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I spoke to LOGP this morning regarfing Barryroe, I suggest others do the same...I am more optimistic after the call...
Is this share being walked down so that the fat cats can buy in big and make many multiplies of their investment.. I actually don't mind if this is true as long as the share price rises again
i am the same as you claymore I'm in deep very deep at the same price.. I am holding on for a break-even but that look to be more pie in the sky
ha ha funny because it's the sad reality
Will Saudi Arabia Cut Production For Iran? Why $70 Oil May Come Sooner Than You Think
Aug. 16, 2015 2:36 AM
Summary
• North American and Saudi production has peaked.
• Drilling costs in Saudi Arabia are increasing as cheap onshore supplies are exhausted, forcing the Arabian Kingdom to develop expensive offshore reserves.
• New Iranian oil has already been reflected in the spot price.
• Barring a surprise purposeful OPEC production increase of 2+ million bbl/day, oil prices should have at least stabilized.
• Higher prices are possible if OPEC cuts production for Iran.
Background
The past year has been a blood bath for oil prices. The descent started last September, when overproduction from the United States caused prices to dip to the 70 dollar per barrel range. The price later went down further as Saudi Arabia and OPEC decided to keep production unchanged in November 2014. Having halved in value from a year ago, prices have been in $40-60 range since January.
While most everyone agrees that oil prices should rise above current levels, the timing of this rise is uncertain. Some, such as Goldman Sachs, claim that oil will not rise above 50 dollars until 2020, while others, such as T. Boone Pickens, think that the next bull market may be right around the corner. While it is impossible to predict oil prices with a crystal ball, the overall projection can be estimated by taking a look at fundamental factors that caused the crash in the first place. There are two main factors behind the current crash: 1) production increases in U.S. and 2) OPEC's Decision to keep production unchanged.
U.S. Production
Earlier this year, I wrote an article regarding correlating historical rig counts as well as well production data to model production growth and estimate the date in which U.S. production would decrease and its effect on oil prices. Not much has changed since the writing of my previous article as things have mostly gone as planned: ex-rig counts have plunged and U.S. production has at least stopped increasing. Although the article/state data contradicts EIA data in that the article predicted production would peak in Dec.-April while EIA data predicted production increases until July, the overall consensus is the same: U.S. production has peaked. The production decline is not surprising, since oil prices crashed to ~$50/barrel large shale producers within the industry have stated that they will not increase production until the market is more balanced. Instead of increasing production, many of these companies such as EOG Resources (NYSE:EOG) have developed a backlog of such wells to releasing should oil prices stabilize around $65/barrel. The fact that the number of such uncompleted wells has increased from 285 to 320 in Q2 2015 (when oil prices were ~$60/barrel) is a good sign that shale companies such as EOG are serious when they say that they will not release the fraclog until oil reaches $65/barrel.
All in all, the poor Q2 exploration and production earnings combined with decreased rig count should lead to U.S. shale oil production cuts in H2 2015. This, combined with Saudi Arabian seasonal production cuts, should lead to stabilization of production in the U.S. and Saudi Arabia.
Will Saudi Arabia cut production?
While oil markets around the world were sent into a tailspin in November 2014 due to OPEC, this time may be different. U.S. shale is not part of OPEC but Iran is. It didn't make sense to cut production for a non-OPEC oil producer. However, it does make sense to cut production for another member of OPEC. Otherwise there is no point to continue having semi-annual meetings as the last few meetings have resulted in zero change. While significant hurdles remain, several factors will likely have large impact on the Saudi decision. These factors include but are not limited to: rising drilling costs in Saudi Arabia, energy independence/national security, and Iran's willingness to make political trades for economic relief.
