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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.

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Forget Rig Counts And OPEC, Media Bias Is Driving Oil Down

Forget Rig Counts And OPEC, Media Bias Is Driving Oil Down

We are in an age of propaganda where most people argue viewpoints not based on facts but on selective perception basis. They cherry pick what supports their argument then ignore the rest to make their case. Facts are no longer weighed objectively and in some cases ignored altogether. This has been going on for years as the “talking heads” come on TV and talk about various things and positions they own attempting to sway others to buy or sell based on a TV appearance. Well what has occurred the last 6 months when the steep decline in oil occurred went one step further.

Yes the move down from $100 to $70-$80 or so was tied to the oversupply that was anticipated to come and has come mainly in the US. Beyond that, most oil industry executes would agree, as have various members of OPEC, that the decline from there was tied to media hysteria that created a negative environment to force an unwinding of long futures positions which ballooned to 5-8X higher than 2008. Related: T. Boone Pickens Points The Finger At U.S Shale

Post OPEC’s November decision, the media has been basically cheerleading oil down. Most know that the media has a liberal bias so naturally anything that helps in carrying out the Feds policy would naturally get supported. We all know the primary mandate of QE1-3 has been to prop up the stock market thereby creating the wealth effect. Well one thing that supports this is consumer spending so the media for months now has run article after article about the so called “oil glut” and still to this day, despite being 9 months into this down turn, is refusing to admit that lower oil did not result in higher consumer spending. At Bloomberg in their energy section they used “glut” in their headlines almost daily in January.

In recent months the US economy actually has slowed not accelerated. Further, what has accelerated is gasoline demand, to 5% plus since December here in the US, which most don’t even realize. But Fed officials even this week keep saying oil is a net positive while most economic indicators (latest is durable goods which is negative in January and February) ex new housing starts recently have stalled as the media still cheerleads on. So the media, with help from select Wall Street analysts/brokers (one well known that I won’t name but on the Street is noted for its bias) create a negative bias whereby most positive indicators of improving supply/demand ratios are dismissed and thus don’t get discounted.

One primary one has been the near 50% drop in rig count and the other the 30% plus decline in US capital spending on oil exploration. At first we were told only vertically rigs are being dropped which weeks later turned out to be 100% false as now the majority are horizontal. Then we were told only the less productive areas saw the majority of rig count drop and production won’t get reduced because of productivity gains in more productive areas from existing wells. This Kansas City Railroad confirmed once and for all that oil over rail is declining (Reuters in fact last week reported a 25% drop!) which is rather telling given that the Bakken primarily uses rail to move crude from wells. Related: Oil Price Speed Limit Presaging An Age Of Austerity?

Further, 90% of active rigs are in 3 counties in North Dakota as of 2 weeks ago yet we continue to see rig counts fall. In fact, rigs according to the North Dakota Resource site have declined week over week again from 107 to 98. So is the spin that rigs are falling in only non-productive areas and production won’t fall but grow through most of 2015 true like the EIA an IEA claim? No, of course not, in fact the EIA caved somewhat by admitting that production in Bakken & Eagle Ford will fall BUT rise in Permian offsetting it resulting in a production increase this month. Well, let us see if that is true.

As a reminder, the EIA uses sampling and algorithms to estimate on a 3 month lag when actual data gets reported US oil production. The point is that the rig count drop isn’t the focus (selective perception created by media basis) any longer despite falling nearly 50% from peak but instead, the focus has now shifted to Cushing hysteria and on it possibly filling up in next 4-6 weeks. Back in 2009 when the rig count dropped, the case was made that it resulted in little production curtailment, but what they failed to declare was that by that time the bottomed oil price recovered, so things like depletion on existing wells didn’t have time to kick in. And back then the same focus was on most productive wells too, but the penetration of horizontal drilling much less so, allowing for more ‘apparent’ productivity gains.

However prices aren’t recovering so why shouldn’t rig count be a leading indicator now, as it always has been? To review, since January we went from “rig count does not matter” tied to “wrong rigs being dropped” to “wrong regions’ rigs being dropped” and now “rig count being dismissed altogether with all the focus on Cushing filling up?” Meanwhile production grew 500,000 BB/D since last October or 3.5M BB/W and we keep adding more than a 2X that to inventory and no one questions how or why, when gasoline demand has accelerated not decelerated (as media focuses on waning China demand & now Iran supply mind you). In a bear market created by media hysteria & bias all the negatives matter and none of the positives as you can see. Related: Wall Street Losing Millions From Bad Energy Loans

The selective perception can all be measured through the relationship between the US dollar and oil which has had a near perfect inverse relationship since oil began to fall in late June 2014. Since last Wednesday the UUP is down 3% while USO is up nearly 7% for a little over 2.33X inverse move. However over the last 3 months it was 2.7X and 6 months 4X. Thus, as the dollar’s ascent decelerated and reversed, the relationship lessened.

