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

[Cardboard]

This is not false data and was confirmed by two independent organizations.

 

The reason that oil is up slightly today is because the oil build is 13.8 million barrels but, products have come down by 12.4 million barrels for a net petroleum stock build of 1.4 million barrels. Gasoline and kerosene inventories down and distillates flat really helped sentiment today since they were up for a couple of weeks in a row raising worries about demand.

 

Regarding production, Lower 48 States production was up 73,000 barrels/day this week and was down 45,000 barrels/day last week. So it is already going up based on that, the 4 week average and has been going up steadily for months with U.S. production now close to 9 million barrels/day. And no, it does not and will not take 3 months for shale oil to suddenly appear since it takes only 10-15 days to drill/complete and most wells hit their peak 1 month after completion. So it is already there but, decline rates do matter and was overlooked by the market for 2 years with all this newly found productivity magic. Stop drilling and you see quickly what happens to your production.

 

Now where this oil comes from remains unexplained but, there was a surge in net imports and commercial stocks that would explain the 14 million barrels. I guess that we will have to wait another week again to finally see some understandable trend.

 

Cardboard

 

[sculpin]

This is not false data and was confirmed by two independent organizations.

 

The reason that oil is up slightly today is because the oil build is 13.8 million barrels but, products have come down by 12.4 million barrels for a net petroleum stock build of 1.4 million barrels. Gasoline and kerosene inventories down and distillates flat really helped sentiment today since they were up for a couple of weeks in a row raising worries about demand.

 

Regarding production, Lower 48 States production was up 73,000 barrels/day this week and was down 45,000 barrels/day last week. So it is already going up based on that, the 4 week average and has been going up steadily for months with U.S. production now close to 9 million barrels/day. And no, it does not and will not take 3 months for shale oil to suddenly appear since it takes only 10-15 days to drill/complete and most wells hit their peak 1 month after completion. So it is already there but, decline rates do matter and was overlooked by the market for 2 years with all this newly found productivity magic. Stop drilling and you see quickly what happens to your production.

 

Now where this oil comes from remains unexplained but, there was a surge in net imports and commercial stocks that would explain the 14 million barrels. I guess that we will have to wait another week again to finally see some understandable trend.

 

Cardboard

I would encourage you to read the EI board on Ivillage. Will cover the topic in a way you will not see in the mainstream media. Nawar's post below...

 

http://www.investorvillage.com/groups.asp?mb=19168&mn=75471&pt=msg&mid=16842168

 

What we got here is a confluence of things taking place, seasonally, this is an inventory build up period, however this build up is being compounded by three powerful factors, the OPEC pre-deal production surge, US SPR sales, US refineries hoarding cheap crude amid fears of an import tax, this last item applies equally to speculators holding inventories in floating storage, by moving this inventory onshore, they insure premium pricing in case of an import tax, as a matter of fact, I wouldn't be surprised if inventories onshore outside of the US are being moved to within US borders as a way to protect against and benefit from a border tax, should BAT materialize.

 

In light of the above, I believe the US inventory numbers are highly distorted, and thus on global basis, its likely that we're seeing a net decline inventories. The IEA January OMR, the EIA STEO (released today) and the latest numbers from private research outfits such as Energy Aspects are uniform in their assessment that global crude inventories will shrink in Q1 based on current crude supply/demand data.

 

Going back to the EIA STEO, something that seems to have been lost in the fray today is the major revision the EIA did to historic and global demand data (upped by 900K barrels), which in turn greatly reduced the EIA assumed global supply/demand imbalance, from the EIA report:

 

The main effect of this change on the forecasted STEO liquid fuels market balances is that the higher consumption in 2014 raises the baseline to which the STEO forecast benchmarks. As the assumed annual growth rates for forecast liquid fuels consumption have remained unchanged for 2015-18, the higher baseline 2014 data raises overall consumption through the forecast period. With higher consumption only partially offset by additional production, the implied inventory builds (total global supply minus total global consumption) for 2015 and 2016 are smaller than previously forecast.

 

In the February STEO, EIA now estimates that global liquid fuels inventories built by an average of 1.8 million barrels per day (b/d) in 2015 and by 0.8 million b/d in 2016. Those estimates are 0.2 million b/d and 0.1 million b/d lower, respectively, than in the January STEO. EIA now estimates the global oil markets will be relatively balanced in 2017 with moderate inventory builds reemerging in 2018, as the rate of U.S. production growth increases. EIA forecasts implied global inventory draws of 0.1 million b/d in 2017 and a build of 0.2 million b/d in 2018.

