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Summary
Implied US oil production basin decline is off to a crazy start - 600k b/d to 800k b/d.
But engineers are cautioning our estimate of basin decline. Pressure build-up when the
wells were shut-in may have resulted in higher initial production.
This means that the peak observed in August was likely unsustainable. Even so, US oil
production dropped ~1.7 mb/d between April and September, representing ~283k b/d per
month.
This means, by the end of 2020, we will be exiting at ~10 mb/d versus the previous two
estimates of ~10.7 to ~11 mb/d. The difference is startling going into 2021, because even
under $60/bbl WTI, US oil production will only recover back to ~10.5 mb/d.
Again, a scenario where US oil production is entering 2021 at ~10 mb/d is truly
unfathomable. We will keep watching the rest of this month's data to confirm, but so far,
it's painting an awfully bullish picture for oil prices going forward.
This idea was discussed in more depth with members of my private investing community,
HFI Research. Get started today »
The highly anticipated September EIA oil figures are starting to come out, and can we just
say, "WOW!"
For the last 3 years, we've tirelessly obsessed over every part of the EIA report, so that we
can better dissect the data. And we are thankful to have done that as our recent
performance in predicting US oil production has significantly improved (see our prediction
for April/May/June).
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If you take a look at the monthly average right now, you will notice that we've only been
declining at ~150k b/d to ~200k b/d. But the August data is massively skewed by
Hurricane Laura which knocked off ~450k b/d of average production in August.
August US oil production was supposed to be the peak this year, so the data came in
closer to ~11.6 mb/d versus the ~11.174 mb/d post-hurricane shut-in.
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You can also see this illustrated in our high frequency 4-week average tracking.
What was clear from the start was that August was going to be the peak, but we didn't
know exactly how much production will start to decline afterward. That was a big
black box we were waiting to unveil, and in the numerous weekly US oil tracking reports,
we said watching basin declines in September and October will be critical to our forecast
for 2021.
From the peak, we saw ~11.7 mb/d for August (in fact, first two weeks of August averaged
~11.7 mb/d), so the drop represents nearly ~800k b/d of drop m-o-m.
Speaking to petroleum engineers familiar with the shut-in production process, they said
some of the initial ramp-ups in production could be caused by pressure build-up while the
wells were shut-in. This means that the peak wasn't nearly as high as shown, and the drop
is merely a reflection of the lower peak. This may result in lower basin decline than we
expect cautioned one of our engineers.
If we take this into account and assess the US oil production landscape, then from April to
September (using March's production as starting base), assuming a production drop of
~1.7 mb/d, then the basin decline is averaging ~283k b/d per month.
This implies that US oil production by the end of the year will hit ~10 mb/d down from our
original ~11 mb/d assumption and our updated ~10.7 mb/d figure.
To give you the importance of how much we exit 2020 is, here's the beforehand forecast:
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As you can see, the difference building into 2021 is completely different, and even if oil
prices shot up, the exit point in 2021 is much lower, given that the production base started
off from a lower starting point.
Again, a scenario where US oil production is entering 2021 at ~10 mb/d is truly
unfathomable. We will keep watching the rest of this month's data to confirm, but so far,
it's painting an awfully bullish picture for oil prices going forward.
For energy investors, the 2014-2020 bear market has been incredibly brutal. But as the
old adage goes, "Low commodity prices cure low commodity prices." Our deep
understanding of US shale and other oil market fundamentals leads us to believe that we
are finally entering a multi-year bull market. Investors should take advantage of the
incoming trend and be positioned in real assets like precious metals and energy stocks. If
you are interested, we can help! We are now offering a 2-week free trial, so come and
see for yourself!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72
hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than
from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (167)
damonhill
Warning to oil traders shorting oil: 'go ahead, make my day'
www.smh.com.au/...
Saudi Energy Minister warned traders against betting heavily in the oil market saying he will try to make the
market "jumpy" and promised those who gamble on the oil price would be hurt "like hell". Prince Abdulaziz
told the gathering OPEC+ could hold an extraordinary meeting in October if the oil market soured because
of weak demand and rising coronavirus cases, according to an OPEC+ source. "Anyone who thinks they
will get a word from me on what we will do next, is absolutely living in a La La Land... I'm going to make
sure whoever gambles on this market will be ouching like hell," Prince Abdulaziz told a news conference
when asked about OPEC+ next steps.
Brian C. Nelson
Contributor
This is priceless! Not what you would normally expect from the "real" leader of OPEC.
Those who are short or bearish must have a death wish or are living in "La La Land"
heung
Premium Marketplace
@damonhill
Sir V-i-val
@Brian C. Nelson Primary Vision talked about the frac spread number needed to produce 10.5
million barrels a day again....it is still 150 to 160 but he stated that that was only for oil frac spreads
when including the other frac spreads that would mean a total frac spread cunt of 190-200 frac
spread to keep a 10.5 million barrel a day oil production going hence must closer to your number,
HFIR's number and my number
Ruffdog
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@damonhill KSA needs to realize that KSA and OPEC do not control the crude market any more.