The lesson here is, don’t get pulled by the nose by selectively perceiving what the media wants you to focus on when the reality is very different. Rig count has always been a leading indicator for oil supply, in some cases more and in some, less. Back in 2008, gains on horizontal drilling helped offset the rig losses as did the rapid price rise toward end of 2009. Everyone has a bias and the secret is to figuring it out in order to remain objective, thereby resisting the selective perception. Most don’t even realize this until someone points it out as they are led like sheep. The reality is US oil production is about to level off and decline in early summer into the fall and Cushing won’t fill up yet but I don’t here the cry for this case at all in the media.


By Leonard Brecken for Oilprice.com

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  • alex_80 on March 26 2015 said:
    It is true, public hysteria is a permanent feature of society. But, please, blame society, and do not describe it as plot.
  • Anonymous on March 26 2015 said:
    Leonard, great article ! At last someone seeing through the hype machine. Just to add to your argument, CSX CEO just came on saying oil volumes are guess what? down !!
  • Ian on March 26 2015 said:
    Good article - thanks for posting. Most people know this already but the media hysteria over everything nowadays has gotten completely out of hand. Companies and reputations can be destroyed overnight.
  • Graham on March 26 2015 said:
    excellent points!
  • David Hrivnak on March 26 2015 said:
    Does not the EIA also report actual production as well on their Web page? From that data March 20th is another record week of production in the USA. To my surprise despite 6 month of dropping oil rig drilling we have also seen 6 months of continually rising production.
  • Jay on March 26 2015 said:
    Honestly this has to be the most accurate article I have read in the past 6 months. Although I do not understand the oil companies. All of them are hurting many to the breaking point, with all there power how or why are they not letting this be known? The ending outcome to this will be a catosrophic rise in oil prices due to lack of investment into future projects/wells drilled. Also demand is increasing maybe not as fast as previously predicted but it is still increasing, so when demand catches supply and surpasses it, combined with lack of investment and the depletion of current wells the shock to the oil market will be huge on the upside.
  • JoeyWeber on March 26 2015 said:
    I totally agree. This whole oversupply of oil story is starting to get old. Let's face it, if oil was still $100/bb and we had an oversupply and no room for storage we would be destroying forest, or overtaking outdated industrial areas, etc.. to build storage vessels. The price is down because it's time to add another chapter to the never ending war USA is in and always will be because war drives our economy and benefits the rich.
  • rodo145 on March 27 2015 said:
    OK Leonard you have an interesting perception of this... but that's somewhat stupid to blame this on media hype. the real issue is the speed at which new oil production is being added to production when oil is 100 + but it'll probably be an issue again even at 80 maybe potentially 70 $... the problem is how this just becomes a feeding frenzy and no company ever was showing a single sign of slowing down, in fact companies were trying to accelerate there increase production by spending more then what they make with the assumption they'll be able to their money back tomorrow.

    NOW think about it Leonard and this is a pretty easy answer... if all the companies are really greedy and just keep wanting a bigger piece of the pie ( even tho most of that pie is already claimed) and oil never collapsed in price. what do you think the effect would be? keep in mind there is rumored roughly 1.5 million barrels of oil that could been added to the market if all the companies complete their frack logs.

    in one hand the price drop was fairly drastic, on the other hand none of these companies dont and wont stop or cut back on new construction unless its unprofitable or hardly profitable... bottom line this had to happen no questions about it. cheap oil supply has their market it share and is stupid for people to think they should move to the side for more expensive oil..everyone else has to fight for theirs and no one wants to lose

    PLUS how many are old shitty out dated rigs that dont give the same results as the new ones.. as someone in the oil industry i can tell you things get run into the ground and theirs a fair amount of old shit

