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At Last The “Experts” Wake Up To Oil

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:

Who’s Ready For $30 Oil?

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:

The Price Of Oil Exposes The True State Of The Economy

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:

Falling Oil Reveals The Truth About The Market

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:

What Matters Is the Debt Shale Drillers Have, Not the Oil

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.

Will Oil Kill The Zombies?

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 Sees Need for $40 Oil as OPEC Cut Forecast Abandoned

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:

UK Oil Firms Warn Osborne: Without Big Tax Cuts We Are Doomed

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:

As Oil Plummets, How Much Pain Still Looms For US Energy Firms?

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:

Oil’s Plunge Wipes Out S&P 500 Earnings

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:

How Falling Gasoline Prices Are Hurting Retail Sales

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.

Why Falling Oil Prices Won’t Delay Fed Rate Increases /span>

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.

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Saudi Arabia Declares Oil War on US Fracking, hits Railroads, Tank-Car Makers, Canada, Russia; Sinks Venezuela

by Wolf Richter • December 1, 2014

When OPEC announced on Thanksgiving Day that it would maintain oil production at 30 million barrels per day, chaos broke out in the oil market, and the price of oil around the globe spiraled into a terrific plunge. The unity of OPEC, if there ever was such a thing, was in tatters with Saudi oil minister smiling victoriously, and with a steaming Venezuelan oil minister thinking of the turmoil his country is facing [OPEC Refuses to Cut Production, Oil Plunges off the Chart].

The bloodletting in the oil markets on Thursday led to some wobbly stability on Friday, and for a while it seemed oil had found a bottom, but then the US stock market closed early while crude continued trading, and suddenly all heck re-broke loose, and the US benchmark WTI plunged again and broke the $66-a-barrel mark before coming to a rest at $66.06. After a near 10% dive in two days, WTI is now down 37% since June!

This chart shows the Thanksgiving plunge following OPEC’s decision, the deceptive stability Friday, and the afterhours plunge:

Now more information has emerged, confirming prior “rumors” and “conspiracy theories.”

During the closed-door meetings in Vienna, Saudi oil minister Ali al-Naimi told OPEC members that OPEC had to combat the US fracking boom. If OPEC cut output to raise the price of oil, it would lose market share, he argued. The way to win would be to allow overproduction to depress prices to the point where they would destroy the profitability of North American producers. And they’d have to cut production, rather than OPEC.

With Saudi Arabia’s overwhelming power within OPEC, his argument won against objections from desperate members, such as Venezuela, Iran, and Algeria, which wanted a production cut to push prices back up.

“Naimi spoke about market share rivalry with the United States, and those who wanted a cut understood that there was no option to achieve it because the Saudis want a market share battle,” a source told Reuters to make sure the message got out.

Asked if this was a response to rising US production, OPEC Secretary General Abdullah al-Badri essentially confirmed OPEC had entered the oil war against the American shale revolution: “We answered,” he said. “We keep the same production. There is an answer here.”

The bloodletting is spreading.

While the US fracking boom is the official target, Canada’s tar-sands producers are getting hit the hardest. The process is expensive. Their production is largely land-locked and often has to be transported to distant refiners in Canada and the US by costly oil trains. Yet these high-cost producers are getting the least for their oil: The heavy-oil benchmark Western Canada Select (WCS) traded for $48.40 per barrel on Friday, down over 40% from June, the cheapest oil in the world.

Their shares got knocked down in sync: For example, Suncor Energy dropped 9% on Friday, down 27% since June; and Canadian Natural Resources dropped nearly 10% for the day, down 28% since June.

The US shale oil revolution is bleeding as well. Shares across the board are getting hit, many of them outright eviscerated. If the word “plunge” occurs a lot, it’s because that’s what these stocks did on Friday.

  • Goodrich Petroleum plunged 34% on Friday; down 80% from June.
  • Sanchez Energy plunged 29.5% on Friday, down 71% from June.
  • Clayton Williams Energy plunged 25.6% on Friday, down 61% from May.
  • Callon Petroleum plunged 18.6% on Friday, down 60% from June.
  • Laredo Petroleum plunged 33.5% on Friday, down 66.5% from June.
  • Oasis Petroleum plunged 27.2% on Friday, down 68% from July.
  • Stone Energy plunged 24.1% on Friday, down 68% from April.
  • Triangle Petroleum plunged 25.6% on Friday, down 62% from June.
  • EP Energy plunged 25.3% on Friday, down 54% from June.

