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

[sculpin]

We had also mentioned that the drilling industry was slowly being dismantled. Here is further proof to that:

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aESN-2420808&symbol=ESN&region=C

 

Many have moved back "home" which means 1,000's of km for some. Returning means moving costs, abandoning a new found job in a different field, disrupting the family, all for a potentially higher paying job with zero certainty as to its duration.

 

Ramping back up to previous production level in the NA shale industry will prove much more difficult that the media has made so many believe. Based on the above, it is pretty clear that drilling costs have reached a bottom and that producers will have to pay more for new wells. Indication of that are multiple in current Q3 reports.

 

And this is for shale which is more flexible with low investment, low risk per well. For deepwater, the situation has got to be much worse.

 

There is no thesis drift in the very large producing bucket outside OPEC and Russia.

 

Cardboard

 

And this from Acumen referencing Trican's (Cdn frac'g service provider) comments...

 

Energy services comments:  interesting comments from TCW yesterday regarding staffing availability.  This note has been stating for some time that labour availability is becoming scarce.  This is counterintuitive given the mass unemployment in the province these days.  But if you listen carefully you will frequently hear radio commercials from service companies that are hiring.  Here is the money quote from TCW:

 

We are not currently anticipating activating any additional equipment. However, management will consider activating parked equipment if service prices increase to a sustainable level and we are confident that long-term demand exists. Staffing challenges and labour constraints are beginning to emerge and may become a significant risk to activating parked equipment in the future.

 

The reality is that service pricing will need to move higher on any incremental activity increase in the Basin if only because there will need to be an incentive (higher wages) to bring back workers, many of whom have integrated elsewhere in the economy.  TCW for instance, is operating half their equipment and in order to bring back any more there will need to be a return attached to it.  The E&P’s have squeezed all the blood from the service company stone and I stick with my rule of thumb that the next $10 move in oil will be in the service company’s favour.

[Uccmal]

We had also mentioned that the drilling industry was slowly being dismantled. Here is further proof to that:

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aESN-2420808&symbol=ESN&region=C

 

Many have moved back "home" which means 1,000's of km for some. Returning means moving costs, abandoning a new found job in a different field, disrupting the family, all for a potentially higher paying job with zero certainty as to its duration.

 

Ramping back up to previous production level in the NA shale industry will prove much more difficult that the media has made so many believe. Based on the above, it is pretty clear that drilling costs have reached a bottom and that producers will have to pay more for new wells. Indication of that are multiple in current Q3 reports.

 

And this is for shale which is more flexible with low investment, low risk per well. For deepwater, the situation has got to be much worse.

 

There is no thesis drift in the very large producing bucket outside OPEC and Russia.

 

Cardboard

 

And this from Acumen referencing Trican's (Cdn frac'g service provider) comments...

 

Energy services comments:  interesting comments from TCW yesterday regarding staffing availability.  This note has been stating for some time that labour availability is becoming scarce.  This is counterintuitive given the mass unemployment in the province these days.  But if you listen carefully you will frequently hear radio commercials from service companies that are hiring.  Here is the money quote from TCW:

 

We are not currently anticipating activating any additional equipment. However, management will consider activating parked equipment if service prices increase to a sustainable level and we are confident that long-term demand exists. Staffing challenges and labour constraints are beginning to emerge and may become a significant risk to activating parked equipment in the future.

 

The reality is that service pricing will need to move higher on any incremental activity increase in the Basin if only because there will need to be an incentive (higher wages) to bring back workers, many of whom have integrated elsewhere in the economy.  TCW for instance, is operating half their equipment and in order to bring back any more there will need to be a return attached to it.  The E&P’s have squeezed all the blood from the service company stone and I stick with my rule of thumb that the next $10 move in oil will be in the service company’s favour.

 

Any thoughts  on if this would apply in other areas of oil production such as deep sea drilling, and fracking in the US.  It would seem to me that if you laid off your engineers involved in designing and building longer term projects, and they have moved on, it may take years to get some large projects up and running again.  The actual drilling is a relatively high skill job as well. 

