Oil Retreats from 3-Year High

[Marina Schwarz + 1,576]

Less than a week after Trump announced the Iran decision. More rigs in the U.S., lots of opposition to new sanctions, no new upbeat demand forecasts, as far as I can see. On the other hand, the Iraqi election might result in an unpleasant surprise with a radical at the helm, so that's an upward driver.

[Scotsman + 14]

so fundamentals do still matter a bit?

[William Edwards + 708]

3 hours ago, Scotsman said:

so fundamentals do still matter a bit?

Yes, fundamentals do still matter a bit, but with a very long lag time. Thus it is impossible for us to decipher any fundamental element included in the knee-jerk futures price movements on a second-by-second basis. This explains why futures price movements are so sharp and instantaneous when comments are made, but the system may take five years to reflect the action reported.

[Seleskya + 50]

Right, oil and gas should be long-term plays for investors. We should be looking at the overall fundamentals and what they tell us about the next 3-5 years. 

[William Edwards + 708]

23 minutes ago, Seleskya said:

Right, oil and gas should be long-term plays for investors. We should be looking at the overall fundamentals and what they tell us about the next 3-5 years. 

Right on, Seleskya.

[Carlsbad + 19]

So I guess the question is, then, how do we see the oil market, fundamentally, in that timeframe? Doesn't look great to me, nor does it look disastrous. Prices are too high right now, but demand is still strong and will be for some time to come. U.S. shale doesn't always follow fundamentals, though. They seem to binge and purge, depending on their level of maturity. 

[Tom Kirkman + 8,860]

1 hour ago, Carlsbad said:

So I guess the question is, then, how do we see the oil market, fundamentally, in that timeframe? Doesn't look great to me, nor does it look disastrous. Prices are too high right now, but demand is still strong and will be for some time to come. U.S. shale doesn't always follow fundamentals, though. They seem to binge and purge, depending on their level of maturity. 

Related to your question, here is a link to Art Berman's recent presentation.

While I don't expect others to agree with Art's conclusions (he is directly flying in the face of mainstream opinion), his presentation raises numerous points that are worth mulling over and at least considering.

The pdf is 15 MB:

http://www.artberman.com/wp-content/uploads/TEC-Presentation-May-2018.pdf

[William Edwards + 708]

15 hours ago, Carlsbad said:

So I guess the question is, then, how do we see the oil market, fundamentally, in that timeframe? Doesn't look great to me, nor does it look disastrous. Prices are too high right now, but demand is still strong and will be for some time to come. U.S. shale doesn't always follow fundamentals, though. They seem to binge and purge, depending on their level of maturity. 

Although it appears that we are basically on the same page,  I sense one significant difference in our understanding of the fundamentals, Carl. When I apply sound logic to my review of past history, I conclude that the price of oil is not a function of supply/demand levels. In other words, high demand does not cause high prices and plentiful supply does not cause low prices. Oversupply and undersupply are actually impossible situations. Consumption draws out whatever supplies that it needs at whatever price is in vogue at that moment. Supply always matches consumption at every price level. If you question this assessment, I can show you historical data that refute whichever side of the supposed supply/demand-caused price moves that you suggest.

Moving on, I agree with your assessment that prices are too high now for a smoothly sustainable industry. But the time for the system to reach equilibrium, once the price is established, is much longer than it takes for the system to make a price change. Therefore demand is forever trying to match the price level, as is supply, but the price changes too rapidly for either to catch up. Distressing but true.

Turning to shale oil, Mike Shellman has spoken for years about the underlying problem of the shale industry. He astutely points out the disconnect between the industry's willingness to borrow and drill, concomitant with no thought of the consequences of their combined output, allowing the industry to suffer the consequences of desperation marketing. So the roller coaster price/production profile will likely continue. Binge and purge it shall be!

Edited May 15, 2018 by William Edwards

[William Edwards + 708]

28 minutes ago, Tom Kirkman said:

Related to your question, here is a link to Art Berman's recent presentation.

While I don't expect others to agree with Art's conclusions (he is directly flying in the face of mainstream opinion), his presentation raises numerous points that are worth mulling over and at least considering.

The pdf is 15 MB:

http://www.artberman.com/wp-content/uploads/TEC-Presentation-May-2018.pdf

Thanks, Tom. I went through Art's presentation, rather quickly I must admit, and I find agreement with most of his presentation. He was over my head on some of it so my comments exclude that info.

I should emphasize my strong agreement with his assessment regarding the swing producer. His views match mine and we both can vigorously defend the validity of that assessment. The US reserves are much too small for us to ever be considered in the swing producer role. On an instantaneous basis we can force pricing actions that are basically unsound for the industry, but we cannot sustain the supply impact that would be necessary to play that game very long.

His presentation is well worth the time required to understand his points.

[Tom Kirkman + 8,860]

Thanks Edward.  Since you are probably already pretty familiar with my views, you may appreciate my attempt to gently nudge members and lurkers to be willing to consider Art Berman's points.  A number of Art's points fly in the face of mainstream media assumptions about U.S. tight oil.

Side note ... note that the number of lurkers is generally more than the number of members browsing this Oil Price forum.  Seems this forum is getting more and more eyeballs on it recently.

So my comments here to at least be willing to consider Art Berman's points are more aimed at lurkers.

[Mike Shellman + 548]

Thank you once again, William. I have a long standing "debate" with an analyst who is very into modeling shale oil growth. His driving factor is price. Our arguments stem around the fact that the US shale oil phenomena is based entirely on the availability of low interest capital and has little to do with product price. We more or less already have proof of that, yes? A portion of the total HZ rig count in America is controlled by loan covenants and lenders; a much smaller portion driven by "free" cash flow due to higher prices. If the price falls, rather when it falls, we'll see less growth but there will still be growth; really its the FED that's has control of the US LTO industry, not OPEC. 

