U.S. Shale's Blows Leave Middle East Oil Producers Staggering. Sub-$50 WTI and $70 Brent may be more suitable for 2019.

I think one of the *biggest* factors in 2019 regarding global oil prices and global oil production will be ... what the heck is U.S. Shale Oil going to do about its overproduction?

Seems to me that U.S. light tight oil will continue its running on the neverending hamster wheel of debt, but will be in for a world of pain if / when interest rates on US Dollar rise.

If oil prices recover to my personally preferred range of around $70 Brent and $65 WTI for 2019, then U.S. Shale Oil industry will probably ramp up overproduction even more.

$70 Brent and $65 WTI is roughly the range that I thought would likely be a relative balance between oil producers and oil consumers for 2019.  Those numbers should allow sufficient profits for oil companies to reinvest back into new Exploration activities (which are pretty darn expensive).

So heading into 2019 shortly, I'm starting to reconsider what I have considered for almost a year now, to be the most suitable, balanced oil prices for 2019.  I'm still thinking $70 - ish Brent is good. 

But since WTI insists on shooting itself in the foot, and also shooting the rest of the oil producing world as well, sub-$50 WTI might be a suitable balance to start choking off the U.S. Shale Oil industry's overproduction, and bring global oil production a bit more back toward a suitable balance.  Not sure yet on the most suitable WTI price. 

Time to mull this over a bit, but it is looking increasingly suitable to me for $70 Brent and sub-$50 WTI in order to balance out the global oil & gas industry in 2019.

Just my opinion; as always, you are free to disagree.

======================

Anyway, Bloomberg reports:

U.S. Shale's Blows Leave Middle East Oil Producers Staggering

The U.S. oil industry is delivering a one-two punch to Middle East producers already reeling from a collapse in prices.

A tussle is playing out in the market for so-called light oils, which have a lower sulfur content and are less dense than heavier varieties. When processed, these grades typically yield a higher amount of fuels like gasoline and naphtha. And now, American supplies are weighing on prices for such crudes as well as fuels made from them.

Light oil pumped in U.S. shale fields is increasingly making its way to Asia, undercutting sales by the likes of Saudi Arabia. Additionally, America is exporting a record amount of refined fuel, contributing to a global glut in gasoline and naphtha. That’s hurting some of the biggest members of the Organization of Petroleum Exporting Countries as they prepare to curb crude output in a bid to stabilize the market.

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(edited)

1 hour ago, Tom Kirkman said:

 

Time to mull this over a bit, but it is looking increasingly suitable to me for $70 Brent and sub-$50 WTI in order to balance out the global oil & gas industry in 2019.

 

Hi Tom, 

first of all sorry for the bad english.

Just two simple basic question about what you wrote:

1) In your most likely scenario, the spread between Brent and Wti is 20$. Don't you think is too much? I know that we are talking about two different products, but there is still a relationship

2) If the WTI stay under 50$, why shouldn't US rig count go down (and consequently bring the price over 50$)?

thanks

Lorenzo

Edited by Lorenzo Giovannini
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On 12/27/2018 at 6:02 PM, Lorenzo Giovannini said:

Hi Tom, 

first of all sorry for the bad english.

Just two simple basic question about what you wrote:

1) In your most likely scenario, the spread between Brent and Wti is 20$. Don't you think is too much? I know that we are talking about two different products, but there is still a relationship

2) If the WTI stay under 50$, why shouldn't US rig count go down (and consequently bring the price over 50$)?

thanks

Lorenzo

Thanks for your thoughts and questions, Lorenzo.  You speak more than 1 language, so you are one up on me already.

There is already a gap between Brent and WTI.  Due to WTI region pipeline bottlenecks (which are being relieved by increased pipeline infrastructure) and domestic U.S. Shale oil overproduction.

The U.S. created the price gap between WTI and Brent, due to those 2 reasons.

For the "rest of the world" outside of U.S. (and Canada, which has its own unique pipeline, sulphur, bitumen and other problems) I still see $70 Brent as a suitable, relative balance between global oil producers and global oil consumers.

That $70 Brent number is just my opinion.  Others think a higher price is more suitable for sustainable production long term, and others think a lower price is more suitable.

