Category Archives: Eagle Ford Shale
The Eagle Ford Formation (also: the Eagle Ford Shale) is a sedimentary rock formation of Cretaceous age underlying much of southern and eastern Texas, United States, consisting of organic-rich fossiliferous marine shale. It derives its name from the old community of Eagle Ford, now a neighborhood in West Dallas, Texas, where outcrops of the Eagle Ford Shale were first observed. Such outcrops can be seen in the geology of the Dallas–Fort Worth Metroplex, and are labeled on images with the label “Kef”. The Eagle Ford Shale is one of the most actively drilled targets for oil and gas in the United States in 2010.
by Michael Snyder via The Economic Collapse blog,
The gravy train is over for oil workers. All over North America, people that felt very secure about their jobs just a few weeks ago are now getting pink slips. There are even some people that I know personally that this has happened to. The economy is really starting to bleed oil patch jobs, and as long as the price of oil stays down at this level the job losses are going to continue. But this is what happens when a “boom” turns into a “bust”.
Since 2003, drilling and extraction jobs in the United States have doubled. And these jobs typically pay very well. It is not uncommon for oil patch workers to make well over $100,000 a year, and these are precisely the types of jobs that we cannot afford to be losing. The middle class is struggling mightily as it is. And just like we witnessed in 2008, oil industry layoffs usually come before a downturn in employment for the overall economy. So if you think that it is tough to find a good job in America right now, you definitely will not like what comes next.
At one time, I encouraged those that were desperate for employment to check out states like North Dakota and Texas that were experiencing an oil boom. Unfortunately, the tremendous expansion that we witnessed is now reversing…
In states like North Dakota, Oklahoma and Texas, which have reaped the benefits of a domestic oil boom, the retrenchment is beginning.
“Drilling budgets are being slashed across the board,” said Ron Ness, president of the North Dakota Petroleum Council, which represents more than 500 companies working in the state’s Bakken oil patch.
Smaller budgets and less extraction activity means less jobs.
Often, the loss of a job in this industry can come without any warning whatsoever. Just check out the following example from a recent Bloomberg article…
The first thing oilfield geophysicist Emmanuel Osakwe noticed when he arrived back at work before 8 a.m. last month after a short vacation was all the darkened offices.
By that time of morning, the West Houston building of his oilfield services company was usually bustling with workers. A couple hours later, after a surprise call from Human Resources, Osakwe was adding to the emptiness: one of thousands of energy industry workers getting their pink slips as crude prices have plunged to less than $50 a barrel.
These jobs are not easy to replace. If oil industry veterans go down to the local Wal-Mart to get jobs, they will end up making only a very small fraction of what they once did. Every one of these jobs that gets lost is really going to hurt.
And at this point, the job losses in the oil industry are threatening to become an avalanche. The following are 12 signs that the economy is really starting to bleed oil patch jobs…
#1 It is being projected that the U.S. oil rig count will decline by 15 percent in the first quarter of 2015 alone. And when there are less rigs operating, less workers are needed so people get fired.
#3 Oilfield services provider Baker Hughes has announced that it plans to lay off 7,000 workers.
#4 Schlumberger, a big player in the energy industry, has announced plans to get rid of 9,000 workers.
#5 Suncor Energy is eliminating 1,000 workers from their oil projects up in Canada.
#6 Halliburton’s energy industry operations have slowed down dramatically, so they gave pink slips to 1,000 workers last month.
#7 Diamondback Energy just slashed their capital expenditure budget 40 percent to just $450 million.
#8 Elevation Resources plans to cut their capital expenditure budget from $227 million to $100 million.
#9 Concho Resources says that it plans to reduce the number of rigs that it is operating from 35 to 25.
#10 Tullow Oil has reduced their exploration budget from approximately a billion dollars to about 200 million dollars.
#11 Henry Resources President Danny Campbell has announced that his company is reducing activity “by up to 40 percent“.
#12 The Federal Reserve Bank of Dallas is projecting that 140,000 jobs related to the energy industry will be lost in the state of Texas alone during 2015.
And of course it isn’t just workers that are going to suffer.