 

Based on the above, the EIA, with a stroke of pen, just removed a total of 110m barrels from global OECD inventories, this is in addition to switching their forecast from 300K barrels build in 2017 to 100K withdrawal, which in turn translates into a 146m swing in their 2017 inventory outlook, going from a 109.5m barrels build in 2017 to 36.5m withdrawal.

 

There is noise and there is data, traders are fretting about  a questionable 14m barrels API build due to the factors highlighted at the top of the post, while the EIA just removed a total of 256m barrels from historic and projected inventories, you decide which data point is more important.

 

Nawar

[Cardboard]

Two news articles that also help explain what has been going on in recent weeks:

 

http://www.cnbc.com/2017/02/08/gasoline-demand-recession-indicator-sprung-up-in-january.html

 

http://www.cnbc.com/2017/02/08/oil-news-jump-in-us-crude-imports-to-reverse-in-march-goldman-says.html

 

And since both reflect the analysis of Goldman Sachs who was one of the biggest bears during the downturn and right. Then I believe that we can count on their data indicating that the fundamentals are still improving.

 

However, I can say that after 2 years of trying to decipher U.S. EIA data and looking for a turn that I am getting more than ready to see something unequivocally positive on fundamentals.

 

Cardboard

[Uccmal]

Cant speak to all the speculation but in the past few days I have bought

some wcp, bte, and a little pwt, and today a big slug of mullen group.  All are trading postions, meaning I will shrink them as they go higher. 

 

Wcp and Bte are trading as if it was last winter.  All three o&g cos. are at worst, break even, at these oil prices. 

 

Seems to me, with all the moving parts in the global oil industry, it is only possible to know what is going on after the fact.  Similar to when the US government says there is no recession (2007), and then backdates the start of the recession a year later. 

 

[sculpin]

From Acumen today. The outright incompetence or fraudulent agenda of the IEA is quite disconcerting....

 

Energy

 

Do you know what day it is?  If you said IEA Oil Market Report Day you would be correct.  Today’s report was another typical IEA report where demand was revised higher – historical and future, the MASSIVE draws on oil stocks was pooh pooh’d and the general commentary was softly bearish.  Ok, to the facts:

 

1.        2016 demand was revised higher by about 200k bbl/d to 1.6 mb/d with most of this baked into Q4 demand;

2.      2017 demand was also revised higher to 1.4 mb/d from 1.3 mb/d and still seems 100 or 200 k a day short (EIA is 1.6);

3.      Those demand revisions have been occurring steadily (i.e. each month) since Q4 once again highlighting the flaws in the data collection if you look at it in a nefarious light or the difficulty in collecting data if you have a benign view of these gov’t agencies;

4.      MASSIVE Q4 stock DRAW of 800k bbl/d, the largest in 3 years!  Readers of this note will not find this surprising because it was pointed out back in November when the IEA was projecting a massive BUILD in Q4 despite having two months of draws…..which was of course the consensus narrative that the oil markets are still in surplus.  “Glut” is the oft used word.  Remember, Q4 drew this heavily PRIOR to any OPEC cuts, in fact OPEC was jamming out as much production as possible at the time.  Still, though, the IEA is saying storage is building in oil at sea, despite a flat to backwardated

5.      OPEC compliance at 90% with overall global supplies off 1.5 mb/d in January.

 

So what does this mean?  Jan will be the 6th month of stock draws and those draws look to continue well into 2017.  Additionally, we see the same story from the IEA – demand revisions continue to occur.  My rule of thumb is demand grows ~1 mb/d +/- at $100 bbl and at $50 it is closer to 1.5 – 2 mb/d, all else equal.  What’s interesting is that the data is hiding in plain sight for all to see – my calls for a draw in Q4 wasn’t a hypothesis it was simple math and it was sitting in the data.  Stocks had been drawing since August yet the narrative from the IEA and the Street was still that the market is in surplus.

 

This oil market is fighting a huge wall of worry – OPEC compliance, shale resurgence, border adjustment tax, Hot Air taxes…..but if the data continues to trend as it has, even the IEA acknowledges that demand will exceed supply by 600k bbl/d this year.

[sculpin]

Martin King of GMP Research onside (below).  With OPEC cuts and the world already in a supply deficit as early as last July what happens when the shuffling of inventory barrels to North America ends and the true nature of the supply shortfall comes to pass? $100+ WTI & Brent?

There could be massive value creation in the holdings of certain oil reserves that the market & most if not all market participants blow off as worthless in the forever glut paradigm. Think oilsands especially. What is Athabasca, Baytex (Cda for free now), POE SAGD project worth at $100+ oil, GXE heavy and (any others with 10 bagger potential in such a scenario)?? What will happen to Canadian service co's in a market that realizes North American shale, tight oil is the only feasible short term response mechanism in a world that looks to be short supply for the next 3 years?

