Tag Archives: #WTI

Texas Fifth Straight Double-Digit Jump

The boom continues in The Permian Basin

Introduction: The US drilling rig count rose by double digits for the fifth consecutive week during the week ended Feb. 17.

Data from Baker Hughes Inc. shows the tally of active rigs gained 10 units to 751, an increase of 347 units since a modern era nadir of 404 touched last May 27 (OGJ Online, Feb. 10, 2017). In the last 2 months alone, the count has risen by 114 units.

Onshore rigs climbed by 13 to 730, with horizontal units up 7 to 614 and directional units up 6 to 72. The horizontal count has expanded by 300 since May 27.

The US offshore count dropped 3 units to 18 as it approaches lows not seen since the aftermath of the Macondo deepwater well blowout and crude oil spill. Three rigs remain drilling in inland waters.

Given the Permian’s overall increased drilling activity, the US Energy Information Administration forecasts Permian oil production to rise 70,000 b/d month-over-month in March to 2.25 million b/d (OGJ Online, Feb. 13, 2017). As of January, the basin boasted a suite of 1,757 drilled but uncompleted (DUC) wells, an increase of 84 from the December total.

EIA projects the Eagle Ford to record a 14,000-b/d month-over-month increase in March to 1.077 million b/d, marking the South Texas region’s first rise in Drilling Productivity Report data since late 2015. Its tally of DUC wells during January gained 11 month-over-month to 1,255.

In summary for Texas:  Texas is the only oil- and gas-producing state to record an increase with the exception Utah during the week, rising 1 unit to 6. The Permian Basin is driving much of the new drilling activity in Texas and the U.S.

Source: Matt Zborowski, “BHI: US rig count makes fifth straight double-digit jump, Oil & Gas Journal, 17 Feb. 2017

Permian Basin Rig Count Explodes

Apache Corp. Drilling In Andrews County, TX

Introduction…The most attractive oil exploration and production region in the United States and perhaps the world has added 101 active drilling rigs since just May 13, 2016. That’s a giantic 84% gain in rigs in just in seven months.

The Permian basin in West Texas and southwestern New Mexico which is 250 miles wide and 300 miles long has become the most attractive drilling region due to the major infrastructure that reduces time and expense to getting oil and gas to the market.

The first commercial oil well in the Permian Basin was completed in 1921 in Mitchell County, on the east side of the basin; completed at a total depth of 2,498 feet, it was the discovery well of the Westbrook field.

With the coming of World War II the need for oil was urgent, and it became economically justified to drill more and deeper tests.

The entire Permian Basin during 1966 produced a total of 607 million barrels of oil and 2.3 trillion cubic feet of gas for a total of $2 billion. A cumulative total of 11.3 billion barrels of oil had been produced.

Conclusion...Intrastate and interstate gas pipeline systems were expanded throughout the area, and Midland-Odessa was the headquarters for the oil and gas industry in the Permian Basin area. Hundreds of millions of dollars have been spent on petrochemical refineries and supplemental construction work in the Permian Basin, which was rated the largest inland petrochemical complex in the United States. Is it no wonder the Permian basin is the most attractive oil exploration and production region in the United States and perhaps the world?

Take away...One business that benefits greatly from the new oil exploration and development is the saltwater disposal wells. These properties tend to have a consistent cash flow and a short payback period. Drop me a note if this intrigues you.

Recovery For Texas Energy

740_energy_oil_and_gas_image_7914 West Texas Oil Boom

In the midst of the shale boom in 2013, Texas added more than 19,000 new jobs in the oil and gas production sector, leading the U.S. job increase in the industry by a wide margin. But back then, global oil prices were stable all year around at US$100 and slightly more.

Crude prices have crashed since 2014—now barely clinging on to above US$50—effectively stagnating drilling activity and oil jobs growth.

Texas, for its part, has shed over 91,000 jobs in oil and gas industry since the end of 2014, with the Houston area economy on the cusp of a recession, according to an article in The Wall Street Journal.