"...traders against betting heavily in the oil market saying he will try to make the market "jumpy" and
promised those who gamble on the oil price would be hurt "like hell". "
shaner1
Premium Marketplace
@Sir V-i-val - Mark works hard at never sounding bullish. That's an important distinction to make.
Thanks
Sir V-i-val
@shaner1 the quality of his work at Primary Vision is at least a 1000 times better than the quality of
articles that you find on oilprice.com....that man puts his heart and soul in Primary Vision
shaner1
Premium Marketplace
@Sir V-i-val - I agree, actually watching the food inflation episode right now..
DogFacePonySoldier
Sounds similar to CEOs of companies in trouble that are furious with the short sellers and threaten
dire things . Usually doe'nt end well for the company!
Brian C. Nelson
Contributor
No - have been following everything Saudi does for 20 years and I cannot recall anything close to
the direct threat MBS is making.
Brian C. Nelson
Contributor
Really? Who controls it? US Shale prevents $80-$100 oil from returning. OPEC production restraint
prevents $20 -$30 oil. Do you agree ?
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Brian C. Nelson
Contributor
He is a really sharp analyst.
I compare him to guys like J. Kilduff who is presented as "an expert" and I just kind of smile. Mark
is the real deal and I hope he develops a nationwide following.
Brian C. Nelson
Contributor
Worked out well for Elon Musk!
DogFacePonySoldier
thats true! At least for a few weeks. But I remember plenty of CEOs back during the 2008 crisis -
who threatened short sellers with dire ... dire consequences. Those did'nt work out as well. But
then Elon is one of a kind - an outlier.
Ruffdog
@Brian C. Nelson MBS sees KSA role in the crude market continuing to diminish, and as the KSA
government get more and more $$$ from selling reserves and less and less from Aramco he will
realize that. Do you think that MBS would have thought that a year age Brent would be selling for
only $43, he was dreaming it would be $100.
KSA needs to cut government subsidies to spoiled brat princes before it is too late.
Ruffdog
@Brian C. Nelson It will be controlled by Global crude demand once the crude manipulators are
broke.
Ruffdog
@Brian C. Nelson Not so well for Trevon Milton, anyone heard from him lately?
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shaner1
Premium Marketplace
Worth reading IMO. What stood out is the call for a decline in production from Russia this decade.
@Brian C. Nelson @PT Larry @Sir V-i-val
www.worldoil.com/...
PT Larry
@shaner1 Thanks for the link. A great oil update.
Brian C. Nelson
Contributor
Ruffdog,
MBS clearly understands the clock is ticking. He has to maximize profits now because in the next
10-20 years the opportunity may be lost. Selling LESS reserves now not MORE maximizes profit.
You have to think about the intersection of micro and macro economics. At the micro level
increasing production will increase revenue, cash flow, and NAV.
At the macro level, where Saudi operates, it's a two variable equation. Revenue = P X Q (i.e, Price
X Production/Quantity). When Saudi increases Q, it floods the market and that in turn results in a
larger magnitude downward impact on P or Price.
We have just seen this entire scenario play out with the new global crude/liquids production leader
- the USA. US Shale added over 4 MMbo/d to the global market the last 4 years and crude prices
averaged roughly $60/bbl. If US Shale had only added 2 MMbo/d, the price would have probably
averaged $90/bbl. In other words, the 100's of billions spent on capex to grow production 10+% per
annum actually destroyed the NAV is sought to create. Saudi learned this lesson a long time ago.
(edited)
iacmw
Premium
“Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.”
PE w/ OPM and Energy Bros are slow learners. Present company excluded, of course. (edited)
Sir V-i-val
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@iacmw What are the mistakes Otto von Bismarck made that led to the German Empire being
crushed soon after its formation?
Ruffdog
@Brian C. Nelson All it means is that if traders that are betting heavily in the oil market against
KSA cannot go into the Turkish Embassy to get their Marriage license.
SonnySidhu
Premium Marketplace
@Brian C. Nelson could you share Mark’s last name. I do not know about him. Thank you.
Sir V-i-val
@SonnySidhu Primary Vision Analyst Mark Rossano
shaner1
Premium Marketplace
@SonnySidhu - https://blogs.pvmic.com/
kimbillro
I thought they sunk the Bismarck on May 27, 1941: Here is what Johnny Horton says about it in
1960:
www.youtube.com/...
Sir V-i-val
If you keep declining like this than I will have to lower my 9.800.000 barrels a day .....at the end of
december 2020! 9.800.000 is mine...all mine!.......meanwhile....
Goldman Sachs talks about a daily deficit 3 million barrel and an oil price of 49 dollars a barrel
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Ruffdog
During the fall refinery maintenance season refiners need to adjust their input blend to refine more Brent
and less WTI.
