*Happy Dance* ... U.S. Shale Oil Slowdown

Music to my ears.  Capitalism works and Supply & Demand are not irrelevant, regardless of musings by certain market pundits.

After kicking up a fuss on assorted topics here on the forum over the last week or so about politics, Trump, U.S. Supreme Court, U.S. National Emergency orders, EU, Environment, Climate Change, Immigration, MSM bias and censorship, Yellow Jacket protests in France, Canada, USA and elsewhere, guns, and I forget what all other fun topics, I'll try to behave myself in this thread and keep it strictly about U.S. Shale Oil and its overproduction.   Wish me luck : )

 

It seems that U.S. Shale Oil industry has overproduced so much that it has shot itself in the foot yet again, causing WTI price to drop due to waaaaay too much O&G produced.

So, U.S. Shale Oil activity appears to be dropping.  And this should eventually help stabilize Brent prices.  

For ages, I have commented repeatedly about my hope for $65 Brent in 2018 and my hope for $70 Brent in 2019.

At this point, WTI is hopeless, and today I don't much give a toss what the WTI oil price is.  The WTI herd of cats seem bound and determined to overproduce themselves into a ditch, repeatedly.

 

Anyway, here be the news today:

New Data Suggests Shocking Shale Slowdown

U.S. shale executives often boast of low breakeven prices, reassuring investors of their ability to operate at a high level even when oil prices fall. But new data suggests that the industry slowed dramatically in the fourth quarter of 2018 in response to the plunge in oil prices.

A survey from the Federal Reserve Bank of Dallas finds that shale activity slammed on the brakes in the fourth quarter. “The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—remained positive, but barely so, plunging from 43.3 in the third quarter to 2.3 in the fourth,” the Dallas Fed reported on January 3.

... The downturn is still in its early days. It takes several months before the rig count really begins to respond to major price movements. The same is true for a string of other data – production levels, inventories, as well as capex decisions.

In other words, some early data points already suggest that the U.S. shale industry could struggle if WTI remains below $50 per barrel. But the longer WTI stays low, the more likely we will see a broader slowdown.

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Also, refineries could slip into excess production of gasoline given shale oil is light if they haven't already and driving season is still rather far away. That will weigh on WTI, too. You're welcome, dance away!

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I believe there is no discipline out here in the patch, because honestly shale producers can't afford it.  With prices where they have been and are, they can't afford to stop producing due to trying to continue to pay on debt.  @Tom Kirkman i do care what the price is as it determines whether I go to work tomorrow.  I see it as a damned if ya drill damned if ya don't scenario.  What are they to do??

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47 minutes ago, cbrasher1 said:

I believe there is no discipline out here in the patch, because honestly shale producers can't afford it.  With prices where they have been and are, they can't afford to stop producing due to trying to continue to pay on debt.  @Tom Kirkman i do care what the price is as it determines whether I go to work tomorrow.  I see it as a damned if ya drill damned if ya don't scenario.  What are they to do??

Indeed.  Yes, I was being a bit flippant about WTI price.  Because the U.S. Shale Oil industry keeps not only shooting itself in the foot by undisciplined overproduction, it keeps shooting global, conventional oil producers along with it.

The root, the crux of the problem is the financial model of a debt trap.  U.S. Shale Oil industry ran on pretty much interest free loans - money for nothing.  Then, frantic drilling and fracking had to continuously occur, to produce in ultra-fast-depleting tight oil & gas in non-porous shale formations.  Due to the horrendous decline rates after the initial burst, new light, tight shale wells needed to be drilled and fracked in order to pay off the initial investment.  

And so the hamster wheel of debt in the U.S. Shale Oil industry began its neverending sqeaking marathon on a neverending debt trap.

As of last year, most of the U.S. Shale Oil industry had cumulatively spent more than it earned.  There were a small smattering of exceptions, but overall, the U.S. Shale Oil industry has been a money-losing proposition.

 

I get it, the U.S. desperately wants energy independence, especially from unfriendly Middle East dictatorial regimes.  I would be overjoyed if this happened as well.

But it ain't gonna happen using the current debt-trap financial model.

 

If some smart person can come up with a new financial model for the U.S. Shale Oil industry, and implement it, they would become insanely rich.  I hope this actually happens.

In the meantime, the debt-trap hamster wheel of the U.S. Shale Oil industry will continue to drag down the rest of the world's conventional oil production and oil prices - including conventional oil in the U.S.

With the insane Socialist Green New Deal being proposed by the U.S. Democrats already actively trying to kill off the oil & gas industry and replacing it magically with full blown Socialism and economic Unicorn Farts, the global oil industry doesn't need U.S. Shale Oil going around dragging down oil prices for everybody else.