[Joe689]

Boone Pickens has brought up this problem a few times in the past.  Not only engineers that found new careers, but also maybe retired.    He has been saying for over a year now that prices would recover because production would peak.  He has mostly been wrong so far.

 

Interesting rebound in oil today.  Next couple weeks are going to be real entertainment with OPEC meeting and jawboning in the meantime.

 

What is everyone's bet on OPEC decision?  I am optimistic on a considerable cut because the alternative would be quite ugly for prices and likely the collapse of OPEC.    Most people think they will do something, but likely be lackluster.

 

 

 

 

[Cardboard]

"What is everyone's bet on OPEC decision?"

 

Here is the latest production chart from OPEC:

 

http://s.wsj.net/public/resources/images/ON-BX026_OPECOc_ER_20161114150028.jpg

 

So, the 3 key players or the ones who have collectively added just over 3 million barrels of oil per day on the market between 2014 and now are: Iran, Iraq and Saudi Arabia.

 

The glut would have been resolved a while ago if these guys had kept their production more or less constant since 2014: Iran is a special case thanks to a foolish deal, Iraq is post Hussein expansion plans and Saudi Arabia really wanted to increase its market share and kill shale.

 

Who is going to cut among these 3 if at all is near impossible to answer? There is a religious war between Iran and Saudi Arabia and Iraq is now controlled by Iran. And none of these countries is doing well fiscally at $45 oil. Acting rationally does not seem to be their strength so I won`t hold my breath.

 

Cardboard

[Uccmal]

I dont think anything gets agreed upon.  If I had some sort of confidence that this motley crew would accomplish anything at all I would be all in with my Cdn. oil stocks.  As it is, I generally keep it below 20%.  The markets are sort of reflecting a dead OPEC. 

 

There doesn't seem to be any cautious optimism, or anything else.  As Cardboard has indicated these dummies would rather bicker on their petty religious differences than actually try to manage a market. 

 

They are caught in a mouse trap of their own making and cant get out.  In order to finance their respective wars and welfare states they need to keep pumping all out.  Pumping all out keeps the price down.  At some point they will run out of money, and be willing to actually come to the table and act on their mutual interest. 

 

Curiously they always seem to have enough sense not to blast their enemies oil rigs, refineries, and pipelines. 

 

I think any gains in the oil price come as longer term projects continue to get mothballed, and capital,  and expertise flees the industry.  It doesn't come from OPEC.  It all takes longer than we expect. 

 

With this in mind I am happy with my three oil holdings PWT, BTE, and WCP for now.  All of them will do okay for at least another couple of years.  As mich as I like quick gratification, I think it is unlikely. 

[Joe689]

I am in the minority that think the deal gets done, and is substantial.  Think we are under playing the Russia card.  Russia has big interests in an OPEC cut, and they too seem to want to freeze at least if OPEC gets it done.  But what I think people are missing is; Russia, being outside OPEC, can help broker this deal within OPEC, especially in regards to IRAN.  You see evidence of this with the latest oil contracts and arms deals. Russia is partnering up with Iran to yet again increase their presence in the middle east.  With Iran being one of the problems in the OPEC deal, I see Russia working behind the scenes here big time.  Russia has a lot to loose.

 

Anyways, API tonight followed by EIA tomorrow.  Refiners should have started to come back on?    Looking for a small build, maybe even a draw?  If bullish numbers come from this report, this could really burn the shorts.  I cannot believe the shorts came back and in such force considering the impending deal.  They are brave.

 

With the right combination of things, it is not too far of a cry to be near 60 by year end. 

 

Or I guess with the wrong combination, back at 35?

 

 

[Cardboard]

I think that you are correct to expect better reports from API and EIA. There were big draws in gasoline, distillates and other products last week along with the relatively small oil build. Refiners were ramping back up but, that was obviously not sufficient to keep finished products inventories stable. So that should soak up some of the oil excess supply with higher refinery runs.

 

Regarding OPEC and Russia, we hear so many conflicting voices so who knows? Putin appeared very much in favor to support a deal but, then the boss at Rosneff said the exact opposite.