Some of my old multi-year thinking on a relative balance for global oil prices is here.

Anyway, since WTI depressed its own prices by overproduction, and WTI region oil is depressing oil prices around the world, it seems logical to me to let the U.S. Shale oil industry keep overproducing until they have no choice to cut back on new drilling and eventually cut back on the overproduction, which will in turn, cause WTI prices to stabilize.  Which will in turn relieve the downward pressure on Brent prices.

WTI prices will eventually recover once the U.S. Shale industry stops overproducing.

The breaking price that seems to nudge U.S. Shale oil to start scaling back drilling is sub-$50.

So, seems to me that while the world will function just fine on $70 Brent, the U.S. Shale oil industry is willfully driving down the price for WTI. 

 

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21 minutes ago, Tom Kirkman said:

So, seems to me that while the world will function just fine on $70 Brent, the U.S. Shale oil industry is willfully driving down the price for WTI. 

Thanks very much Tom for the answer.

This is the part that I don't understand. If some of the shale producers are lost money under 50$ WTI, why are they willfully still drilling? (For example in Italy we had for a long time a sort of government stimuli / incetives for solar panel.. but I don't think there are something similar for the shale industry in the US.. or not?)

Edited by Lorenzo Giovannini
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8 minutes ago, Lorenzo Giovannini said:

Thanks very much Tom for the answer.

This is the part that I don't understand. If some of the shale producers are lost money under 50$ WTI, why are they willfully still drilling? (For example in Italy we had for a long time a sort of government stimuli / incetives for solar panel.. but I don't think there are something similar for the shale industry in the US.. or not?)

Let me introduce you to Mr. @Mike Shellman and his site:

Oily Stuff

Poke around and read a few articles by Mike.  It should be an eye-opening education for you.  He can answer your questions better than I can (I'm in Malaysia, while Mike is over there smack in the heart of WTI-stan).

 

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Tom, you are always so kind to mention me; thank you. I guess one can say instead of being the cookie monster I am the shale oil monster.

Indeed, as you point out, the US shale oil phenomena has significantly altered the world oil landscape; I suspect there are still tens of thousands of men and women worldwide unemployed in the oilfield because of price volatility. There are rigs stacked, offshore rigs cold stacked rusting away, capital has been deferred from all exploration and a good bit of infill development because of low, volatile oil prices. Infill development, of course, helps arrest the decline rates in the worlds major oil fields; not very much of that is occurring anymore when one looks at world rig counts. Entire economies and social structures dependent on their nations oil sovereignty are suffering, all of which I believe is a direct result of the unfettered explosion of shale oil in America. That happened, and is still happening...on credit. Economic growth in America is now pretty much all debt related. The 'make America great' again crowd thinks this is good stuff, but of course they are ignoring the legacy of debt we are leaving our kids. And the fact, of course, that in 25 years we will have left them NO hydrocarbons to use for their future.

My question to you is, does all this 'American shale oil' first stuff piss the rest of the world's oil business off? It has to be maddening in the ME, or Indonesia, in Norway, everywhere the world has oil. I mean, how can anyone compete with America's ability to print money? I can't, even in America, and because of the shale oil phenomena am now looking at the end of my long oily career. Price volatility is a killer. What are your observations as you travel the world on how others view the US shale revolution?

 

 

 

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Mike, thanks for explaining (again) to lurkers here about the U.S. Shale Oil industry.  It's unique, and it runs on credit.  Actually, more like U.S. Shale Oil industry runs on credit cards to pay other older credit cards.

Outside of the U.S. a lot of people I meet wonder why the government doesn't control or throttle back the WTI overproduction.  Hard to explain about "independent" oil producers in the U.S. when many people are more familiar with the OPEC cartel.  (OPEC being a more controlled herd of cats than the fiercely independent cats of Texas and U.S.)

I like your idea of bringing back a type of Texas Railroad Commission limit on well spacing.  That 1 single enforcement could rein in the crazy overproduction of light tight shale oil, and scale things down a notch toward sanity.

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Thank you, Tom. I met a Saudi engineer not long ago who asked precisely the same question, why does our government not intervene to conserve our nations resources and help stabilize oil prices? 