 

 

"Putting aside various reasons why we think U.S. supply growth

may not be as optimistic as some think, such growth in the U.S.

(and Canada) still pales in comparison to the supply losses that

are happening in the rest of the world. If we extract out the

U.S. and Canada from monthly Non-OPEC supply data, the

losses have been significant over the past six months, seeing

year-over-year supply losses in the range of 2.0 million bbl/d

(Figure 8). Allowing for what is going to be little capex

expansion outside of North America this year, further supply

losses are likely for at least the remainder of 2017. With

growth of U.S. supply this year being suggested at 200 to 500

thousand bbl/d, and add in a generous 300 thousand bbl/d for

Canada (which may be too high), and these gains are easily

outweighed by the supply losses in other Non-OPEC supplies.

Layering in the supply reductions from OPEC, and it is obvious

that the global market still has a serious supply problem on its

hands that can only be met by tapping into inventories,

whether those be in the U.S. or elsewhere.

 

To make a long story short, inventory draws are already under

way in other parts of the globe and we think it is only now a

matter of weeks to one or two months before we see

significant crude oil inventory reductions in the United States,

both as a function of lower imports and the potential for

greater crude oil exports to other parts of the world of its own

(potentially) growing supply. Either way, inventories in the U.S.

and elsewhere are going lower. We think that once this

message begins to sink in, prices will be headed for a break out

to the upside."

 

[JayGatsby]

Curious for other people's take on the US rig count data... the story from the newsmedia seems to be that the the US rig count is rising so production will increase. Intuitively that obviously makes sense and so far that correlation has played out. However, given 2011 through 2014 averaged ~1900 rigs, at ~700 currently that would indicate to me that there may still be more oil being extracted than is coming online. A year or two ago we were hearing about all of these wells that were being plugged after they were done being drilled ("fracklog" i think was the cnbc term). Is it possible (and/or probable) that the increase in US production is due to the uncorking of these wells and drilled reserves are continuing to decline?

 

7 months old at this point: https://www.bloomberg.com/news/articles/2016-07-21/the-fracklog-isn-t-growing-anymore-and-that-s-bad-news-for-bulls

[SharperDingaan]

A drilling 'program' typically consists of 2-3 horizontal production wells drilled from a common pad, and a number of vertical injection wells. All the wells get drilled at the same time, and some of the production wells are immediately shut-in for future use. As the producing well depletes over time, or additional space becomes available in the collector facility, the shut-in wells are put into service. Point is a lot of drilling, does not equal immediate additional production.

 

Over the downturn new drilling was curtailed, but shut-in wells (frac log)continued to be put into service. Those now depleted fields need new injection wells to pressure up the field and minimize the water/gas/liquids production cut. It's additional (very cheap) injection drilling, but there's no big production spike - as its old wells that are producing.

 

We're now at the stage where new production has begun to come primarily from newly drilled production wells, and the frac log has begun to rebuild. It indicates rising supply, sustainable for some time - but its from a very low base level of production. The  numbers example I did earlier in this thread.

 

Rising NA shale production just means less NA imports; it has zero impact on depletion & supply cutbacks elsewhere in the world, and only marginally reduces the demand on that non NA supply. It doesn't become an issue until NA becomes a net exporter, and that would be primarily a political consideration.

 

For now everybody will just continue to sleepwalk, until the first of the inventory storage runs dry.

Then it gets interesting.

 

SD

 

 

 

 

 

 

     

[JayGatsby]

It’s useful to do a little arithmetic….

 

Assume a 1000 shale oil wells were drilled & connected, on Jan 01, 2014 (3 years ago). They stay in production their entire lives, and on day 1 they test out at 100 barrels/month of 100% light crude - or 1,200,000 barrels/year (1000x100/monthx12 months). Over time; pressure drop, gas and water cuts deplete production at 35%, 40%, 45%, 50% per year. At the end of year 4 the average well is no longer commercial. This is most shale oil.

 

At the end of year 1 - production is down to 780,000 barrels/year (1,200,000 x (1-.35)). At the end of year 2 it’s 468,000 barrels/year (780,000 x (1-.40)). At the end of year 3 it’s 257,400 barrels/year, at the end of year 4 it’s 128,700 barrels/year. Year 1, 2, 3, 4, 5 depletion was 420000, 312000, 210600, 128700, and 128700 barrels/year. Point is; significantly less depletion every year.

