• 3 hours Saudi Aramco CEO Affirms IPO On Track For H2 2018
  • 5 hours Canadia Ltd. Returns To Sudan For First Time Since Oil Price Crash
  • 6 hours Syrian Rebel Group Takes Over Oil Field From IS
  • 3 days PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 3 days Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 3 days Syrian Rebels Relinquish Control Of Major Gas Field
  • 3 days Schlumberger Warns Of Moderating Investment In North America
  • 3 days Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 3 days Energy Regulators Look To Guard Grid From Cyberattacks
  • 3 days Mexico Says OPEC Has Not Approached It For Deal Extension
  • 3 days New Video Game Targets Oil Infrastructure
  • 3 days Shell Restarts Bonny Light Exports
  • 3 days Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 4 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 4 days British Utility Companies Brace For Major Reforms
  • 4 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 4 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 4 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 4 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 4 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 4 days Rosneft Signs $400M Deal With Kurdistan
  • 4 days Kinder Morgan Warns About Trans Mountain Delays
  • 5 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 5 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 5 days Russia, Saudis Team Up To Boost Fracking Tech
  • 5 days Conflicting News Spurs Doubt On Aramco IPO
  • 5 days Exxon Starts Production At New Refinery In Texas
  • 5 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 6 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 6 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 6 days China To Take 5% Of Rosneft’s Output In New Deal
  • 6 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 6 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 6 days VW Fails To Secure Critical Commodity For EVs
  • 6 days Enbridge Pipeline Expansion Finally Approved
  • 6 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 6 days OPEC Oil Deal Compliance Falls To 86%
  • 7 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 7 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 7 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes

Top 12 Media Myths On Oil Prices

Top 12 Media Myths On Oil Prices

The upstream oil and gas industry is not a black hole. There’s no mystery wrapped in an enigma here.

There are a lot of meetings with engineers, chemists and geologists. There’s a constantly evolving learning curve. And then there’s all the regulations and compliance. But all-in-all it’s pretty straight forward, that is, until the media gets a hold of it. That’s when it becomes complicated. It’s as though we are getting reports from the mysteries of the deep ocean or life in the great galaxies beyond. There is so much hyperbole and unsupported guesswork that investors don’t have a chance. So, in a small effort to set the record straight, let’s see if we can’t dispel some of the misinformation.

Misperception #1: Goldman Sachs knows what is going on. This is incorrect. Goldman Sachs should not be quoted extensively. They are notoriously wrong when forecasting tops and bottoms. What they are good at is jumping on the band wagon and stoking fires. Their forecasting always seems to be done through a rear view mirror and their calls for peaks and troughs are always overdone. Back in July 2014 when WTI was peaking, they were calling for more, even as the dollar was showing signs of strength (and we know what happened there) and as oil inventories were beginning to wash up over our ankles. And then when we are forming a bottom in January and retesting it in March, they were calling for a deeper bottom. And then there was 2008. Remember the calls for $150 and $200 oil from Goldman and Morgan Stanley? That was right before we went to $40 and then some. (To be fair, Ed Morse from Citi called the top but he overshot the bottom. We’re not going into the 20s).

Misperception #2: The “non-productive rigs” are the first to go. This statement is a little baffling because all drilling rigs are productive, some are just more efficient. H&P’s Flex 4 and Flex 5 rigs are state of the art. But these rigs are stacking up just as fast as the less efficient rigs that require more man hours but are not as expensive to contract. Have a drive past H&P’s Odessa yard. It’s stocked full of these Flex 4s. Rigs are enormous which makes them costly to move around. You’re not going to bring in a dozen or so tractor trailers and a few cranes for a rig move back to Texas or Oklahoma, and hire the same sized fleet to bring in the newest generation rig. The closer truth is that the ones that are running in particular areas—that have not been let go—will continue running in those areas. And what the oil companies are going to do is put pricing pressure on their driller for not having supplied the cat’s ass in the first place. Related: How Much Longer Can OPEC Hold Out?

