A "Flood" of new oil..........

[Southernguy]

Re: deflation vs oil

However, as oil (and natural gas) are inputs of production be it bread, butter or cars, a sharp drop in the former's prices implies a (lesser but significant) drop in the latter's.

I am hoping EJ will explain more about the related questions of interest rates, dollar purchasing power, oil prices, and debt deflation.

One thing I am certain of is that lower prices due to lower cost oil is not the same thing as lower prices due to a debt deflation. Finster has speculated that the lower oil prices are due to the lack of QE, ie, the fed is now permitting market forces to express the deflationary bias inherent in the still high debt levels.

If oil is genuinely cheaper, it just means more money to be spent on other things, which is certainly not deflationary.

[GRG55]

Re: A "Flood" of new oil..........

Can you explain why oil being priced in dollar causes deflation when oil prices fall? I don't understand this.

"Headline inflation" usually refers to the Consumer Price Index published by the US Bureau of Labor Statistics. The BLS measures the change in relative price of a basket of goods (in US Dollars, of course) that includes energy products. "Core inflation" excludes energy and food prices from the basket of goods on the premise that these two are much more volatile than other goods. Hence the headline inflation number has gone negative, due to the rapid fall in energy products like gasoline and home heating oil, while core inflation is still slightly positive.

jk is correct that the Fed (FOMC) seems to favor a Chain Price Index of the Personal Consumption Expenditure published by the Bureau of Economic Analysis, which attempts to measure consumption of durable goods, non-durable goods and services. It too has headline and core versions of the measure.

[GRG55]

Re: A "Flood" of new oil : Be Careful What You Wish For

People seem to be under the gross misunderstanding that this is something new. It isn't.

The resource extraction industries (all of them, not just oil and gas) have a well deserved reputation for being extraordinarily efficient destroyers of capital.

There's an old adage in the oil patch that the second owner of a property makes all the money. We are about to see that video play yet again. There will be plenty of producing properties that change hands, some at distress prices, as the banks choke off credit to the most indebted companies that paid to drill them. And despite the high initial decline rates the oil will keep flowing, and the smart money second owners are going to make out like bandits. Count on it.

Edit added: The smart money in the oil patch knows there are four distinct phases to every cycle: A time to drill, a time to sell, a time to work on the golf game, and a time to buy. Rinse and repeat. And in case anybody is wondering, there is still plenty of time to finish the back nine.

Forget about the rig count. The serious "drilling for oil" is about to shift to Wall Street. It is early stages yet


Get Ready for Oil Deals: Shale Is Going on Sale

(Bloomberg) -- A decision by Whiting Petroleum Corp., the largest producer in North Dakota’s Bakken shale basin, to put itself up for sale looks to be the first tremor in a potential wave of consolidation as $50-a-barrel prices undercut companies with heavy debt and high costs...

...Buyers are ultimately after reserves, the amount of oil a company has in the ground based on its drilling acreage. The value of about 75 shale-focused U.S. producers based on their reserves fell by a median of 25 percent by the end of 2014 compared to 2013, according to data compiled by Bloomberg...

...In the pre-plunge days, acquisitions were dominated by foreign buyers overpaying to get a seat at the shale boom table. That buying frenzy was followed by an explosion in asset sales as companies pieced together their ideal drilling portfolios. Joint ventures were a popular way of funding what seemed like an unstoppable drilling machine.

Now, an expected surge of deals is more likely to feature fire sales by companies unable to pay expenses, falling asset prices and a widening division between the haves and have-nots.

Sellers will be companies like Whiting, handicapped by heavy debt and lacking the cash reserves or hedging contracts that would have provided some insulation from the market crash. Among the three biggest producers in North Dakota -- Whiting, Continental and Oasis Petroleum Inc. -- the value per-barrel of reserves has fallen by about half since June, the data show, meaning those reserves would cost a buyer half what they were worth eight months ago...

[GRG55]

Re: A "Flood" of new oil..........

It's a purely USA WTI related wager. There's lots of moving parts in the equation but in a nutshell:

1. Unlikely to receive approval from Washington to export large quantities of crude oil;
2. Rig utilization is rising, so domestic gas and oil production both likely continue to increase for a while yet.
3. Gas substitution is accelerating rapidly; the oil and gas industry is walkin' the talk by converting drilling rigs, frac spreads, water heating and boilers to CNG and LNG supply now. Other industries, including shipping, rail and mining are coming along. This change won't materially influence actual oil product consumption in one year (2014), but there is the very real possibility that it influences market sentiment toward future demand for diesel and other oil derivative fuels.
4. These two trends have not yet changed:

Might be appropriate to apply a Hobbesian analogue to the oil producers and markets today: fragmented, poorer, nasty, brutish and maybe comparatively shorter lived than most are expecting.