 

The other unknown IMO is Libya. They are slowly ramping back up and the situation over there seems to have calmed down a fair bit in recent months. They have a lot of capacity that could come back on line if the country comes together and they should not be part of any cap by any potential OPEC deal.

 

Venezuela remains a very potential Gray Swan. They need condensates from other countries to dilute their heavy oil and have had some difficulties paying bills. They have been able to delay the unavoidable on their various bonds but, for how much longer? The country is an absolute disaster and this is a 2.1 million barrels/day producer.

 

So there are a lot of moving pieces and until OPEC speaks and acts in unison or if some disaster occurs, it does not seem so courageous for traders to short this market with the media still firmly in their camp with negative news all the time.

 

Cardboard

[Joe689]

Talk about a reversal.....  Big day for oil.  OPEC is scrambling...

[sculpin]

This is the same fund manager who wrote the comprehensive report on the oil market at the beginning of the year....

 

 

 

https://www.islainvest.com/LTI/Tarpon_Q3_16_LTI.html#Cales_Notes

 

Dear Investors,

 

The Tarpon Folio has returned 37.7% from January 1, 2016 through August 31, net of all fees. Over the same period the S&P 500 Index has returned 7.8%.

 

It has been a challenging time to be a value investor in the energy sector. The good news is that my being a stubborn fool seems to be working well for us. Thank you for sticking it out so far.

 

We continue to hold low cost-basis positions in sixteen energy companies that will benefit significantly as oil prices rebound.

Our companies operating in the Permian Basin of West Texas have continued to drive Tarpon’s outperformance. Our cost basis in Resolute Energy (REN) is $3.07 per share. Shares closed on August 31st at $16.91, representing a 451% gain. We have also seen a 594% return on our holdings of Clayton Williams Energy (CWEI), which we originally acquired for a weighted average price of $9.09 per share and which ended August at $63.11. Alas, neither position was a very large one for us in Tarpon originally, but we retain full positions in both companies today. All things being equal, both stocks should be ten-baggers for us at the peak of the oil cycle.

To be clear, we have owned a few duds during this oil cycle, too. The degree of difficulty when investing in small energy companies during the worst oil bear market in history has been considerably higher than I would normally choose to pursue…but, well, the potential gains have been that much higher, too. Fortunately, at this point, the difficult-and-duds have been jettisoned from the portfolio – some with extreme prejudice. But let’s just move along, shall we?

 

On The Permian

 

 

Analysts at Wood Mackenzie believe the Permian has larger recoverable oil and gas potential than the giant Ghawar field of Saudi Arabia. The Midland and Delaware basins of the Permian in particular "hold the largest number of undrilled, low-cost tight [unconventional] oil locations in the lower 48. No other region comes close." Much of the capital in Tarpon is invested right there.

 

The geology of the Permian is unique. It consists of 3,000 to 5,000 feet of a dozen prospective oil zones, stacked right on top of each other. These “stacked pays” translate into dramatically lower costs to produce oil, making well managed Permian companies the most capital-efficient oil companies in North America. Over time, as technology continues to improve costs and extraction techniques, Permian players will steal market share from other higher-cost producers – both in the U.S. and abroad.

 

That said, we are value investors. We aren’t buying companies simply because they can spell Permian and plan to grow by constantly issuing new stock. The Street’s history of myopically rewarding growth above all else in the oil patch has created a number of extremely low valuations among the more disciplined of management teams. We are looking for the cheapest, safest exposure to the Permian we can find - run by management teams that emphasize internal economic returns over growth-at-any-cost - in order to maximize our own long-term returns.

 

The largest, most popular publicly traded Permian operators appear overvalued to me – in spite of the oil bust. In contrast, none of our Permian companies appear to get much respect at all from the Street right now, which I view as a good thing. But that’s a subject for another letter.

