Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.

[Joe689]

Another wild day approaching with tomorrow's report.  Last week's draw was sold off, likely on the increasing shale output.  Seems like consensus is for another draw tomorrow but again there will be continued shale output growth.  So same as last week.  But I bet this week, we see the report get bought.  Crazy oil market

 

Going out on a limb, but I expect around $55 oil until the May meeting.  Then it will be a tough choice for the gang.  Feel like market will decide whether they extend or not.  $50 oil, they extend (cannot allow it to dive).  $60 oil, they will not extend (will say market is balanced)

 

 

 

 

[sculpin]

Energy View-FPA Capital

 

Energy – a sector that had generated higher returns for us in 2016 – struggled in the first quarter of 2017. Russell 2500 energy companies were down 9.12%, representing 4.26% underperformance vs. the index. We view the sector’s weakness as a speed bump on the road to market rebalancing and higher oil prices. Our conviction in this thesis remains firm, as the Organization for Economic Co-operation and Development (OECD) inventory (the proxy for global storage) draws suggest that the market has been under-supplied since Q3’2016. Additionally, OPEC and 13 additional countries have accelerated reductions in excess inventory by largely complying with their November agreement to cut production by 1.8 million barrels per day (bpd). Meanwhile, global demand has been consistently revised upward.

 

So why have oil prices declined during the quarter? There are a few primary reasons, all of which we believe will prove short-lived. The first is simply investor impatience surrounding U.S petroleum stocks, which we believe remain stubbornly high relative to the rest of the world. We would note here that weekly imports have been trending downward since January 11, just as refining utilization is set to ramp up after a particularly heavy maintenance season. At the same time, OECD Europe & Asia Pacific stocks have been falling sharply toward their respective long-term averages since mid-2016. The second issue is anxiety about a resurgence in U.S. shale supply. Indeed, the domestic rig count experienced a notable acceleration since November, while crude production has bounced back by over 600,000 bpd over the last five months. Interestingly, The Energy Information Agency’s (EIA) data show that more than 100% of the increase from September to December 2016 came from Alaska and federal offshore projects, not from the lower 48 states. Moreover, U.S. production alone is simply insufficient to offset the onslaught of OPEC production cuts, limited OPEC spare capacity, historically muted production gains outside OPEC and the United States, multiple years of lower global capital investment, natural production decline rates, and, yes, steadily growing global demand. Further, there are multiple underappreciated headwinds to U.S. production growth, including service bottlenecks, levered balance sheets, potential imbalances between high- and low-density crude supplies, and a limited footprint of tier-one core acreage. Finally, many investors worry OPEC will scale back recent cuts in response to surging U.S. shale production. We believe a Saudi-led extension of the cuts is more likely than not, because the International Monetary Fund estimates that the kingdom needs at least an $80 oil price to balance its (slimmed down) budget, and because of Saudi Arabia’s publicly acknowledged goal this year of reducing global storage levels back to their five-year average. Moreover, OPEC sources have indicated that the group’s members increasingly favor an extension beyond this June.

 

Let’s end with some simple math to better illustrate why those concerned with today’s oil market concerns may be missing the larger picture. On the demand side, the International Energy Agency expects global oil demand to grow by 6 million bpd from YE2016 to YE2022. On the supply side, the EIA estimates that OPEC currently has 2 million bpd in spare capacity (just 3% of global supply); U.S. production is expected to increase by just 800,000 bpd by YE2018; and Non-OPEC ex. U.S. production growth has not budged since 2010 while investment has fallen off a cliff. Add in a supply shock emanating from Venezuela, Nigeria, Libya, or elsewhere and the situation becomes more precarious, and yet constructive for higher oil prices. These are the asymmetric scenarios that we look for, and we are confident that our high quality energy companies are well positioned to benefit in this environment going forward.

 

Source: Robert Rodriguez FPA Capital

[Joe689]

Neutral report to me.  But nothing big to reinforce cuts/re balancing, so bearish in market eyes.

 

Should be an interesting upcoming 30 days or so with upcoming extension talk.  Think the right move is to persevere short term weakness and buy some distressed value oil names.  Can anyone say Canadian E&P?  I will have to go way overweight unfortunately. 

 

 

[Joe689]

Oil markets show blood in the streets.  What a day

[Joe689]

Oil capitulation continues today.    Oil equities are not quite following.  Indication to me that the oil sell off is not fundamental based.    Grabbing some UWT to hold over weekend.