Some states are extremely dependent on oil revenues. Just take the state of Alaska for instance. According to one recent news report, 90 percent of the budget of Alaska comes from oil revenue…
But oil is also a revenue source in more than two dozen states, especially for about a third of them. In Alaska, where up to 90 percent of the budget is funded by oil, new Gov. Bill Walker has ordered agency heads to start identifying spending cuts.
Sadly, it looks like oil is not going to rebound any time soon.
China, the biggest user of oil in the world, just reported that economic growth expanded at the slowest pace in 24 years. And concerns about oversupply drove the price of U.S. crude down another couple of dollars on Monday…
Oil declined about 5 percent on Tuesday after the International Monetary Fund cut its 2015 global economic forecast on lower fuel demand and key producer Iran hinted prices could drop to $25 a barrel without supportive OPEC action.
U.S. crude, also known as West Texas Intermediate or WTI, settled 4.7 percent lower at $46.39 a barrel, near its intraday bottom of $46.23.
There is only one other time in history when we have seen an oil price crash of this magnitude.
That was in 2008, just before the greatest financial crisis since the Great Depression.
by Raul Ilargi Meijer via The Automatic Earth blog,
Boy, did the ‘experts’ and ‘analysts’ drop the ball on this one, or what’s the story. Only yesterday, Goldman’s highly paid analysts admitted they’ve been dead wrong from months, that their prediction that OPEC would cut production will not happen, and that therefore oil may go as low as $40. Anyone have any idea what that miss has cost Goldman’s clients? And now of course other ‘experts’ – prone to herd behavior – ‘adjust’ their expectations as well.
They all have consistently underestimated three things: the drop in global oil demand, the impact QE had on commodity prices, and the ‘power’ OPEC has. Everyone kept on talking, over the past 3 months, as oil went from $75 – couldn’t go lower than that, could it? – to today’s $46, about how OPEC and the Saudis were going to have to cut output or else, but they never understood the position OPEC countries are in. Which is that they don’t have anything near the power they had in 1973 or 1986, but that completely escaped all analysts and experts and media. Everyone still thinks China is growing at a 7%+ clip, but the only numbers that sort of thing is based on come from .. China. As for QE, need I say anymore, or anything at all?
So Goldman says oil will drop to $40, but Goldman was spectacularly wrong until now, so why believe them this time around? As oil prices plunged from $75 in mid November all the way to $45 today (about a 40% drop, more like 55% from June 2014′s $102), their analysts kept saying OPEC and the Saudis would cut output. Didn’t happen. As I said several times since last fall, OPEC saw the new reality before anyone else. But why did it still take 2 months+ for the ‘experts’ and ‘analysts’ to catch up? I would almost wonder how many of these smart guys bet against their clients in the meantime.
I’m going to try and adhere to a chronological order here, or both you and I will get lost. On November 22 2014, when WTI oil was at about $75, I wrote:
What is clear is that even at $75, angst is setting in, if not yet panic. If China demand falls substantially in 2015, and prices move south of $70, $60 etc., that panic will be there. In US shale, in Venezuela, in Russia, and all across producing nations. Even if OPEC on November 27 decides on an output cut, there’s no guarantee members will stick to it. Let alone non-members. And sure, yes, eventually production will sink so much that prices stop falling. But with all major economies in the doldrums, it may not hit a bottom until $40 or even lower.
Oil was last- and briefly – at $40 exactly 6 years ago, but today is a very different situation. All the stimulus, all $50 trillion or so globally, has been thrown into the fire, and look at where we are. There’s nothing left, and there won’t be another $50 trillion. Sure, stock markets set records. But who cares with oil at $40? Calling for more QE, from Japan and/or Europe or even grandma Yellen, is either entirely useless or will work only to prop up stock markets for a very short time. Diminishing returns. The one word that comes to mind here is bloodbath. Well, unless China miraculously recovers. But who believes in that?
5 days later, on November 27, with WTI still around $75, I followed up with:
Tracy Alloway at FT mentions major banks and their energy-related losses:
“Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850 million loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. [..] if Barclays and Wells attempted to syndicate the $850m loan now, it could go for as little as 60 cents on the dollar.”