 

With reference to those two outperformers in Tarpon I mentioned earlier - two of Resolute Energy’s recent wells in the Upper Wolfcamp play in Reeves County, Texas, are now producing pre-tax, full cycle IRRs (internal rates of return) in excess of 100% at current oil prices. And that is just in two zones of what could be a dozen plays in the same stack. Clayton Williams Energy, historically a mediocre operator, nonetheless has 66,000 net acres of really good rock also in Reeves County, and is having operational discipline thrust upon them by a large private equity firm which has been buying up CWEI’s equity and debt. Recent transactions in the immediate area put CWEI's landholdings well in excess of $100 per share.

 

On a look-through basis, an aggregated view of all Tarpon company holdings shows a clear, heavy and intentional portfolio weighting towards cheap, safe growth in oil production in the Permian. These companies should continue to be among the first to resume growth as oil prices rise – while either keeping their balance sheets stabilized and/or improving them.

 

We also continue to own companies operating in areas outside the Permian – including in Canada, the Bakken in North Dakota, and the Eagle Ford in Texas. I characterize these positions in Tarpon as low-to-no-current growth, but cash flow neutral. Despite a lack of growth of late, they own good-to-great rock that will drive attractive internal returns once their balance sheets are fully in order and as oil prices increase, at which point these companies can begin to grow intelligently - and at lower cost due to improved efficiencies, drilling processes and technology.

 

Our other companies outside the Permian should soon begin to appreciate significantly as well, assuming a sustained rebound in the price of oil is imminent. And I believe it is.

 

Stocks vs. Flows

 

 

I believe that there is a very high probability that the global oil market is currently balanced – meaning daily supply is meeting daily demand, right now in real-time. This pivotal development, however, is not being reflected in the price of a barrel of oil for a number of reasons.

The first is that the data that should confirm this balance is on a significant lag.

 

U.S. inventories and production data are delayed and revised for up to three months. Inventories in thirty-five other developed economies (“OECD” countries) are revised on a four to six month lag. OECD consumption data is published monthly, but global consumption figures are only published annually. Nobody has a good handle on monthly oil demand in small (“non-OECD”) countries – and that number could be meaningful at this point in the oil cycle.

Quick aside: a really interesting question right now is…never mind “balanced” - if the world was actually in a supply deficit right now, how would the market know?

Also, speculation in the “paper” markets could be temporarily masking fundamental shifts in the “physical” market by way of sheer volume. This one takes a little bit of explaining.

 

The “paper” oil market dominated by speculators dwarfs the “physical” oil market of actual oil producers. The volume of WTI (West Texas Intermediate) oil barrel contracts (1 contract = 1,000 barrels) is over 100x the volume of actual barrels of WTI oil that move through the Cushing, Oklahoma oil hub – and is more than 5x global supply. In other words, in the short-term, speculation can easily overwhelm longer-term fundamentals. Thus all these volatile short-term price swings.

To speculators, oil prices should be correlated most strongly to oil storage levels in the U.S. It’s “stocks” not “flows” that matter to the paper market – in other words, the level of inventories is of much greater interest than the supply/demand balance in the market. Speculators are incentivized to exploit arbitrage strategies (i.e. attempt to create risk-free profit) that right now seem to rely on importing low cost oil barrels in the U.S. – keeping oil inventories higher than might be expected – in order to then export it at significantly higher prices and profit.

 

Seasonal demand for oil in the U.S. is typically strongest in June, July and August – but the weekly headline numbers for inventory draws this summer, oddly, not only came in smaller than expected but culminated in a series of small increases in U.S. oil storage. This seemed all the more befuddling because oil was concurrently seeing very strong demand, and we saw multiple supply disruptions in the market this summer as well, from Canada to Nigeria.

So how in the world were oil supplies in the U.S. still building this summer?

 

Strong imports.

 

High oil imports in the U.S. – ostensibly driven by both speculators and refiners – painted a confusing picture in the paper market this summer. And those elevated levels of oil imports into the U.S. are obscuring more fundamental trends in the physical market, specifically in crude inventory withdrawal numbers.

Interestingly, the data seems clear that (a) a high percentage of oil imported into the U.S. this summer came from “floating storage” – ships that traders rent, fill with oil and temporarily park offshore in the pursuit of arbitrage – and that (b) those floating barrels are just about exhausted.