Sir V-i-val
I do not think that we will have a maintenance season....there is no reason to produce more diesel
and heating oil ...so they will not need more brent...I even believe that they will try to use as much
WTI as possible....gasoline will decline fast as people return to work
caracer
Marketplace
PSX has decided to move up maintenance for their Alliance refinery.
seekingalpha.com/...
Sir V-i-val
@caracer probably shutting down and doing maintenance but not preparing of winter
season....there is no need to do so....these refiners have a big problem ....the most economical
point for a factory is at 85 percent of its capacity...and then you have to add the loss of every barrel
of oil being processed....there is little to no point running at a loss...lower product storage will
support prices hence stop the refinery and mothball it for a couple of weeks or months extra our go
after the taxpayer's money by turning into a green refinery hence not having to pay for the farmer's
subsidies for another part of your production ...refineries refuse to have to pay for the farmer's his
ethanol and biodiesel subsidies this way
shaner1
Premium Marketplace
@caracer - Thanks for the link.. PSX has some decent Insider buying recently.
Ruffdog
@Sir V-i-val although it is not as efficient, most refiners can vary the % of products refined based
on price so high Brent and lowed WTI would not produce as much refined product but as the price
of distillates goes down and gasoline stays about the same I see this happening.
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PT Larry
@Ruffdog Rarely is the price of diesel displayed here where i live in TX, but saw one this week
advertising diesel for $1.839.
@shaner1
Ruffdog
I do not know about gulf state refiners but West coast refiners need both a spring and fall
maintenance seasons as the gasoline sold in the winter has a different composition than the gas
sold in summer.
heung
Premium Marketplace
@caracer
Sir V-i-val
@Ruffdog the difference is that the vapor pressure of summer gasoline must be lower than winter
gasoline ...the reason is to stop gasoline from evaporating from the higher summer temp....however
summer gasoline is more costly to produce but you have a higher mileage with summer
gasoline...hence there is no need to do maintenance but summer gasoline would be a little bit more
expensive to produce
Ruffdog
@Sir V-i-val I think that it is the fact that the gas sold in California in the summer has to be
reformatted to meet higher air quality standards and that is why California has to have spring and
fall maintenance seasons. The gas sold in California in the summer cannot come from out of state
refiners.
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at these ridiculous prices. Sadly governments don't seem to care about selling their assets cheap or at a
loss to keep revenue flowing into their pockets.
Ruffdog
@Moon Kil Woong Most crude producing countries need the crude dollars to balance their
government budgets. KSA is the best example, what does KSA have to get $$$s besides crude?
Brian C. Nelson
Contributor
Exactly - KSA is interested in crude dollars which is the main reason they will produce less.
Sir V-i-val
@Brian C. Nelson after doing some research I believe that you could be right that some producers
kept more shut-in.....probably to meet their obligations by the end of the year as they do not have
the cash to ready wells.....GS is talking about a 3 million barrel a day deficit and a 49 dollar a barrel
oil price.....if they are correct about the 3 million barrel decline then my oil price guesstimate is 57
dollars a barrel.....after checking the charts the Goldman Sachs estimate of 49 dollars a barrel is
nothing but the 54 dollar resistance minus the usual 10 percent discount for WTI
Ruffdog
@Brian C. Nelson and while exporting less what will KSA pay their bills with? Reduce the Aramco
dividend or sell more shares of Aramco or both?
Ruffdog
@Sir V-i-val what is GS smoking? I am looking at the futures and for WTI through June 2023 the
highest price I see is $45.48.
Brian C. Nelson
Contributor
Ruffdog - exporting more means KSA has less not more to pay bills. You would be wise to take the
time to understand this point.
kenberthiaume
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@Brian C. Nelson yes, in the short run. In the longer run, if they cut back and shale expands, they'll
have to cut further to keep the status quo and eventually will be at 0.
This is exactly why they decided to let the market decide by producing all out in the first place.
It's exactly what happened in 1986 when they went from producing 3mm bpd at $40 to 11mm bpd
at $15. It killed the US domestic supply and prices levelled out at $20-$25 for 20 years. Keeping
prices high by cutting back production doesn't work if the price is high enough to encourage more
supply.
DogFacePonySoldier
The June 2023 futures price is Todays spot price+storage costs, nothing more , nothing less.
It has to be , otherwise there is free money to be made. Because if the futures price was any higher
you can short the futures and buy spot, store it for 3 years...then close out the position ... free
money!
DogFacePonySoldier
I wont be as rude as Brian, instructing you to be wise, but it would be wise to remember that the
futures price is NOT a prediction of the price. It is simply the price today+storage costs.
If you are more bullish you can buy oil today and store it for 3 years , or buy the 3 yr futures - same
thing.
DogFacePonySoldier
are you an elementary school teacher? because that sort of thing is rude when said to adults. You
would be wise to understand that point.