The Railroad Commission of Texas regulated our industry here in Texas from 1933 to about 1977 and it worked beautifully; it was the longest, most stable period of world oil prices in history. The principles of hydrocarbon conservation got us to where we are today. For some odd reason now nobody in America, including the politicians we hire, can think past next week. Americans save very little, something like 70% of our population does not have 1000 dollars saved. So it is with oil, I suppose. The future is now and all that dookey.

Thanks again, mate.

 

 

 

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(edited)

6 hours ago, Tom Kirkman said:

I think one of the *biggest* factors in 2019 regarding global oil prices and global oil production will be ... what the heck is U.S. Shale Oil going to do about its overproduction?

Seems to me that U.S. light tight oil will continue its running on the neverending hamster wheel of debt, but will be in for a world of pain if / when interest rates on US Dollar rise.

If oil prices recover to my personally preferred range of around $70 Brent and $65 WTI for 2019, then U.S. Shale Oil industry will probably ramp up overproduction even more.

$70 Brent and $65 WTI is roughly the range that I thought would likely be a relative balance between oil producers and oil consumers for 2019.  Those numbers should allow sufficient profits for oil companies to reinvest back into new Exploration activities (which are pretty darn expensive).

So heading into 2019 shortly, I'm starting to reconsider what I have considered for almost a year now, to be the most suitable, balanced oil prices for 2019.  I'm still thinking $70 - ish Brent is good. 

But since WTI insists on shooting itself in the foot, and also shooting the rest of the oil producing world as well, sub-$50 WTI might be a suitable balance to start choking off the U.S. Shale Oil industry's overproduction, and bring global oil production a bit more back toward a suitable balance.  Not sure yet on the most suitable WTI price. 

Time to mull this over a bit, but it is looking increasingly suitable to me for $70 Brent and sub-$50 WTI in order to balance out the global oil & gas industry in 2019.

Just my opinion; as always, you are free to disagree.

======================

Anyway, Bloomberg reports:

U.S. Shale's Blows Leave Middle East Oil Producers Staggering

The U.S. oil industry is delivering a one-two punch to Middle East producers already reeling from a collapse in prices.

A tussle is playing out in the market for so-called light oils, which have a lower sulfur content and are less dense than heavier varieties. When processed, these grades typically yield a higher amount of fuels like gasoline and naphtha. And now, American supplies are weighing on prices for such crudes as well as fuels made from them.

Light oil pumped in U.S. shale fields is increasingly making its way to Asia, undercutting sales by the likes of Saudi Arabia. Additionally, America is exporting a record amount of refined fuel, contributing to a global glut in gasoline and naphtha. That’s hurting some of the biggest members of the Organization of Petroleum Exporting Countries as they prepare to curb crude output in a bid to stabilize the market.

Hello Mr.Kirkman

Are you familiar with a S.Korean company named SK Energy?( parent company SK Innovation) They mainly deal in natural gas. We have a rather unique scenario happening in Oklahoma.

Back in 2014, SK Energy entered into a 20 year agreement with Continental Resources for a 50% stake and 270 million in project financing for properties in the SCOOP/STACK. At the same time SK inked a 20 year deal with Cheniere Energy to build a pipeline to the heart of the SCOOP/STACK with a guarantee that the Oklahoma areas provide up to 20% of Ngl to be purchased for sale by SK to S.Korea and its affiliated buyers.

The kicker is this... S.Korea can sell to countries the US cannot. This creates a "proxy" distribution for US ( specifically Oklahoma) Oil and gas products.

I wonder if you have any knowledge or input on this subject.

I agree with your somewhat with your speculation on Brent, although my price falls in the $63-66 for Brent.

 

Edited by Justin Hicks
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6 hours ago, Justin Hicks said:

Hello Mr.Kirkman

Are you familiar with a S.Korean company named SK Energy?( parent company SK Innovation) They mainly deal in natural gas. We have a rather unique scenario happening in Oklahoma.

Back in 2014, SK Energy entered into a 20 year agreement with Continental Resources for a 50% stake and 270 million in project financing for properties in the SCOOP/STACK. At the same time SK inked a 20 year deal with Cheniere Energy to build a pipeline to the heart of the SCOOP/STACK with a guarantee that the Oklahoma areas provide up to 20% of Ngl to be purchased for sale by SK to S.Korea and its affiliated buyers.