If you combine the drawdown in floating storage stocks this summer with reductions in oil inventories this summer in Saudi Arabia, Nigeria, Canada, Venezuela and Iran, you’ll come up with almost 80 million barrels of previously stored oil that is now gone outside the U.S. And that’s just from places that are easy to track.

So “stocks” or oil inventories are coming down throughout the world. “Flows” are slowing dramatically (see the footnote below). Once inventory stocks have reached an equilibrium point where global supply matches global demand, and oil no longer accumulates in storage, then the market price of oil will be less driven by the paper market’s obsession with near-term shifts in U.S. oil inventories, and global fundamentals in the physical market will resume their importance. And I believe that day is upon us.

 

The Rest of 2016

 

 

It is possible but unlikely that imports into the U.S. will continue to trend higher throughout September and October – a time when our refineries temporarily shut down to reconfigure for producing winter-blend fuels. And once fewer barrels are coming into the U.S. less than leaving, we will see oil inventory in the U.S. drawdown at a rate that will likely surprise many.

 

To reiterate – it is global fundamentals which drive crude oil prices in the long-term, not levels of oil storage in the U.S. The current persistent inventory surplus in the U.S., more recently due to the large scale movement of other people’s barrels into the U.S. to capture arbitrage and/or refining profit, is creating an impression of abundant global oil stocks while masking significant worldwide production declines.

 

The speculators’ obsession with the “stocks” view of high U.S. oil inventory levels is dominating the pricing of oil today. A fundamental view of changes in production “flows,” however, not only provides little analytical support for the speculator’s view – it eviscerates it by the end of 2016. As a result, I believe this will become obvious to both sides of the oil market in the next few months.

 

So while speculators, oil bears and shortsellers appear to be banking on increased storage builds in the U.S. during the refiners’ upcoming maintenance season, trading on simple seasonality may not work when re-balancing can occur in unpredictable ways, and especially now that U.S. producers can export oil.

If crude inventories in the U.S. could build this summer, then unwinding arbitrage trades on imported barrels this fall could completely flummox those who are ignoring the fundamentals. And that, too, would continue to be good for us.

 

In Summary

 

 

Based on my own tracking of global production “flows,” the world is currently in a deficit of approximately 1.2 million bopd – and headed lower – compared to a year ago. Demand, meanwhile, is up about 1 million bopd over the same period last year. All of which means that even if something miraculous happened – like that, say, Rhode Island suddenly starts producing 1 million barrels of oil per day – the world will still see a supply deficit of over 1 million bopd by the end of 2016.

The mainstream media and Wall Street continue to obsess about U.S. shale and OPEC. They are missing the bigger picture. Neither U.S. shale nor OPEC have any material additional capacity, and the 40 million barrels of oil per day previously coming to market from the rest of the world is in significant decline. The capex is simply not there to replace that declining production anytime soon. And the geopolitics of the Middle East continue to simmer on medium-high.

 

As a result, I continue to believe that the oil market is at serious risk of sleepwalking into a supply crunch in 2017.

 

When it comes to our own companies in Tarpon, I suspect the most near-term catalyst when it comes to further price appreciation is likely to be the current record high interest in shorting stocks across the sector. I believe the bears and shortsellers are dramatically overplaying their hand today. The primary question seems to be what exactly will convince them of that, too. I suspect that seeing significant drawdowns in U.S. oil storage during refiner shoulder season might finally do it.

Regardless, by mid-October, a more accurate global picture of supply and demand should become clearer to all - free of the noise caused by a massive shift of oil inventories into the U.S. this summer.

 

Signs of this are starting to emerge already, most notably in pricing curve signals like “fading Brent contango” – a narrowing discount between the price of Brent oil available for sale immediately and the Brent price six months out, which reduces the incentive to store oil. This signal in particular is probably the clearest indicator that the market is beginning to sense an end to the biggest oil bust of all time relatively soon. Another sign is apparent in a recent price hike by Saudi Arabia on oil shipped to the U.S. and Asia. The Saudi’s own oil inventories appear to have come down far enough, and they appear to not want their storage levels to fall any further while global demand is still very high.

