Oil price discussion and analysis

Smurf1976 · 10 March 2020

Something to note about the US "shale" wells is that they have an extremely rapid decline in output initially, it falls like a rock basically, but they do ultimately stabilise at a low but steady rate that goes on for a very long period.

I won't put figures on it since it seems to be highly variable between regions and between wells but bottom line is bring it online today and a year later you've lost two thirds - three quarters of the flow rate. A year after that it's down by half again. Roughly. Keeping overall production up thus requires a lot of capital and ongoing physical activity.

It's plausible that in a forced sale situation someone will buy them up with the intention of operating for low costs rather than maximum flow rate. Keep them going, there's stuff all costs to keep an existing well running, and it just plods along trickling out for many years. An unexciting but still profitable business if you can buy them at the right price.

So in that scenario the well that flowed at 100 barrels / day ends up sitting there doing 5 - 10 barrels / day for a very long time as essentially a passive operation. Someone goes and checks the equipment once every now and then but it's otherwise just a low cost passive operation not aiming for high production rates but rather, aiming for low cost. Unexciting but not dead.

Such operations already do exist in the US, commonly known as stripper wells, and are typically owned by small operators operating them in a passive manner.

I can see that as being an uncertain but plausible scenario. Stop drilling, total production drops rapidly with the lack of new wells and there still being many relatively new ones undergoing rapid decline, but it's not heading to zero if they're kept in operation as such. Possible.....

ducati916 · 10 March 2020

qldfrog said:
With the aud low, i bough ooo osh and beach petroleum today..my only buy foray.
Amza got slammed 40pc last night in the us market and i had a decent exposure so it hurts
50pc down in 2 sessions
Duc must not be happy

No not happy at all. However, that is the reality currently. I will step in tomorrow and buy some additional shares with February's dividend and possibly use some of the current cash (AMZA).

I did buy ERX today at $2.52 (down 60%). This (in time) will provide a good return (leveraged x 3 ETF) to oil producers. If it is down tomorrow, I'll buy some more.

jog on
duc

ducati916 · 10 March 2020

basilio said:
I think the real looming disaster is the huge debt overhang particularly in the fracking industry. It was already precarious. It is now totally untenable.

On top of that if/when the companies fall over there will be huge clean up liability left for... yep the taxpayer. This story is 3 months old when POO was still $60 per B

As Fracking Companies Face Bankruptcy, US Regulators Enable Firms to Duck Cleanup Costs
Read time: 9 mins
By Justin Mikulka • Friday, December 20, 2019 - 08:45
https://www.desmogblog.com/2019/12/20/fracking-oil-gas-bankruptcies-cleanup-costs-regulators

US oil production was always going to either slow through bankruptcy or consolidate into the Majors through acquisitions. The Majors, one would hope, would manage their reserves better.

Given that they are buying distressed assets, they should be accretive over time to the bottom line. Buying the Majors in this decline should work out well over time.

jog on
duc

rederob · 10 March 2020

ducati916 said:
Given that they are buying distressed assets, they should be accretive over time to the bottom line. Buying the Majors in this decline should work out well over time.

There seems little logic in this idea.
The reason the assets are distressed is because they have failed to return a profit.
Moreover, from 2017 until recently WTI prices averaged over $55/bbl, so they failed to return a profit in a relatively stable environment.
The oil majors would do well to avoid the Bakken and Permian formations and look to more recent conventional plays where total lifting costs are estimated at mid-teens (eg Guyana, Ghana and Mauritania). These are also long-life fields that do not suffer the rapid declines of LTO wells.
Until better technology gets more oil for longer from fracking it's difficult to see banks lending to them to maintain these fields, and it's not as profitable as conventional oil.

sptrawler · 10 March 2020

Looks like a deal has been signed with the U.S for access to their strategic oil reserves.

https://www.theage.com.au/world/nor...s-gain-angus-taylor-says-20200310-p548mp.html

SirRumpole · 10 March 2020

sptrawler said:
Looks like a deal has been signed with the U.S for access to their strategic oil reserves.

https://www.theage.com.au/world/nor...s-gain-angus-taylor-says-20200310-p548mp.html

Just shows how vulnerable we are.

More drilling in Bass Strait ?

frugal.rock · 10 March 2020

WTI at 30.17
Apparently down 27.3%....
The POO is in the ....