Brian C. Nelson
Contributor
Global oil demand growth has averaged ~2% for the last 50 years. I am now modeling 1.2-1.4% for
the next ten years to reflect the transition away from fossil fuels. Accordingly, that is still roughly 12
to 14 MMbo/d of additional crude demand or basically the equivalent of another Saudi Arabia. Not
an easy task to say the least. My guess is US Shale meets 2/3rds of this incremental demand and
Saudi/OPEC meets the other 1/3rd.
Brian C. Nelson
Contributor
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Brian C. Nelson
Contributor
point well taken
Ruffdog
@kenberthiaume and @Brian C. Nelson "Keeping prices high by cutting back production doesn't
work if the price is high enough to encourage more supply." Also it encourages less demand as
high prices increase the sale of cars with higher MPGs and also non-crude burning vehicles.
Ruffdog
@Brian C. Nelson It depends, at the same price, the more KSA exports the more $$$ KSA has to
pay their bills. KSA continuing to dip into reserves each month to pay its bills mean the “credit rate
agency man” is knocking on KSA's door.
Ruffdog
@kenberthiaume I see in 2021 the price of WTI becoming higher than Brent, especially with Libya
slowly going back to full production.
Sir V-i-val
@Brian C. Nelson Today there was some other Bravo Sierra out about how easy it's going to be to
be carbon neutral by 2050...all that it will cost is 0.5 percent of the GDP or 1 to 2 trillions dollars a
year until 2050...even Germany claimed that it has reduced CO2 emissions by 40 percent since
1990...and while that is true that Germany has reduced CO2 emission by 40 percent since 1990
the reality is that already 39 percent of the 40 percent happened before the Energiewende of
2012...so the extra 1 percent cost the taxpayer 840 billion dollars and the consumer saw his
electricity bill rise to 41 dollar cent /kWh while the electricity is sold on the exchange for average 3
to dollar cent /kWh ( the rest are taxes to pay for green subsidies)...and then they think that 2 and 3
world countries will be able to pay the bill?I doubt that very much...It is my belief that the US
economy grew not because of Obama or Trump but by the abundance of cheap energy....Take that
away cheap energy and no country will grow ...consumption will go down and everything will cost
twice or 3 times as much ....and that will result in even less consumption while governments try to
compensate the income loss with trials like the trials of clown of New York or new taxes...from here
the West is going downhill for at least a 1000 years...it is the end of the West and the beginning of
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the East
Sir V-i-val
@Ruffdog It has little to do with quality but with the fact that 95 percent of the refineries are build to
run heavier crude than WTI hence they cannot run on just WTI...so the 10 percent spread with
Brent is here to stay..
Brian C. Nelson
Contributor
Many good points.
(i) 1% for $840 billion is alarming. With that kind of investment, you better pray the "science is
settled".
(ii) Cheap energy in the US is one of the main reason the US emerged from the 2008-2010
downturn in far better shape than other economies, including China. In fact, now that I think about it
is the reason the entire planet paid 50% less for gasoline and other transportation fuels. It's almost
like a gigantic tax reduction for the bulk of the global population of consumers. Back of the envelop
math suggests a $15 Trillion stimulus (i.e., $58 vs $100/bbl X 10 years X 96 MMbo/d avg per year)
(iii) Hope you are wrong on end of the West, because it's Western Democracies and Constitutional
Republics that have lifted the greatest number of people out of poverty in human history.
Unfortunately, this important point is lost or not even taught to wide segments of younger
generations. Unfortunately this is probably done for the wealth of politicians and so called elites at
the expense of the wealth of nations - perhaps Adam Smith should be required reading in high
school.
Brian C. Nelson
Contributor
You are describing the cost of carry model and arbitrage (i.e., risk free profits). Theoretically you
are correct, but I can tell you people/firms buy and sell futures contracts just like they do stocks and
bonds and that sets the price.
heung
Premium Marketplace
@Brian C. Nelson
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Brian C. Nelson
Contributor
"Keeping prices high by cutting back production doesn't work if the price is high enough to
encourage more supply."
If we need 5-8 MMbo/d more global crude production in the next 5 years, where is this "more
supply" going to come from other than the US and Saudi?
Brian C. Nelson
Contributor
If KSA decided to only produce 5MMbo/d tomorrow, oil prices would quickly trade up to somewhere
between $100-$200/bbl.
shaner1
Premium Marketplace
The East (China) had a 10000 years head start, finely making progress when the West needed
cheaper stuff. The lack of diversity and system of Govt. is an insurmountable Handicap IMO.
Ruffdog
@Moon Kil Woong and with Brent at $42 what refiner needs US Production?
You'd think this oil gambit was thought up by environmentalists trying to destroy the oil industry,
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Brian C. Nelson
Contributor
Moon Kil Woong - The US catastrophe was more case of inexperience and victim of your own
success. Everybody thought after the 2015/2016 downturn we would return to $100 oil, prompting
Wall Street to reward companies that could increase production 10+% per annum with little thought
to what that meant in the aggregate or at the macro level. The strategy was flawed to say the least.