 

Either way, it appears the tide is about to turn. Finally.

 

If I am right about the oil market being in balance already, then we will soon see oil prices begin to increase for an extended period of time.

If I am wrong, and the world is not currently balanced, or if for some other reason oil prices continue to wallow in spite of important fundamental trends, then the probability of that 2017 supply shock will increase materially. At some point it will become unavoidable. And though our gains might be deferred, they should still be significant.

 

In either case, our reaction will be the same. We will be patient and wait.

Please let me know if you have any questions.

Thank you.

- Cale

 

 

*Footnote:

Much more relevant than market structure is market math. Other relevant facts from this summer supporting the conclusion the global oil market is currently in balance:

By the end of June, Chinese oil production had decreased by 376,000 bopd compared to last year.

In August, oil production in Colombia had fallen 102,000 bopd per day compared to a year earlier – an approximate 11% decline in a year, the biggest year over year (YOY) decline in its history.

The hot mess that is Venezuela has seen its YOY production decline by at least 200,000 bopd.

Nigeria’s YOY production is down at least 300,000 bopd.

Mexico’s YOY production is down at least 100,000 bopd.

In July, Russian production had fallen by 200,000 bopd – since just the first of this year.

U.S. production is now down from the peak in April of 2015 by just under 1,000,000 bopd.

Each of the numbers above, without increased capex, will continue to fall into 2017. They appear largely unaccounted for in IEA projections. In addition, Brazil production is in decline; Petrobras now only has 10 rigs working offshore. The North Sea is in decline. Etcetera. I think you see the point:

Global production is falling significantly – all while inventories are being reduced by strong demand. That oil inventories in the U.S. have been too high for too long appears largely due to arbitrage and refiner incentives, both of which are (for oil bulls) problems that should soon take care of themselves.

[Uccmal]

I am in the minority that think the deal gets done, and is substantial.  Think we are under playing the Russia card.  Russia has big interests in an OPEC cut, and they too seem to want to freeze at least if OPEC gets it done.  But what I think people are missing is; Russia, being outside OPEC, can help broker this deal within OPEC, especially in regards to IRAN.  You see evidence of this with the latest oil contracts and arms deals. Russia is partnering up with Iran to yet again increase their presence in the middle east.  With Iran being one of the problems in the OPEC deal, I see Russia working behind the scenes here big time.  Russia has a lot to loose.

 

Anyways, API tonight followed by EIA tomorrow.  Refiners should have started to come back on?    Looking for a small build, maybe even a draw?  If bullish numbers come from this report, this could really burn the shorts.  I cannot believe the shorts came back and in such force considering the impending deal.  They are brave.

 

With the right combination of things, it is not too far of a cry to be near 60 by year end. 

 

Or I guess with the wrong combination, back at 35?

 

Does Russia, or has Russia, since the fall of the wall, ever engaged in supply side control of the oil flow?  I dont know the answer, but my understanding has been that the companies operate as private enterprises 'independent' of the government.  They obviously can only pump to a certain level without alot of lead time due to distance issues not faced by OPEC. 

[Joe689]

Good question.  During the last OPEC freeze/cut, I believe Russia agreed to participate, but then didn't stay true, and just kept pumping.  So they have a track record of not keeping integrity.

 

As for the dynamics of government vs private enterprises, it is so inter-mingled.  It all comes down to the loyalty to Putin.

Good article here:

http://www.bloomberg.com/news/articles/2016-10-20/putin-helped-save-his-oil-giant-now-rosneft-returns-the-favor

 

So I would say there are no free market rules in Russia, and maybe Rosneft could rationalize that freezing would be still be in its interest as it will increase prices proportionally more than the actual supply growth that it could have had.  Just as OPEC is arguing....  It is worth more to cut.

 

All in all, this entire deal is a hot mess and will never live up to its max potential.  Nonetheless, something is better than nothing and can only speed up the supply demand balance. 