So, can some bright youngster please come up with a better business model than the existing, unworkable debt trap of the U.S. Shale Oil industry? 

● It would help the U.S. Shale Oil industry actually make money, and pay off existing loans.

● It could choke off the nonsense narrative of the Socialist New Green Deal.

● It would help the U.S. achieve its long hoped for goal of energy independence.

Win-win-win scenario, if some bright person can come up with a new business model that gets the U.S. Shale Oil industry off the hamster wheel of debt and onto a 4 Wheel Drive of Profits.

 

@Mike Shellman

@shaleprofile

 

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45 minutes ago, cbrasher1 said:

I believe there is no discipline out here in the patch, because honestly shale producers can't afford it.  With prices where they have been and are, they can't afford to stop producing due to trying to continue to pay on debt.  @Tom Kirkman i do care what the price is as it determines whether I go to work tomorrow.  I see it as a damned if ya drill damned if ya don't scenario.  What are they to do??

"What are they to do" - develop a economically viable business and stop deluding investors and wasting their money!

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On 1/7/2019 at 9:57 AM, mthebold said:

Granted, low WTI could lead to further slowdowns, which will hammer the shale industry.

On the other hand the WTI-Brent spread is so wide in part because of transport bottlenecks.  How much will the spread narrow when new pipelines come oneline in 2019? 

Also, shale wells are flaring vast quantities of natural gas, and new gas pipelines have been announced.  How would sale of that gas affect shale oil economics? 

The U.S. Shale Oil industry is hammering itself.  I can't really stop an industry from picking up a hammer and repeatedly smashing itself in the foot.

Once the pipeline bottleneck gets resolved even more, the hammer-smash-own-foot business model will likely accelerate, further widening the gap between WTI and Brent.

Flaring of gas is simply wasteful.  I wouldn't mind seeing firmer legislation enacted to curtail this waste of perfectly good hydrocarbons.

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1 hour ago, Marina Schwarz said:

Also, refineries could slip into excess production of gasoline given shale oil is light if they haven't already and driving season is still rather far away. That will weigh on WTI, too. You're welcome, dance away!

As the runaway light tight oil overproduction should eventually get curtailed by self-induced low WTI oil prices, WTI prices should eventually recover. 

But in that interim gap, I fully expect the U.S. Shale Oil industry to rack up even more losses on inability to pay down its loans on the hamster wheel of debt.  Lather, rinse, repeat, run hamster run!

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They have to flare gas because its the cheapest way to produce oil.  If they were forced by regulations not to flare gas, it would make their economics worse.

"The primary greenhouse gases in Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide and ozone".

In other parts of the world if you cant re-inject or sell gas you cant produce the oil!

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Tom, I am curious about the impact DUCs have had on the shale industry's bottom line. There are about 9,000 of them in the US right now and the number has been climbing in most of the shale basins. I was not surprised to see the count climb in 2015 and 2016 when WTI was low and drilling was relatively cheap but it has continued to climb all the way to present even in the presence of drilling cost inflation. 

The question is: How have 9,000 drilled-but-yet-to-be-produced wells skewed the shale industry's appearance of fiscal woes? Does anyone expect to see the DUC count start coming down anytime soon? 

I am no expert, just a curious observer of the industry and would like to hear what you all think.

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While I be down in Permian in a week, I called a friend and said pipeline takeaway seems the issue and DUC wells at all time high. So the "if" in the writers prediction could possibly be a smoke screen to get prices back up. The survey he spoke of means squat to me as there is no real numbers, 43% of? what, 35 oil executives? Before your happy dance, time will tell, it'll take 3 months plus to get a real photo of what is going on. Leases completed?, Maintenance time? there are toooooo many variables for all to come to a screeching halt.

Service industry consists more than just Halli and Schlumb. They be the 2 biguns'. I can tell you they were maxed out in Sept when I was down there. I feel they don't want to invest in a lot of new machines at this point. 

Pipeline takeaway to me is still the enemy of overproduction. Going to start giving away? Like Canada was last month lol. Anyways, my 2 cents worth of 'guessing".

A good WTI number of 54.00 bbl to 56.00 and money can be made. May not be to investors idea of a good number but realistic profit even at them numbers.

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(edited)

On 1/7/2019 at 12:05 PM, NWMan said:

"What are they to do" - develop a economically viable business and stop deluding investors and wasting their money!