The US became the largest global producer which had the adverse effect of flooding the market
and capping oil prices at ~$60/bbl. Ironically, if the growth rate would have been 1/3rd or even 1/2
of what it turned out to be, US Oil companies would have made a lot more money. Lesson learned
and experienced gained - unfortunately at a great cost. (edited)
thor11
@Brian C. Nelson is it lesson learnt though? we'll see i guess.
Brian C. Nelson
Contributor
Let me put it too you like this. The next time you see the world leading producer, the USA,
increasing production 10+% per annum when global demand growth is 1.25% per annum, you
should sell all of your stocks and other oil holdings and wait for the next collapse, executive firings,
and round of bargain basement prices.
DogFacePonySoldier
You might have learned a lesson, but did the executives learn any lesson ?- I mean other than it
was a roaring success for most of them.
Brian C. Nelson
Contributor
There were also Titans like Aubrey McClendon and Floyd Wilson whom you will never hear from
again.
kimbillro
A few of the ex oil executives are retired in the Bahamas laughing all the way to the bank
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@DogFacePonySoldier . (edited)
thor11
@kimbillro if they're retired and in the Bahamas are they still laughing all the way to the bank
though? Presumably, they've already gone to the bank, deposited their profits and now enjoying
those profits. There is no need for them to go to the bank anymore. They've already done so.
Ruffdog
@Brian C. Nelson why do refineries need US Oil companies when they can buy Brent for under
$42? Should shut down all US Oil companies and save us crude for reserves.
Ruffdog
@Brian C. Nelson the smart countries are getting their crude out of the ground while it is worth
something rather than waiting and selling into a continuing decreasing market.
Brian C. Nelson
Contributor
Russia - True with the exception of Covid-19/2020
Saudi - Evidence supports the Saudis have done the opposite for the better part of the last 20
years. Saudi could have produced 15 MMbo/d, but opted to support prices instead and produce
about 9.2MMbo/d on average. Saudi will make it very clear when they change their mind like they
did briefly this year in the month of April
Brian C. Nelson
Contributor
I guess I don't understand the question, but let me give it a shot. Unlike nat gas, crude is an
international commodity. We set up our refining complex in the 70's and 80's to handle heavier
crudes grades (i..e., Mexican Mayan/Venezuelan) with large pieces of equipment like coker units.
As such, we export a lot of our super light sweet crude because international pricing is better and
we can import heavier grades and make better overall refining margins. My guess is we will slowly
transition to handle more domestic light barrels but that will take at least a decade.
What do you mean by "shut-down all US OIl Companies?" You do realize if you mean that literally,
the price would not be $42 it would be $142+? (edited)
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DogFacePonySoldier
"You do realize if you mean that literally, the price would not be $42 it would be $142+?"
maybe so. But there is an alternative thats quite likely .. people just settle into a lower standard of
living due to shortages. Wait 4 hours for that govt run electric bus to get you somewhere that in the
"good old days" people would have just jumped in their cars and driven for 15 minutes. In my
experience this kind of thing happens quite frequently. Things gradually get worse - and people
adapt ( with the aid of copious amounts of cheap Vodka!)
DogFacePonySoldier
If we put our minds together I am sure we can point to a number of things that have got worse
since , say, the 1960s.
Iam convinced higher education today is objectively much worse than it was in prior decades. Its
not the case that the Price for a 1960s style education has become very high, its just that it is no
longer available.
kimbillro
I'll take a 1960s hamburger of 15 cents @DogFacePonySoldier .
purplemountaingirl
@Brian C. Nelson What does this mean for the likes of MPC and VLO? Please.
Brian C. Nelson
Contributor
I don't follow either closely, but I would think having flexibility to handle both light and heavy will
help both to achieve superior refining margins. Also - they are stealing NGL/Condensate from the
Delaware, so although it irks me personally, it is probably good for both. MPC also has some prime
Permian acreage so would take that into consideration as well.
Ruffdog
@Brian C. Nelson “…we export a lot of our super light sweet crude because international pricing is
better and we can import heavier grades and make better overall refining margins.”
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2021 Brent is selling for $45 and less, so why do not refiners go out and buy and import those
heaver crudes and forget about shale light; especially as I watch the spread of Brent over WTI
decrease and to a point that be years end Brent may be cheaper than WTI. (edited)
Ruffdog
@DogFacePonySoldier In Santa Cruz Co we have been using buses running on CNG for over 5
years; Less cost to fuel, less breakdowns and maintenanceand and burns many times cleaner.
Ruffdog
@DogFacePonySoldier Yes all PG&E thermal plants were fueled by imported crude!
kenberthiaume
@Ruffdog because wti is cheaper and they're maximizing profits.
Ruffdog
@kenberthiaume All those PG&E thermal plants that were fueled by imported crude were sold to
other companies and have been shutdown.
RySci
None of this matters....
stag15
@RySci Is this the same magazine that said gold was dead circa 2016? :)
Mountain Marmot
Premium
Buy when it turns your stomach. Currently adding to existing positions.