The list goes on. Even large oil companies got clobbered:

  • Exxon Mobil down 4.2% for the day and 13% from July.
  • ConocoPhillips down 6.7% for the day and 24% from July.
  • Marathon Oil down 11% for the day and 31% from early September.
  • Occidental Petroleum down 7.4% for the day and 24% from June.
  • Anadarko Petroleum down 10.5% for the day and 30% since late August.
Then there is the Oil Service sector.

The Market Vectors Oil Services ETF dropped 8.9% for the day and has plummeted 34% from June. The current standout is its 10th-most heavily weighted component, Norway-based SeaDrill which had announced that it would cut its dividend to zero to deal with its mountain of debt, given the current environment. Its shares swooned on Thursday and Friday a total of 28% and are now down 70% from a year ago. The whole sector followed. This is what debt can do when the going gets tough.

Those are among the official targets of OPEC’s scorched-earth oil war. They’ve been hit, and they’re taking on water.

There is collateral damage.

With increasing amounts of oil being carried by oil trains, the railroads, which had been trading near their exuberant 52-week highs in large part due to the lucrative oil-train business, suddenly took a dive on Friday:

  • Union Pacific -4.9%
  • CSX -3.8%
  • Canadian Pacific -8.0%
  • Norfolk Southern -4.7%
  • Kansas City Southern -5.1%
  • Canadian National Railway -4.6%
  • Burlington Northern Santa Fe, which is owned by Warren Buffett’s Berkshire Hathaway, isn’t publicly traded. But if the oil-train business gets hit, so will Buffett’s “steal.”

But this pales compared to the carnage in tank-car builders. On Friday, they plunged:

  • Greenbrier -15% for the day, -28% from its September high.
  • American Railcar Industries -12.9% for the day, -28.3% since August.
  • FreightCar America -7.5% for the day, -21% since September.
  • Trinity Industries -11.3% for the day, -36% since September.

The oil price move is already cascading through American industry. Bondholders are next. The US fracking boom was built with debt, much of it junk rated. And this pile of debt is now at the confluence of the collapsing price of oil, high costs of production, and sharp decline rates of fracked wells that force drillers to continue drilling just to maintain their revenues. It’s a toxic mix.

And there are victims of friendly fire, so to speak.

Particularly OPEC member Venezuela, dogged by the world’s highest inflation and worst budget deficit, is running out of options. On November 18, President Nicolas Maduro ordered $4 billion in loan proceeds from China to be transferred from an off-budget fund to one counted in the international reserves. The sudden appearance of $4 billion in international reserves pumped up bondholder confidence: the next day in intraday trading, Venezuelan bonds jumped the most in six years.

But it didn’t last long. Within a week, its international reserves dropped by $1.3 billion to $22.2 billion, Bloomberg reported. Venezuela had burned through one third of the Chinese money in one week. Venezuela must have much higher oil prices. Unless a miracles happens, or unless China bails it out altogether – at a steep price – the country is headed for default.

Russia, third-largest oil producer in the world, after Saudi Arabia and the US, also got hit, as did Norway, and their currencies have been brutalized [Ruble Freefall: And the Ugliest Currencies Are?]

But this time it’s different.

This time, OPEC is trying to depress oil prices. In prior years, OPEC tried to push prices as high as possible, but without killing the global economy and demand for oil. The balancing act led to high oil prices that consumers struggled to pay but that allowed the US shale revolution to bloom. If oil had remained at $40 or $50 a barrel, fracking wouldn’t have taken off. OPEC was, ironically, one of the enablers of fracking (yield-desperate investors, driven to near insanity by the Fed’s zero-interest-rate policy, were the other one). And now fracking is threatening to make OPEC irrelevant.

Saudi Arabia, formerly the dominant oil producer in the world, the country whose mere words could shake up markets and manipulate US policies in the Middle East, and the master of an all-powerful OPEC, is reduced to struggling for simple market share, the hard way.

A lot of people believe that the plunge in the price of oil will be brief, and that it has gone pretty much as far as it can go, given production costs in the US and Canada. But the bloodletting in the US fracking revolution will go on until the money finally dries up. Read…   How Low Can the Price of Oil Plunge?