F.Rock

rederob · 10 March 2020

frugal.rock said:
WTI at 30.17
Apparently down 27.3%....
The POO is in the ....

F.Rock

That was pretty much yesterday's news.
POO recovered today, as noted below in the minute-by-minute chart from its collapse:

WTI was sitting over $33/bbl at time of posting.
I added some BPT at $1.40 in late trading.

ducati916 · 11 March 2020

rederob said:
1. There seems little logic in this idea.

2. The reason the assets are distressed is because they have failed to return a profit.
Moreover, from 2017 until recently WTI prices averaged over $55/bbl, so they failed to return a profit in a relatively stable environment.

3. The oil majors would do well to avoid the Bakken and Permian formations and look to more recent conventional plays where total lifting costs are estimated at mid-teens (eg Guyana, Ghana and Mauritania). These are also long-life fields that do not suffer the rapid declines of LTO wells.

4. Until better technology gets more oil for longer from fracking it's difficult to see banks lending to them to maintain these fields, and it's not as profitable as conventional oil.

1. Let me try and explain the logic.

2. They have failed to return a profit because the assets were too expensive. Lower the price (distressed sales) and they can be profitable.

3. All valid points. Re. Bakken etc: it is the price you pay. If the price is low enough, they can be profitable.

4. Banks have stopped lending on this class. That is the point. That is why the Majors can buy select assets at fire-sale prices.

jog on
duc

rederob · 11 March 2020

ducati916 said:
1. Let me try and explain the logic.

2. They have failed to return a profit because the assets were too expensive. Lower the price (distressed sales) and they can be profitable.

3. All valid points. Re. Bakken etc: it is the price you pay. If the price is low enough, they can be profitable.

4. Banks have stopped lending on this class. That is the point. That is why the Majors can buy select assets at fire-sale prices.

jog on
duc

I suggest you examine the share prices of those oil majors largely responsible for getting the USA to world dominance in the last few years, where LTO has been instrumental.
If the massive volumes of LTO being extracted were profitable then their share prices would reflect this.
But they do not.
This link gives an idea of the relative cost differences between LTO and conventional oil.
So lets look at your logic.
The distressed asset is now cheap to pick up. It was distressed even though WTI prices averaged about $55/bbl over recent years and, on a near term best case scenario, are going to be about $45/bbl ($34 at time of posting).
As the decline rate of LTO wells is extremely sharp, the distressed assets will have already sold off their best production.
So, the purchaser would be gambling on new finds on the same patch that were now going to be profitable, and an oil price ideally a lot higher than $55.
The oil industry is not risk averse, but the fixed costs of fracking suggest that oil majors would be locking in losses on the gamble that global oi prices rise to at at least former average levels and that they are sustainable.
In that regard they are also gambling on the Russians and Saudis playing the OPEC game again, and managing supply though quotas.

ducati916 · 12 March 2020

rederob said:
1. I suggest you examine the share prices of those oil majors largely responsible for getting the USA to world dominance in the last few years, where LTO has been instrumental.

2. If the massive volumes of LTO being extracted were profitable then their share prices would reflect this.
But they do not.

3.This link gives an idea of the relative cost differences between LTO and conventional oil.

4. So lets look at your logic.
The distressed asset is now cheap to pick up. It was distressed even though WTI prices averaged about $55/bbl over recent years and, on a near term best case scenario, are going to be about $45/bbl ($34 at time of posting).

5. As the decline rate of LTO wells is extremely sharp, the distressed assets will have already sold off their best production.

6. So, the purchaser would be gambling on new finds on the same patch that were now going to be profitable, and an oil price ideally a lot higher than $55.

7. The oil industry is not risk averse, but the fixed costs of fracking suggest that oil majors would be locking in losses on the gamble that global oi prices rise to at at least former average levels and that they are sustainable.

8. In that regard they are also gambling on the Russians and Saudis playing the OPEC game again, and managing supply though quotas.

1. The share prices have been in a bear market for a number of years.

2. The Majors are profitable. They do have issues (absolutely). Share prices do not always reflect value (up or down).

3.

4. That information will now be available. It is not tough to calculate what you need to pay, to make that purchase profitable. Of course part of that calculation will include a selling price for oil (on aggregate).