The kicker is this... S.Korea can sell to countries the US cannot. This creates a "proxy" distribution for US (specifically Oklahoma) Oil and gas products.

I wonder if you have any knowledge or input on this subject.

I agree with your somewhat with your speculation on Brent, although my price falls in the $63-66 for Brent.

Hi Justin,

I vaguely recall hearing something about SK with Cheniere back when this agreement was reached.  No, I don't have any details or futher input.  Interesting workaround for Cheniere to get access for resale to other countries via South Korea.

Understood your views on a suitable Brent price are different than mine.  If you recall half a year ago, $70 Brent was considered too low, with all the crazy talk of triple digit oil.  My views on a suitable, sustainable, relative balance price for oil tend to be longer term, and take about a year to gradually change.

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From the Seeking Alpha article.....

"But that was then, now is different; the drillers must bring in twice as much oil every month as they managed then, just to cover today's legacy losses, so demand for equipment and services is double what it was in September 2016, and 20% more than the previous peak in 2014.

Today legacy loss is 520,000 b/d, per month; that's how much the drillers need to bring in every month just to stay even."

 

Gentlemen the Red Queen Effect is in full swing in the Permian Basin.

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11 hours ago, Mike Shellman said:

Thank you, Tom. I met a Saudi engineer not long ago who asked precisely the same question, why does our government not intervene to conserve our nations resources and help stabilize oil prices? 

The Railroad Commission of Texas regulated our industry here in Texas from 1933 to about 1977 and it worked beautifully; it was the longest, most stable period of world oil prices in history. The principles of hydrocarbon conservation got us to where we are today. For some odd reason now nobody in America, including the politicians we hire, can think past next week. Americans save very little, something like 70% of our population does not have 1000 dollars saved. So it is with oil, I suppose. The future is now and all that dookey.

Thanks again, mate.

 

 

 

@Mike Shellman, to a large degree US depends on its ability to export LTO while importing heavier crude - to avoid re-tooling refineries (light crude refining is also lower margins business) which may be challenging from many standpoints - capital requirements, environmental regulations, longevity of said LTO supply etc.

But I agree on a need to control the frenzy from environmental standpoint; flaring gas is a waste. Recycling produced water for frac also make sense but I'vev heard economic incentives aren't always right - land owner may be tempted to sell his water etc.

As for well spacing - I'd leave it to operators to sort out. Spacing too closely means frac hits but nobody wants to leave resource in the ground when land cost $up to 100K/acre.

It appears that we've just entered into bear market which may promptly lead to a recession and possibly greater financial crisis (aka reset) - this may put a cap on shale oil production growth. Or any production growth, for that matter... Not to end on a bad note, oil demand is fairly inelastic and grew steadily at a rate over 1MM bopd/year. Hope it won't fall off the cliff with rest of the markets

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12 hours ago, Mike Shellman said:

Thank you, Tom. I met a Saudi engineer not long ago who asked precisely the same question, why does our government not intervene to conserve our nations resources and help stabilize oil prices? 

The Railroad Commission of Texas regulated our industry here in Texas from 1933 to about 1977 and it worked beautifully; it was the longest, most stable period of world oil prices in history. The principles of hydrocarbon conservation got us to where we are today. For some odd reason now nobody in America, including the politicians we hire, can think past next week. Americans save very little, something like 70% of our population does not have 1000 dollars saved. So it is with oil, I suppose. The future is now and all that dookey.

Thanks again, mate.

Any idea if it is possible to get the Texas Railroad Commission re-activated again, to regulate well spacing in U.S. Shale Oil industry?

Seems to me, that single idea - if implemented - would probably create more stabilization benefit for oil prices globally, than OPEC + Russia production agreements.

Dunno, you are there in WTI-ville, Texas, and I'm halfway around the world.  Think it's possible?  It would be nice to have some global oil stability in production and prices.  A rejuvenated Texas RR Commission could do possibly just that.

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1 hour ago, Tom Kirkman said:

Any idea if it is possible to get the Texas Railroad Commission re-activated again, to regulate well spacing in U.S. Shale Oil industry?