The least they could do, given the large inventory of DUC wells (at least the firms holding a healthy inventory of DUC wells), is to stop drilling more. At least till the pipeline capacity catches up with the production capacity (one of the reasons for large WTI-Brent spread being the cost of inefficient transportation, i.e. rail and road, similar to WCS-WTI). Have been very surprised (thus far) by the trends in the Baker Hughes Oil Rig count data - WTI prices crashed in Nov and we are in January. Yet rig count has seen a modest reduction (still up yoy). Two questions to the experts in this group - (1) what is the typical lag between oil prices and rig count and (2) any good reason why you would continue to drill more wells given (a) current oil price (WTI), (b) pipeline capacity constraint and (c) DUC inventory. Tx in advance.

Edited by AcK
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2 hours ago, AcK said:

Two questions to the experts in this group -

(1) what is the typical lag between oil prices and rig count and

(2) any good reason why you would continue to drill more wells given

(a) current oil price (WTI),

(b) pipeline capacity constraint and 

(c) DUC inventory. Tx in advance.

Excellent questions.

Before I shoot my mouth off and offer my take on answers to these questions, anyone else want to take a crack at answering?

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A barrel of oil is roughly equal to 1700 Kwh, or 1.7 Mwh. Dividing $50 by 1700 is .029, or roughly 3 cents per Kwh. Wholesale power rates are usually in the $20 per Mwh range, which is 2 cents per Kwh. It doesn't matter whether this power is generated by coal, natural gas, wind, or solar.

A real time display of grid power prices in Texas is available at Ercot.com. There are others, however this one is convenient and somewhat relevant to the Permian Basin. Generally mousing over one of the nodes displays a price around $20 per Mwh, although this can vary wildly, including 'negative' power rates as low as -$300.

A gallon of gasoline contains 32Kwh. Dividing $2.20 (current retail price of gas where I live) by 32 equals .068, or roughly 7 cents per Kwh. My power bill is around 10 cents per Kwh unless I exceed 1000Kwh per month, at which point it rises to 11 cents.

Migrating trucks and railroads to natural gas knocks out support for oil. This isn't a bunch of idiot investors and hedge funds, it is steely eyed accountants looking at ROI. The more distressed the car industry, the more likely they are to cater to demand for electric cars and other alternative fuels. This is one technological thread that is 'out of sight and out of mind', but keeps improving year over year.

Anyone who gets car dealer flyers in their mail every month should look carefully at what's being dumped in used car lots. Hybrids aren't sold at '$10,000 off list'.

Texas oil isn't just competing with Saudi Arabia. It's competing with Silicon Valley startups, Japanese and Korean battery companies, and an unknown number of disruptors toiling away in their garages.

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The tank car situated between the locomotives contains LNG. These engines have been customized for 'dual fuel', which means that they can burn natural gas or diesel depending on power demands and fuel costs.

Keyword searches on 'Natural Gas Locomotives' brings up research on this running back to the 1960's. Given that the US is sitting on a huge puddle of natural gas, particularly in the Northeast, replacing the filth of diesel with cleaner gas is a no-brainer. 

FloridaEastCostRailway_intermodal_tender.jpg

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On 1/7/2019 at 5:25 PM, mthebold said:

Yes... but I'm not so convinced they have a choice.  Some thoughts:
1)  America is in a political cold war.  If conservatives lose that cold war, the oil industry suffers immensely.  Thus, they have an incentive to keep prices low for the next two years in support of conservative politicians.
2)  America spends enormous sums of blood and treasure keeping Middle Eastern oil flowing.  This costs votes, as the American people have grown tired of foreign wars.  Even the staunch conservatives in small towns are growing tired of their young men coming home broken, committing suicide, and infecting communities with the military's toxic culture.  The military was a conservative jobs program in peacetime, but that's now backfiring.  Conservatives need to wean us off foreign influence and develop domestic job programs.  Shale oil contributes to that. 
3)  The more they grow their market share, the more political influence they gain.  Suffering short-term losses may be to their long-term benefit.
4)  Printing money to keep prices low eventually harms foreign oil.  The Middle East's welfare states now require higher prices than shale.  If shale holds on long enough, is it possible foreign instability will lead to a loss of oil production, which in turn will drive up prices? 

I also suspect that today's depressed prices are short-term.  Shale went through a volatile period in which there was great uncertainty.  We didn't know if low break-even prices could be achieved, if there was enough shale to sustain production, if a sympathetic president could be elected, etc.  Today, there's enough certainty to fast-track oil infrastructure.  Eventually, the infrastructure will catch up to drilling, avoiding huge price differentials between Brent and WTI.  And of course, they'll begin making money on all the methane they're flaring.  What will shale economics look like if that happens? 