Disc; long/overweight xom, cvx, bp, tot, rds.b, cop, ogzpy, psx, xle, iez, xes
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kenberthiaume
Why is it so unfathable that shale declines? Opec has 7.7 mmbpd of cheap oil being held back. The usa
needs to cut production. So shale will contract.
Madeline Bray
Yeah, exactly. When we grew from 10 to 13 Mbpd, OPEC+ was restrained in an effort to maintain
prices. The Russians finally grew tired of limiting their production and allowing more expensive US
oil to take market share, and then all this happened. But we never could have maintained that level
anyway. I'm surprised they're only talking 10 Mbpd, I would think something more like 8 would be
sustainable in demand recovery.
shaner1
Premium Marketplace
@Madeline Bray - Up until COVID, Russia never cut a single barrel and never lost MKT share
(surprise! Putin lied) that's why SA launched a price war.
Madeline Bray
That's complete nonsense, the Russians were fully part of the OPEC+ cuts until Sechin convinced
Putin to pull out. It was said by one person attending the OPEC meeting that ministers of some
countries were struck speechless when Novak announced their position.
shaner1
Premium Marketplace
@Madeline Bray - Could be my anti Putin bias is showing? Thanks for the post.
Ruffdog
With Brent under $43 why not cut back on US production and import more Brent? For November
the differential between Brent and WTI is down to only $2.20.
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There is some assumption that demand will increase by more than that 7.7
It feels like it's going to be another long winter for us longs. I also see many names here from the
2015/6 timeframe, so we're getting used to it.
Brian C. Nelson
Contributor
"That's complete nonsense"....not so sure....It's been awhile since I dug into this, but if memory
serves Russians did little in terms of cutting before Covid. We can go back to late 2016 when they
agreed to cooperate with OPEC and evaluate their cut commitment vs. actual production. When I
did this a year or so ago, from what I recall it was kind of amusing.
shaner1
Premium Marketplace
@Brian C. Nelson - My Amateur analysis is/was they never actually cut, the reason they took an
extra Month, to agree, back in the spring was they needed time to find new ways to cheat. China
had actually stopped taking deliveries, threw them a curve ball.
Ruffdog
@shaner1 3) the China-Kazakhstan pipeline allows Russia to export 200kbld to China will allow
Russia's cheating on their quota to go basically unchecked; China is not going to report what is
flowing through this pipeline and for sure Russia is not!.
shaner1
Premium Marketplace
@Ruffdog - That's exactly how I see it. Thanks for the post!
Brian C. Nelson
Contributor
So let me get this straight? I think you are trying to tell us that two communist dictators may say
one thing and do another.
shaner1
Premium Marketplace
LOL!
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Mountain Marmot
Premium
Long ERUS, OGZPY
kenberthiaume
Shale declines very quickly in the first few months and then more slowly. I would think shale contracts
about 2% a month now. Conventional and offshore very little. Probable declines of 150k bpd per month
here on in. But then less next year.
KramerKarma
@kenberthiaume actually month 2 to 3 is peak flow for a well. The oily wells start at 400bd get to
700-1000 a few months on then by month 12-14 are close to 300b/d again and 150 at month 24.
So first 2 years are a drop.50% plus that's why 70%? Of shale oil is from 1+2yo wells . Q2 is when
drilling and completion went low so 2-3 months after should be peak decline. One of the things hfir
mentioned in the sept / oct decline rate .also the wells have to be open to decline.
Murshed
Another bullish signal is that Alberta storage has decreased from ~40mb in January to ~23mb now. There’s
still a lot of shut ins in Canada. Suncor, Meg, CPG, etc. Are all producing well below their max output.
kenberthiaume
@Murshed why is that bullish? As soon as prices go up those oil plays come back online.
Murshed
@kenberthiaume the decrease in inventories was the bullish part. I guess the second part about
decrease in production isn’t so much. Same issue with OPEC holding back. But it does show that
long term there’s going to be less capital to grow.
Jesse Pylväläinen
@kenberthiaume oil fields do not go on and off like some light switch, thats why it has natural
cyclicality
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Jay111222
@Jesse Pylväläinen can you elaborate on that?
Jesse Pylväläinen
@Jay111222 Well, first you have to determine the site, train the crew, lease the rig and manage the
logistical chain. In essence this means around 2 months of time in the US Shale patch.
Offshore sites take way more time, some more than 10years from their discovery
DogFacePonySoldier
Almost all oil related equities have been beaten to a pulp. The sentiment is diabolically negative. And the
fundamentals point to a future of extremely constrained supply and demand returning. So how to profit?
So... why dabble in micro-cap companies with possible survival risks and subject to all the usual small cap
shenanigans by traders, short sellers, private equity hawks and greedy managements? Sure , they may be
a bit cheaper, but as a small investor in their publicly traded securities, you are on the outside, while the
sharks on the inside regularly get together and discuss how to make themselves rich - at your expense.