Seems to me, that single idea - if implemented - would probably create more stabilization benefit for oil prices globally, than OPEC + Russia production agreements.

Dunno, you are there in WTI-ville, Texas, and I'm halfway around the world.  Think it's possible?  It would be nice to have some global oil stability in production and prices.  A rejuvenated Texas RR Commission could do possibly just that.

What is stabilization to you is price fixing to me.  I would rather let price competition fix the price even if it results in temporary shortages for a while. America has a lot to gain by keeping money in the pocket of our consumers and beating our competitors in the oil, natural gas, and related fuels.

Edited by ronwagn

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(edited)

Tom, there are several ways to view the shale oil phenomena in the US, one as a consumer or, for instance, an upstream E&P investor in stocks, the other from a business/sustainability standpoint. As someone who has dealt with decline, depletion and reserve replacement for many years I struggle to see this shale thing as anything other than a failing business.

Re-tooling America's refinery system to handle more LTO is exactly what needs to be done. Exporting LTO as a means of offsetting heavy oil imports assumes heavy oil imports will always be available. There are security and economic risks to that, of course. It is better to keep America's oil IN America. The comment regarding TRRC intervention being akin to price fixing is typical of the American consumer, who at the moment is enjoying low gas and fuel costs, who believes the shale oil abundance hype and does not understand that depletion never sleeps.  There are no free market principles at work anymore in the US, not when a Tweet can effectively send the price of oil down 40% in two months. "Beating our competitors in oil" totally neglects decline, depletion and debt. Its a marathon, not the 100 yard dash.

The growth of America's oil reserves was regulated successfully for over 40 years. Regulating the growth  of shale oil in the US is a sound, long term policy; it would stabilize oil prices, employment, reduce debt and promote conservation of our country's last remaining oil resources. It makes sense, that is exactly why it will never be done again. As Art Berman points out, if the TRRC were to do nothing other than enforce existing flaring regulations and protect W. Texas groundwater resources, the shale oil industry would be forced to slow down. In America, however, we are now incapable of thinking past next week, with our kids in mind.

Thank you for inviting me here, Tom. I should hang around with my kind, however. Happy New Year, buddy!

 

 

 

 

Edited by Mike Shellman
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Mike, always happy to have you chime in and speak up.  You were the main person back around 2014 or so back on Oilpro that got me to stop and re-think my gung-ho promotion of U.S. Shale oil as an unstoppable force, ready to kill off OPEC and provide "energy independence" for America.  You and Art Berman, but mostly you.  Enno Peters later website which showed graphic analysis of the decline rates was probably the final brick for me.  Cold hard facts, undisputable.

The insane decline rates of fracking were the first thing that reluctantly got me to STOP, take a hard look, and re-assess the whole U.S. "energy independence" bandwagon.  Then the priblem with the overall money losing economics of most (probably 80% or so) U.S. Shale oil production, once land leases, drilling, bank loans to finance everthing, were actually factored in.

As I've mentioned before Mike, please keep speaking up, you never know who you might convince to stop and re-think and re-examine the situation. 

Cheers, Mike.  Hope you and your family have a Happy and Prosperous New Year.

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Hey, Chaps Newbie here,

 

Loving the discussions though. 

 

One thing I do not understand about US shale industry economics is that somewhere along the line the creditors providing the debt finance will want their cash back not just interest payments. I kind of see how you can keep going refinancing/refinancing with ever increasing debt/interest.

However, it will fall/fail inevitably.

I suppose like a proper Ponzi the fall/fail will occur only after MASSIVE HYPE and everyday people will end up taking on the debt (via pensions etc). Whilst the city exists left....

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58 minutes ago, Oil_Bath said:

Hey, Chaps Newbie here,

Loving the discussions though. 

One thing I do not understand about US shale industry economics is that somewhere along the line the creditors providing the debt finance will want their cash back not just interest payments. I kind of see how you can keep going refinancing/refinancing with ever increasing debt/interest.

However, it will fall/fail inevitably.

I suppose like a proper Ponzi the fall/fail will occur only after MASSIVE HYPE and everyday people will end up taking on the debt (via pensions etc). Whilst the city exists left....