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Energy: Texas Tops Finds From Brazil to Bakken as Best Prospect

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By Edward Klump – Mar 22, 2012 7:00 PM CT

Energy companies in search of oil riches rivaling the biggest finds from Brazil to Angola are flocking to Texas shale, where new wells have triggered a 230- fold increase in crude output in three years

More than 115 years after a gusher 55 miles (88 kilometers) south of Dallas ushered in Texas’ first oil boom, U.S. producers such as ConocoPhillips and Marathon Oil Corp. (MRO) are counting on the Eagle Ford Shale to boost crude output amid a glut-driven slump in natural-gas prices.

Drilling for oil in the brush-covered plains of south Texas is cheaper and less risky than exploration offshore Brazil, the largest oil find in the Western Hemisphere in 30 years, and more profitable than the remote, rougher terrain of the Bakken Shale in North Dakota and Montana.

“The Eagle Ford is the top basin we have in the world today,” David Roberts, chief operating officer at Marathon Oil, told analysts and investors on a conference call last month.

Surging production in shale formations has transformed the U.S. energy landscape, flooding the market with gas and boosting domestic oil production by 14 percent from three years ago after dropping by a third in the previous 17 years, according to Energy Department data. After worries of a global oil shortage drove prices to record highs above $140 a barrel in 2008, politicians and industry executives now are discussing the prospect of the U.S. weaning itself from dependence on imports.

Doubling Down

Marathon Oil and ConocoPhillips (COP) both plan to double their production in the Eagle Ford this year. EOG Resources Inc. (EOG), based in Houston, calls the Texas shale play its biggest source of growth, and last month boosted its estimated recoverable reserves there by 78 percent.

Oil production in the Eagle Ford jumped almost sevenfold in 2011 to surpass 30 million barrels, still less than Bakken production in North Dakota that exceeded 128 million barrels. This year daily oil production in the Eagle Ford is forecast to expand by 200,000 barrels, roughly the same amount as the Bakken, according to estimates by Wood Mackenzie Ltd. cited by Hill Vaden, an analyst with the industry consultant.

The South Texas oil fields are winning a larger portion of producers’ investment because it’s easier and more profitable to drill there compared to many prospects in the U.S. and in the world. Wells are faster and cheaper to develop, and the formation is located closer to refineries on the U.S. Gulf Coast, lowering transportation costs.

Higher Prices

EOG said it costs about $5.5 million per well in the Eagle Ford, compared with more than $8 million per well in the Bakken, because of different well configurations. An offshore Gulf of Mexico well can cost $100 million, said Brian Uhlmer, an analyst at Global Hunter Securities LLC in Houston.

Deep-water wells can take five months or longer to drill, compared to a couple of weeks for a well in the Eagle Ford, said Brian Cain, a spokesman for Anadarko Petroleum Corp. (APC)

Producers can get a higher price for their Eagle Ford output than they can in the Bakken. Prices for Texas and Louisiana (USCRLLSS) crude this week are as much as about $38 a barrel more than production in the Bakken (USCRLLSS), according to data compiled by Bloomberg.

“The economics there are absolutely stellar,” said Danny Brown, a general manager who helps oversee Anadarko’s Eagle Ford operations. Anadarko has said it is considering selling its exploration properties offshore Brazil.

Less Political Risk

Texas provides a more stable investment environment compared to many international projects, said Pavel Molchanov, an analyst at Raymond James & Associates in Houston.

“Clearly, there’s less political risk in Texas than in Libya, let’s say, or Kurdistan,” he said. Marathon Oil last year had output suspended in Libya during unrest in that country.

The Eagle Ford cuts across a 400-mile swath of southern Texas, according to the Railroad Commission, which regulates oil and gas production in the state. Producers have unlocked the resource using advances in horizontal drilling and hydraulic fracturing, which sends jets of water, sand and chemicals underground to break up rock.

Petrohawk Energy Corp., acquired by BHP Billiton Ltd. (BHP) last year, first drew attention to the Eagle Ford when it announced a gas find in 2008, a year when futures for the fuel in New York averaged more than $8 per million British thermal units.

Surging Production

Expanded use of fracturing, or fracking, across the U.S. caused a surge in gas output that drove prices to a 10-year low this month of $2.204 per million Btu. Meanwhile, crude in New York has climbed 15 percent since the end of 2010 and is trading for about $105 a barrel.

