And there was much rejoicing in the land.... Gas Prices

[Ruffdaddy]

Man...time to start allowing us to sell crude to other countries. Or there's gonna be a big fucking crash.

[Broncojohnny]

Speculate nigga!

Call me when it hits $30

[Strychnine]

Man...time to start allowing us to sell crude to other countries. Or there's gonna be a big fucking crash.

Here's a snip of a summary email I sent back in November after the IADC annual conference. This was when prices were at $78/bbl and US rig count was still over 1800.

Market Outlook
Marshall Adkins - Managing Director, Raymond James & Associates

In 2012 they had the same concerns as they do now with an emphasis on extreme near term uncertainty. Without the ability to export crude they are predicting a collapse in WTI in late 2015, for reasons laid out below.

From 2007 to 2014 wells in the Bakken have experienced a 10x increase in efficiency, going from an average of 50 bbl/day to 500 bbl/day.

Many currently believe that with the high decline rate in unconventional wells that 4 out of 5 rigs are purely maintaining supply and that pulling a few rigs out of the field for a short time will bring balance back to the supply side. One example is Halliburton David Lesar who has been recently (and often) quoted as saying that the supply-demand imbalance is temporary and that we will level out between $80-100 in short order.

According to Raymond James & Associates this is not true. In their models, assuming a FLAT rig count, the Bakken’s production will actually go up 60% between now and 2020. If the production rate is modeled flat, then the rig count will have to drop 60% in the Bakken to balance the system. It is more like 2 of every 5 rigs are “maintenance” rigs at this time.
A 10% rise in efficiency with a flat rig count will double the Bakken’s output by 2020 so the rig count drop will likely need to be greater than first thought.

Gasoline consumption in the US is down 8% over the last 5 years, but diesel demand is growing. The US is seeing around a 0.7% increase in oil demand this year. (2.5% increase in demand in the Middle East). Their global demand growth prediction is ~1.2% which is in line with IEA expectations.

The focus should be on Saudi Arabia and not OPEC as a whole. They will drop prices to :
Kill competition and slow down US shale plays
Punish Iran
Punish Russia – They don’t view the meeting between John Kerry and Saudi leaders the day before Saudi made announcements as a coincidence
Counteract the dollar

By late 2015 we MUST start exporting light sweet crude. US refineries will not be able to handle the growing supply at that time
At the moment the US demand growth is around 1 million bbl/day with the supply growth closer to 2 million bb/day, giving us approximate 1 million bbl/day surplus.
By the end of 2015 we will likely be oversupplied by 2 million bbl/day.
The big worry is 2016. By then we will have a 3 million bbl/day oversupply.

In 1983 there was a 16 million bbl/day oversupply compared with the 1 to 1.5 million bbl/day surplus now. In ’83 it took a 20 year bear market to work off the glut, but this is not 1983. Assuming we start exporting next year, a short slowdown will put us “back in business” – Raymond James & Associates are expecting the downturn to last up to two years.

Drilling activity is driven by cash flow not breakeven points.

Between now and 2016 we’ll need to see a 20-30% reduction in rig count to slow the surplus growth rate from 1.5 million bbl/day to 0.7 million bbl/day and level out. This is not as big as it sounds – in 2008’s downturn the rig count took a 60% hit.

Major thoughts:
Oil is structurally broken at the moment.
US exports are a MUST

[Denny]

Too big to shale!

[Strychnine]

+10M barrels in inventory just now, largest in 14 years

Yup. And it's exactly what people predicted. See my quoted summary above from last year:

At the moment (Nov 2014) the US demand growth is around 1 million bbl/day with the supply growth closer to 2 million bb/day, giving us approximate 1 million bbl/day surplus.
By the end of 2015 we will likely be oversupplied by 2 million bbl/day.

Right now we are at a 1.4M bbl/day surplus.

By mid year they expect up to 100 million barrels to be floating stored offshore.