Good for you to start questioning this.

Try poking around some more and asking more questions.  I'm a huge fan of questioning the official narrative.

Last oil price crash back around 2015, lots of U.S. shale oil companies went bankrupt.  Many company owners walked away free, while investors were left holding the bag of debts.  Then the same owners started up new shale oil companies.

Guess what will likely happen to U.S. Shale oil company debts when the next crash happens...

Anyway, some reading for you, if you are interested:

Oily Stuff

Shale Profile  @shaleprofile

Art Berman

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I hope the investors catch on sooner rather than later.

I am enjoying reading a Christmas book from my civil engineer daughter:

Nate Silver's The Signal And The Noise -Why So Many Predictions Fail- But Some Don't

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On ‎12‎/‎27‎/‎2018 at 9:24 PM, ronwagn said:

What is stabilization to you is price fixing to me.  I would rather let price competition fix the price even if it results in temporary shortages for a while. America has a lot to gain by keeping money in the pocket of our consumers and beating our competitors in the oil, natural gas, and related fuels.

Geez Ron, 

That just sounds too simple of a plan!!! There are a lot of posts on here from the investment side that would like 70.00 bbl oil. 

I doubt many have ever worked "in the field" rather sit at a desk all day an stare at monitors and shrill the sky is falling when 

WTI hits 50.00 a bbl. There is so much involved into exploration to completion of wells that are not understood by mainstream

investors. The Oil Companies wouldn't be contracting the 600+ rigs in the Permian if they were going to lose money at 50.00.

Might not like less profits but they are still making money. Go back to the early 80's and the windfall profits tax Reagan enacted.

I was there, and it wasn't a pretty sight. There are to this day rigs stacked west of Odessa from then. Rusting away and obsolete now.

Over in Penwell which is west of Odessa along interstate 20, the mountains of drill stem is there still. All from that time period. Sad 

but one can surmise that money is being made, just not what some investors would like as Greed will always be around.

 

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14 hours ago, Old-Ruffneck said:

The Oil Companies wouldn't be contracting the 600+ rigs in the Permian if they were going to lose money at 50.00

But they would, with the right incentives. For instance, in order to keep interest coverage up, which requires expanding production in the face of falling oil prices, and drilling wells that are not normally economical but in this instance make sense in order to allow the company to delay insolvency until hopefully higher oil prices allow profits to flow again.

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9 hours ago, SimeonK said:

But they would, with the right incentives. For instance, in order to keep interest coverage up, which requires expanding production in the face of falling oil prices, and drilling wells that are not normally economical but in this instance make sense in order to allow the company to delay insolvency until hopefully higher oil prices allow profits to flow again.

I don't believe that is the case as several years now of continuous drilling would've already bankrupted the Oil Majors. While plausible that

the banks will keep lending for a 18 month to 2 year period their boards would like to see real return on their investments. I personally cant 

foresee your scenario playing out this long.  Just my opinion, but most the Permian is good break-even 33.00. So while 50.00 isn't a great 

profit, it is still a profit.  Time will tell, but how much more time before the banks start calling in their loans on top of loans etc.??

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21 minutes ago, Old-Ruffneck said:

I don't believe that is the case as several years now of continuous drilling would've already bankrupted the Oil Majors. While plausible that

the banks will keep lending for a 18 month to 2 year period their boards would like to see real return on their investments. I personally cant 

foresee your scenario playing out this long.  Just my opinion, but most the Permian is good break-even 33.00. So while 50.00 isn't a great 

profit, it is still a profit.  Time will tell, but how much more time before the banks start calling in their loans on top of loans etc.??

Excerpt from @Mike Shellman musings for year end:

 

To replace declining LTO reserves the US shale oil industry needs a constant influx of  capital to stay on the drilling hamster wheel. With oil prices of less than $55 per BO, 95% of the wells drilled in the future will be unprofitable, or marginally profitable, to  produce. The public and private shale oil industry in America has drilled 70,000 wells the past 10 years and has approximately $280 billion of long term debt; $85 billion dollars of long term debt as already been walked (Haynes & Boone). In other words, the shale oil industry has not even paid for what it has already produced yet. 

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