Drilling Our Way Into Oblivion
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DPC Broadway from Chambers Street, NYC 1910 Oh, that sweet black gold won’t leave us alone, will it? West Texas Intermediate went through some speedbu
[See the full post at: Drilling Our Way Into Oblivion]Ilargi – masterful writing, again! There’s going to be a lot of hurt out there. And when these laid-off workers cut back on consuming, driving their own cars, applying for new loans, it all grinds down.
Doug Noland asks who are the counter parties to all those hedges and ‘three ways’
https://www.prudentbear.com/2014/12/bo-bo.html#moreThat’s a very good question. Like the October plunge and last weeks the rocket blasts off the bottom seem to suggest the panic or near panic was fake. Maybe not. I suppose fat finger buy orders from those with unlimited funds can always save the day. We will see. I tend to think such could go on for years but won’t count on it.
As things stand today 250 S&P points to the upside by spring are not out of the question. Melt ups or melt downs seem to be the only paths.
rapier – Noland says: “Indeed, this dynamic now plays a critical role in prolonged “blow off” excesses. Importantly, when the Core begins to succumb to the faltering Bubble this massive derivatives (hedging/speculating) trade will overhang system stability. The market cannot hedge market risk. There’s no one with the wherewithal to “take the other side of the trade.” The “other side” is instead a computer model, programmed to dump sell orders into declining markets. Liquidity will inevitably become a critical problem.”
He’s great, but occasionally even he drops the ball, and it happens fast. Now if the ball is actually attached up above somewhere by a piece of string (as if it had its own central bank fraudulently holding it up), then it can’t fall, at least not until the string becomes frayed.
Then let’s enter into the equation the proposition that perhaps the central bank wants the ball to fall, the scissors come out and – snip. “Look, we’ve got these suckers trained into believing we’ve got their backs. No better time to rip their shirts off.”
A lot of good points here.
– Drilling cost: as the industry slows, service costs are going to plummet. They were already down from the highs, and they’re going to be dropping again. Every service company is getting hit up to cut prices now, and every equipment vendor is, too. The days of “cost is no object – get that well done!” may give way to more considered spending. When COP says they’re cutting investment by 20%, that’ll probably drill as many well in 2015 as they did in 2014. But they’ll probably cut more if prices stay down.
– Well costs don’t all cost $10M. I’d say the range is $6M to $11M, drilling on pads reduces per-well cost. Plus, producers will cherry-pick as they cut back, going for lower cost play.
– As weaker companies go under, debt will wash out. This will be excruciating for their financiers, but whoever picks up the relics can milk it for a good while. This will reduce the average cost basis and keep the game going longer, and prices low for longer as a consequence.
– The North Sea has at least as high a cost basis for new projects, and probably at least as high ongoing production costs, as shale. If the North Sea drops first, this will pull oil of the market (up to 2Mbpd if it all goes away), but that’ll take a while.
– The 130% cash ratio isn’t the same as a ponzi scheme for any company that is still increasing production, as pretty much no areas had yet peaked at the 2000 rigs level. Efficiencies had been going up, so 1900 rigs could drill next year what 2000 did this year, but it’ll drop beyond that in a few months as contracts complete and rigs lie down.
– Natural gas is trending down, as the NAM winter has been fairly mild so far, but gas is not as fungible as oil and the prices have held up better. As production of oil draws down, gas production will slide as well, and gas may recover more quickly than oil. There aren’t many rigs drilling dry gas anymore, but they could, if there was money in it. Chenier LNG is still the first export terminal planned to come on-line, and the US industry desperately needs every penny it can get. I think that’s still a year away, though.I keep seeing “2Mbpd excess production”, but I struggle to see back up for this. Some excess is obviously headed to China, but overall storage is not yet in full glut. In 2004, we saw many millions of barrels parked at see (investors buying to sell higher later), and shipping rates for VLCCs were way down. VLCC rates have been low for a long time now, given newly built ships are plentiful, but they are above even the 2014 lows.
I think we’re seeing some negative market momentum seeing a bleaker future than the current reality, though that may be well where we’re heading. It will be interesting to see what happens in China’s economy with lower energy costs, whether Baltic Dry and other commerce indicators pick up, and how storage numbers evolve at Cushing, in floating storage (say, off Malta), and elsewhere.
I mostly agree on Ilargi’s OPEC angle, but once rigs lay down OPEC could elect to slow production to drain the glut once they see production dropping, else we’ll overshoot on the far side. I’m still not convinced the world can eat $100 oil continually (the US may do better with local $100 oil than imported $60 oil, though!), but OPEC doesn’t want to see a repeat of 2008 either.
About 30 years ago during the first embargo small drillers saturated the midwest looking anywhere for some oil to drill (Illinois, Indiana, etc.). Places that don’t ring any bells when you commonly think of oil fields. But times change and all the wells were turned off and the drillers went elsewhere as these wells didn’t produce at a very fast rate.
As these last few weeks I have driven through many of these former places I have noticed more and more of these pumps working again. And why not? The only cost in them is the electricity needed to run the pump and the trucks needed to make the stops and pick up the oil. The cost of oil from these wells is effectively zero.
As I read articles posted by very intelligent people I find myself somewhat confused. We, the people, are the counter parties to all this malinvestment. Congress and the too big to fail banks shifted all the risk to the public sector in the last budget stopgap. The oil business smaller players will be absorbed and/or nationalized just as was General Motors, Bear Stearns, Lehman, Countrywide, etc. The beat goes on.
This isn’t some grand plan of market manipulation it’s just simple grab and growl
So I will remind everyone. In USA the oil industry is as much or more subsidized than corn, wheat, soybeans, sugar or tobacco. That would be you and me, fellow taxpayers, We will insure that oil is profitable down to whatever, because we are on the hook for the note.Pepe Escobar has a good article today on how Russia/Putin are NOT checkmated by recent economic sanctions and currency/financial attacks (including the covert ones).
What Putin is not Telling Us: The Raid on the Ruble was supposed to be a Checkmate. It’s Not
The oil industry may be subsidized, but it is far better to spend oil money in the US than sending it to the Mideast. You can argue the same thing about cars and computers (the “buy American” angle for jobs and manufacturing), and that’s the crux of post-globalism and a perpetual current accounts deficity.
One thing the Norwegian government defunded is seal hunting according to The Dodo. The sealers are not getting one dime to go out and club baby seals to death. Talk about a silver lining. Yeah!
@ John Day
Thanks Dr. John; I love Pepe and read everything he prints.
Here’s another; Go West Young Hanhttps://www.atimes.com/atimes/China/CHIN-01-171214.html
Putin is Russia’s Cool Hand Luke and one of the few adults in the room…
Every time Obama, Kerry, and Cameron open their pie holes I just walk away shaking my head.Cheers
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