The Dallas Fed has said that signs of recovery have emerged in the U.S. oil market, most notably in the Permian. The Dallas Fed also noted that Texas’s oil and gas employment increased in August—a first since 2014—suggesting that the worst of the energy crisis may be over.

“Increased activity in the Permian Basin and elsewhere has affected employment in the Texas mining sector, which rose slightly in August—its first increase since late 2014,” the Fed statement said.

The Dallas Fed issued probably the most bullish comment on the Texas oil economy so far this year, when Fed economist Pia Orrenius said that encouraging employment growth in Texas suggests that “the worst of the energy crisis may be over”.

In summary...So the latest numbers show that Texas has been overcoming this energy downturn – as it has done with many other lows – to continue to be the mainstay for America’s superpower status.

Reference:  Tsvetama Paraskova, October 14, 2016, Texas Is Making An Energy Recover, OilPrice, OilPrice.com

Oil Price Spike Close?

WTI Crude Pricing

We are beginning to see the first real signs of the global oil markets moving rapidly back into balance. OPEC, which produces approximately 40 percent of the world’s oil supply, cannot meet future oil demand on their own.

Supporting data follows that supports the analysis that oil price spike may be close:

  • On May 11th the U.S. Energy Information Administration (EIA) reported that U.S. crude oil production declined by 206,000 barrels per day over the six weeks ending May 5, 2016.
  • U.S. crude oil inventories unexpectedly fell by 3.41 million barrels during the week ending May 6, 2016
  • Gasoline inventories declined by 1.231 million barrels’=
  • Distillate stockpiles fell by 1.647 million barrels
  • The International Energy Agency (IEA) say the annual summer spike in demand for transportation fuels has begun.
  • On Friday, May 13 an explosion closed a second Chevron facility in Nigeria, Africa’s biggest oil producer
  • Exxon Mobil also reported on May 13 that a drilling rig damaged a pipeline, shutting off more production of crude. Nigeria’s oil production was already down 600,000 barrels per day before these two incidents, primarily the result of militant attacks.
  • Latin American oil production is now down close to 500,000 bpd from year ago levels.

In conclusion…If history repeats itself, the demand spike will be even larger. In 2010, the final year of the last major oil price cycle, the IEA began the year forecasting a 1.0 million barrel per day increase that year. Actual demand growth was 3.3 million barrels per day. The forecast error made in 2010 was that IEA’s formula for calculating demand, did not consider the impact of lower fuel prices on demand. IEA may have made the same mistake this time around.

Crude Drops After Producers’ Fail To Cut Output

Forget Doha

Almost 60% of the world’s oil producers gathered in Doha on Aril 17 to discuss freezing their production output at January levels in effort to stabilize prices.  Russia, Saudi Arabia, Qatar, and Venezuela made a preliminary deal in February and were seeking to add more producers and extend the recent price recovery.

The oil producers failed to reach an agreement to freeze production.  Just after the futures market opened Monday. April 18th around 6 P.M. ET, West Texas Intermediate fell 6% to a low of $39.02. However, by the close on Monday he price had risen to $40.36 or producing only a 4% decline since April 12th recent high.

Some of the headlines said, “Crude Crashes…” or “Crude Oil Plunges…”  A 4% drop to $40.36 from the April 12th high, hardly seems like a crash, but the news must be sold.

A several mediating factors may be at work.

  1. Striking oil workers disable 60% of Kuwait’s production
  2. U.S. production drops below 9 million bpd law week according to EIA
  3. Canada oil industry to see 62% decline in investment
  4. Drop in non-OPEC supply should accelerate through rest of year and into 2017

In conclusion, regardless of what didn’t happen in Doha, the market is starting to rebalance.  And read the news, not just the headline.

Where Is U.S. Exporting Oil?

Export Tanker Crude Leaving The U.S.

It has only been three months since the U.S. lifted a 40-year ban on oil exports.  So, it may be surprising that American crude is flowing to virtually every corner of the market and remaking the world’s energy map.