    Also somewhat recently they figured out how to revive a well so that mean less new construction will be required in the future to keep production at a similar level
  • jason on March 27 2015 said:
    Your article is spot on. Finally a true and accurate report of what we see every day in the bakken. I don't think the media will be shocked when production starts leveling off and declining soon, but they will not tell the investing world until it's too late. it's painful to watch their inaccurate spin on prices.
  • Jay on March 27 2015 said:
    Robo 145. Your explanation of getting rid of old shitty rigs because they don't give the same results is complete shit. You say that you work in the industry? From this statement I would assume u do not work in the industry or do and have very little knowledge on the actual drilling and completion of wells. First yes there are more efficient wells that will drill a well a little faster but that doesn't mean the well is drilled better. When dealing with a horizontal well the result of the well depends on the quality of geologist and direction drillers you have. Not the newer more efficient rig. Secondly the rate at which they might still a well might be a day faster. If you are dealing with a top drive double to drill your wells you will be saving about 18,000 for the extra rig rate per day plus another maybe 15,000 for other services depending on type of well and formation you are in. Also the speed at which you drill by saving a day doesn't mean it will produce more then a well that was drilled a little slower. Some formations can not be drilled at top speed and reunite a slower pace to better stimulate the formation in order to produce oil shows so you know where to set fraks. So based on this rig efficiency deals little to over all savings unless you are drilling a 6000m well which takes 3 months to drill but then again it all comes down to the quality of people working for the company in the end not the newer better equipment. And this is coming from someone that actually works in the oil industry. It also proves why you have been reading about more efficient rigs as media bullshit. Now different fraking materials and methods are a different story but not when it comes to drilling a well. THIS ARTICLE WAS BANG ON
  • john clarke on March 28 2015 said:
    Oil price forecasting is for dummies. All analysis on forecast after the fact show remarkable failure to have been correct and have overlooked the basic laws of supply and demand. Why is OPEC (proxy for the Kingdom) refusing to cut production? Because OPEC's production has been flat for past 10 years at about 37 mmbd whereas non-OPEC share has risen 20% from 47 mmbd to 57 mmbd over same time-frame! Much of the increase can be attributed to the shale oil revolution in the US, where imports have dropped by over 3 mmbd in the last 8 years. Shale oil is an economic treadmill due to rapid decline rates in the first year so look out for a rapid drop in this production as a correlated effect of reduced drilling. Full cycle economics for this oil is around $70/bbl to break even and drilling is down and getting worse,
    Geopolitical perturbations will move oil up or down on a daily basis, but in an oversupplied market the room for longer term upside pricing is limited. Does anyone expect Walmart to increase prices so that it's competition can gain market share. SAUDI Arabia will continue its policies on pricing and drive out high cost production first (shale oil and new oil sands projects) unless the US becomes too uncomfortable that lower prices may not be a stimulus to their overall economy and slow but growing global demand (about 1mmb/d) soaks up surplus supply. Another 12-18 months of $50 WTI should prove that the "cure for high oil prices is high oil prices... and vice versa".
    Adam Smith is right over the long term and media is just noise driving short term fluctuations. Watch out for the expiration of big forward hedges coming off in the next six months and pushing production down more rapidly for those that are currently basking in passing the loss to the buyers... pity them also?
  • Sean on March 28 2015 said:
    Heh, nah, if anything the liberals are more upset about low oil prices than anyone. Undermining their panicmongering about peak oil.
  • TJNY on March 29 2015 said:
    Good article, still does not answer my question. If US is producing 9 mb /day and consuming 19 mb, why do we have a storage problem. And don't blame refiners , by now they should have adjusted to domestic crude.
  • vernony on March 29 2015 said:
    Of course this article is right . Its the amount being produced, not the number of rigs in operation. If the amount being produced is higher than is required, then the rig in operation will decline. Another factor is price , if the price gets to low then new exploration will fall. But, that is cyclical, if the price is too low then investment will drop, in turn, this will lead to less exploration, and that in turn leads to a higher price and in turn to more rigs being put to work. That is how business works !
  • thecrud on March 29 2015 said:
    BS the price of oil is falling for one simple reason OPEC production no longer being cut to keep prices artificially high.
    They did it so long we forgot 20.00 dollar oil was the normal price.

    To Justify the price we were paying to dig our own and to not take heat for doing nothing about it.

    Now America has never look more foolish. And you still have not learned as the market price is still not real for Saudi off market side deals.

    We are really truly stupid.
  • thecrud on March 29 2015 said:
    Yeah it was poor people and the working class that wanted higher oil prices.
  • Amvet on March 29 2015 said:
    Most of the Bakken oil is shipped by rail. Reuters reported that rail shipments were down 25% this month.
  • Rocman on March 30 2015 said:
    Continued rise in production even with declining rig counts not surprising as many wells drilled in 4Q and early 2015 were not completed right away. Typically 30 -90 days on horizontal after completion to actually have decent idea as to what you've got. One can go to Baker to verify # and what type of rigs being dropped. Seems like last time I checked(30-45days ago)it was @20% vertical and @45% horizontal.
  • Guy Minton on March 30 2015 said:
    Very well put. Most recent information by the Texas RRC, and North Dakota indicate a drop in production in January to the tune of about 94k barrels a day. EIA posted huge increases in January. I keep up on permits in the Eagle Ford, and they are running about half of what they did year to year since January. Overall, Oct to Dec, they had an average of 20% drop. Forget, the rig count. Oil production has been tubing since the first of the year.
  • production side on March 31 2015 said:
    The media outlets have no idea that monthly production numbers aren't due to the EIA until months after they occur. The numbers released by the EIA are stale, at best. Even then, the production for Jan, due to the EIA in March, likely reflects peaks from wells that were drilled in Q4 2014, or earlier in pad drilling scenarios.
  • geophysics68 on March 31 2015 said:
    The hype is important. One objective story for every 10 negative stories. Think about that and if you don't buy it search oil prices in Google news and look at the list. Corrections are necessary yes, but this is a clear effort to hammer a negative view ignoring inconvenient points of information. What about this storage hype. Morgan Stanley sends out a note showing available storage at 650MM barrels. Don't think oil will be pouring into the streets anytime soon. And Rodo, for a guy who works in the oil patch, you talk a lot like a trader in a financial shop.
  • amvet on May 18 2015 said:
    My view is that the media butchers reality to sell a low oil price because they support our government´s economic and propaganda war on Iran, Russia, and Venezuela.

    The media´s treatment of the oil and gas situation cannot be dismissed as slant. It is dishonesty.
  • Amvet on June 23 2015 said:
    This is total crap: " Most know that the media has a liberal bias".
    The media is part of the military-industrial complex and keeping oil prices low is part of our war on Iran, Russia, and Venezuela.
    Media hysteria? How about media organized dishonesty?

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