While drilling has slowed in U.S. shale gas fields such as the Fayetteville in Arkansas, development has accelerated in South Texas as producers focus on the formation’s oil-rich geology.

The Eagle Ford will help lead a surge in state drilling permits that’s on pace to reach 25,000 this year, the most since 1985, said Barry Smitherman, the commission’s chairman.

“It’s by far the most sought-after play anywhere — not only in this country, but anywhere around the world,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York.

A Sanford C. Bernstein report last August estimated Eagle Ford production would reach 1.2 million barrels of oil equivalent a day in 2015, with 750,000 of that being liquids.

“A long-time oil field axiom is that big fields tend to get bigger over time, and that’s certainly the case here,” EOG Chief Executive Officer Mark Papa told investors during a Feb. 17 conference call. “This continues to be the hottest and highest reinvestment rate-of-return play in North America.”

To contact the reporter on this story: Edward Klump in Houston at eklump@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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Obama Puppetmaster Warren Buffett Biggest Winner From Keystone Pipeline Rejection

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Submitted by Tyler Durden on 01/24/2012 08:36 –0500

Just when one thinks American crony capitalism couldn’t hit new lows, here comes Warren Buffett and his personal puppet, the president, proving everyone wrong once more. Because if one thinks there is no (s)quid pro quo for all that “sage” advice that Buffett has been giving to Obama on extracting as much wealth as possible from future wealthy Americans (before they decide they have had enough with this crony shit and leave the country for good), one would be fatally wrong. As it turns out, it is not just natural resources and aquifer purity that Obama had in mind when sealing the fate of the Keystone XL pipeline. No – it appears there were far more relevant numerial metrics that determined Obama’s decisions. Such as the bottom line number of Buffett’s Burlington Northern, which according to Bloomberg, is among U.S. and Canadian railroads that stand to benefit from the Obama administration’s decision to reject TransCanada Corp.’s Keystone XL oil pipeline permit. ‘“Whatever people bring to us, we’re ready to haul,” Krista York-Wooley, a spokeswoman for Burlington Northern, a unit of Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A), said in an interview. If Keystone XL “doesn’t happen, we’re here to haul.” And quite delighted to reap the windfalls of unfounded populist fears she forgot to add. Because while the whole “carbon-credit” multi-trillion top line expansion scheme for Goldman under the pretense of actually caring for the environment may have collapsed, it is not preventing others from trying and succeeding where even Goldman has failed.

From Bloomberg:

Rail car production is already at a three-year high as manufacturers such as Greenbrier Cos Inc. (GBX) and American Railcar Industries Inc. (ARII) expand to meet demand for sand used in oil and gas exploration, according to Steve Barger, an analyst at Keybanc Capital Markets Inc. in Cleveland, citing Railway Supply Institute statistics.

Rail-car suppliers can add capacity, Hatch said.

“Railroads are not just a stopgap while we wait for a pipeline,” Hatch said in an interview. “They are potentially part of the long-term solution.”

Railroads are being used in North Dakota (STOND1), where oil producers have spurred a fivefold increase in output by using intensive drilling practices in the Bakken, a geologic formation that stretches from southern Alberta to the northern U.S. Great Plains. During 2011, rail capacity in the region tripled to almost 300,000 barrels a day as higher production exceeded what pipelines handle, according to the State Department report on Keystone XL.

Burlington Northern carries about 25 percent of the oil from the Bakken, said Krista York-Wooley, the railroad spokeswoman. The company can carry higher volumes from North Dakota or Alberta, she said.

Canadian Pacific Railway Ltd. (CP)’s shipments from North Dakota climbed to more than 13,000 carloads last year from about 500 in 2009, Ed Greenberg, a spokesman, said in an e-mail. The Calgary- based company has a similar plan in western Canada.

“With an extensive rail network and proven expertise in moving energy, CP offers a flexible option for transporting crude oil and other energy-related products to and from key locations in North America,” Vice President Tracy Robinson said in an e-mail. “Rail is scalable, allowing CP to effectively keep pace with the shipping needs of producers.”

So those wondering how it is that AAR railroad statistics continue to be so very strong, it is not because the economy actually justifies it: it is because crony interests such as those of the Octogenarian of Omaha demand it as “payment” for their crony collegiality with the biggest dunce president since Carter.

In other news, it is truly amazing how with every new development, America is now becoming like one giant conspiracy theory, only this time it is actually not a theory as with every passing day we see it enacted in practice.

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