• 4 minutes Pompeo: Aramco Attacks Are An "Act Of War" By Iran
  • 7 minutes Who Really Benefits From The "Iran Attacked Saudi Arabia" Narrative?
  • 11 minutes Trump Will Win In 2020
  • 15 minutes Experts review Saudi damage photos. Say Said is need to do a lot of explaining.
  • 1 min Ethanol, the Perfect Home Remedy for A Saudi Oil Fever
  • 4 hours Hong Kong protesters appeal to Trump for support.
  • 14 hours Europe: The Cracks Are Beginning To Show
  • 16 hours Iran Vows Major War Even If US Conducts "Limited Strikes"
  • 1 hour Memorize date 05/15/2018 cause Huawei ban is the most important single event in world history after 9/11/2001.
  • 1 hour Millennials: A boil on the butt of the work ethic
  • 2 hours A little something for all you Offshore swabbies
  • 11 hours Ban Fracking? What in the World Are Democrats Thinking?
  • 15 hours LA Times: Vote Trump out in 2020 to Prevent Climate Apocalypse
  • 13 hours When Trying To Be Objective About Ethanol, Don't Include Big Oil Lies To Balance The Argument
  • 4 hours US and China are already in a full economic war and this battle for global hegemony is a little bit frightening
  • 46 mins Saudi State-of-Art Defense System looking the wrong way. MBS must fire Defense Minister. Oh, MBS is Defense Minister. Forget about it.
  • 1 hour Shale profitability
  • 24 hours Yawn... Parliament Poised to Force Brexit Delay Until Jan. 31
  • 11 hours Let's shut down dissent like The Conversation in Australia
Alt Text

UAE: OPEC Can Fill Saudi Oil Supply Gap If Necessary

OPEC has sufficient spare capacity…

Alt Text

How An Oil Supply Outage Could Paralyze Asia

The oil supply outages in…

Alt Text

Iran Has Perfected The Art Of Hiding Its Oil Tankers

Despite sanctions and mounting geopolitical…

Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

More Info

Premium Content

US Shale Will Not Bounce Back At Current Prices

This week starts with a refreshing call by Deutsche Bank (DB), which basically encapsulates my view on the E&P group. Notwithstanding the valuation issues in the group that remain significant, there continues to be ample evidence that $55 oil does not support production increases in either 2015 or 2016 for that matter.

To reiterate, my view, which DB essentially shares, is that virtually all E&P company cash flows aren’t sufficient to support increases in capital spending. Most, through 2015, are out spending operational cash flow even with reduced capital spending. To further the point, most E&P companies are well hedged in 2015 (over 50 percent) thus their effective oil price is much higher than spot or strip pricing. Related: Terawatt Solar Farms By 2050?

Thus, when hedges roll off in 2016, the cash flow situation will grow worse and so will the breakeven price for them to support increased capital spending. The 20 percent reduction in drilling costs will offset some of the loss of hedging but not all, as most hedges are in the $70s, well above the current $60 spot price and strip. Both Deutsche Bank’s and my research continues to support $70 as the price whereby production can be added as supported by cash flow. They believe at $72 operation cash flow will only equal capital spending for oil producers in 2016/2017.

The ease with which this can calculated, plus what was said on their first quarter conference calls, makes us wonder what the basis of the Goldman Sachs’ (GS) call is, while rendering it as nonsense motived by more than fundamental research. It just cannot be that someone who studies this day in and day out can miss the simple math yet, not only has GS missed it, they have gone to the other extreme by saying oil “must” fall to $45 by summers’ end to balance the market. Related: Investors Turning Away From Green Energy

DB states that, by 2017, the call on US production will grow to 1 million barrels per day (Bbls/day), as depletion math dictates, and major fields that began development in June 2014 will fall in 2015 again and be well below 23 year average. That ties in well with prior thoughts that the oil market may end this downturn, like others, in a huge deficit on the supply side.

Months ago, The Saudis sounded the same alarm about the urgency for oil producers to continue to support capital spending despite low prices. The problem is, with high debt levels on US producers and their not being government entities, with virtually unlimited borrowing capacity or reserve use, they simply cannot fund operational growth. The stronger ones, like Pioneer Resources (PXD) can, and maybe the majors too, but not the smaller independents. That is why reality will set in and by the second half of this year, ahead of the fall credit determination, the smaller ones will be forced to sell outright or begin to monetize low-growth assets. Related: Which East African Nation Will Win The LNG Race?

On a separate note, this morning Cornerstone Analytics points out something that was missed in earlier analysis. The “missing oil” phenomena began to expand on global basis exactly when oil peaked and the US dollar began to fall. Another coincidence? This “miscellaneous to balance” adjustment shows up in the EIA weekly data analysis as a supply adjustment, if one wants to check it. It should be noted that it started at a small number in 2014, then accelerated and grew from there to nearly 20 million Bbls/day cumulatively so far in 2015 alone. In the world of calculated propaganda, nothing is coincidental.

Oil will likely be range bound until either the EIA or IEA capitulate on their figures by restating them and thereby showing the supply/demand balance as much tighter or, production falls off reducing the stated US oil inventory. Another option is the US dollar falls in reflection of the recession we are currently in, or about to enter, and the nonsense of raising rates later in 2015 gets rebuked.

By Leonard Brecken of Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage



Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play