5. Quite possibly. But there will still be recoverable oil. It comes down to what you pay for the asset with a best guess where you think average prices for oil will sit.

6. Not necessarily at all. Prices to be profitable could easily sit in the $45-$55 range. Higher would obviously be better and lower worse.

7. At $20 oil that is probably true. At $60 oil false. The question is where on aggregate does it settle. I'm guessing circa $50-$60.

8. Quite possibly.

jog on
duc

rederob · 12 March 2020

ducati916 said:
1. The share prices have been in a bear market for a number of years.

2. The Majors are profitable. They do have issues (absolutely). Share prices do not always reflect value (up or down).

3.

4. That information will now be available. It is not tough to calculate what you need to pay, to make that purchase profitable. Of course part of that calculation will include a selling price for oil (on aggregate).

5. Quite possibly. But there will still be recoverable oil. It comes down to what you pay for the asset with a best guess where you think average prices for oil will sit.

6. Not necessarily at all. Prices to be profitable could easily sit in the $45-$55 range. Higher would obviously be better and lower worse.

7. At $20 oil that is probably true. At $60 oil false. The question is where on aggregate does it settle. I'm guessing circa $50-$60.

8. Quite possibly.

jog on
duc

Your points overlook the reason the LTO asset was distressed. That is, the wells consistently failed to deliver enough oil at a price that covered all obligations.
Remember that these asset's best volumes from existing wells have already been extracted, so any purchaser is now gambling on more profitable wells being newly drilled. In an oil environment which is already unsupportive such a purchase does not make much sense.
Your idea that "to be profitable (oil) could easily sit in the $45-$55 range" is a further gamble, on two fronts.
First, amongst LTO analysts the consensus is that former prices that averaged nearer $55/bbl were already unprofitable. No doubt some oil patches might be producing at half that, but they are the outliers and only become known of after the event. This is where there is a major difference between conventional oil (CO) and LTO, as the effort (cost) of lifting CO is relatively easy to calculate. Whereas fracking involves a massive upfront cost and an element of luck in that they need to get compliant geology, correct proppant (cost vary considerably between regular sand, resin-coated, and ceramic proppants), and hit the best formations.
Secondly, if Russia and the Saudis decide to flood the market with cheap oil then the USA's LTO industry will be brought to its knees. The only saving grace here is that at a global level business-as-usual case a large amount of LTO will be essential for our total energy needs. That will become WTI's pivot price going forward.

ducati916 · 13 March 2020

rederob said:
1. Your points overlook the reason the LTO asset was distressed. That is, the wells consistently failed to deliver enough oil at a price that covered all obligations.

2. Remember that these asset's best volumes from existing wells have already been extracted, so any purchaser is now gambling on more profitable wells being newly drilled. In an oil environment which is already unsupportive such a purchase does not make much sense.

3. Your idea that "to be profitable (oil) could easily sit in the $45-$55 range" is a further gamble, on two fronts.

4. First, amongst LTO analysts the consensus is that former prices that averaged nearer $55/bbl were already unprofitable. No doubt some oil patches might be producing at half that, but they are the outliers and only become known of after the event. This is where there is a major difference between conventional oil (CO) and LTO, as the effort (cost) of lifting CO is relatively easy to calculate. Whereas fracking involves a massive upfront cost and an element of luck in that they need to get compliant geology, correct proppant (cost vary considerably between regular sand, resin-coated, and ceramic proppants), and hit the best formations.

5. Secondly, if Russia and the Saudis decide to flood the market with cheap oil then the USA's LTO industry will be brought to its knees. The only saving grace here is that at a global level business-as-usual case a large amount of LTO will be essential for our total energy needs. That will become WTI's pivot price going forward.

1. Incorrect. But the 'reason' is now unimportant. That is the entire point in buying distressed assets.

2. If the price to be paid does not create a profitable asset, it will not be purchased.

3. That is not a price that I said was required for distressed assets to be profitable. However, an estimation of the aggregate price ($45-$55) will allow a calculation as to how profitable the potential is.

4. So what. That is the entire point when buying a distressed asset, you get it cheap.

5. That is a speculation that is being tested as we speak. I think it will fail for economic axioms. However we shall see.

jog on
duc

rederob · 13 March 2020

ducati916 said:
1. Incorrect. But the 'reason' is now unimportant. That is the entire point in buying distressed assets.