 

Natural market forces will force a balance between supply and demand.  It is just taking forever.  And by the time is happens, it will be too late, oil will spike for years because of the delay/lag in new production/exploration.  So I think these efforts are important.  It might not be a stretch to say that majority of the world wants to see this deal happen.  It will be best for stable world growth.  Only country that might not give a flying f, is Iran.  A year ago they were without oil revenue anyways.  They have a lot of leverage.

 

Sorry for all the randomness.  Thinking out-loud. 

[Cardboard]

API was bad last night with a build of 3.7 million barrels vs an expected draw of 2 million. Let's see what EIA has to say in 20 minutes. Products inventories and Lower 48 States production will be important too.

 

Cardboard

[Cardboard]

Well, other than for a small decline in U.S. production, it really was an abysmal report for the bulls. No idea why oil is slightly up right now...

 

Refinery runs have gone back up and now seem sufficient to keep products inventories stable. So not much upside from there.

 

Net imports did increase by another 6.37 million barrels for the week which explains most of the 5.3 million oil build being reported.

 

Imports were 58.961 million barrels for the week vs 48.776 last year and 55.783 for the last 4 week average. Exports were pretty stable.

 

Very Large Crude Carriers which is the most common type of vessel to carry crude over long distance contain around 2 million barrels. So we can say that roughly 3 more of these did offload this week vs last week, 5 more vs last year and 1.5 more vs the 4 week average.

 

You would think that a reversion to the mean for imports should be expected in coming weeks but, unless OPEC gets it act together, it seems that the best one can hope for is for inventories to remain as is going forward. The market appears balanced. If they don't act and there is no further cuts elsewhere, then inventories will remain sky high.

 

Get your shorts ready Tombgrt!

 

Cardboard

[Joe689]

This party is just getting started.  Bad report mostly with higher than expected builds but with a small decrease in domestic production.  Oil drops after report, and five minutes later the jawboning comments are released.  Timely aren't they?  I do not need to be convinced anymore.  There is a concerted effort  from OPEC and others (Russia) to prop oil prices.  With Russia and SA on board, who is to stop them?  Iran, Iraq? 

 

Feeling very confident with my oil holdings over the next 6-12 months.

[Joe689]

RUSSIA’S NOVAK SAYS MAY MEET SAUDI ARABIA’S FALIH IN DOHA

RUSSIA ENERGY MINISTER SAYS SEES BIG CHANCES FOR OPEC TO AGREE

RUSSIA ENERGY MINISTER SAYS EVERYTHING WILL DEPEND ON OPECS DECISION, RUSSIA WILL SUPPORT OPEC DECISION

RUSSIA ENERGY MINISTER SAYS THERE IS NOT YET DECISION WHICH DATE TO TAKE FOR OIL FREEZE, NOVEMBER OR JAN 1

[Cardboard]

"There is a concerted effort  from OPEC and others (Russia) to prop oil prices."

 

Well that is the problem, it is just talk. And the market is getting really tired of their propping.

 

Cardboard

[JayGatsby]

I don't really understand OPEC's logic here. If they collectively reduced output by 10% wouldn't most people agree that prices would increase by at least 10% (world would then be in an undisputed deficit)? So revenue would go up while they're selling less oil?

[Joe689]

"There is a concerted effort  from OPEC and others (Russia) to prop oil prices."

 

Well that is the problem, it is just talk. And the market is getting really tired of their propping.

 

Cardboard

 

Agree, market is getting tired of their propping, and prices reflect that.  If the market believed all that they said, oil would be trading at 55 by now.  I am just in the minority that a substantial deal gets signed on Nov 30th.  Prices will pop just as they have in history.  By the time, we find out if cheating is taken place, we should be further down the road of being re-balanced anyways. 

 

Jay, yes, it is a non brainer, and is the reason cartels are formed, to control price.  Nov 30th will decide if there is or if there isn't a cartel anymore. 

[tombgrt]

I don't really understand OPEC's logic here. If they collectively reduced output by 10% wouldn't most people agree that prices would increase by at least 10% (world would then be in an undisputed deficit)? So revenue would go up while they're selling less oil?