That’s just one loan. At 60 cents on the dollar, a $340 million loss. Who knows how many similar, and bigger, loans are out there? Put together, these stories slowly seeping out of the juncture of energy and finance gives the good and willing listener an inkling of an idea of the losses being incurred throughout the global economy, and by the large financiers. There’s a bloodbath brewing in the shadows. Countries can see their revenues cut by a third and move on, perhaps with new leaders, but many companies can’t lose that much income and keep on going, certainly not when they’re heavily leveraged.
The Saudi’s refuse to cut output and say: let America cut. But American oil producers can’t cut even if they would want to, it would blow their debt laden enterprises out of the water, and out of existence. Besides, that energy independence thing plays a big role of course. But with prices continuing to fall, much of that industry will go belly up because credit gets withdrawn.
That was then. Today, oil is at $46, not $75. Also today, Michael A. Gayed, CFA, hedge funder and chief investment strategist and co-portfolio manager at Pension Partners, LLC, draws the exact same conclusion, over 7 weeks and a 40%-odd drop in prices later:
It seems like every day some pundit is on air arguing that falling oil is a net long-term positive for the U.S. economy. The cheaper energy gets, the more consumers have to spend elsewhere, serving as a tax cut for the average American. There is a lot of logic to that, assuming that oil’s price movement is not indicative of a major breakdown in economic and growth expectations. What’s not to love about cheap oil? The problem with this argument, of course, is that it assumes follow through to end users. If oil gets cheaper but is not fully reflected in the price of goods, the consumer does not benefit, or at least only partially does and less so than one might otherwise think. I believe this is a nuance not fully understood by those making the bull argument. Falling oil may actually be a precursor to higher volatility as investors begin to question speed’s message.
How much did Michael’s clients lose in those 7+ weeks?
Something I also said in that same November 27 article was:
US shale is no longer about what’s feasible to drill today, it’s about what can still be financed tomorrow.
And whaddaya know, Bloomberg runs this headline 51 days and -40% further along:
U.S. shale drillers may tout how much oil they have in the ground or how cheaply they can get it out. For stock investors, what matters most is debt. The worst performers among U.S. oil producers in a Bloomberg index owe about 5.7 times more than they earn, before certain deductions, compared with 1.7 times for companies that have taken less of a hit. Operations, such as where the companies drill or how much oil versus gas they pump, matter less.
“With oil prices below $50 and approaching $40, we’re in survivor mode,” Steven Rees, who helps oversee about $1 trillion as global head of equity strategy at JPMorgan Private Bank, said via phone. “The companies with the higher degrees of leverage have underperformed, and you don’t want to own those because there’s a fair amount of uncertainty as to whether they can repay that debt.”
That’s the exact same thing I said way back when! Who trusts these guys with either their money or their news? When they could just read me and be 7 weeks+ ahead of the game? Not that I want to manage your money, don’t get me wrong, I’m just thinking these errors can add up to serious losses. And they wouldn’t have to. That’s why there’s TheAutomaticEarth.com.
A good one, which I posted December 12, with WTI at $67 (remember the gold old days, grandma?), was this one on what oil actually sells for out there, not what WTO and Brent standards say. An eye-opener.
Tom Kloza, founder and analyst at Oil Price Information Service, said the market could bottom for the winter in about 30 days, but then it will be up to whatever OPEC does. “It’s (oil) actually much weaker than the futures markets indicate. This is true for crude oil, and it’s true for gasoline. There’s a little bit of a desperation in the crude market,” said Kloza.”The Canadian crude, if you go into the oil sands, is in the $30s, and you talk about Western Canadian Select heavy crude upgrade that comes out of Canada, it’s at $41/$42 a barrel.”
“Bakken is probably about $54.” Kloza said there’s some talk that Venezuelan heavy crude is seeing prices $20 to $22 less than Brent, the international benchmark. Brent futures were at $63.20 per barrel late Thursday. “In the actual physical market, it’s fallen by even more than the futures market. That’s a telling sign, and it’s telling me that this isn’t over yet. This isn’t the bottoming process. The physical market turns before the futures,” he said.