 

Were we in 2014 (Year 1) an additional 420,000 barrels/year of production (via the drill bit) would have just kept Year 1 production ‘flat’ at 1,200,000 barrels/year. That same drilling addition of 420,000 barrels/year of production in 2017 (Year 4) would have raised Year 4 production to 548,700 barrels/year – a 130% increase. Point is; at the aggregate level, the impact of new drilling is currently being swamped by depletion on existing wells. Hence we see rising rig counts, falling production, & drillers talking about better prospects.

This makes sense if you assume that 2014 is Year 1 (Year 1 gushes, and Year 2 keeps it stable with year 1). But if you run that out with 3 years of 1000 rigs per year you see a steep increase in production (similar to what we saw). Then in Year 4 when drilled wells fall to 350 (1/3rd), production falls by ~20% (not dissimilar to what we saw, if you assume that not all wells are horizontal and decline this quick). Then in Year 5 to sustain production with year 4 you need 700 wells. If you assume that's where we are today, that's where the arithmetic seems to not line up with what we're seeing. We're seeing wells drilled of ~1/3rd of prior levels but production stable or increasing.

[sculpin]

Many analysts & the media have the US production response incorrect. As a friend says...

 

The increase by 500,000 in US prodn is not the result of shale! Both Bakken & Eagle Ford are still in decline while the Permian increase is aprrox. 200,000 bbls/d according to the EIA YoY. This is modelling revisions and GoM production a lot of which came online in 2015 & 2016 masking shale and other conventional declines. It is about to dry up a long with other long lead time projects. We have seen this in Canada with oilsands projects start ups over the last two years where recent oilsands cost of prodn of 80,000 flowing bbl would mean in todays environment those projects would get shelved. Many analysts are conflating legacy $100 oil decisions with $50 oil to suggest shale is responsible for the recent US prodn rise off the lows of 2016.

[sculpin]

In the end, the EIA called the very large increase in inventories caused by the counting of domestic production logistics (collection, storage and transmission) as compared to imports, “an accounting issue”.

 

http://blog.pricegroup.com/2017/02/21/manufacturing-break-out-the-energy-report-022117/?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+PhilFlynn+%28Market+Insights+%C2%BB+Phil+Flynn%29#.WKyOBFXyu6I

 

The crude oil price broke out to the upside as European Union manufacturing data stunned analysts and give us a surge in oil. The February PMI gauge of Euro zone manufacturing activity came in at 56.0, compared to 54.3 that was the expected read. The rally happened despite a roaring dollar that was pumped on Fed talk that is trying to tell the market that a rate hike may be on the table at the next FOMC meeting. We will get U.S. manufacturing data today as well as more Fed speak but for now, the charts on oil are speaking for themselves.

 

The move higher comes as traders are looking past the U.S. oil and gas glut and focusing on the rising demand expectations that have increased in part because of this strong data. As OPEC compliance to production cuts are good, the global oil market is well on its way to being balanced and as U.S. refiners come out of maintenance, we should see the global oil supply be less than demand. Even Russia has set up its own system to monitor compliance.

 

Our lonely prediction of a market supply balance and record compliance to OPEC cuts is coming true, setting the stage for what should be a very strong oil market for 2017 and 2018.  We had one of the most bullish calls on the street last year and turned out to be correct after a wild swinging and volatile year. Now many others are getting on the bull oil bandwagon as we are on target for oil to test near $73.00 a barrel this year.

 

Dow Jones reports that the Organization of the Petroleum Exporting Countries wants the recent initiative to cut production to be the starting point for a new era of cooperation in the oil industry, according to Mohammad Barkindo secretary general of cartel. Speaking at the International Petroleum Week being held in London, the executive said that it was very positive to see other non-OPEC producers such as Russia to agree to join in with cuts and this type of congenial approach was something that needed to be built on for the future well being of the industry. OPEC pledged to cut production by 1.2 million barrels a day on Nov. 30 last year in order to hasten the rebalancing of the oil markets.

 

We still must work through record U.S. petroleum supply and based on market action, that is expected to happen. U.S. oil exports, already at a modern historical high, will continue to expand and we should see product exports surge to near records as well. We still will see another 10 million barrels sold from the Static Petroleum Reserve here in the U.S and that will happen this month. It appears this oil will show up in commercial inventories when the buyer takes possession.

 

The Energy Information Admission may be giving the impression that supply may be a little bigger than it is. One loyal Energy Report reader says that one reason for the crude oil build is what is called “line fill” in the pipelines and storage tanks that were built by the MLPs to get the new shale oil production from the various fields to the refining markets. The oil is not “usable”. In fact as is the case for the past several years, refinery inventories are virtually unchanged. Meanwhile the change in pipelines and tankage storage fits the change in total inventories perfectly. That is where all the inventory build is and it will not go back to previous levels.