In a perverse twist, the Saudi/OPEC and non-OPEC reluctance to cut production may drive the price into a regime where capex intentions are more severely curtailed than so far, and production is more aggessively shut in. At the moment, other than the Chapter 11s, there is great reluctance to change much.

Market share, market share, market share! Saudi didn't spend tens of Billions of Dollars last decade to shut it in this decade:

Oil slips close to $55 as Saudi output rises to near record

LONDONMon Mar 23, 2015 8:25am EDT

(Reuters) - Oil prices declined on Monday, holding near $55 a barrel after Saudi Arabiaindicated it was now pumping near a record high of 10 million barrels per day, adding to concerns of global oversupply.

Saudi Arabia has stood firm on output, saying it would only consider cutting it if other producers outside OPEC also joined......Saudi oil minister Ali al Naimi also said the kingdom was now pumping around 10 million barrels per day (bpd), which could indicate an increase of 350,000 bpd over its February production...

Minimal adjustments at Sinopec - a top decile destroyer of capital in this business:

Sinopec Profit Falls to Lowest Since Lehman Collapse in 2008

3:45 AM MDT
March 22, 2015

(Bloomberg) -- China Petroleum & Chemical Corp. shares slumped the most in over three months after Asia’s biggest refiner posted its lowest annual profit since the 2008 collapse of Lehman Brothers Inc. sparked the global financial crisis...

...Last year’s “profit decline was mostly due to lower crude prices and inventory losses,” said Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC. “This year will be ugly for Sinopec as upstream losses may intensify and inventory losses may continue.” Sinopec’s 2015 profit could fall another 80 percent, assuming a price of $50 a barrel for Brent, he said.

Sinopec shares dropped as much as 3.6 percent in Hong Kong trading this morning. The stock was down 2.8 percent to HK$6.03 as of 9:49 a.m. Sinopec has fallen 12 percent in the past year, compared with a 12 percent gain in the city’s benchmark Hang Seng Index...

...Capital spend this year will drop to 135.9 billion yuan from 154.6 billion yuan in 2014, with more than half that investment going to oil and gas exploration and production, Sinopec said.

The cut in capital spending is insufficient if the refiner wants to maintain an operating margin similar to that of 2014, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein, said in an e-mailed research note.

“The focus of Sinopec this year has to be more emphasis on cost control, capex cuts, restructuring and reform to improve long term returns which are simply too low,” he said...

[don]

Re: A "Flood" of new oil..........

Hedgers paying more for downside oil protection


Author: Asia Unhedged March 27, 2015


Oil had its best week in five years on the back of the Saudi-led coalition air strikes in Yemen, but the gap between the cost of options with a strike price 10% below spot and options 10% above spot is wider than ever. The normalized cost of options at different strike prices and maturities is expressed in points of implied volatility, an output of option-pricing models

As the oil price plunge gained speed in mid-December, the normalized cost of oil options at different strike prices was roughly the same. But as oil recovered, the gap between implied volatility on options with a strike 10% above spot widened relative to options with a strike 10% below spot. In plain English, that means that a 10% drop in oil hurts a lot more people than a 10% rise in oil.

[GRG55]

Re: Are Petrodollars the Real Story?

i'm waiting for the economist to repeat the cover titled "drowning in oil."

More Big Oil layoffs: Schlumberger axes 11K jobs

USA TODAY11:20 a.m. EDT April 17, 2015

NEW YORK—The beleaguered oilfield services industry took another big hit Friday with Schlumberger announcing it would slash another 11,000 jobs, on top of the 9,000 jobs the company previously announced would be cut. Schlumberger Chairman and CEO Paal Kibsgaard made the announcement in a press release announcing a first quarter profit decline of 29%...

[thriftyandboringinohio]

Re: Are Petrodollars the Real Story?

I was looking at the logistics websites today and see more evidence that conservation may keep oil demand down for a long time.

These quotes are from this article http://www.scdigest.com/ASSETS/FIRST...7.PHP?CID=9216
The article is a quick summery of a recent shipping industry conference.
Of note:

...The always interesting Derek Leathers of Werner noted that the length of haul for truckload carriers continues to decrease, down some 25% in recent years as shippers position inventory closer to customers, driven specifically by ecommerce strategies but more generally as well. Leathers said the averages have fallen from 700-800 miles per load to 500 or so, sometimes even lower....

and

...FedEx's Henry Maier said his company has kind of thrown its advocacy chips toward a move from twin 28-foot trailers to twin 33-footers, rather than even longer trailers or heavier truck limits, because it believes this is a change than can get done in Washington. Maier said such new rules would lead to an 18% reduction in trucks on the road for that class of freight , and of course reduce CO2 emissions proportionately...

[don]

Re: Are Petrodollars the Real Story?