Oil prices have come down close to another 20% since then, in just one month $67 to $46 right now. And it’s going to keep plunging, if only because Goldman belatedly woke up and said so today:
Goldman Sachs said U.S. oil prices need to trade near $40 a barrel in the first half of this year to curb shale investments as it gave up on OPEC cutting output to balance the market. The bank cut its forecasts for global benchmark crude prices, predicting inventories will increase over the first half of this year.. Excess storage and tanker capacity suggests the market can run a surplus far longer than it has in the past, said Goldman analysts including Jeffrey Currie in New York. The U.S. is pumping oil at the fastest pace in more than three decades, helped by a shale boom ..
“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in the report. “The search for a new equilibrium in oil markets continues.” West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter. Goldman reduced its six and 12-month WTI predictions to $39 a barrel and $65, from $75 and $80, respectively ..
Well, after that 2-month blooper I described above, who would trust Goldman anymore, right, silly you is thinking. Don’t be mistaken, people listen to GS, no matter how wrong they are.
Meanwhile, the thumbscrews keep on tightening:
North Sea oil and gas companies are to be offered tax concessions by the Chancellor in an effort to avoid production and investment cutbacks and an exodus of explorers. George Osborne has drawn up a set of tax reform plans, following warnings that the industry’s future is at risk without substantial tax cuts. But the industry fears he will not go far enough. Oil & Gas UK, the industry body, is urging a tax cut of as much as 30% [..] “If we don’t get an immediate 10% cut, then that will be the death knell for the industry [..] Companies operating fields discovered before 1992 can end up with handing over80% of their profits to the Chancellor; post-1992 discoveries carry a 60% profits hit.
And hitting botttom lines:
A closer look at valuations and interviews with a dozen of smaller firms ahead of fourth quarter results from their bigger, listed rivals, shows there are reasons to be nervous. What small firms say is that the oil rout hit home faster and harder than most had expected. “Things have changed a lot quicker than I thought they would,” says Greg Doramus, sales manager at Orion Drilling in Texas, a small firm which leases 16 drilling rigs. He talks about falling rates, last-minute order cancellations and customers breaking leases. The conventional wisdom is that hedging and long-term contracts would ensure that most energy firms would only start feeling the full force of the downdraft this year.
The view from the oil fields from Texas to North Dakota is that the pain is already spreading. “We have been cut from the work,” says Adam Marriott, president of Fandango Logistics, a small oil trucking firm in Salt Lake City. He says shipments have fallen by half since June when oil was fetching more than $100 a barrel and his company had all the business it could handle. Bigger firms are also feeling the sting. Last week, a leading U.S. drilling contractor Helmerich & Payne reported that leasing rates for its high-tech rigs plunged 10% from the previous quarter, sending its shares 5% lower.
And, then, as yours truly predicted last fall, oil’s downward spiral spreads, and the entire – always nonsensical – narrative of a boost to the economy from falling oil prices vanishes into thin air. You could have known that, too, at least 2 months ago. Bloomberg:
While stock investors wait for the benefits of cheaper oil to seep into the economy, all they can see lately is downside. Forecasts for first-quarter profits in the Standard & Poor’s 500 Index have fallen by 6.4 percentage points from three months ago, the biggest decrease since 2009, according to more than 6,000 analyst estimates compiled by Bloomberg. Reductions spread across nine of 10 industry groups and energy companies saw the biggest cut. Earnings pessimism is growing just as the best three-year rally since the technology boom pushed equity valuations to the highest level since 2010.
At the same time, volatility has surged in the American stock market as oil’s 55% drop since June to below $49 a barrel raises speculation that companies will cancel investment and credit markets and banks will suffer from debt defaults. [..] American companies are facing the weakest back-to-back quarterly earnings expansions since 2009 as energy wipes out more than half the growth and the benefit to retailers and shippers fails to catch up.