Shale oil producers are not unison; I don't think there even exists a cat-herder that could get them to march to same tune. 

This is the invisible hand of the market (supply and demand) + capital allocation committees trying to factor in risk as well. 

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I wonder about the DUCs. It may be that some are not really economical to complete and frac. That takes big bucks and cash flow seems to be an issue with  these companies. At the same time to P&A also takes money so it is easier to just call them DUCs.

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8 hours ago, Tom Kirkman said:

Excellent questions.

Before I shoot my mouth off and offer my take on answers to these questions, anyone else want to take a crack at answering?

I have never understood why rig counts are considered important when completions seem to me the more valued trend to watch. The amount of DUCT’s in my view made rig counts useless over the last 5 years.

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This idea the US needs foreign oil for consumption other than from Canada dosen't seem to match the numbers. Heck the US needs less than  1/2 of Canadian net imports. 

That oil from the Saudi, Venezuela and even Mexico just gets refined and resold on the global markets.  Check the history of exports since fracking took off. 

N America has been FF independent for some time. It won't be long till even Canadian oil won't be needed and the US will be Oil independent on its own. This year or the next.

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On 1/6/2019 at 7:46 PM, Tom Kirkman said:

Music to my ears.  Capitalism works and Supply & Demand are not irrelevant, regardless of musings by certain market pundits.

After kicking up a fuss on assorted topics here on the forum over the last week or so about politics, Trump, U.S. Supreme Court, U.S. National Emergency orders, EU, Environment, Climate Change, Immigration, MSM bias and censorship, Yellow Jacket protests in France, Canada, USA and elsewhere, guns, and I forget what all other fun topics, I'll try to behave myself in this thread and keep it strictly about U.S. Shale Oil and its overproduction.   Wish me luck : )

 

It seems that U.S. Shale Oil industry has overproduced so much that it has shot itself in the foot yet again, causing WTI price to drop due to waaaaay too much O&G produced.

So, U.S. Shale Oil activity appears to be dropping.  And this should eventually help stabilize Brent prices.  

For ages, I have commented repeatedly about my hope for $65 Brent in 2018 and my hope for $70 Brent in 2019.

At this point, WTI is hopeless, and today I don't much give a toss what the WTI oil price is.  The WTI herd of cats seem bound and determined to overproduce themselves into a ditch, repeatedly.

 

Anyway, here be the news today:

New Data Suggests Shocking Shale Slowdown

U.S. shale executives often boast of low breakeven prices, reassuring investors of their ability to operate at a high level even when oil prices fall. But new data suggests that the industry slowed dramatically in the fourth quarter of 2018 in response to the plunge in oil prices.

A survey from the Federal Reserve Bank of Dallas finds that shale activity slammed on the brakes in the fourth quarter. “The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—remained positive, but barely so, plunging from 43.3 in the third quarter to 2.3 in the fourth,” the Dallas Fed reported on January 3.

... The downturn is still in its early days. It takes several months before the rig count really begins to respond to major price movements. The same is true for a string of other data – production levels, inventories, as well as capex decisions.

In other words, some early data points already suggest that the U.S. shale industry could struggle if WTI remains below $50 per barrel. But the longer WTI stays low, the more likely we will see a broader slowdown.

You say, Tom, that "In other words, some early data points already suggest that the U.S. shale industry could struggle if WTI remains below $50 per barrel. But the longer WTI stays low, the more likely we will see a broader slowdown." There is another view possible. History suggests that the longer the price stays low (if $50 is considered low), the harder the producers will work to lower their cost, produce oil more efficiently and lower the breakeven cost, resulting in more production at a lower price. Add to that other factors like the recent indication that China will buy more US crude (which is in their best interest as they replace heavy sour with light sweet as IMO 2020 approaches) and the failure of OPEC to do the simple arithmetic of how much they need to cut production to balance (2 million barrels a day, not one), and maybe what you get is the price of crude DROPPING further to match more closely the equilibrium point of about $40/B. 

I apologize if this seems to be a dose of cold water (or maybe just reality)

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3 hours ago, Boat said:

I have never understood why rig counts are considered important when completions seem to me the more valued trend to watch. The amount of DUCT’s in my view made rig counts useless over the last 5 years.

Agreed, information about completions would be more useful than rig counts.

Unfortunately, the reason rig counts are closely tracked is they are easy to track.  DUCs, and completions, not so much.  Getting accurate information about rig counts is not difficult.  But go ahead and try to find an accurate count of DUCs... good luck.  Last estimate I saw was around 7,000 DUCs.