[Uccmal]

Oil capitulation continues today.    Oil equities are not quite following.  Indication to me that the oil sell off is not fundamental based.    Grabbing some UWT to hold over weekend.

 

You can drive yourself nuts following this too closely.  The sentiment shifts all over the place.  So much of the "news" is manipulated by speculators trying to make tiny increments across huge positions. 

[Joe689]

Certainly can go nuts watching oil closely.  Have to remember to keep that in mind.  Anyways, EIA reports today!  ;)  Looking for more guidance on imports, and domestic production.  API was showing gains across the board except for distillates. 

 

OPEC and Russia have sort of been mum during this recent breakdown.  I think they are happy to remind the shale guys not to get over excited, slowing them down.    This price should force the extension?  Otherwise, look out below....

[JayGatsby]

Certainly can go nuts watching oil closely.  Have to remember to keep that in mind.  Anyways, EIA reports today!  ;)  Looking for more guidance on imports, and domestic production.  API was showing gains across the board except for distillates. 

 

OPEC and Russia have sort of been mum during this recent breakdown.  I think they are happy to remind the shale guys not to get over excited, slowing them down.    This price should force the extension?  Otherwise, look out below....

Trend is showing the market as rebalancing:

.

 

Article yesterday that despite OPEC cuts they're still exporting the same amount: http://www.reuters.com/article/column-russell-crude-opec-idUKL4N1HX1V4 . I'm not sure how to interpret that?

[Joe689]

They are drawing from their storage.  To keep market share.  The deal was for production cuts not export cuts.    Inventories are going down as a whole.  Same difference but delay the visibility in the US, which just happens to be the most transparent.  The Saudi's may be building a "supply crunch" narrative.  They will deplete their storage,  use their production to satisfy domestic,  and exports will drop big time.  Suddenly, buyers wont be able to get their barrells at the quantity, grade, price they need.  That's when the freak out will occur.

 

It was game of who could keep exports high, longer.  To keep market share.  Just delays the inevitable and when it is realized, it is too late.

 

Maybe I am getting ahead of myself but if the cuts are extended, we are headed to 60 quickly, maybe higher. 

[sculpin]

Certainly can go nuts watching oil closely.  Have to remember to keep that in mind.  Anyways, EIA reports today!  ;)  Looking for more guidance on imports, and domestic production.  API was showing gains across the board except for distillates. 

 

OPEC and Russia have sort of been mum during this recent breakdown.  I think they are happy to remind the shale guys not to get over excited, slowing them down.    This price should force the extension?  Otherwise, look out below....

Trend is showing the market as rebalancing:

.

 

Article yesterday that despite OPEC cuts they're still exporting the same amount: http://www.reuters.com/article/column-russell-crude-opec-idUKL4N1HX1V4 . I'm not sure how to interpret that?

OPEC has cut production but have been exporting out of their storage inventories (both land based and floating). So overall world & OPEC inventories are decreasing but this oil has been sent to North America increasing the widely followed EIA inventory. Hence everyone believes there is still a huge glut - could be a tactic to keep shale under control and drive the need for a second 6 month OPEC production cut extension.

 

"Oil market is driven by a hub (US inventory) that represents 1/6 of OECD inventory and US production that represents less then 10% of world supply. Shale about half that and Permian another half (so Permian is only 2-3% of world supply). Nonetheless this is all that seems to matter. OPEC has cut production but has been emptying inventories (both land & floating) into North America where the only easily tracked inventory measures are kept. See Iran story below.  As well, inventories & supply/demand must be estimated on a worldwide basis.

 

"The market is also buying into “$40/bbl breakeven B.S.” being promoted by many US oil companies. It is true that the “break-even” level for US oil co’s has fallen over the past 2 years. However, the biggest reason for this has not been from efficiency or well performance gains but rather high grading of locations and profound service cost deflation. Morgan Stanley estimates that of the $30/bbl in breakeven reductions $18/bbl of it is from service cost deflation (more on this later) and $5/bbl is from high grading (drilling only the best of the best rock). Service costs are rapidly rising at the moment and every 10% price move increases the break-even by around $5/bbl. When I hear of the cost of frac sand DOUBLING over the past 6 months and the cost of fracture stimulation rising 25% Q1/Q4 it gives me confidence that we are not living in a $40-50/bbl world. As well, as we have written that the US is not big enough to offset global declines and meet annual demand growth and as such the global supply cost of $60-70/bbl makes much more sense in the medium term."