 

My purpose for writing is to gain public exposure on the confusion in counting and reporting of domestic inventories and the direct impact of that process on the size of inventories reported by the EIA. And very importantly, to extend this understanding to the markets. I am convinced this would go a long way toward dispelling the misunderstood claim of an oil glut in the U.S. and worldwide now, and in the future.

 

More importantly, I want to explain to you how EIA counts and reports domestic inventories of crude oil and how this process can and does grossly mistake inventory levels in a way that confuses investors and ultimately can lead to very bad and even harmful mispricing of oil – particularly in the huge and controlling paper market. It is simple, increased domestic production causes exponentially larger inventory “counts” as compared to oil that is sourced from imports. Where crude oil is sourced from has a huge impact on the size of inventory reported by the EIA. As domestic production increased in 2010 to 2015, inventory levels had to increase even though we were reducing imports.

 

And the EIA knows about all of this. They agree with me. I have communicated my concerns to the EIA and I am convinced they are sympathetic with my argument, but I am equally convinced they will do nothing about it. Sure, because of my “hounding” they removed that ridiculous outdated statement about “the highest inventories in 80 years”. Clearly, that does not contend with the issue that causes me great concern. That is why I am contacting you! In the end, the EIA called the very large increase in inventories caused by the counting of domestic production logistics (collection, storage and transmission) as compared to imports, “an accounting issue”.

 

If you choose to consider my claims of “misreporting” by the EIA, during my research regarding the so- called glut in domestic oil inventories that carried over to the entire non-OPEC market, I discovered a very interesting article written by John Kemp, in which he came to some of the same conclusions. But, in the end he wandered into a delta in the contango in the futures market, and the reporting issue lost impact. Here is his article, if you choose to read. Reuters wrote, “The basis of my argument is simple – in the last 5 to 7 years the midstream MLP industry has made a huge amount of capital additions totally purposed to get our new shale oil production gains to refining markets. Obviously, this means adding a lot of new gathering and transmission pipelines and along with them very large amounts of tankage/storage. I spent several years as a senior financial executive of two domestic and international trading companies and one domestic merchant refinery. When I saw this, it seemed to me that this would have the effect of adding a lot of inventory to our system. So, with all this talk about the oil glut from every “expert” you could possibly hear from, I decided to visit the EIA web site once again and check it out.

 

Kemp continued, “As you know, there are now two types of crude inventory; (1) refinery inventories, and (2) tank storage and pipeline inventories. When I looked at the data, I think it supported my suspicion as to why inventories are so high, and why they will not likely go back to prior levels. Along with the data history, the historical graphs paint an overwhelmingly convincing picture of how the growth in total inventories comes almost entirely from pipelines and tankage/storage associated with collecting and transmitting domestic production to refinery markets. To simplify the data presentation for this note, I looked at two data points – March 2011 and March 2016.  – in 3/11, refinery inventory was 93.9 mm bbl, while in 3/16 refinery inventory was 101.2 mm bbl; a very small increase of 7.3 mm bbl.  – in 3/11, tank storage and pipeline inventory was 240.8 mm bbl, while in 3/16 tank storage and pipeline inventory was 395.1 mm bbl; a very large increase of 154.3 mm bbl – explaining all the increase in crude inventories and quite frankly all the crude oil glut. The key to the problem is where the crude is sourced from. When one looks at these numbers, I think it makes it very clear that the inventory increase and oil glut was caused by the increase in domestic production and the new pipelines and tankage that were built to accommodate it. The heart of the issue is what the source of the crude oil is. This will significantly determine the relative level of inventory – and whether there’s an “oil glut” or not. Given the way the EIA accounts for foreign waterborne crude imports (which are counted at discharge near refinery tanks), I would guess they would be at the refinery gates in about 10 days’ max after being picked up as inventory by the EIA.

 

On the other hand, domestic production must go through gathering pipelines to storage at transmission locations or input sites. Once it is in storage at input, it is then transferred in 30 day batches starting at the beginning of the next month. But, the oil is not available to the receiver until the end of the month, at the output location. So, it could be in tank storage and pipeline inventories for 40 to 60 days (or more) IMO, and based on my experience – but it is clearly not usable inventory. But, the important factor is – this not USABLE INVENTORY, any more than the oil on the ships headed to discharge from distant foreign suppliers! Why would you count oil in transit and related storage for domestic production, but not count oil in transit on vessels from foreign ports even though the oil on board is likely owned by the refiner and the vessel is likely controlled by the refiner? Clearly, as we shift from imports to more domestic production for refinery demand, total inventory will increase dramatically, but usable inventory won’t change!