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1 hour ago, William Edwards said:

You say, Tom, that "In other words, some early data points already suggest that the U.S. shale industry could struggle if WTI remains below $50 per barrel. But the longer WTI stays low, the more likely we will see a broader slowdown." There is another view possible. History suggests that the longer the price stays low (if $50 is considered low), the harder the producers will work to lower their cost, produce oil more efficiently and lower the breakeven cost, resulting in more production at a lower price. Add to that other factors like the recent indication that China will buy more US crude (which is in their best interest as they replace heavy sour with light sweet as IMO 2020 approaches) and the failure of OPEC to do the simple arithmetic of how much they need to cut production to balance (2 million barrels a day, not one), and maybe what you get is the price of crude DROPPING further to match more closely the equilibrium point of about $40/B. 

I apologize if this seems to be a dose of cold water (or maybe just reality)

No issue with a dose of reality or cold water, William.

I have a different view that this WTI will stay sub - $50 for a while, Brent may rise back up to $70, which is the best price range for the next year or so, in my opinion.

WTI breakeven "efficiencies" of cost reduction seem to be mostly squeezing service providors and vendors for lower prices, and not actually lower the real breakeven costs.

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33 minutes ago, Tom Kirkman said:

No issue with a dose of reality or cold water, William.

I have a different view that this WTI will stay sub - $50 for a while, Brent may rise back up to $70, which is the best price range for the next year or so, in my opinion.

WTI breakeven "efficiencies" of cost reduction seem to be mostly squeezing service providors and vendors for lower prices, and not actually lower the real breakeven costs.

Let us check the data mid-year.

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(edited)

20 hours ago, William Edwards said:

You say, Tom, that "In other words, some early data points already suggest that the U.S. shale industry could struggle if WTI remains below $50 per barrel. But the longer WTI stays low, the more likely we will see a broader slowdown." There is another view possible. History suggests that the longer the price stays low (if $50 is considered low), the harder the producers will work to lower their cost, produce oil more efficiently and lower the breakeven cost, resulting in more production at a lower price. Add to that other factors like the recent indication that China will buy more US crude (which is in their best interest as they replace heavy sour with light sweet as IMO 2020 approaches) and the failure of OPEC to do the simple arithmetic of how much they need to cut production to balance (2 million barrels a day, not one), and maybe what you get is the price of crude DROPPING further to match more closely the equilibrium point of about $40/B. 

I apologize if this seems to be a dose of cold water (or maybe just reality)

Would love to hear how OPEC got its math wrong. Below is my math (2017 data basis IEA), rest basis OPEC data released yesterday. Are we missing the fact that Iran/Venezuela (not part of OPEC cuts) are already down like 1.5mbd+ in aggregate. OPEC production will be down 1mbd in aggregate in 1HCY19 over 2017 with the announced cuts. Another 1mbd and we might as well start talking US$100 crude. Maybe demand is not as strong and maybe OPEC does indeed need to do more, but 1mbd incremental cut??

oilprice exhibit.jpg

 

Edited by AcK
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US rigs down 25. Herd of cats on the way to being herded. 

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5 hours ago, AcK said:

Would love to hear how OPEC got its math wrong. Below is my math (2017 data basis IEA), rest basis OPEC data released yesterday. Are we missing the fact that Iran/Venezuela (not part of OPEC cuts) are already down like 1.5mbd+ in aggregate. OPEC production will be down 1mbd in aggregate in 1HCY19 over 2017 with the announced cuts. Another 1mbd and we might as well start talking US$100 crude. Maybe demand conditions are not as strong and maybe OPEC does indeed need to do more, but 1mbd additional cut??669822813_oilpriceexhibit.jpg.c087d44840ad832c4edbc183acd56383.jpg

oilprice exhibit.jpg

Here is the math that OPEC missed. Non-OPEC production was up 2.5 MB/D in 2018. A similar increase is expected this year. Demand grows about 1.5 MB/D each year. If the 2017 supply/demand were balanced, then 2018 saw a 1 MB/D gain and 2019 will see another 1 MB/D gain, minus any OPEC decrease below 2017 levels. 29-2=27. An additional cut of 1 MB/D below the projected 28 MB/D level seems necessary to balance.

I might re-state the point that the idea that the system can "feel" an imbalance of this magnitude on a daily basis and, therefore, responds with price movements is rather absurd. The notion that the oil market is controlled by the relationship between two large numbers (which will not be determined until months or years later) is pure fiction, in spite of its universal acceptance by the trade. Check the historical data for proof.

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