 

Now that Iran has lost an important instrument of sustaining its exports, the country will have little choice but to cut them. With crude oil production at 3.6-3.7 million barrels per day and 1.8 million bpd utilized in domestic demand, Iran has less than 2 million bpd to spare for exports. This is significantly lower than the 3 million bpd it exported with the help of its tanker storages...

 

 

http://www.economiccalendar.com/2017/04/11/depleted-reserves-iran-sold-all-crude-oil-it-stored-in-tankers-at-sea/

[JayGatsby]

I guess the question is if they cut production but they continued to export, have they really cut at all?

Yes: Global inventories (including OPEC) continue to decline, which was the intended effect. If opec continues to export more than they produce, at some point they'll run out of inventory and global inventories (outside of opec) will decline as well.

No: They're still selling the same amount of oil they always were. The cuts are mainly optics and they'll keep the "cuts" going until they run out of inventory, at which point they'll turn the spigots back on and not miss a beat. Win/win for Opec.

 

Pioneer says breakeven is below $20!  ???

[Joe689]

Yes, I think that two sided argument is spot on and is reflected in the current weak pricing.  But,  I like argument one (yes). 

 

The goal of the cut was to stabilize prices and expedite the re-balancing.  It was assumed that natural laws of supply and demand was working, just taking too long.   

[sculpin]

And the world uses 35 billion barrels of oil & liquids a year?

 

"discoveries declined to 2.4 b bbl in 2016 vs an average of 9 b bbl average over the past 15 years"

 

IEA raising the alarm bells.  This is a great chart that shows you how tight the oil market will get, notwithstanding the shale production emanating from the USA.  Conventional oil discoveries declined to 2.4 b bbl in 2016 vs an average of 9 b bbl average over the past 15 years.  In terms of new projects sanctioned, in 2016 that was only 4.7 b bbl which is 30% lower than last year with the total number of projects reaching FID at levels last seen since the 1940’s.  Moreover, global E&D spending is expected to fall for the third straight year in 2017, an unprecedented occurrence in the modern history of the oil market.

 

“The key question for the future of the oil market is for how long can a surge in US shale supplies make up for the slow pace of growth elsewhere in the oil sector."

 

https://www.iea.org/media/news/2017/Crudeoilresources.png

 

''total number of projects reaching FID at levels last seen since the 1940’s''

 

This illustrates the whole absurdity of the way the market has viewed the cost of new barrels since the rout. OG companies are harvesting existing reserves and their best inventory without replacing these barrels with new reserves of similar quality.  Without step-outs wells, exploratory wells, wildcats and brownfield FID's the true cost of the barrels of oil needed in the future is not represented by the current break-even price.

 

https://www.iea.org/newsroom/news/2017/april/global-oil-discoveries-and-new-projects-fell-to-historic-lows-in-2016.html

 

[Joe689]

Just another day in paradise with the oil sector

[sculpin]

This is good. From the IV BB....

 

In the ESN (Essential Energy) CC, CEO said they are turning down work and picking the contracts they want. And prices are being negotiated higher across the board. The most interesting thing is that I started listening to their CC's about 3 quarters ago and the Q&A session would last 45 min with several analysts asking questions (Even though they are small company, they have a lot of customers and give very good info on the activity). Well, this time their was not one single question asked. The CEO couldn't believe that nobody called in. In fact all the CC's have virtually nobody calling in anymore. It's almost as if the banks fired all the energy analysts.... maybe they only work 3 days a week now and took 50% pay cuts..... It's hilarious.... Right at the bottom.... And everyone is gone....

 

http://www.investorvillage.com/groups.asp?mb=19168&mn=90408&pt=msg&mid=17148956

 

[JayGatsby]

Maybe I'm imagining it, but the API data seems to have an increasingly muted effect on the market with more people waiting for the EIA data on Wednesday.

 

Existing data seems to be pointing more toward an supply/demand deficit?

http://www.marketwatch.com/story/further-opec-cuts-will-deepen-oil-supply-deficit-in-second-half-of-2017-iea-2017-05-10

[Uccmal]

Recent price movements have been event driven rather than fundamental.  The shorts load up, get a few pump pieces out about US shale taking over planet Earth, cash their shorts out, knowing the agencies will bring out data that shows supply is tightening.  And then reload and do it all again.  The smarter guys will be getting out of the short trade at some point. 