Having said that, I do believe OPEC, Russia and Non-OPEC producers know exactly how shale oil growth is funded in America, what it costs, how unprofitable it is, and understand rising GOR, decline and depletion very well. They are not stupid about oil and gas production, in spite of what folks might think in Midland. There is a price level that is good for the US shale oil industry (this may be it!) that will drive it plum off the cliff in 3-5 years and that is precisely the plan. We're always in a big damn hurry in America...in this case to deplete our remaining hydrocarbon resources. The buzzards are circling.

A last word about Art's presentation in Dallas; he has been getting hammered for his comments by the shale industry and by the MSM because most, in their rush to attack the messenger, did not even read the message. The PDP, PUD reserves he quoted that might leave the Permian HZ play with only about 7-8 more years of life were proven reserves estimated by shale oil companies themselves and reported to the SEC. He did not make that data up; they did.

Why do folks hate Art Berman's message so much?

Fear.

[William Edwards + 708]

19 minutes ago, Mike Shellman said:

Thank you once again, William. I have a long standing "debate" with an analyst who is very into modeling shale oil growth. His driving factor is price. Our arguments stem around the fact that the US shale oil phenomena is based entirely on the availability of low interest capital and has little to do with product price. We more or less already have proof of that, yes? A portion of the total HZ rig count in America is controlled by loan covenants and lenders; a much smaller portion driven by "free" cash flow due to higher prices. If the price falls, rather when it falls, we'll see less growth but there will still be growth; really its the FED that's has control of the US LTO industry, not OPEC. 

Having said that, I do believe OPEC, Russia and Non-OPEC producers know exactly how shale oil growth is funded in America, what it costs, how unprofitable it is, and understand rising GOR, decline and depletion very well. They are not stupid about oil and gas production, in spite of what folks might think in Midland. There is a price level that is good for the US shale oil industry (this may be it!) that will drive it plum off the cliff in 3-5 years and that is precisely the plan. We're always in a big damn hurry in America...in this case to deplete our remaining hydrocarbon resources. The buzzards are circling.

A last word about Art's presentation in Dallas; he has been getting hammered for his comments by the shale industry and by the MSM because most, in their rush to attack the messenger, did not even read the message. The PDP, PUD reserves he quoted that might leave the Permian HZ play with only about 7-8 more years of life were proven reserves estimated by shale oil companies themselves and reported to the SEC. He did not make that data up; they did.

Why do folks hate Art Berman's message so much?

Fear.

And when fear is gone, greed takes its place. Reason NEVER prevails!

[Eric C. Alldritt + 18]

20 hours ago, Tom Kirkman said:

Related to your question, here is a link to Art Berman's recent presentation.

While I don't expect others to agree with Art's conclusions (he is directly flying in the face of mainstream opinion), his presentation raises numerous points that are worth mulling over and at least considering.

The pdf is 15 MB:

http://www.artberman.com/wp-content/uploads/TEC-Presentation-May-2018.pdf

 

Considering the relatively small reserves that the Permian currently has, along with lack of growth in exploration spending, pipeline issues, sand shortage, labor shortages and the heavy discounts for Midland oil, how can the Permian be sustainable in the medium/long-term (at least 5 years in the future)? I know I am just a college student, but if someone may enlighten me, it would be much appreciated since there is so much I do not know. Based on these charts, there is no way the Permian can sustain this growth, especially since investors want higher returns first.

The "73% of Companies Lost Money" in 2017, how is this still happening despite 100 shale company bankruptcies happening since the oil crash? 

Sources: The top and bottom image (Slides 14 and 16): http://www.artberman.com/wp-content/uploads/TEC-Presentation-May-2018.pdf, 

The middle one: https://oilprice.com/Energy/Crude-Oil/OPEC-The-Oil-Glut-Is-Gone.html

 

Edited May 15, 2018 by Eric C. Alldritt
Wrong picture.

[Mike Shellman + 548]

Eric, with respect to my friend, Art Berman, and Yahoo finance, the possibility that 27% of shale oil companies in America made money in 2017  is a stretch to me. In my opinion, there was a lot of non-GAPP, funky accounting that created this illusion based on asset sales and enormous, one time tax charges. We have to rely on SEC data, of course, but personally  I don't think anybody made money in 2017, in spite of lower costs, higher productivity, and production cuts from OPEC. More importantly, at least to me,  they did not make enough money to put a dent in debt (Devon reduced debt, EOG added debt).

The shale oil industry, even the mighty Permian, is sustainable only as long as the money holds out. Or until they saturate core, sweet spots and have to start drilling the really lousy rock, then things will go from bad to worse. In the mean time the shale industry is facing some hefty debt maturities coming up in a few years, with interest rates going up.

Here is a statistic that will knock your socks off, about 75% of all unconventional HZ wells drilled in the Permian, since the beginning, now make less than 40 BOPD (IHS, shaleprofile.com); the answer to your question might lie there.

But pat yourself on the back; you are on the right track. Question everything. Dig out the facts. Do your own math. This might be interesting to you also:  https://www.scribd.com/document/370742449/Shale-Reality-Check-Drilling-into-The-U-S-Government-s-Rosy-Projections-for-Shale-Gas-Tight-Oil-Production-Through-2050#fullscreen&from_embed

 

[Tom Kirkman + 8,860]

Thanks Mike.  You are far better at explaining the U.S. tight oil situation than I am.