Well before you get your hoped-for 10X , insiders and sharks will make sure you dont. Assets will get sold
to related parties, execs will get massive options grants, private equity deals will be made that are highly
dilutive.( and the SEC guys in charge of looking out for your interests are busy sending their resumes to the
CEO of the company). Face it this is a poker game and you need to realize that you are the patsy. And we
have no regulations/laws to protect us - its the wild west - patsies get eaten for lunch.
So .. it seems to me far safer to stick with large well managed oil companies - like a CNQ or SU , where in
a very bullish oil environment you might make 20+% /yr for several years. And dividends to boot.
DogFacePonySoldier
If you want to buy super undervalued assets and make 10X, you need to man up, hire some good
lawyers and hit the ground and make deals on your own. Buying small cap public stock is not the
way.
DogFacePonySoldier
I am sure someone is going to get rich over the next decade buying CRCs assets . Those are great
assets - with a decent (new , not newsom) govt, and fresh balance sheet - the sky is the limit.
Unfortunately not for the public shareholders of the now defunct company.
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DogFacePonySoldier
Because buying a ticket to visit the Louvre is not the same thing as owning the Mona Lisa !!
Murshed
@DogFacePonySoldier SU has been a significant under performer the past couple of months. Any
insight why? Is it because of the damage done to one of their facilities from the fire?
DogFacePonySoldier
SU has underperformed CNQ since the March lows. I suspect it has to do with refining - SU has a
large component of refining in its portfolio, while CNQ is pure upstream.
Murshed
@DogFacePonySoldier other factors may be investors leaving Suncor for CNQ due to the higher
dividend after Suncor cut theirs. Also, CNQ produces a significant amount of natural gas which did
well in the summer until recently. And lastly, CNQ has better assets... Suncor currently has more
than 100k off line due to high production costs.
DogFacePonySoldier
I dont make too much of this. We are talking about 4 months , in the long run these two stocks tend
to be pretty correlated. They diverge for periods of time - sure, but if you can predict what these will
do in the next 6 months , you are a better man than me !
Petja Ylitalo
Good and expensive vs mediocre and cheap is a tough question. But usually unnecessary, as now
aswell.
Big companies are relatively expensive, both good and bad ones.
So no reason why you shouldn´t buy one that is small, good and cheap.
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geologist
@DogFacePonySoldier - Interesting post by you. Do you advocate sticking with the large majors
and their dividend issues and their dropped share prices? Thanks in advance. Regards.
DogFacePonySoldier
Thanks geologist: I dont like the supermajors - and I dont invest in equities based on dividend yield
( If I want an income instrument , I buy a bond).
The supermajors are a political football - caught in the middle of this 'global warming' - 'climate
change" narrative. Some of them like Shell and BP have surrendered -= and are actively shifting
their strategy away from oil - so cannot be considered oil companies in the long run. Buy them if
you enjoy the virtue-signalling - it might even be profitable if a friendly govt provides massive
subsidies and tax breaks - but I dont like the odds.
Then you have smaller companies struggling with large debt burdens - forget those. The volatility in
this business will swiftly eliminate the overleveraged.
Then you have the US shale companies struggling with an economically unviable business model
with those 70% decline rates. never liked those - obvious ponzi like business.
So what does that leave us? Probably best to buy long dated crude futures. But I dont trade futures
anymore - too stressful!
So that brings us to CNQ. As good an oil company as one can find. Maybe SU and CVE as well.
DogFacePonySoldier
small companies that are very cheap are a trap. That was my point. lets say you spend a weekend
analyzing company X and decide its value is $50 , and its trading at $10. Its high risk - given this is
a volatile business and the company is leveraged.
But in exchange for the high risk ( of losing everything) you think the upside of 5X is a good
risk/reward.
Because that $10 company can easily be taken over for $15 ( a 50% premium is considered pretty
generous).
ie. You will, in all likelihood, never see that 5X return. However on the downside you , ofcourse, still
have the risk of losing everything.
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Petja Ylitalo
It could happen, but from my experience the chance is around 5%, and if it happens you can just
move on to the next cheap company with more money, since share prices usually move together.
Also as long as you check so that either leverage is low, or debt maturities are far away and value
of assets with normal commodity prices is above value of debt, i don´t see the risk as that big
either.
Ruffdog
@geologist Aramco will be forced to cut its dividend before XOM
Papillon1973
Premium
Question for the author: how much of the production decline (3 million bbl) will be represented by 1) shale,
2) onshore conventional, and 3) offshore please?..
kenberthiaume
@Papillon1973 almost all shale. Maybe 10% conventional, a few hundred k bpd.
Papillon1973
Premium
@kenberthiaume thank you for answering..
Murshed
Completions are picking back up after bottoming in June and July according to EIA data and the frac
spread counts. So we may slow from the average decline rate of ~283k b/d. Might finish around 10.2mb/d
by year end which is still exceptional.
