Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

Oil prices – Trends don’t continue in a straight line forever

Thousands of wells can come on line when prices edge up. Photo of two wells about to start production by James Ulvog.

Thousands of wells can quickly be drilled and come on line when prices edge up. Three wells in 9/15 about to start production. Photo by James Ulvog.

Here are three very different articles on the future of crude oil prices.

One of the memorable things I learned in grad school was the idea that you can’t project the current trend of something into the future forever.

Keep in mind that West Texas Intermediate price was somewhere in the region of $100 a barrel in mid ’14. WTI is now about $26. Let me round off some calculations for simplicity. Let’s call that a current price of $30. Let’s call that a year and a half.

So we see a drop of about $70 in 1.5 years. A straight line projection would calculate out as another $45/bbl in another year. Thus, by 12/31/16 WTI price will be  $30 minus $45, or a negative $15. Yes, you read that right. A straight line projection means that oil producers will be paying refineries $15 for every barrel the refiners agree to take off the producer’s hands. Gas prices will consist only of the refining costs, a humongous list of taxes, with an offset for the negative cost of raw material.

You can’t do straight line projections forever.

Here are three superb articles that help me understand what is going on in the world of crude oil…

  • After the Carnage, Shale Will Rise Again
  • Helms predicts oil prices to rise again in foreseeable future
  • Rumors Swirl Around the Saudi Throne

1/18 – Mark P. Mills at The Wall Street Journal – After the Carnage, Shale Will Rise Again / Vast swaths of shale will be profitable with oil at about $40 a barrel, and the nimble industry is ready – If you actually pay attention to my blog, Mr. Mills’ article is a must-read.

Oil prices are quite cyclical. He points out there have been six extremes since the’73-’74 oil embargo. The extremes create turmoil. At the moment we are in the carnage stage of the cyclical extremes.

Lots of companies have been hit hard – he says two dozen companies defaulted last year and another fifteen went into bankruptcy.

You need to keep worrying if still have a job with a E&P company. Or if you invest in oil stock. Or you have a job or business that is related to production. Or if you are a loan officer sitting on a pile of oil loans.

Do drilling knowledge and oil in the ground have an expiration date?

Mr. Mills asks a critical question: What happens to the shale oil that is in the ground after the carnage has wrecked another bunch of companies?

Answer: Neither the oil locked in the rock nor the knowledge on how to get the oil out of the ground will go away. Neither will dissipate like smoke in the wind after another slug of oil companies go belly up and lots of workers go back home.

The oil will still be here. The knowledge will still be here.

Article points out the long-term fundamentals are extremely strong. He expects global demand will grow 1.3M barrels a day in the next year. The middle class in Asia is growing rapidly. Average number of cars per 1,000 residents is running in the range of 60 or 80 in Asia today. In the West it is 600 or 800 per 1000. That produces opportunity for growth by factor of 10 in both cars produced and gas consumption.

Rebound

Article sites discussions by RBN Energy that large portions of American shale can be profitable when prices go above $40.

More importantly, a huge amount of production can come on line very quickly. Thousands of shale wells can start producing with two weeks of drilling and a couple more weeks for fracking. Major oil projects take many years.

The point? Shale oil producers can respond en masse within two months of their having an expectation that prices will sustain at the level where they can make a couple of dollars of profit. That horrid Bakken decline rate makes it easier to decide when to start drilling – remember a huge portion of the life-time production comes out of the ground in the first year or three of a shale well’s productive life.

Oh, what OPEC, Russia, and Iran really fear is the super-fast responsiveness of American shale producers.

If you haven’t read about Mr. Mills ideas of Shale 2.0, you really need to see the rest of the articles to see how this could play out down the road.

Want to know what I consider to be the best news in the entire article? Mr. Mills will soon release a paper entitled Geopolitics in the New Oil Era: Why and How America Should Expand its Petroleum Power. Can’t wait to see that discussion.

1/20 – Andrew Wernette at Dickinson press – Helms predicts oil prices to rise again in foreseeable future – After having paid attention to energy for a little while now, I’m slowly catching on that there are certain people to whom you should pay very close attention. Mr. Mills, see above, is one. Mr. Helms is another.

Mr. Helms said in a speech that North Dakota Sweet Crude is selling for about $25 a barrel. There are 49 rigs currently. If prices stay where they are, the rig count could drop to 30.

He indicates the price we see now is temporary. He attributed the current price to a war between Saudi Arabia, Iran, and Russia. That is called a price war.

He attributes the price war to the Saudi’s attempt to

“wipe out the US shale industry”

His perspective is the Saudi advisors said at a price below $70, the US shale industry would collapse. If that had been the case, OPEC could ride out the price war easily.

As it is now, with WTI around $30 and ND prices about $25, the shale industry is in severe distress, carnage even.

On the other hand, think through what the low price of $30 is doing to the Saudi budget. Price declines during 2015 and late 2014 devastated their budget. My previous calculations of burn rate were not aggressive enough. They could burn through their entire stash of foreign reserves in a year or three instead of five at this rate.

Completely apart from the geopolitics, oil is cyclical. It will bounce back at some point.

Back to the article. Mr. Helms thinks if prices in North Dakota go back to somewhere in the range of $30-$40, the rig count can be sustained and output will continue at above the 1.0M bopd mark. Prices going up beyond that level will see rig count and daily production increase.

Ultimately, the state could hit and sustain the 2.0M bopd level.

He indicated he has heard scuttlebutt that the Saudi’s might scale back production a bit in order to push prices up a little. Keep in mind he has access to far higher quality scuttlebutt than you or I or any newspaper reporter will ever hear.

Speaking of the Saudis….

1/18 – the American Interest (previously  Via Meadia) – Rumors Swirl Around the Saudi Throne – Rumors are circulating in the diplomatic world that sometime this year Saudi King Salman may abdicate in favor of his son Prince Mohammed bin Salman. Pattern of the last several decades would suggest that he will be succeeded by his nephew who is 56. Transitioning to a 30-year-old would be a really big deal.

I haven’t had a chance to write about a major interview in The Economist with Prince Salman. If you have read this far in my post, you really need to find that article. He is the force behind the restructuring going on in the country.

Article points out the geopolitical dimensions of this. The U.S. favors the Crown Prince. It may be more in Saudi Arabia’s interest to have a more flexible, creative, dynamic, younger leader who can chart a course when American is not a major ally, since that seems to be our intention.

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