2. If the price to be paid does not create a profitable asset, it will not be purchased.

3. That is not a price that I said was required for distressed assets to be profitable. However, an estimation of the aggregate price ($45-$55) will allow a calculation as to how profitable the potential is.

4. So what. That is the entire point when buying a distressed asset, you get it cheap.

5. That is a speculation that is being tested as we speak. I think it will fail for economic axioms. However we shall see.

jog on
duc

Your analysis is a crock of cobblers.
I won't bother taking you seriously.

rederob · 13 March 2020

Except for a period in 2018 the POO has seldom been near or above $65/bbl.
Most global oil majors have struggled in recent years due to low average prices.
In the current standoff on production curtailments to prop up the price, all analysts agree that USA's LTO producers will be the biggest losers: their fixed costs are too high. That said, the winner will be Russia over the Saudis. The reason for this is because in recent years the Saudis have not made the investments necessary to match Russian output. Despite the Saudis claims that they can ramp up production, it has never been tested at the levels it claims, and has instead relied on its reserves to meet demand. In the present environment Russia is probably the only major producer that can survive oil prices at $30/bbl.

jbocker · 13 March 2020

rederob said:
Except for a period in 2018 the POO has seldom been near or above $65/bbl.
Most global oil majors have struggled in recent years due to low average prices.
In the current standoff on production curtailments to prop up the price, all analysts agree that USA's LTO producers will be the biggest losers: their fixed costs are too high. That said, the winner will be Russia over the Saudis. The reason for this is because in recent years the Saudis have not made the investments necessary to match Russian output. Despite the Saudis claims that they can ramp up production, it has never been tested at the levels it claims, and has instead relied on its reserves to meet demand. In the present environment Russia is probably the only major producer that can survive oil prices at $30/bbl.

They ARE sharp spring-backs, but it is the sharper drops that worry me.

rederob · 13 March 2020

jbocker said:
They ARE sharp spring-backs, but it is the sharper drops that worry me.

I think that is mostly behind us - see below:

There was an attempt at a bounce back after the crash on Monday, but the past 2 day's carnage put a damper on it.
Even in a COVID-19 affected world, demand for oil will still be high as it remains the principal source of energy for transport. However, only a few nations are going to be wanting to sell it at a loss, and that used to be the power that OPEC had.
What is interesting now is that the USA had been eating into former OPEC markets, but it was based on the expensive LTO's surplus position. You will not find any analysts suggesting that LTO can come close to keep doing that at market prices under $45/bbl.
The other point to bear in mind from a longer-term perspective is that the low oil price of recent years has led to reduced exploration.
The flipside to oil, however, is natural gas. There's plenty and it's cheap. I do not know how substitution will affect comparative prices. However, my guess will be that it will keep the average price of WTI lower for longer.

ducati916 · 14 March 2020

rederob said:
Your analysis is a crock of cobblers.
I won't bother taking you seriously.

Which is more or less the standard of reply that I was expecting.
Avoid any analysis.
Post a personal insult.

jog on
duc

ducati916 · 14 March 2020

Price (after the initial plunge) seems to be holding at $30'ish. I will post the latest COT whan it becomes available, I am interested to see where the Commercials are on this. My guess is that they are buyers and are currently supporting the price.

If they are...who has the deeper pockets? Common sense would suggest the Arabs. Yet their pockets are not bottomless either. They require oil revenues to diversify their society away from oil, which they have been doing for a while. If Russia does not capitulate and reduce supply, then they will cannibalise their own industries, which will eventually have the effect of reducing supply anyway.

The question is really: does this price war last weeks or months and does the loser (or winner) actually lose in the longer term?

jog on
duc

ducati916 · 14 March 2020

So:

Hedges offer shale drillers a lifeline. A study of 30 shale drillers accounting for 38 percent of total U.S. oil production finds that roughly 50 percent of their output is hedged an average price of $56 per barrel. If WTI averages $40 this year, the hedges would save the companies a combined $10.5 billion; or $17 billion if WTI averages $25.

Interesting if accurate. Can the Arabs and Russians (although they may also have hedges in place) sustain a price war for this duration?

jog on
duc

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