Oil producers are rocked by a combination of faltering demand and booming supplies from North American shale fields, with crude sinking to $48.36 a barrel from an average $98.61 in the first three months of 2014. Except for utilities, every other industry has seen reductions in estimates. Profit from energy producers such as Exxon Mobil and Chevron will plunge 35% this quarter, analysts estimated.
In October, analysts expected the industry to earn about the same as it did a year ago. “My initial thought was oil would take a dollar or two off the overall S&P 500 earnings but that obviously might be worse now,” Dan Greenhaus at BTIG said in a phone interview. “The whole thing has moved much more rapidly and farther than anyone thought. People were only taking into account consumer spending and there was a sense that falling energy is ubiquitously positive for the U.S., but I’m not convinced.”
Well, not than anyone thought. Not me, for one. Just than the ‘experts’ thought. But that’s exactly what I said at the time. And I must thank Bloomberg for vindicating me. Don’t worry, guys, I wouldn’t want to be part of your expert panel if my life depended on it. And it’s not about me wanting to toot my own horn either, tickling as it may be for a few seconds, but about the likes of TheAutomaticEarth.com, or ZeroHedge.com and WolfStreet.com and many others, getting the recognition we deserve. If you ask me, reading the finance blogosphere can save you a lot of money. That’s merely a simple conclusion to draw from the above.
And only now are people starting to figure out that the real economy may not have had any boon from lower oil prices either:
Aren’t declining gasoline prices supposed to be good news for the economy? They certainly are to households not employed in the energy industry, but it might not seem so from the one of the biggest economic indicators due for release this week. On Wednesday, the Commerce Department is set to report retail sales for December. It’s the most important month of the year for retailers, but economists polled by MarketWatch are expecting a flat reading, and quite a few say a monthly decline wouldn’t be a surprise. [..] After department stores saw a 1% monthly gain in November, the segment may reverse some of that advance in the final month of the year.
This whole idea of Americans running rampant in malls with the cash they saved from lower prices at the pump was always just something somebody smoked. And now we’ll get swamped soon with desperate attempts to make US holiday sales look good, but if I were you, I’d take an idled oiltanker’s worth of salt with all of those attempts.
Still, the Fed, in my view, is set to stick with its narrative of the US economy doing so well they just have to raise interest rates. It’s for the Wall Street banks, don’t you know. That narrative, in this case, is “Ignore transitory volatility in energy prices.” The Fed expects for sufficient mayhem to happen in emerging markets to lift the US, and for enough dollars to ‘come home’ to justify a rate hike that will shake the world economy on its foundations but will leave the US elites relatively unscathed and even provide them with more riches. And if anyone wants to get richer, it’s the rich. They simply think they have it figured out.
Financial markets have been shaken over the past several weeks by a misguided fear that deflation has imbedded itself not only into the European economy but the U.S. economy as well. Deflation is a serious problem for Europe, because the eurozone is plagued with bad debts and stagnant growth. Prices and wages in the peripheral nations (such as Greece and Spain) must fall still further in relation to Germany’s in order to restore their economies to competitiveness. But that’s not possible if prices and wages are falling in Germany (or even if they are only rising slowly).
In Europe, deflation will extend the economic crisis, but that’s not an issue in the United States, where households, businesses and banks have mostly completed the necessary adjustments to their balance sheets after the great debt boom of the prior decade. The plunge in oil prices will likely push the annual U.S. inflation rate below 1%, further from the Fed target of 2%. [..] Falling oil prices are a temporary phenomenon that shouldn’t alter anyone’s view about the underlying rate of inflation.
On Wednesday, the newly released minutes of the Fed’s latest meeting in December revealed that most members of the FOMC are ready to raise rates this summer even if inflation continues to fall, as long as there’s a reasonable expectation that inflation will eventually drift back to 2%. Fed Chairman Ben Bernanke got a lot of flak in the spring of 2011 when oil prices were rising and annual inflation rates climbed to near 4%, double the Fed’s target.
Bernanke’s critics wanted him to raise interest rates immediately to fight the inflation, but he insisted that the spike was “transitory” and that the Fed wouldn’t respond. Bernanke was right then: Inflation rates drifted lower, just as he predicted. Now the situation is reversed: Oil prices are falling, and critics of the Fed say it should hold off on raising interest rates. The Fed’s policy in both cases is the same: Ignore transitory volatility in energy prices.