 

With the detail of that earlier email I sent to you, and your understanding of what is really happening, you have all that is needed to clear up the confusion about inventory levels in the U.S. As I was concerned, prices are not increasing to a level of acceptable returns for anybody. This talk about shale producers lowering their breakeven costs is just a bunch of undeserved chest pounding. As services start to raise their prices back to a profitable level, well costs are going right back up. And needed deep water projects are being canceled.

 

That should help put the so-called glut into perspective!

Thanks,

Phil Flynn

[K2SO]

Curious what the long-term oil bulls think about the argument presented in this article:

http://www.marketwatch.com/story/why-oil-prices-will-never-return-to-100-a-barrel-in-one-chart-2017-02-22

 

There's so much focus here on inventory numbers and other short-term indicators. For the longest time, it has made sense to be long oil because a growing economy would mean growing demand, and because it was assumed that we would use up all of the easily accessible reserves.

 

Now, with the upcoming Aramco IPO and the fissures within OPEC, it seems to me that oil producing countries are acting as if they are sitting on a depreciating asset, and are trying to monetize it as quickly as they can.

 

Now assuming the author's interpretation fo this chart is correct, apart from insuring against the tail risk of a Saudi overthrow or WW3, is there any reason for a long-term value investor to own oil stocks?

 

 

[Cardboard]

"API reports inventory declines in crude oil, gasoline: sources. The American Petroleum Institute late Wednesday reported a 884,000 barrel decline in U.S. crude supplies for the week ended Feb. 17, according to sources. Analysts and traders polled by The Wall Street Journal expected a consensus gain of 3.4 million barrels. API also reported a decline of 893,000 barrels of gasoline and a 4.3 million barrel decline in distillates. Analysts expected a decline in gasoline stockpiles of 1.2 million barrels and a decline of distillates of 400,000 barrels. The API report precedes the more closely watched Energy Information Administration report on Thursday. After the report, crude oil for April delivery rose to $53.90 a barrel in electronic trading, following a day in which crude futures snapped a three-session winning streak to settle at $53.59 a barrel."

 

About time!!!

[Cardboard]

Weather there is a giga-trillion barrels of oil or not underground is irrelevant. It is how much is available to markets right away, at what price and how much people are willing to consume at that price?

 

Ask the same economist (LOL) working for BP why oil traded at or above $100 for so many trading days over a 7-8 years span? And how much of these same extractable reserves, with no mention of cost at all, did increase in percentage over the past 2 1/2 years?

 

Cardboard

[Uccmal]

Curious what the long-term oil bulls think about the argument presented in this article:

http://www.marketwatch.com/story/why-oil-prices-will-never-return-to-100-a-barrel-in-one-chart-2017-02-22

 

There's so much focus here on inventory numbers and other short-term indicators. For the longest time, it has made sense to be long oil because a growing economy would mean growing demand, and because it was assumed that we would use up all of the easily accessible reserves.

 

Now, with the upcoming Aramco IPO and the fissures within OPEC, it seems to me that oil producing countries are acting as if they are sitting on a depreciating asset, and are trying to monetize it as quickly as they can.

 

Now assuming the author's interpretation fo this chart is correct, apart from insuring against the tail risk of a Saudi overthrow or WW3, is there any reason for a long-term value investor to own oil stocks?

 

Do you suppose that technically recoverable oil is meaningful?  Pulling a similar chart ten years ago would have revealed nearly the same amount of technically recoverable oil but prices were at 100 per barrel.  We were talking about peak oil on this boards predecessor.  I was arguing that the entire planet had been covered with swamps for hundreds of millions of years, and that we would never run out of oil.  Others disagreed. 

 

Medium term oil prices have nothing to do with the amount of oil that can be recovered.  They have to do with the amount of investment in producing the commodity.  If companies and countries are gun shy about investing in large long term projects then the price will rise.  Of course then we will be in an oil shortage situation.  Back and forth.  Its how commodities behave. 

 

In the mid 2000s we had a shortage of metals of all types.  People were stripping copper from abandoned houses.  Companies leaving cable spools in my neigbourhood would write "no copper" all over the spool so it wouldn't be stolen.  Steel was being stolen and shipped to Asia.  Then suddenly we are in a glut of every common metal after the financial crisis.  So no one explores,or builds, or upgrades their refining capacity for 10 years and then we will get another shortage.  Oil being more of a depleting asset operates on a tighter cycle than metals.  When oil prices rise they have a negative effect on economic production.  Arguably, according to Jeremy Grantham, with whom I agree, the 2008 financial crisis was partly caused by high oil prices.

 

We are not talking a buy and hold forever situation here.  I will be out of oil stocks long before the price reaches 100, if it does. 