Salman Fishing in the Yemen: Saudi Arabia and Russia deal to stabilize oil price

Author: Asia Unhedged April 24, 2015

A quiet, partial rapprochement between Saudi Arabia and Russia could change the dynamics in the oil market. Hence the sudden short-covering in the crude market.

Oil has been roaring back, and geostrategic considerations explain at least part of the price recovery (the weakening dollar, which Asia Unhedged also predicted, is another factor).



In Asia Times today, M.K. Bhadrakumar explains the reason that Russia did a 180-degree turn over the delivery of its S-300 air defense system to Iran:

Clearly, the Saudis hope to strike a deal with Putin over Yemen so as to isolate Iran. They are preparing for a showdown with Iran, as the scrape yesterday in the Yemeni skies foretell. This is not a time the Saudis would like to see the Russians beefing up Iran’s air defence system.
Now, one thing Saudis can do for Russia is to calibrate the oil prices to move up, which is a critical issue for the Russian economy.

The Russians are chess-players, and in chess, the threat is mightier than the execution. Russia has the power to change the strategic balance in the Persian Gulf. It doesn’t have a lot of pieces to play, but Russian missile technology is an important factor. Russia offered an older version of its air defense missile system to Iran (China is getting a newer version, the S-400) as soon as the Obama administration struck its nuclear deal with Iran. That served a lot of Russian objectives (including putting a cream pie in Washington’s face). But it also gave Russia a bargaining chip against Saudi Arabia.

On April 20, Russia’s President Vladimir Putin invited Saudi King Salman Bin Abdulaziz to Moscow. No Saudi King has visited Russia before, and something big presumably is afoot. Whatever it is, it’s good for oil.


Update:

By M.K. Bhadrakumar

The Russian Deputy Foreign Minister Sergey Ryabkov announced yesterday, inter alia, that Moscow is going slow on the supply of S-300 missiles to Iran. He said the S-300 deal isn’t “a matter of the nearest future.” It’s a wonderful quibble over time past, time present and time future. What could possibly explain the Russian retreat?

Moscow certainly expected that the Iranians would summarily drop their $4 billion claim with the international court of arbitration in Geneva against Russia’s non-compliance with the 2007 deal. But this may not be happening .

Moscow doesn’t have a strong case to defend in Geneva. Of course, for the Russians it’d be a humiliation to be seen executing the deal while the suit is still pending. Obviously, a meeting point needs to be found. The trust deficit needs to be overcome.

Having said that, Moscow’s retreat also has a broader context. The Russians announced their “rethink” three days after the telephone call to Putin by King Salman bin Abdulaziz of Saudi Arabia on April 20.

We don’t know what prompted Putin to invite Salman to visit Russia. In fact, as recently as the recent Sharm El-Sheikh summit meet of the Arab league (March 28-29) regarding Syria, Saudi Arabia and Russia had an ugly spat and the Saudi Foreign Minister Saud al-Faisal had accused Putin of hypocrisy.

Clearly, the Saudis hope to strike a deal with Putin over Yemen so as to isolate Iran. They are preparing for a showdown with Iran, as the scrape yesterday in the Yemeni skies foretell. This is not a time the Saudis would like to see the Russians beefing up Iran’s air defence system.

Now, one thing Saudis can do for Russia is to calibrate the oil prices to move up, which is a critical issue for the Russian economy.

On the other hand, the priority at this stage for Tehran is to preserve the dynamic of their talks with the US on the nuclear issue, which have reached a crucial stage. Interestingly, Zarif penned an Op-Ed in the New York Times offering seamless cooperation with the US exactly a week after Putin signed the presidential decree in Moscow on S-300.

Put differently, if Putin had hoped that S-300 would complicate the US-Iranian engagement, that hasn’t happened.The excellent chemistry at the personal level between the Iranian foreign minister Mohammad Zarif and the US secretary of state John Kerry has helped the two countries to expand their confidential exchanges to cover issues such as Yemen. Significantly, Washington also has downplayed the S-300. President Barack Obama was plainly dismissive.

All in all, Moscow would have thought the April 13 decree on S-300 would be a masterstroke, but the calculations have gone awry. It remains to be seen how Moscow seeks to explain this retreat on S-300. Foreign Minister Sergey Lavrov’s bold statement of April 13 on the issue is the current benchmark.

But the real thing to be watched is how the Putin-Salman dialogue develops. As I wrote yesterday, the shadow play going on in the Middle East has many sub-plots.

[gwynedd1]

Re: A "Flood" of new oil..........

I love the oil business; so honest; so forthright; always an honest day's pay for an honest day's work.

[don]

Re: A "Flood" of new oil..........

I love the oil business; so honest; so forthright; always an honest day's pay for an honest day's work.

Back before extreme extraction I met a geological survey engineer who said his work decided where the next wars would be fought. Not your grandma's home bakery.

