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Peak Oil Review – 11 May 2015

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.

Posted On : Published By : Tom Whipple
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Quote – 11 May 2015

“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

Posted On : Published By : Tom Whipple
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Quote – 4 May 2015

“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

Posted On : Published By : Tom Whipple