[Joe689]

Yet another wild day in oil.  And now a big EIA report to surely shake things up even more.  Data is getting so noisy that I am attributing that to a fundamental change that is working its way through the system.

 

Still buying some beaten down Canadian E&P.  Only place I see value right now.

[SharperDingaan]

The argument that much of the inventory is unusable line-fill is a good one - so long as price continues to rise.

When price falls there is incentive to keep the lines full, but draw down the tank storage via physical delivery on contracts.

 

Spot price is for delivery, now....

 

It means that when US lines & tanks are full, & the expectation is rising prices; the US spot price is very sensitive upwards. If you want more oil now, your choices are to either pay up - or get it from offshore. With offshore cutting supply overall, & diverting that supply to Asia versus the US, it really means pay up. The GS call for higher prices.

 

Once the US lines & tanks are full, US shale production also does not matter - as it cannot get to market.

To make it matter the US has to start tidewater exports (creating space in the tanks); adding pipeline simply creates more unusable line-fill. Hence we can have lots of new/replacement pipeline, and new drilling (replacing depletion) - without it really impacting price.

 

More critically, no-one can afford a sustained decline in price - that starts the tanks emptying.

Hence there is a both a floor price, and a built-in march upwards to offset cost pressures. The price today rising in small increments for quite some time until we get to the USD 70 that GS is calling for.

 

It adds up to a great time to be in oil ...

 

SD

 

 

 

[Cardboard]

EIA confirms mostly API with a small build of 0.6 million barrels vs 0.9 million draw but, larger decline in products more than make up for it.

 

Small increase in Lower 48 States production of 17,000 b/d which is good. No oil rush at $54 WTI...

 

But, big eye popping reduction in net imports of 1.39 million b/d. Net imports for the week at 6.075 million b/d is the smallest that I have seen in a long time.

 

So OPEC and non-OPEC cuts seems to be kicking in with fewer vessels arriving. We now need to see a few more weeks like that.

 

Cardboard

[Joe689]

Eye popping API build.  Doesn't make too much sense.  Waiting for EIA.

[Joe689]

U.S. COMMERCIAL CRUDE STOCKS rose +8.2 million bbl to 528 million bbl last week (SPR release accounted for just 0.251 million bbl)

 

paired with a huge gasoline stock draw.

 

 

[Cardboard]

API was both too high on oil build and too low on product draws.

 

With EIA saying 8 million barrels build and gasoline down 6.6 million barrels, distillates down 2.7 million barrels and others, we have a net petroleum products inventory down 2.4 to 2.6 million barrels for the week. That is a plus.

 

Interesting to see some selling from the SPR of 300,000 barrels. I vaguely recall some decision from Congress but, didn't think it was this early.

 

Net imports were back up 385,000 barrels/day or 2.7 million barrels for the week and refineries consumed 172,000 fewer barrels/day or 1.2 million barrels for the week.

 

So the whole eye popping oil build seems explainable by less production from refineries that are entering their maintenance season and switch over to Summer fuels and an increase in imports. The latter is getting problematic. Where is all that oil coming from with OPEC and non-OPEC cuts now into full gear? Compliance is apparently good, we are 3 months in and vessels at sea should have normalized. I have noticed that Nigeria is up a lot in a chart that I saw this week which could help explain some.

 

Lower 48 States production has continued to climb with 46,000 barrels/day this week and this is getting a bit high for my taste. It appears that a lot of that production is being exported with U.S. refineries being saturated or unable to process all that very light oil. It is still a negative on the supply side on a Global basis.

 

Cardboard

 

[Joe689]

Interesting day to say the least.  Seems the high ratio of long contracts finally got torched.  Now where does it go next? Yet again OPEC needs to step up and assure everybody the cut deal is solid.  Or we are going to extend cuts.

[sculpin]

This is a good post on IV. Huge market with no oversight. Inventory manipulation could make billions for those controlling the flow & know the truth behind it.

 

http://www.investorvillage.com/groups.asp?mb=19168&mn=80482&pt=msg&mid=16943938

 

 

Boy, I think this is one of the best examples of market manipulation I've seen

in quite a while.

 

The numbers are absolutely huge.  With consumption somewhere around 100M bbl/d globally, a dollar change in price represents a $36B annualized change in value.

 

And you throw in paper "future" barrels and it goes off the charts.

 

But with global players and trillions of dollars moving around, how they do it is absolutely remarkable.  Probably the real advantage they have is absolutely no oversight and no fear of punishment from insider trading, collusion and all the other SEC no no's.

 

Throw in electronic trading on multiple exchanges globally that no government oversight agency can possible keep up with, corrupt governments involved and personal greed and bingo.