[santafe2]

Re: A "Flood" of new oil..........

I love the oil business; so honest; so forthright; always an honest day's pay for an honest day's work.

Yup, almost as honorable as the precious metals mining business.

[lektrode]

Re: A "Flood" of new oil..........

Yup, almost as honorable as the precious metals mining business.

which might've been - or might yet still be - had the honorable bankster biz not be rigging/fixing the game...

but where would either of them be, were it not for the most honorable profession
(which is right up there on the honorable scale with the oldest..)

wait fer it....

that of the occupants of the beltway

/sarc

[GRG55]

Re: A "Flood" of new oil..........

I love the oil business; so honest; so forthright; always an honest day's pay for an honest day's work.

I'll bet more business is still done with a handshake in oil and gas than banking, finance, law, accounting, auto retailing, mortgage broking, property realtors...

[jiimbergin]

Re: A "Flood" of new oil..........

i'll bet more business is still done with a handshake in oil and gas than banking, finance, law, accounting, auto retailing, mortgage broking, property realtors...

or insurance!

[don]

Re: A "Flood" of new oil..........

We Are Witnessing A Fundamental Change In The Oil Sector

By Arthur Berman
Posted on Wed, 29 April 2015 20:46 |

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 implications are profound. Production will decline by several hundred thousand barrels per day before the effect of reduced rig count is fully seen. Unless oil prices rebound above $75 or $85 per barrel, the rig count won’t matter because there will not be enough money to complete more wells than are being completed today.

Tight oil production in the Eagle Ford, Bakken and Permian basin plays declined approximately 111,000 barrels of oil per day in January. These declines are part of a systematic decrease in the number of new producing wells added since oil prices fell below $90 per barrel in October 2014 (Figure 1).


Figure 1. Eagle Ford, Bakken and Permian basin new producing wells by month. Source: Drilling Info and Labyrinth Consulting Services, Inc
(Click image to enlarge)

Deferred completions (drilled uncompleted wells) are not discretionary for most companies. Producers entered into long-term rig contracts assuming at least $90 oil prices. Lower prices result in substantially reduced cash flows. Capital is only available to fulfill contractual drilling commitments, basic costs of doing business, and to complete the best wells that come closest to breaking even at present oil prices.

Related: A Closer Look At The World’s 5 Biggest Oil Companies

Much of the new capital from junk bonds and share offerings is being used to pay overhead and interest expense, and to pay down debt to avoid triggering loan covenant thresholds. Hedges help soften the blow of low oil prices for some companies but not enough to carry on business as usual when it comes to well completions.

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. The Eagle Ford Shale is the most attractive play with a break-even price of about $75 per barrel. Well completions averaged 312 per month from January through September 2014 when WTI averaged $100 per barrel (Figure 2). When oil prices dropped below $90 per barrel in October, November well completions fell to 214. As prices fell further, 169 new producing wells were added in December and only 118 in January.


Figure 2. Eagle Ford new producing wells (2 month moving average) and WTI oil prices. Source: Drilling Info, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Bakken break-even prices are higher at about $85 per barrel. Well completions averaged 189 per month from January through September 2014. In November, only 80 new producing wells were added. In December and January, 123 and 114 new wells were added, respectively. Orders for rail cars used to transport oil decreased by 70% in the first quarter of 2015 compared with the fourth quarter of 2014.

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Related: What Happens To US Shale When The Easy Money Runs Out?

Figure 3. Bakken new producing wells (2 month moving average) and WTI oil prices. Source: Drilling Info, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Permian “shale” play break-even prices are also about $85 per barrel based on declining well completion data. Well completions averaged 175 per month from January through September 2014. In January 2015, only 35 new producing wells were added.


Figure 4. Permian “shale” new producing wells (2 month moving average) and WTI oil prices. Permian “shale” includes horizontal wells in the Bone Springs, Consolidated, Delaware, Spraberry, Wolfcamp,Trend Area and related combinations of those reservoirs. Source: Drilling Info, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Related: Oil Prices Won’t Recover Anytime Soon Says Exxon CEO

Much of the commentary about the backlog of deferred completions is exaggerated and irrelevant unless oil prices increase to $75 or $85 per barrel. The assumption underlying most industry chatter these days is that oil prices will return to normal.

The world oil market is undergoing a fundamental structural change in response to expensive oil. Producers are trying to survive by limiting expenditures. While analysts have been focused on rig counts, deferred completions have emerged as the initial path to lower U.S. oil production. This unanticipated outcome suggests that others may follow. While everyone is waiting for higher oil prices and for things to return to normal, what we may be witnessing is the end of normal*.

*James Kenneth Galbraith, The End of Normal–The Great Crisis and the Future of Growth (2014).

By Art Berman for Oilprice.com