Estimates are that 80% of the available storage in the US is full right now. In Cushing, for example:

The market data provider Genscape, which flies helicopters equipped with infrared cameras and other technology over Cushing twice a week to measure storage levels, estimates Cushing is two-thirds full.

And they expect Cushing could be full within 6 weeks (mid April)



The way I read it described this morning is that we're running at 100mph up to that "out of storage space" wall... and the wall is just about 1000 ft away.

[Sean88gt]

Call me when it hits $30

I really think that is a mental number. Once it starts falling again, it'll fall fast. There is no valid reason it is still at the price it is.

[Strychnine]

I think I mentioned back in December when Joe Barton introduced legislation to open up the crude exports.

Refiners are against it though... there's no rules against exporting refined fuels, just crude. So we actually ship 3 million barrels of refined product out of the US every day.

"... this thing hasn’t been debated in the congress in 40 years. Everybody just assumed we didn’t have enough oil, we were going to import it, so to have a debate about exporting crude oil just wasn’t necessary. Well now, we have domestic oil production increasing every month, and we’re shipping overseas about 3 million barrels of refined products a day.

So, what we’re doing is we’re taking that domestic discount at the wellhead and converting it to a profit margin for the refiners as they ship it overseas. If you repeal the ban on crude oil exports, you’re not going to affect the price, in the short term. In the long term, you’ll probably help make it a little lower, because we’ll keep the crude price on the world market down, which is what ultimately sets the gasoline price at retail. "

- Joe Barton

[Broncojohnny]

I really think that is a mental number. Once it starts falling again, it'll fall fast. There is no valid reason it is still at the price it is.

No, there is. Speculation is the reason. It is enabled by low interest rates. Once they have no place to store oil though, the party ends. Once the price drops enough the speculators get margin called and the real fun begins.

[Sean88gt]

No, there is. Speculation is the reason. It is enabled by low interest rates. Once they have no place to store oil though, the party ends. Once the price drops enough the speculators get margin called and the real fun begins.

Hopefully mass suicide follows.

[87t-coupe]

I was just laid off from my drilling rig here in colorado this last tuesday. It was a sad day to say the least. Alot of people are hurting right now. I would pass a stack yard for h&p everyday on the way to work that had at least 10 rigs in it. Thats just one company and one yard which equals about 500 people out of work.

[Ruffdaddy]

Sorry to hear. We all need to push for an end to the export ban.

Its absolute BS that refiners get to exploit US crude restrictions. This would end that strike real fast too...

[Rick Modena]

Hopefully mass suicide follows.

lol.

[Broncojohnny]

If you want to see what is wrong, just look at what happened to the price of oil today. Largest inventory build in 14 years and the price goes up. As has been mentioned, you can buy a barrel today and contract it for sale in December at a nice gain. The carry costs are low on this trade because of low rates. Until this changes, we are heading full steam ahead for the iceberg.

[Broncojohnny]

American Eagle Energy apparently defaulted on a $175 million junk bond offering on Monday. Coupon was 11% and they didn't even make the first payment.

[Strychnine]

American Eagle Energy apparently defaulted on a $175 million junk bond offering on Monday. Coupon was 11% and they didn't even make the first payment.

I was just reading that. 7 months.

Less than seven months after raising $175 million in a junk-bond offering, American Eagle Energy Corp. said Monday that it wouldn’t make its first interest payment on the debt. Instead, it hired two advisers -- Canaccord Genuity Group Inc. and Seaport Global Holdings LLC -- to negotiate with bondholders on a plan to restructure its debt, according to three people with knowledge of the situation who asked not to be named because the matter is private. The holders of the notes are left to consider how to maximize recovery of their investment, either by giving the company more time to try to become profitable or by pushing it into default.

American Eagle Energy’s shares lost 96 percent since the bonds were issued in mid-August, trading at 21 cents on the dollar at 1:41 p.m. in New York.

I'll bet they wish they could go back in time 7.5 months and polish their crystal ball a bit. What a kick in the nuts.