There are all these press-op announcements all the time by Fed officials that I think can only be read as setting up a fake discussion between pro and con rate hike, that are meant just for public consumption. The Fed serves it member banks, not the American people, don’t let’s forget that. No matter what happens, they can always issue a majority opinion that oil prices or real estate prices, or anything, are only ‘transitory’, and so their policies should ignore them. US economic numbers look great on the surface, it’s only when you start digging that they don’t.
I see far too much complacency out there when it comes to interest rates, in the same manner that I’ve seen it concerning oil prices. We live in a new world, not a continuation of the old one. That old world died with Fed QE. Just check the price of oil. There have been tectonic shifts since over, let’s say, the holidays, and I wouldn’t wait for the ‘experts’ to catch up with live events. Being 7 weeks or two months late is a lot of time. And they will be late, again. It’s inherent in what they do. And what they represent.
Dec 14, 2014 9:36 a.m. ET
NEW YORK (MarketWatch)—Talk about an oil spill. The spectacular unhinging of crude oil prices over the past six months is weighing mightily on the U.S. stock market.
And while it may be too early to abandon all hope that the market will stage a year-end Santa rally, it appears that if Father Christmas comes, there’s a good chance his sleigh will be driven by polar bears, instead of gift-laden reindeer.
Wall Street’s gift: a major stock correction.
Indeed, the Dow Jones Industrial Average DJIA, -1.79% already endured a bludgeoning, registering its second-worst weekly loss in 2014, shedding 570 points, or 3.2%, on Friday. That’s just shy of the 579 points that the Dow lost during the week ending Jan. 24, earlier this year. It’s also the second worst week for the S&P 500 this year SPX, -1.62% which was down about 58 points, over the past five trading days, or 2.83%, compared to a cumulative weekly loss of 61.7 points, or 3.14%, during the week concluding Oct. 10.
But all that carnage is nothing compared to what may be in store for the oil sector as crude oil tumbles to new gut-wrenching lows on an almost daily basis. On the New York Mercantile exchange light, sweet crude oil for January delivery settled at $57.81 on Friday, its lowest settlement since May 15, 2009.
Moreover, the largest energy exchange traded fund, the energy SPDR XLE, -1.86% is off by 14% over the past month and has lost a quarter of its value since mid-June.
The real damage, however, is yet to come. By some estimates the wreckage, particularly for the oil-services companies, may add up to a stunning $1.6 trillion annual loss, at oil’s current $57 low, predicts Eric Lascelles, RBC Global Asset Management chief economist.
Since it’s a zero-sum game, that translates into a big windfall for everyone else outside of oil players.
In his calculation, Lascelles includes the cumulative decline in oil prices since July and current supply estimates of 93 million barrels a day. It’s a fairly simplistic tally, but it gets the point across that the energy sector is facing a serious oil leak. Here’s a look at a graphic illustrating the zero-sum, wealth redistribution playing out as oil craters: Source and more
In space, no one can hear you scream… unless you happen to be Venezuela’s (soon to be former) leader Nicolas Maduro, who has been doing a lot of screaming this morning following news that UAE’s Energy Minister Suhail Al-Mazrouei said OPEC will stand by its decision not to cut crude output “even if oil prices fall as low as $40 a barrel” and will wait at least three months before considering an emergency meeting.
In doing so, OPEC not only confirms that the once mighty cartel is essentially non-existant and has been replaced by the veto vote of the lowest-cost exporters (again, sorry Maduro), but that all those energy hedge funds (and not only) who hoped that by allowing margin calls to go straight to voicemail on Friday afternoon, their troubles would go away because of some magical intervention by OPEC over the weekend, are about to have a very unpleasant Monday, now that the next oil price bogey has been set: $40 per barrell.
Luckily, this will be so “unambiguously good” for the US consumer, it should surely offset the epic capex destruction that is about to be unleashed on America’s shale patch, in junk bond hedge funds around the globe, and as millions of high-paying jobs created as a result of the shale miracle are pink slipped.