Overseas sales, which started on December 31 with a small cargo aboard the Theo T tanker have been picking up speed.  Exxon Mobil, China Petroleum, and Chemical Corp have joined independent traders Vitol Group and Trafigura in exporting American crude.

“The flurry of export activity is helping support spot oil prices in the U.S. relative to contracts for later delivery,” said Amrita Sen, chief oil analyst at Energy Aspects, Ltd in London.

American stockpiles are at unprecedented levels, so oil takers laden with U.S. crude have docked in, or are headed to France, Germany, the Netherlands, Israel, China, and Panama.  Oil traders said other destinations are likely.

One reason behind the rise in exports is cheap pipeline and railway fees to move crude from the fields in Texas, Oklahoma, and North Dakota into the ports of the U.S.  Another reason is that the U.S. prices have been trading at a discount to Brent crude, allowing traders to move oil from one shore of the Atlantic to another at a profit.

Source: “The U.S. Is Exporting Its Oil Everywhere, Javier Blas, BloombergBusiness, March 17, 2016

Oil Markets Remain Oversupplied

Let’s look at  last week’s key figures for the oil & gas industry.  U.S. oil production is slightly up, whereas oil futures have been trading lower. Gasoline prices continue their trend downwards.

Friday, December 6, 2015 WTI closed at $39.97, down $1.11 for the week.

U.S. Oil Production

Friday OPEC’s meeting in Vienna did not give oil markets any relief. There was little expectation of an agreement on production cuts, despite the majority of OPEC members pleading with Saudi Arabia to reverse course and cut back the cartel’s output target level, which stood at 30 million barrels per day (mb/d) heading into the meeting.

In summary, here we are a year after Saudi Arabia decided to keep market share rather than cutting production to support pricing.  That decision combined with the U.S. shale industry keeping production levels up has precipitated in a nearly 50% drop in oil prices from a year ago.

Source: OPEC Won’t Cut, Markets Remain Oversupplied, OilPrice.com by Evan Kelly, December 4, 2015

It’s Not A Matter If Oil Prices Will Head Upwards, But When

US Shale Oil Boom…

Looking solely at US Shale Oil production since 2007, it is no wonder that OPEC was caught off-guard by the pace of Shale Oil production growth. Production grew from just over a million barrels per day in 2007 to around 5.5 mmbbls/day at its peak earlier in April this year.

U.S. Shale Oil Production

US Shale Supply To Decline…

Shale production decline is a reality. Overall decline rates in the Bakken Shale are around 50%, Eagleford Shale 55% and the Permian is around 25% and the US rig-count has now fallen by over a half. So why have we not witnessed anything yet?

Well the answer to that is a mixed and somewhat cloudy one. Delays in completing some wells are clouding the decline picture as are delays in actual hard production data. The answer to the delays in both cases is around 4 months. We have to wait around 4 months to get the actual data for what is happening now, and quite often wells are not completed until some 4 months after they have been spudded.

Some have asked why oil companies in the US have not colluded to shut-in production and wait for higher prices. The simple answer, many smaller oil companies must continue producing to keep paying-off the loans that financed the well in the first place. A fact that the banks and bond-holders that have financed some of the more risky ventures are about to find out to their cost.

Iranian Crude Supply Fears Are Misdirected…

Despite the worries of extra supply coming back onto the table from Iran, perhaps as early as November, the expectations are perhaps a little exaggerated. Indeed Iran may have millions of barrels in storage ready to supply the market. However, as for immediate production abilities, that will take a little longer. Any production that Iran has shut-in over a long-period of time will take perhaps as much as 18 months to get back to full-swing. Beyond this, it is unlikely Iran will be able to increase its oil production much higher than 3.5 mmbbls/day without the aid of Western technology and know-how.

Worldwide Demand Trend Upwards…

Oil demand has resurged anew with the oil price currently below $50/bbl for both WTI and Brent. The IEA has had to revise its demand figures upwards again for this year and next with its forecast of 1.6 mmbbls/day growth this year. In fact, the underlying rate of demand growth is at just over 1.4 mmbbls/day year on year.