HFIR
Contributor Premium Marketplace Guide
Author’s reply » @Murshed keep in mind EIA DPR data is a guesstimate even for historical data
which makes that report worthless.
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Murshed
@HFIR I also follow the @bakkenblog on twitter who post daily completions in the Bakken and it
shows a similar trend. Which is also consistent with the trusted frac spread count. There’s definitely
been an uptick but still at a significantly lower level than a year ago.
HFIR
Contributor Premium Marketplace Guide
Author’s reply » Yup. We see an uptick via Rystad’s frac focus data as well.
kimbillro
Oil goes up and NG drops 10% in one day.
shaner1
Premium Marketplace
Great Stuff! Thanks @HFIR
OilBull123
Thanks for the article.
dfossier
Why isn’t this lack of production showing up in the inventory reports? Will this excess inventory have to be
drained before anything else happens price wise?
TreyT
Demand is still way down, domestically and globally.
dfossier
@TreyT is demand down more than production or the other way around?
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HFIR
Contributor Premium Marketplace Guide
Author’s reply » @dfossier it has shown up in the report. That’s why it was a surprise draw
yesterday.
dfossier
@HFIR so what’s the net between your predicted supply numbers and current demand numbers,
considering the weak demand from India, China, and the rest of Asia? When is that projected to put
our supply back into the range of the already elevated 5 yr avg?
Ruffdog
@dfossier with current storgae running 130-140 above last year it will take a long long time if ever.,
especially, after China and India have completed filling their SPR, OPEC will have no other choice
but to dump excess exports onto the US and why do refiners need US crude when they can buy
Brent for $43.
And I am looking out thru 2021 and I do not see any Brent above $46, so why would not refiners
lock in Brent through 2021 at a blended price between $43 and $46 and then modify their input
blend to higher Brent less WTI?
Jay111222
Thanks for article. Thank you, xie xie, arigato.
boomtastic
When do you see refiners making a final low & what would your top 5 refiners be coming out of this ?
Thank you
Energy-Investor
Premium
You may be correct on the supply side of this equation. But if the demand side is lower than historical
levels, and if storage does not drop below the 5-yr average, then how does oil price go much above $45?
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Ruffdog
@Oil-Investor With parts of Europe going back into lockdown I see reduced EU demand.
Mike_Frenchie
Not really, just some clusters but no serious lockdown (no money for that anymore). Traffic was
unbearable this morning in Lisbon... I suspect some people are avoiding public transports at all
costs!
Sir V-i-val
@Ruffdog the average European country has upped the number of tests by about 1000 percent...
as a result, there are more positive PCR tests ...however the number of positive tests is still around
4 percent of all the tests taken ....96 percent of the tests are negative and 4 percent are positive ...
and there is only a very very small increase in the number of patients ...about 0.1 percent of all the
people being tested end up in hospital...so there will be no lockdown
Boomshakalakah
@HFIR will you guys be playing PVAC as a trade avenue?
HFIR
Contributor Premium Marketplace Guide
Author’s reply » @Boomshakalakah will be looking to go long PVAC if EIA confirms next week.
Boomshakalakah
@HFIR, thank you!
Ruffdog
@Hidden Rock Capital Saw this headline this am and it may be what knocked the wind out of the
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Brent sails;
Looks like OPEC will have to find cuts of an additional 1mmb/d to make up for the Libya production
coming back on line.
drooyrich
Premium Marketplace
Technip, Rig, Eni, Saipem, Gazprom and Lukoil are my biggest holdings .. waiting for oil and gas spike up ..
take timber as an example of the mania approaching
Crude Man
Contributor
Wouldn't the timber spike be a reaction to the wildfires and potential loss of resource?
shaner1
Premium Marketplace
@Crude Man - No shortage of Corn LOL! bad for Oil industry and worse for Automobiles. @PT
Larry @Sir V-i-val @kimbillro
oilprice.com/...
PT Larry
@Crude Man Heard on FOX Business News that in Canada, a pine bug has destroyed enough
forest that could have produced 9 million homes. This could be a reason.
kimbillro
Watch out for them pine bugs @PT Larry . Next they'll be blaming it on the butterflies. @PT Larry
@shaner1 @Rinascimento
PT Larry
@kimbillro Need pine bugs to feed on crude for a while.
shaner1
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Premium Marketplace
@PT Larry -Frac Spreads up 4 to 89 this week.
@kimbillro
kimbillro
Thanks @shaner1 . They're sinking millions of dollars back in to it.
shaner1
Premium Marketplace
@kimbillro - Need at least 150 to maintain current production.
PT Larry
@shaner1 Thanks for that.
Sounds like a few drillers are preparing, but still too little.
shaner1
Premium Marketplace
@PT Larry - It was an interesting episode, Some spreads are for Gas, so 180 frac spreads is more
realistic to compensate for decline rate.
PT Larry
Many thanks for the update.
HFIR
Contributor Premium Marketplace Guide
Author’s reply » @PT Larry you bet Larry. Thanks for reading.
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