have core assets that yield highly competitive economics. As a result, a significant portion of the U.S. shale industry can grow sustainably in a $60 per barrel WTI environment.
On the other hand, many other operators have less prolific core assets and substantially higher operating costs, and would not be able to generate sufficient returns at the corporate level in a $60 per barrel environment. Those operators effectively depend on a substantial improvement in commodity prices to arrest economic bleeding that they are currently experiencing. At $60 per barrel, those operators would be forced to shrink their footprint or transfer their assets over to better-capitalized operators.
It appears that the industry as a whole still needs oil prices of $65-$70 per barrel WTI, while preserving the current cost efficiencies, to grow at a moderate rate. At that commodity price level, some operators would still struggle to make adequate returns at the corporate level and would have difficulty accessing additional capital. Low-cost operators with strong assets, on the other hand, would be able to grow at impressive rates.
Given that the U.S. shale industry is essentially a price-taker in the context of the much larger global supply, U.S. E&P operators’ cost structure has little relevance in defining their profitability. A high-cost U.S. operator may still do well, should a global supply shortage develop. By the same token, even the most cost-efficient U.S. operators may continue to make poor returns if oversupply from price-insensitive producers such as Iraq, Iran, Libya and Saudi Arabia persists.
freak on Wed, 12th Aug 2015 8:47 pm
I would not be surprised to see the US Government step in and subsidize the oil producers much like the way they do with Big Agra.
Makati1 on Wed, 12th Aug 2015 9:41 pm
“Producers are boiling in cheap oil”
MORE WOOD! LMAO
kanon on Thu, 13th Aug 2015 12:48 am
There is no mention of renewables or electric cars as competition to oil. I suspect this is one main reason for the extended “glut” and low prices. Also, there is no consideration of demand falling off with higher prices. I don’t think the oil industry complex has ever faced quite these circumstances, so I think it is anybody’s guess how things will progress.