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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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Oil Rebound May Come Sooner Than Expected

Oil Rebound May Come Sooner Than Expected

The EIA reported continued gains in oil inventory coming in slightly above expectations at 4.8MB. But for the first time this year production actually dropped 36,000BD overall and 37,000BD in the lower 48. This runs contra to almost every media report and sell side analyst that has been spouting off that production would continue to rise thru at least 3Q rising 500,000-700,000B/D for the year. And, as a reminder, the lower 48 production is an EIA estimate which I guarantee will be revised downward in the coming quarters as actual data gets processed. The oil over rail data bears this out especially in TX where it dropped 25% recently as already reported here, while the EIA assumed production in the Permian would continue to rise. What was amazing is how shell shocked the talking head media were on this surprise turn of events. These two videos bear the obvious media bias that is occurring (though in fairness CNBC has been more level handed than others such as Bloomberg)….. Related: Many Big Guns Still Betting On Oil Comeback In 2015

Notice how the commentator takes on the speakers repeatedly on the negatives thrown at them. Also noteworthy is Goldman once again back tracking on its $30 oil prediction as the normalized price for Brent is expected to reach $70 late this year. Today oil is down despite a weaker dollar and lower production because the media has now refocused attention to the threat of a resumption of Iranian oil exports tied to ongoing nuclear talks. What is mostly likely to occur is some sort of toothless resolution that’s vague so that the US can save face and say we got something done. The US administration seems hell bent on accomplishing something despite Iran repeatedly making sensationalistic comments on Israel’s destruction and the necessity to continue nuclear research as well as Yemen conflict which they support. Regardless it seems unlikely that we will see Iran flooding the market with oil in 2015. Just another media driven fear that will be dispelled. Related: U.S. Oil Glut Story Grossly Exaggerated

So is the EIA data a blip or the beginning of a trend? It is likely signaling a production top given how virtually everyone has ignored the effects of decline rates which common sense stated would start kicking in right about now on wells brought online 3-6 months ago. The recent lower rig decline rates are a reflection that producers know this and have basically cut to bone. Until hedges roll off in 2H2015 from producers, look for rig count declines to moderate from here on out unless prices remain under $50 for WTI. In the most prolific regions, such as the Williston Basin, decline rates reach 50% in some cases within 6 months. Thus production has likely topped and, with refiners slated to ramp production this month as maintenance season ends, demand will pick up even more. Related: This Is What Will Determine If Oil Prices Go Up Or Down

What was more interesting from the EIA data is that NGL production was also flat this week, possibly reflecting a decrease in natural gas production finally. Chesapeake recently reduced anticipated natural gas out guidance for 2015 by 2%; in part tied to the reality that most basins for new production are unprofitable at $2.65MMBTU spot except maybe Marcellus and parts of Utica. Natural gas is a byproduct from oil drilling as NGLs are from natural gas drilling.

One last point to note is that producers are focusing on the lowest cost regions that produce the most oil. These types of supplies aren’t endless and will deplete in next 12-18 months which will pose more challenges for producer’s balance sheets if prices don’t rise. But in all likelihood they will as producers are forced to go beyond the bounds of these regions to find supply. Watch for analysts to begin to wake up to this reality as 2015 plays out.

By Leonard Brecken for Oilprice.com

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  • Tommy Trukie on April 03 2015 said:
    OIL will hit $80 in two months, PERIOD!
  • Guy Minton on April 04 2015 said:
    Guess EIA and Texas RRC will have to identify that there is an elephant in the room, before they can figure out how to get it out of the door. Right now, publically, it is not being recognized by either entity. Using models to predict how the production should look from shale plays has to be the height of conceit by the EIA. Consequently, the oil from Texas is being over stated to the tune of over 600,000 barrels a day. Much too much to say: "whoops, we made a mistake." The US government never does that without proper press coverage, which it doesn't have now. Ron Patterson covers this pretty well, but doesn't actually go to the point of elaborating how big the problem is. Guess, he figures people can read charts, can't they?
    So, yes, at some point the elephant is going to step on someone's toes.
  • Guy Minton on April 04 2015 said:
    The mantra of EIA, is that they are concentrating drilling in the most productive areas to offset the costs of wells. However, my research didn't support that supposition. In the Eagle Ford, which I have devoted most of my spare time to, I know that the average of the wells in the Western area do good to get an 800 barrel a day IP rate. So, in March's completions, which is most of February's completed wells, I did an average IP rate of the wells completed in both Gonzales and Karnes county. I came up with a little over a thousand barrel a day IP rate. That would not support that they are concentrating drilling in highly productive areas. I would consider that fairly low for that area, and consequently the wells currently being drilled would have a higher decline curve. Add this to the fact that permits since December are at almost a half, then the perfect storm is being created. Production by the Texas RRC site states that production from December to January is down about 87,000 barrels. Believe the RRC, who makes their income from production figures, or the EIA who make numbers up. Either way it is going to drop fast.
  • Glenn Stehle on April 05 2015 said:
    What? The "beautiful story," as Art Berman put it, that Washington, big oil and the MSM were peddling was all fiction?

    Tell me it ain't so.
  • George Gest on April 06 2015 said:
    Some of us have been saying the shale will fall faster than anyone can imagine since about Thanksgiving. Few realize that the "glut" was bigger in 2012 than it ever was in 2014. Imagine that? What happened? I wonder if the old King of Saudi went a little mad before he died and they are taking their time about reversing his madness out of respect and saving face?

    Not much at all has been said about the tens of thousands of stripper wells that can't even pay to haul off the salt water and that are now on lease maintenance pumping.

    The people who are making the market crushing predictions about oil prices don't understand the oil business.

    I guess it had to happen though. Shale was getting too far out of hand. The gravy train had to end one day. You can only run out of other people's money for so long. The balance sheets of some of these shale companies are just dreadful. When Whiting Oil and Samson Resources makes noises about bankruptcy the game went too far. Those companies have been around a long time. I guess the successors screwed the pooch.

    I can tell you one thing for sure... it hurts right now to be in the oil business. Every day another shoe drops and we are running out of shoes.
  • Stabilizer on April 08 2015 said:
    The price of oil isn't set by anything simplistic. Oil has had more than a century to develop a sophisticated, highly interdependent, world wide network. Predicting oil prices is like looking at one strand of a 2 meter diameter spider web and guessing if the spider is asleep. The fact is experts inside the oil industry can't predict prices - the system is far too complex for anyone to fully understand. We do know a few things. Saudi cannot reduce extraction, their major oil fields are old and tired and on life support, not about to roll over and die but if they stop EOR techniques, extraction rates will plummet and not be easy or fast to restore. Basically, Saudi CANNOT efficiently extract either more or less BPD from their oldest reservoirs, unless prices take a HUGE swing from the $30-$150 range. US high cost oil extraction, however, is highly elastic, and has basically halted, though oil already in the pipeline will flow for as long as the contracts are locked in, at least another month or two, though it behooves everyone to shut down sooner and get the price back up. I have a pretty safe prediction, gasoline prices will bottom AFTER oil prices have moved up quite a bit.

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