 

In the meantime, I am doing a little of the opposite, or at least trying to buy partial extra positions in a couple of my stocks low, and sell higher.  The shorts are better at it than me, with more access to media feeds. 

 

Goldman and Citicorp have gone long from what I have seen in the news. 

[Joe689]

Well looks like the gang is at least going to extend another 8-9 months.  They are not giving up.    They are going to force this market into a deficit if not already.  Question is that once we are into a deficit,  how do we get out?    The more and more you analyze this, you almost just feel that this will follow the cyclical norms and oil will be back into 70s within a couple years.

[Uccmal]

Well looks like the gang is at least going to extend another 8-9 months.  They are not giving up.    They are going to force this market into a deficit if not already.  Question is that once we are into a deficit,  how do we get out?    The more and more you analyze this, you almost just feel that this will follow the cyclical norms and oil will be back into 70s within a couple years.

 

Cant even hazard a guess.  If Capex for major projects stays depressed, at levels lower than my lifetime, then at some point a significant deficit gets created and persists for a long time. 

[Joe689]

Should be an exciting rest of the month as we are about 10 days away from the OPEC meeting.

 

IEA reported last night more of what market already knows.  Balancing is happening, but slowly.  Variables exist i.e. shale that are hard to predict.

 

John Kemp's article "OPEC AND HEDGE FUNDS ARE TRAPPED IN GROUNDHOG DAY" is a good read.  My money is on the saudi-russia partnership being successful in raising oil prices.  I expect a surprise too. 

 

 

[sculpin]

First page from Marshall Adkins (Raymond James) new presentation..

 

Very bullish on oil prices relative to futures strip:

 

Crude moves much higher (30%-50%) by YE2017

 

• Natural gas ok in 2017, lower long-term: gas

supply growth keeps a lid long-term prices

• US Oilfield infrastructure damaged in 2015/16:

Bottlenecks emerge in 2017/18

• At sub-$50/bbl industry cash flows don’t support

800 rigs or current US oil supply growth estimates

• US activity, spending & oil must move up 2017/18

 

[Cardboard]

Sounds like another shitty API report.  >:(

 

Cardboard

[Uccmal]

Since this is in the strategy section....

 

I am having a serious rethink on strategy around oil.  Will elaborate as I think it through. 

 

I no longer believe that we will ever see the price rise.  That is not to say that oil cos. cant be profitable, just that most will be marginally profitable. 

[JayGatsby]

What am I missing from this latest IEA report... doesn't this imply a 1.7 mb/d draw?

Weakness in a number of previously solid countries - India, US, Germany and Turkey - curtailed the 1H17 global demand growth estimate by 115 kb/d. Global demand growth is, however, still forecast at 1.3 mb/d in 2017, with demand at 97.9 mb/d.

 

Global oil supply fell by 140 kb/d in April as non-OPEC, and especially Canada, pumped less. At 96.17 mb/d, output stood 90 kb/d below a year ago, even as non-OPEC returned to growth. Non-OPEC supply is set to increase 600 kb/d in 2017.

 

OECD commercial stocks decreased for a second straight month in March, by 32.9 mb (1.1 mb/d), to 3 025 mb. Product stocks fell sharply on lower refinery output and increased exports. For 1Q17 as a whole, OECD stocks were up 24.1 mb (0.3 mb/d) due to a large build in January. Preliminary data suggests OECD stocks increased in April.

 

Looking at 2Q17, if we assume that April's OPEC crude oil production level of 31.8 mb/d is maintained, and nothing changes elsewhere in the balance, there is an implied stock draw of 0.7 mb/d.

https://www.iea.org/oilmarketreport/omrpublic/

[sculpin]

Since this is in the strategy section....

 

I am having a serious rethink on strategy around oil.  Will elaborate as I think it through. 

 

I no longer believe that we will ever see the price rise.  That is not to say that oil cos. cant be profitable, just that most will be marginally profitable.

 

Pretty much think this is the consensus (oil price will never rise) now. I prefer the other side.  Time to revert to the mean....

 

https://pbs.twimg.com/media/DAAOubsUMAA-gO7.jpg:large

 

https://pbs.twimg.com/media/DAAO3_XUQAAhmZo.jpg

 

Feels eerily like 1999/2000....

 

5/16/17 Most Consensus Trades

 

- bearish inflation theme (commodities)

 

- short energy

 

- long US tech

 

- short CAD

 

https://twitter.com/PainCapital/status/864707488213475328