Volatility continued last week with oil prices falling early in the week, rebounding on Wednesday and Thursday, and then falling again on Friday. At week’s end, New York futures were down 1.4 percent for the week closing at $59.72 and London was down 2.2 percent to $65.37. Traders’ hopes for higheroil prices, which sparked the recent 35-40 percent price rally, have come mainly from falling rig counts and expectations that lower prices would fuel increased demand. These ideas have been supported by small declines in US oil stocks. The deteriorating situation in the Middle East, which shows every sign of getting worse, is another factor supporting prices despite indications that there is still a global oil surplus.
“Multinationals like Halliburton, Schlumberger, and Weatherford have shed tens of thousands of skilled workers that have centuries of combined experience. If history is our guide – and it’s a good guide—most of these people will find employment in other industries and never return, even when the text message, “When can u come back to work?” flashes on their mobiles… To be sure, workforce and equipment can be built up again in the future, but it will take time and money. What wounded service company is likely to invest in new parts and hire back people unless they are convinced that activity is going to be sustained?”
Peter Tertzakian – chief energy economist and managing director, ARC Financial
Last week oil prices gained for the ninth week in a row, setting a 30-year record for consecutive weeks of price increases. On Wednesday New York oil futures approached $62 a barrel, but settled to close out the week at $59.69. London futures performed similarly, closing out the week 2.2 percent higher at $66.69. The debate over whether prices have climbed too high, too soon continues. Those believing that prices are going higher look at the continuing drop in the US rig count – down again last week to 660 which about 58 percent lower than where it was last October. Those people expect US production will be dropping shortly, and indeed the EIA now is forecasting an 86,000 b/d drop in US shaleoil production next month. While this sounds like a lot, in comparison which total US production of around 11 million b/d this is not much. Market analysts are still expecting that US production which grew by 1.1 million b/d in 2014 will by up by another 675,000 b/d this year and 425,000 b/d in 2016.
“Despite Europe’s desire to loosen its reliance on Russian gas, the shale revolution has turned out to be a dud. Difficult geological conditions, fierce environmental opposition, cumbersome regulations and a bloody war in Ukraine have conspired to quash investors’ enthusiasm and wear down their patience. The collapse of oil prices to less than $50 a barrel in March was the final straw because the cost of much of Europe’s gas, including Russian imports, is linked to crude.”
Bloomberg News 5-12-15
The battle between higher and lower oil prices continued last week with futures hitting 2015 highs on Wednesday of $69.63 in London and $62.68 in New York. Prices then fell to close out the week at $65.39 and $59.39 respectively. London oil was down 1.6 percent for the week, its weekly drop in a month. As has been the case for several weeks now some observers are looking at the continuing decline in US drilling rigs – down by 11 last week — and some better US employment numbers which they believe will lead to an imminent decline in US oil production and higher domestic demand. Others, however, note that global oil production is still circa 1.5 million b/d above consumption; the global economy is not doing that well; and the US shale oil industry has such a large backlog on drilled but not-yet-fracked wells, that it still will be a while before demand catches up with supply.
“The large oil frackers have spent $80 billion more than they have received from selling oil. Wall Street greased those skids by underwriting debt and equity securities that allowed them to garner billions in fees. The banks are clearly incentivized to enable the frack addicts. What’s less obvious is whether investors are furnished a clear analysis of the returns these companies actually generate.
“As oil prices rose, it seemed like the frackers should have been drowning in cash. But none of them generated excess cash flow, not even when oil was at $100 a barrel. In fact, the opposite was true.
“Recently, oil prices have declined. Because the frackers have less revenue, they’ve been forced to cut Capex. Though they will continue to spend more dollars than they take in, production is no longer growing. A business that burns cash and doesn’t grow isn’t worth anything.
“On the $36 of revenues per BOE [barrel of oil equivalent], Pioneer [Pioneer Natural Resources] spends about $14 on field operating expenses and another $6 on corporate expenses. Subtract the historical $28 of Capex, and Pioneer loses $12 for every BOE it develops. That’s like using $50 bills to counterfeit $20s.”
All of the above is from a recent presentation by David Einhorn, cofounder of Greenlight Capital
Contents 1. Oil and the Global Economy 2. The Middle East & North Africa 3. Continue Reading
“The U.S. oil production decline has begun. It is not because of decreased rig count. It is because cash flow at current oil prices is too low to complete most wells being drilled…The decrease in well completions provides additional evidence that the true break-even price for tight oil plays is between $75 and $85 per barrel.”
Art Berman, independent consulting geologist