According to Bloomberg, OPEC won’t immediately change its Nov. 27 decision to keep the group’s collective output target unchanged at 30 million barrels a day, Suhail Al-Mazrouei said. Venezuela supports an OPEC meeting given the price slide, though the country hasn’t officially requested one, an official at Venezuela’s foreign ministry said Dec. 12. The group is due to meet again on June 5.
“We are not going to change our minds because the prices went to $60 or to $40,” Mazrouei told Bloomberg at a conference in Dubai. “We’re not targeting a price; the market will stabilize itself.” He said current conditions don’t justify an extraordinary OPEC meeting. “We need to wait for at least a quarter” to consider an urgent session, he said.
And with OPEC’s 12 members pumped 30.56 million barrels a day in November, exceeding their collective target for a sixth straight month, according to data compiled by Bloomberg. Saudi Arabia, Iraq and Kuwait this month deepened discounts on shipments to Asia, feeding speculation that they’re fighting for market share amid a glut fed by surging U.S. shale production.
The above only focuses on the (unchanged) supply side of the equation – and since the entire world is rolling over into yet another round of global recession, following not only a Chinese slowdown to a record low growth rate, but also a recession in both Japan and Europe, the just as important issue is where demand will be in the coming year. The answer: much lower.
OPEC’s unchanged production level, a lower demand growth forecast from the International Energy Agency further put the skids under oil on Friday, raising concerns of possible broader negative effects such as debt defaults by companies and countries heavily exposed to crude prices. There was also talk of the price trend adding to deflation pressures in Europe, increasing bets that the European Central Bank will be forced to resort to further stimulus early next year.
And while the bankruptcy advisors and “fondos buitre” as they are known in Buenos Aires, are circling Venezuela whose default is essentially just a matter of day, OPEC is – just in case its plan to crush higher cost production fails – doing a little of the “good cop” routing as a Plan B.
According to Reuters, OPEC secretary general tried to moderate the infighting within the oil exporters, saying “OPEC can ride out a slump in oil prices and keep output unchanged, arguing market weakness did not reflect supply and demand fundamentals and could have been driven by speculators.”
Ah yes, it had been a while since we heard the good old “evil speculators” excuse. Usually it appeared when crude prices soared. Now, it has re-emerged to explain the historic plunge of crude.
Speaking at a conference in Dubai, Abdullah al-Badri defended November’s decision by the Organization of the Petroleum Exporting Countries to not cut its output target of 30 million barrels per day (bdp) in the face of a drop in crude prices to multi-year lows.
“We agreed that it is important to continue with production (at current levels) for the … coming period. This decision was made by consensus by all ministers,” he said. “The decision has been made. Things will be left as is.”
Some say selling may continue as few participants are yet willing to call a bottom for markets.
There is some hope for the falling knife catchers: “Badri suggested the crude price fall had been overdone. “The fundamentals should not lead to this dramatic reduction (in price),” he said in Arabic through an English interpreter. He said only a small increase in supply had lead to a sharp drop in prices, adding: “I believe that speculation has entered strongly in deciding these prices.””
Unfortunately for the crude longs, Badri is lying, as can be gleaned from the following statement:
Badri said OPEC sought a price level that was suitable and satisfactory both for consumers and producers, but did not specify a figure. The OPEC chief also said November’s decision was not aimed at any other oil producer, rebutting suggestions it was intended to either undermine the economics of U.S. shale oil production or weaken rival powers closer to home.
“Some people say this decision was directed at the United States and shale oil. All of this is incorrect. Some also say it was directed at Iran and Russia. This also is incorrect,” he said.
Well actually… “Saudi Arabia’s oil minister Ali al-Naimi had told last month’s OPEC meeting the organization must combat the U.S. shale oil boom, arguing for maintaining output to depress prices and undermine the profitability of North American producers, said a source who was briefed by a non-Gulf OPEC minister.”