Rising Drilling Costs in Saudi Arabia
It is well known that Saudi Arabia is one of the few places on earth where cheap oil still exists. Conventional onshore fields such as the Gharwar, Abqaiq, and Khurais are known to produce plenty of cheap oil costing below $10/barrel. However, what is not so well known is that Saudi Arabia has developed significant offshore oil production facilities. Offshore drilling is, by nature, more expensive than conventional onshore drilling, as this chart shows. Offshore shelf drilling, as done in Saudi Arabia, can break even if the cost is anywhere from $20 to $60 per barrel. Based on those cost estimates, it doesn't make sense for OPEC countries such as Saudi Arabia to flood the market with cheap oil as such an action would make their own offshore fields economically unviable.
Energy Independence - National Security
In additional to the higher costs involved with obtaining oil in this environment, it is also important to consider the fact that oil is also arguably the world's most important commodity. For national security purposes, every country wants some sort of energy security / independence. This means that countries with state owned oil companies will develop their own reserves even if oil goes to 10 dollars a barrel. This point is reinforced by the fact that, companies such as BP (NYSE:BP) and Petrobras (NYSE
BR) recently announced new deepwater drilling projects in spite of low oil prices.
No matter how much market share OPEC hopes to obtain by lowering prices, other countries will still develop their own reserves. Despite the intense rhetoric surrounding OPEC, recent seasonal production cuts from Saudi Arabia is a sign that OPEC favors stability over market share.
Political Trades in Exchange for Production Cuts
While national security is an important reason for OPEC not to increase production, one also has to consider the international relations in one of the most volatile regions of the world before deciding on oil prices. I'm not a political scientist, so I won't even try to discuss religious or political issues between Iran and Saudi Arabia. However, the fact remains that Iran was able to leverage nuclear limitations in order to obtain sanctions relief from the U.S. Likewise, the country should also be able to leverage proxy wars with Saudi Arabia in order to obtain a production cut. This kind of leverage could involve the trade of political concessions such as reduced support for Assad in Syria or Houthi Rebels in Yemen in exchange for a production cut from Saudi Arabia.
Conclusion
Most of the bad news has already been factored into the oil prices: U.S. production maxed out, Saudi/Russian production maxed out, and Iranian oil guaranteed to come to market in December 2015. Going forward we have declining or stabilizing U.S. production, Saudi Arabia production cut to 10.3 million Barrels per day, increased motor fuels demand due to lower prices, and possible further OPEC production cut to make room for Iran. While seasonally weaker demand from refiners and China's currency devaluation could push oil into the 30's, China is still increasing crude imports and the overall picture looks good. Worst-case scenario, oil will most likely stay within the $40-60/barrel range until mid-2016. Best-case Scenario, OPEC cuts production for Iran and we see $65-70/barrel by the end of the year.
All in all, the U.S. shale producers have learned their lessons regarding rampant production growth and have recently greatly scaled back operations. Furthermore, rising drilling costs in Saudi Arabia, means that the Saudis should have no incentive to let oil fall much more below current levels. Finally, Iran's willingness to compromise with the U.S. for economic relief is a good sign that they may also be willing to compromise with Saudi Arabia for similar economic relief. Nothing in the oil market is guaranteed, but should Saudi Arabia cut production for Iran, don't be surprised to see $65-70 oil sometime between December 2015 and June 2016.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UCO over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Market fundamentalists tell us that prices convey information. Yet, while our barbers and hairdressers might be able to give us an extended account of why their prices have changed in the last few years, commodities such as oil--which reached a six-year low last week—stand mute. To fill that silence, many people are only too eager to speak for oil. And, they have been speaking volumes. So much information in that one price!
First, as prices fell last year when OPEC refused to cut its oil production in the face of slowing world demand, the industry kept saying that it could continue to produce from American tight oil fields at around $80 a barrel and be profitable. Then, as prices fell further, the industry and its consultants assured everyone that while growth in tight oil production would slow, it would still be profitable for the vast majority of wells planned.
Petroleum geologist and consultant Art Berman is probably the best representative from the skeptical camp. For many years Berman has been pointing to the high cost of getting fracked oil out of the ground. And, those costs led to negative free cash flow for most tight oil operators for several years in a row—that is, they spent considerably more cash than they took in, making up the balance with debt and stock issuance. Not surprisingly, the operators took that money and kept drilling as fast as they could.