 

Prisoner's dilemma. Cartels work until they don't.

 

 

 

@ Cardboard: I'm rather agnostic on where oil is headed. I'll keep to just disagreeing with some of your logic. No offense otherwise. Maybe I was a little blunt about it.

[Joe689]

The jawboning continues.  SA says to reduce at the low end of target.  At this rate, we will have leak on more specific details of deal soon.    How can one bet against oil right now? 

[SharperDingaan]

You might want to keep in mind that those VLCCs were filled up somewhere.

Whoever did so had to open their taps wide, & will be showing elevated production this month - just ahead of these discussions. A cut from an elevated level appears much bigger than it actually is, as does the jump to a predetermined price level - from an artificially lowered bar.

 

We're essentially on a little ship watching a play about oil.

What we see on the stage is theatre; what's making us seasick are the growing swells that the ship is floating on. 

 

We live in interesting times.

 

SD

 

 

Well, other than for a small decline in U.S. production, it really was an abysmal report for the bulls. No idea why oil is slightly up right now...

 

Refinery runs have gone back up and now seem sufficient to keep products inventories stable. So not much upside from there.

 

Net imports did increase by another 6.37 million barrels for the week which explains most of the 5.3 million oil build being reported.

 

Imports were 58.961 million barrels for the week vs 48.776 last year and 55.783 for the last 4 week average. Exports were pretty stable.

 

Very Large Crude Carriers which is the most common type of vessel to carry crude over long distance contain around 2 million barrels. So we can say that roughly 3 more of these did offload this week vs last week, 5 more vs last year and 1.5 more vs the 4 week average.

 

You would think that a reversion to the mean for imports should be expected in coming weeks but, unless OPEC gets it act together, it seems that the best one can hope for is for inventories to remain as is going forward. The market appears balanced. If they don't act and there is no further cuts elsewhere, then inventories will remain sky high.

 

Get your shorts ready Tombgrt!

 

Cardboard

[Joe689]

 

So elegantly described!  What is the best strategy to make money during this drama?  Think staying long on oil is the play.  Random thoughts:

 

1.  They will end up cheating

2.  What price will OPEC target considering US Shale is breathing down their neck

3.  Are we over analyzing?  Is this just another cycle in the cyclical nature of oil?  Are we going to spike big time?

4.  Trump card.

 

 

[Uccmal]

 

So elegantly described!  What is the best strategy to make money during this drama?  Think staying long on oil is the play.  Random thoughts:

 

1.  They will end up cheating

2.  What price will OPEC target considering US Shale is breathing down their neck

3.  Are we over analyzing?  Is this just another cycle in the cyclical nature of oil?  Are we going to spike big time?

4.  Trump card.

 

1. Of course, but it doesn't matter because all the big OPEC players are overpumping - is that even a word?  Anyways...

 

2) Dont  know and probably doesn't matter.  Capital has become more cautious right now, and will stay that way until it appears that we have reached peak oil again. 

 

3) Yes, it is cycle.  This too shall pass and one day the oil age will pass, but not today. 

 

4) Completely not relevant.  Aside from actually investing Us government money in shale, the US gov't cant do anything.  For every action there is a reaction.  Cutting off Mid-East oil to the US would drive prices higher on the continent - that would not be popular.  The only beneficiary I see from the US eliminating mideast supply is Canada and the shale states.  And I believe the US operates mostly as a free market, that is capitalized by private investors, unlike the OPECs.  More tax breaks for domestic development maybe - but where does the money come from?  The only thing I see happening under the PE, is the mother of all recessions following a tax and spend binge (a little off piste - sorry).

 

The upshot is it is all unpredictable in one sense, but completely predictable on another level.  Companies that sensibly manage their balance sheets should do well going forward. 

 

 

[rkbabang]

 

Largest oil deposit ever found in U.S. discovered in Texas

[Joe689]

What price does it take to get out of the ground though?  The planet has plenty of oil in ground , no question there.  The question is how much is economical at $45 to drill....