Let me be clear, this isn’t a approach buy or sell recommendation when it comes to oil of a U.S. Oil ETF (NYSEARCA:USO). Instead, this is a food for suspicion square as we continue to review articles and explanation created by some SA authors and readers that advise that oil will knowledge a pointy miscarry in 2016. we am not intelligent adequate to fake that we can accurately foresee a destiny cost of oil, though these articles seem to be formed some-more on wish than receptive suspicion or experimental evidence.
Unlike spark or healthy gas prices, that are mostly U.S. centric markets given of a high costs to export, a oil marketplace is truly a tellurian market. Notwithstanding a receptive adjustments for peculiarity (light vs. heavy, green and sweet, etc.) as good as travel costs and banking adjustments, prices pierce in tandem, generally with a lifting of a U.S. trade ban. The widespread between Brent and WTI is nearby parity. As we can see below, compliments of a CME Group, mark oil sealed Friday during $33 per tub for WTI. One of a few glimmers of wish for oil bulls is a high marketplace contango that helps midstream owners of oil storage in several forms.
Here is a problem, tellurian blurb wanton register reached 3 billion barrels in mid-November 2015. This is simply approach too high.
U.S. wanton inventories, totalled during approximately 482 million barrels, are a top in story totalled in a comprehensive sense.
Here is one interpretation of a Global Supply and Demand dynamic. As we can see, record wanton outlay that outpaces healthy direct growth.
Enclosed subsequent is an EIA image that captures a apocalyptic situation. There are 2.975 billion tellurian barrels of oil inventories, that confirms a 3 billion figure above (from early Nov 2015). However, notwithstanding healthy direct expansion in 2013, 2014, and 2015, tellurian supply has outpaced direct by a cause of 1.47 million barrels per day in 2015 (down from 2 million barrels per day in 2013 and 2014), though still approach too high given a register overhang.
Now let’s spin to Saudi Arabia, a many critical nation when it comes to oil. Here is a image from a Dec 28, 2015 New York Times essay below.
As everybody knows, notwithstanding using a $98 billion necessity in 2015, Saudi Arabia still has $640 billion in unfamiliar sell reserves.
Here is where a defeat unfolding comes in. Enclosed subsequent is a image of this past Friday’s WSJ essay of a probable Saudi Aramco IPO. Estimates vary, though depending on that resources would potentially be brought to a market, a Saudis could simply lift a $100 billion or some-more by offered a minority interest in a Saudi Aramco or a interest in some of a downstream assets.
If we were a U.S. Shale executive of a second or third tier producer, we would be jolt in my boots and doing all we could to safety capital. The Saudis have radically signaled to a marketplace “We contingency mangle you” (Ivan Drago – Rocky IV).
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The other energetic that could infer illogical for a rarely leveraged U.S. shale producers is a mangle and ice cold family between a U.S. and Saudi Arabia during a Obama Administration. we don’t wish to get overly domestic as SA isn’t a process website, though we contingency discuss a conclusions and insights by Princeton University’s well-regarded Middle East process expert, Bernard Haykel.
I listen to a lot of podcasts during my daily one-hour invert any approach to work and we would suggest intellectually extraordinary SA readers listen to Tom Ashbrook’s Jan 5, 2016 podcast “Why The Saudi-Iranian Standoff Is Escalating.” we will simply produce readers with some of Mr. Haykel’s high-level thoughts and if they so chose afterwards they can listen to a podcast as good as try his many books on a Middle East. Essentially, in Mr. Haykel’s estimation, a House of Saud no longer finds a U.S. a arguable fan given Obama’s presidency.
This viewpoint has been made by a U.S. not safeguarding Egypt’s Mubarak in 2011, a polite wars in Syria financed by Iran, and many particularly a Iranian chief deal, that is already unsatisfactory (i.e. ballistic barb program). As forty years of auspicious Saudi Arabian family have tattered not to discuss a cooling in a U.S.’s family with a once fixed ally, Israel, Saudi Arabia seems to be safeguarding a possess interests.
The other bearish energetic from an oil cost viewpoint is if a Iranian sanctions were carried afterwards another 1 million barrels per day of wanton supply could strike a marketplace quickly. Even Russia is digging in and personification for a prolonged game. Check out this essay if we don’t trust me. Russia is formulation on oil remaining in a operation of $40 to $60 per tub for a subsequent 7 years.
It is so bad in Venezuela that a amicable celebration got swept out of bureau in a new election. Check out this BBC article chronicling a Dec 2015 elections. Weak players wish prices to rise, though no one is peaceful to unilaterally cut output.
Major headwinds for U.S. shale embody high prolongation costs, a hazard of bank re-determinations revoke due to low prices (PV-10 accounting benchmark prices will be dramatically revoke in 2015 than 2014), and a reduced sidestep book to isolate producers from low prices.
Here is a new WSJ essay that estimates a following cost per tub per dish in a U.S.
Here are a PV-10 accounting benchmark prices from 2012 – 2014
Here is a touching image from a Dec 2015 essay deliberating a 2016 hedges rolling off from Reuters.
As there contingency be a vast reserve of articles in a reserve early Monday morning, we combined these snapshots from Oppenheimer’s well-regarded oil attention veteran, Fadel Gheit.
Concluding thoughts: The indicate of my essay is to upsurge cold H2O on SA readers’ hopes for a pointy oil cost recovery. Unfortunately, a revoke for many longer unfolding seems a many expected one in a nearby and middle term. The arriving Q1 2016 change piece risk of liabilities leading shortly to be created down resources values led by a likes of PV-10 accounting is significant. Again, given a low cost environment, many likely, bankers will strengthen their possess interests and use covenants to revoke cumulative credit comforts bank lines during bank re-determination in late Q1 or early Q2 2016.
U.S. shale producers can emanate a many extraordinary slip decks with cherry picked information with confidant proclamations of high EURs, mangle by parallel drilling techniques, mixed cavalcade pads, disappearing good costs, etc., etc. But during a finish of a day, my viewpoint is that U.S. shale with a inherently high decrease rates is a lousy business, unless oil prices are north of $70. The waves has left out and we will learn how many companies were swimming naked. Expect many bankruptcies in 2016 and design prolongation to tumble off. There is a healthy loiter outcome that has behind a coming of this prolongation decrease led by DUCs and drillers cherry picking a many prolific acreages.
If we demeanour during many oil and gas money upsurge statements (in this low cost environment), it is apparent that money upsurge from operations can’t account collateral output programs indispensable to say production. Therefore, a collateral markets are mostly sealed for a tier 2 and tier 3 producers as a hangover from a biggest oil and gas high produce financed binge finished final year. So my viewpoint is be clever out there, as even during $40 per barrel, we design it to get worse for EP producers and oil services companies. Proceed with impassioned counsel when deliberation doubling or tripling down on diseased shale players.