More recently, evidence of what exactly the low-oil-price-scenario has done for the world economy can be seen in the latest GDP releases. US GDP was reported at 3.7% last week, much higher than analysts were expecting. World GDP is likely to be above 3% this year and is forecast above 3% next year and into 2018, according to the World Bank group.

World Oil Supply vs. Demand

In conclusion…

As the commodities expert, Jim Rogers said last week, “The cure for low prices is low prices.” The decline in supply and the rise in demand is happening right now. It’s not a matter of if the oil price will head back upwards, but when?

Sources: Opinion: Why The Crude Oil Doom-Merchants Have Got It All Wrong, Oil Pro by Andy Douglas, September 3, 2015: Oil To Drop Again Before Sanity Can Return, Oil & Energy Insider by Evan Kelly, September 4, 2015

A Race To The Bottom?

PumpingRigWTexas

Pumping Rig In West Texas

Friday, August 21 the Dow Jones Industrial Average dropped 530.94 points, down 1012 points for the week or a 5.8% decline.   This as WTI oil closed at $40.45 down $2.55 or a 6% decline for the week.

The news media made a big deal about oil dropping temporarily below  $40.  The big picture is that oil has dropped 55% in the last year, to a six-year low.

The oil price decline has led Saudi Arabia to borrow $4 billion in July and to burn almost $62 billion in foreign reserves this year.  Analyst suggest the Saudis could issue bonds around $5 billion a month through the rest of the year to foreign investors.  Its budget deficit is expected to reach 20% of GDP in 2015.

Saudi Arabia’s aggressive fight to defend OPEC’s share of the global market has contributed to the massive oil glut.

Some suggest Riyadh refusing to cut oil output in hope to drive other producers, such as U.S. shale companies, out of business.

Professionals in the oil sector keep cutting the price of oil futures in their projections.  The financial sectors exposure to energy could be the next shoe to drop.  One big bank said 72 out of 74 energy producers requested modification of their loan covenants.

Conclusion…With OPEC, Russia, and the United States pumping record oil production, the current six-year low in pricing may be  with us for the rest of year until some production comes off line.

Sources: “What’s Really Going On With International Production,” CNBC August 20, 2015 interview with Dr. Ken Moors; “Riyadh is refusing to cut output,” CNN Money-London by Ivana Kottasova and John Defterios, August 6, 2015,

Price Of Oil To Trash Corporate Accounting Valuations

H&P Drilling Rig Midland, TX

Midland, Texas Drilling Rig

Introduction...There is one place where oil is still $95 per barrel.
On Paper.
SEC Rules…The U.S. Securities and Exchange Commission requires drillers to calculate the value of their oil reserves every year using average prices from the first trading days in each of the previous 12 months. Because oil didn’t start its freefall to about $45 till after the OPEC meeting in late November, companies in their latest regulatory filings used $95 a barrel to figure out how much oil they could profitably produce and what it’s worth. Of the 12 days that went into the fourth-quarter average, crude was above $90 a barrel on 10 of them.

Two examples Continental Resources Inc. reported last month that the present value of its oil and gas operations increased 13 percent last year to $22.8 billion. For Devon Energy Corp., a pioneer of hydraulic fracturing, it jumped 31 percent to $27.9 billion.

The real story… This year tells a different story. The average price on the first trading days of January, February and March was $51.28 a barrel. That means a lot of pain — and writedowns — are in store when drillers’ first-quarter numbers are announced in April and May.
The downward valuations drive will continue each quarter throughout 2015 without a oil price increase,

What it means to us… Investment capital for new oil and gas projects will likely get scarcer for the large public companies as the year progresses.  This may open up opportunities for independent oil companies with private capital.

In Conclusion…What should we do while we’re waiting for the production costs and acquisition costs to drop enough to create opportunity at today’s oil and gas pricing?
Keep our capital on the sideline or look for other cash flow projects.

 If you are inclined to venture into fixed price cash flow projects, drop me a note.

Sources: “The Price of Oil Is About to Blow a Hole in Corporate Accounting,” Bloomberg Business by By Jasjylyn Loder, March 3, 2015