And as Europe has shown repeatedly, not only is it serious when you have to lie, but it is even worse when you can’t remember what lies you have said in the past. That alone assures that the chaos within OPEC – if only for purely optical reasons – will only get worse and likely lead to least a few sovereign defaults as the petroleum exporting organization mutates to meet the far lower demand levels of the new normal.
In the meantime, the only question is how much longer can stocks ignore the bloodbath in energy (where there has been much interstellar screaming too) because as we showed on Friday, despite the worst week for stocks in 3 years, equities have a long way to go if and when they finally catch up, or rather down, with the crude reality…
A new study has cast serious doubt on whether the much-ballyhooed U.S. shale oil and gas revolution has long-term staying power.
The U.S. produced 8.5 million barrels of oil per day in July of this year — 60 percent more than just three years earlier. That is also the highest rate of production in three decades.
Put another way, since 2011, the U.S. has added 3 million barrels per day in additional capacity to global supplies. Had that volume not come online, oil prices would surely be much higher than they currently are.
That has “revolutionized” the energy industry and geopolitics, as scores of energy analysts have claimed. The Energy Information Administration (EIA) forecasts that U.S. oil production will hit 9.6 million barrels per day (bpd) in 2019, and gradually decline to 7.5 million bpd by 2040.
This would allow the U.S. to be one of the world’s top oil producers for an extended period of time. With such an achievement now at hand, many analysts are predicting an era of American dominance in geopolitics. For example, in an op-ed on Oct. 20, columnist Joe Nocera considered a “world without OPEC,” in which U.S. oil production soon kills off the oil cartel.
Or consider this rather triumphalist piece in Foreign Affairs from earlier this year, where two former National Security Council members who worked under President George W. Bush boasted that the recent surge in oil production “should help put to rest declinist thinking” and “sharpen the instruments of U.S. statecraft.” In the following issue, Ed Morse of Citibank went further. “Despite its doubters and haters, the shale revolution in oil and gas production is here to stay,” he declared.
But a new report throws cold water on the thinking that U.S. shale production will be around for the long haul. The Post Carbon Institute conducted an analysis of the top seven oil and top seven natural gas plays, which together account for 89 percent of current shale oil production and 88 percent of shale gas production.
The report found that both shale oil and shale gas production will peak before 2020. More importantly, the report’s author, David Hughes, says oil production will decline much more quickly than the EIA has predicted.
That’s largely because of high decline rates at shale wells across the country. Unlike conventional wells, which can produce relatively stable rates for a long period of time, shale oil and gas wells experience an initial burst of production in the first few years, followed by a precipitous decline thereafter.
Hughes estimates that the average shale oil well declines at a rate of between 60 and 91 percent over three years. Wells in the Bakken decline by 45 percent per year, which stands in stark contrast to the 5 percent annual decline for an average conventional well.
Or put another way, oil and gas companies will have to keep drilling at a feverish pace just to stand still. This means the industry is on a “drilling treadmill” that will be unsustainable over the long-term.
Predicting what oil production will be in 25 years is difficult, to say the least, but the Post Carbon report projects that oil production from the Bakken and Eagle Ford will be just one-tenth of the level that EIA is forecasting. The EIA predicts that the Bakken and the Eagle Ford will be producing a combined 1 million bpd in 2040. Hughes thinks it will be just a small fraction of that amount – a mere 73,000 bpd.
This is not the first time that David Hughes has taken aim at EIA data. In a December 2013 report, he skewered the high estimates for the potential of the Monterrey Shale in California, calling the EIA’s numbers “simplistic and highly overstated.” Several months later, the EIA was forced to back track on its figures, downgrading the recoverable oil estimates in the Monterrey by 96 percent.
Hughes says the implications of getting it wrong are “profound,” since so many companies are basing very large investments on incorrect projections. He says rosy estimates have cut into investment for renewables, while steering capital towards expensive oil and gas export terminals that should now be called into question.
An article in CleanTechnica points to the possibility of boom towns turning into “ghost towns” if the pace of drilling drops off. If David Hughes and The Post Carbon Institute are correct, there could be quite a few ghost towns popping up in the coming years as the shale revolution begins to fizzle.
Source and Full Report Here