It was a recipe for oversupply and a crash, one that is now threatening the solvency of many fracking-dependent U.S. oil companies.
As if to the rescue, the giant consulting firm Deloitte called a bottom in the oil price when U.S. futures prices hit $48 a barrel on February 4—a little prematurely it seems. Friday's price for September futures on the NYMEX closed at $42.50.
Not to worry. Two major international oil companies, Chevron (NYSE:CVX) and Exxon (NYSE:XOM), declared back in December that $40-a-barrel oil won't be a problem for them. One of the sources cited was Exxon CEO Rex Tillerson whose company has had trouble replacing its oil reserves for more than a decade at much higher average prices. In fact, oil majors have been cutting exploration budgets since early 2014 when oil prices were still hovering above $100.
It seemed as if the message that the price of oil was sending from about the middle of last year until just recently was going unheeded by American oil producers. U.S. oil production kept rising despite dramatically falling prices. But when production growth finally stopped in June, there was hope that less supply would be weighing on prices, and predictions abounded that the price would go higher.
The reasoning behind this call was that continuing economic growth worldwide would combine with stagnating growth in oil supplies to squeeze the market enough to move prices up.
While low oil prices were supposed to "spur the global economy" according the the International Monetary Fund, The Economist magazine took a more measured view. It also looked at the decline in employment and investment in oil which had previously been booming.
High-cost oil from the Canadian tar sands is also taking a significant hit as investment is slashed in the face of low prices.
With the recent renewed slump in oil prices, the industry is trotting out the same kind of stories it trotted out when oil was around $80 and then $60. Oil at $30 a barrel will be no problem for a special breed of drillers in the Bakken Formation of North Dakota, we are told. If you actually read the story, it is stating the obvious: that break-even prices vary from well to well. And, the writer refers to "realized" prices, not the NYMEX futures price. It turns out that because Bakken lacks pipelines for transporting oil, it must use oil trains. That's expensive.
So, those buying oil from North Dakota take the freight costs into account. The average realized price on Friday was $28.75 for the type of oil extracted from Bakken's deep shales in North Dakota. While wells that are already drilled often produce regardless of price because those who operate them must pay back debt, it is doubtful that very many new wells would be profitable at this price. And, it is worth noting, those investing their capital do not as a rule seek to break even. A break-even proposition usually sends them looking elsewhere to invest their money.
Beyond this, there is a broader consideration. And, it is something which very few people seem to be talking about when it comes to all the information that is supposed to be conveyed by the oil price.
As the world's central energy commodity, oil is a good indicator of economic activity. With the nearly universal conviction that the previous bounce in oil prices, to around $60, signaled a stronger economy and thus stronger oil demand, logic would dictate that we now consider the opposite: that the new slide in oil prices is signaling new weakness in the world economy. If so, it's the kind that ought to frighten even the optimists this time.
Having said all this, it might be wise to take any day's price reports in the same way as the low or high temperatures on a particular day. A cool morning in summer does not mean winter is right around the corner. Nor does a hot day in mid-winter spell the end of the season. What's more important is to look at the overall picture to see if the season is changing—or even more important, if the climate itself has shifted, both literally and metaphorically.
That takes a lot more analysis than the daily market reports can provide and than most people—even those whose job it is to follow markets—have patience for.
In that regard the long view suggests that the acute investment slump in oil which is unfolding will lead to tight supplies in a few years (because of all the wells that are not going to be drilled to replace the depletion from existing wells). That would set us up for a price spike at some point as it takes a considerable amount of time to ramp up new drilling after a long period of decline.