 

Maybe from a macro sense supply and demand matters, but realistically unless you are way out of balance, it really doesn't.  We can track ships, storage, consumption, depletion rates, terrorist attacks, etc. to the tenth of a barrel but realistically you are still throwing at the dartboard.

 

The whole stock market is rigged and unless you are an insider, you are an outsider.

 

GLTA .. you will need it.

 

Meanwhile, Mexico and Venezuela

 

While the shifting stored oil barrels game continues, in the real world, Mexico's production for January was down 240,000 BOD YOY, with another 100k to 150k BOD drop expected, this year. In Venezuela, as of Feb. they were about 13 million barrels in arrears, in terms of oil for loan payments, to Russia and China. Rosneft has a 49.9% lien on Citgo, as collateral for loans, and may press to take ownership if/when PDVSA defaults this year. PDVSA claims they'll average 2.5 million BOD production this year, but they haven't been above 1.8 million BOD in exports for months, and can't pay for diluent, or to have export tankers cleaned, so they can begin their voyage. Funny thing : you have to dig in the weeds to get this information, which is mostly absent from the main stream financial media.

 

 

[Cardboard]

Reminds me of good ole John Embry on BNN in the early 2000's when he was asked if gold would reach $400 an ounce. And he would reply: "Probably not on this trip."

 

It was so discouraging to be a gold investor back then, it was very similar to oil now. There was also a lot of discussion around manipulation. And a group called GATA was formed and sued large banks such as JP Morgan. Even Embry himself left Royal Bank because they did not like him mentioning that gold was being manipulated by banks and he joined Eric Sprott which in my opinion really helped put Sprott on the map.

 

Controlling oil sentiment is really not that hard when you think about it. You have to tell people what factor to look for, create illogical or make scratch your head type data and wait for the perfect opportunity to present it.

 

The financial media kept on saying in recent weeks that there was a large long contract position held by speculators. And for a few years now, they have been talking endlessly about U.S. oil inventories. Then all of a sudden, we have an eye popping 8 million barrels oil build while it should have been logically going down based on OPEC cuts. And voila, you had the perfect conditions to create a large profitable short downswing in oil this week.

 

How often did you hear mentioned this week that net oil products actually went down 2.5 million barrels in the U.S.? Or any indication about fewer loaded ships now being at sea explaining the large onshore build?

 

And how hard and painful is it to manipulate the media? All the big guys have to do is to go have lunch with a babe such as Jackie Deangelis, give her your side of the story, pay her lunch, maybe offer her a Louis Vuitton bag or tickets for some event? She may or may not say exactly what you want on TV but, it was a cheap investment and likely pleasant experience. Ever wondered why John Kilduff gets so much airtime?

 

Now this will work as long as we are in "balance" according to the poster. I see 3 large supply events in the oil market and they should all be due this year:

 

1- Venezuela is on its last $10 billion and it is burning fast. These guys can't be saved by $55 oil, not even $70. If civil war or regime change occurs, it won't be good for their production.

2- Nigeria has been really ramping up production with a more peaceful situation in the delta. However, the president is outside the country to address major health issues, the economy is doing terrible and you still have a divided population. What happens if sudden elections are required?

3- Iran is not on Trump's list of friends and they keep on defying the U.S. with missile tests, harrassing U.S. vessels, etc. Even without confrontation, new sanctions are almost unavoidable and if U.S. businesses can't do business there, it makes it very hard for European businesses too due to banking. Means fewer outlets for their oil, tougher to insure shipments, etc.

 

While previously it was worrisome to be an oil investor. Now you can own very cheap oil stocks with very solid balance sheets, good hedges in place and cash flow positive at $40 oil. Even if oil was to go in the $30's for a few months, they would still make it without any trouble. So while it is unpleasant to be hit like this week with declining share prices, you at least know that you will make in through.

 

Cardboard 

 

 

[Uccmal]

Yeah, there is alot of manipulation as always. 

 

There is alot missed in any analysis.  Prices to produce from Us and Cdn shale are cheaper than they were.  But for how long?  They have been going after the low hanging fruit for the past two years.  At some point prices for production rise in NA.  Sharper Dingaan discusses this in the PWT thread.  My read is that getting labour back to shale is proving difficult.  The high skill labour force has moved on to other more stable industries. 

 

WCP, my largest O&G holdimg reported GAAP, EPS profits for the 4th Q 2016.  BTE, is looking better, but still speculative, with no GAAP profits anywhere to be seen, but they are making slow progress on their debt.  PWT reports next week.  I dont expect EPS profits yet but they should be in materially better shape. 

 

The price manipulation allows the small investor good entry points, or re-entry points.  I would expect Oil to whipsaw more.