All this assumes that the current, seeming weakness in the economy doesn't morph into something that would cause a long-term economic decline or stagnation which would keep oil prices low for a much longer period.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email [email protected] to buy additional rights. [link] August 16, 2015 7:34 pm Saudi Arabia’s hard choices on oil and regional influence Nick Butler Share Author alerts Print Clip Gift Article Comments The country’s interests lie in price stability for the next five years, writes Nick Butler Saudi Arabia's monarch, King Salman©AP King Salman bin Abdulaziz Al Saud of Saudi Arabia T he year 2015 is not going well for Saudi Arabia. The attempts of King Salman bin Abdulaziz al-Saud and his son Prince Mohammed bin Salman — who, not quite 30, is not just deputy crown prince and chief of the Royal Court but also defence minister and chairman of the supreme council of state oil company Aramco — to assert their authority in the region and in the oil market are failing. Barack Obama, US president, pointedly overrode Saudi concerns to reach a deal with Iran that is already transforming the regional balance of power. Concerns about Iranian influence led Saudi Arabia to intervene in Yemen, but the ill-conceived air campaign has achieved little beyond demonstrating the limitations of the Saudi military. The result is a humanitarian disaster with Houthi forces still in control of much of the north of Yemen. More ON THIS TOPIC Audio Saudi Arabia feels impact of low oil prices Saudi Arabia plans $27bn in bond issues EM Squared Saudi finances slip as FX reserves slide Saudi crude output hits record in June NICK BUTLER Russia is in trouble as energy prices fall Nick Butler Obama’s canny climate plan The reports are false – coal burns on The energy implications of China’s downturn Sign up now firstFT FirstFT is our new essential daily email briefing of the best stories from across the web Worst of all, perhaps, the US shale industry has not followed the script by obediently cutting back production as prices have fallen. On the contrary, costs have been cut and production this year will be higher than in 2014. Elsewhere, other producers have increased oil output to raise revenue. The price is back to $50 a barrel and falling. So, what next? The kingdom could move in one of two ways. It could seek to form a coalition of forces to counter Iran’s network of alliances in Lebanon, Syria, Yemen and Iraq. That may be why representatives of Hamas and of the Muslim Brotherhood have visited Riyadh in recent weeks. The result could be a decisive intervention against the Assad regime in Syria as well as an intensification of the conflict in Yemen. In the oil market, the kingdom could decide that, if $50 is not low enough to hurt the shale industry, it could aim for $40 and maintain the pain for longer. That could explain the heavy borrowing the Saudis have announced in the past two weeks. This intransigent approach, however, is not immutable. The alternative is a more realistic assessment of whether Saudi’s real interests are being well served by the current policies. The risk of even more strife is obvious. The bomb attack this month on a mosque near the border with Yemen shows that the enemy is within the gates. The threat of conflict spreading south from the Islamic State of Iraq and the Levant-controlled area of Iraq and north from Yemen is real. So is the possibility of low prices leading to more instability in the region and beyond. It is hard to see how those outcomes match the interests of those in power in Riyadh. To ensure their own survival in power the Saudi rulers need a period of calm. Internally, Saudi needs reforms such as the removal of hugely inefficient subsidies. Gasoline costs 16 cents a litre, which means an estimated $80bn a year in forgone export revenue. At the same time the oil price must be increased and stabilised. The king is 79; oil minister Ali al-Naimi is 80. Both perhaps have thought that the world oil market still operated as it did in the 1980s. It does not, and a pragmatic regime in Riyadh would accept that Saudi’s interests lie in a stable price, perhaps at $70 to $80 a barrel, for the next five years. That requires a serious cut in production of perhaps 2m barrels per day. Pragmatism is needed elsewhere too. The rivalry with Iran is real but there is still scope for co-operation — not least on the common objective of defeating Isis. Internationally, Saudi Arabia needs friends. Its record on humÂan rights — with 102 people beheaded this year, according to Amnesty International — is giving the country a pariah status. Only reform and modernisation can change attitudes. These are not easy choices and nothing is certain. On balance, a change of policy before the end of this year seems more likely than not, even if it means a transfer of power and the departure of the deputy crown prince. Over the years caution rather than assertion has served the Kingdom pretty well. At the moment, however, rational outcomes cannot be taken for granted in the Middle East.
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