Misperception #3: Supply keeps coming on because of innovations in fracking. Yes, fracking has gotten much better in shale formations but the real advances are already baked in. What has been occurring over the last 24 months or so is that more sand is being run per stage and stage intervals are more densely packed. Other than some new chemistry and a few software updates, that is the bulk of it. There really is no smoking gun between well completions in July 2014 when oil was at $100 and now--9 months later--when oil has been cut in half.

Misperception #4: Fracking has not gotten exponentially more efficient resulting in outsized cost reductions. Yes and no, but more “no” than “yes.” The 600 lb gorilla in the room is competition. Fracking has gotten competitive, damned competitive. Five years ago fleet sizes were smaller and there were nowhere near as many players. But then came the boom and service companies did what they do best. They overbuilt. They were also cheered on by cheap and plentiful money because everyone, especially bankers and private equity, wanted in on this one. To get an idea of just how competitive the shale landscape has become, a stage in a 2012 Marcellus well fetched almost twice the same stage today. There have been multiple improvements in both design and implementation, but the heavy lifting on cheaper frack pricing has been competition.

Misperception #5: The Baker Hughes rig count has become irrelevant. Incorrect. The Baker Hughes rig count is always relevant. Remember, this was the weekly number that allowed us to hold a bottom at $43 in March. But because supply didn’t immediately go lockstep with the falling count, analysts lost patience. They are now theorizing that rigs are so “productive” that the count no longer carries the weight that it once did. That’s a tough position to take. We were at 1,600 rigs drilling for oil in October and we’re now at 800. There is some truth that E&Ps are now favoring sweet spots but that won’t make up for the 50% collapse in the count. Shale extraction resembles an industrial process more than it does wildcatting. There aren’t many dry holes with shale. Microseismic advances have put an end to that as have data rooms stuffed full of old well logs that chart the potential of shales. Thus, most shale wells drilled today have a much better chance of being economic than step out and exploratory wells of the past. There is no legitimate model for 800 rigs growing US production past 8.9 mm BOPD in the Lower 48. And because its shale, and because shale is “tight”, drilling must continue at a breakneck pace to grow production. Analysts looking for a more ‘spot on’ number should start following the activity of fuel distributors who run nonstop between depots and frack jobs. Watch their sales for a more immediate indication of future production. Related: Oil Rebound May Come Sooner Than Expected

Misperception #6: We are running out of storage space for crude. We’re not. We’re going to be OK. Volumes have increased, especially at the oft mentioned Cushing, but Cushing accounts for only about 10% of US storage. Other storage areas are up but nowhere near as much. The reason is that physical traders like to park their inventory close to market and Cushing gives them that proximity. Also, Cushing is not a dead end. There are large pipelines that connect it to the Gulf Coast where storage is more plentiful and not nearly as full. Additionally, large inventory draws will be coming shortly with the advent of warmer weather.

Misperception #7: Shale wells have a productive life of only a few years. The truth on this one is slowly being sorted out and commentators are finally getting it right. Shale lacks permeability. Which means it’s very “tight”. It requires a frack job to free up the oil and gas trapped in its pore space. Fracking creates and sustains permeability and permeability is the pathway to the wellbore. Like any tight formation, oil and gas production is front loaded, meaning that most production will come right after stimulation. This results in excellent up front results but production tails off quickly, maybe even falling as much as 75% in year one and settling into something less for the next 10 or 20 years. This is called the tail and the tail is profitable, but only if the flush pays for most of the well.

Misperception #8: You can turn shale on and off. That’s wrong. Shale takes time like any other industrial activity. Slowing down its progress is a bit like stopping a supertanker. You can do it, but you need a lot of room. Most drillers require contracts and breaking them can be painful. Sand can pile up at rail sidings and result in demurrages. Layoffs can take time. Regulatory penalties may force an operator into activity whether he wants activity or not. All this takes time to work out. And then there’s always the stronger balance sheets that will drill regardless of price or that will drill and create a “fracklog” which is a newly minted MBA speak for a backlog of wells to frack. There is no switch you can flip.

Misperception #9: Oil is inversely related to the dollar. It is. This was a head fake. It’s not a misperception. Match the DXY to Brent and WTI over the last 12 months. It’s a perfect divergence. You want to bet on oil, then bet on the Euro. Related: Why The Oil Price Collapse Is U.S. Shale’s Fault

Misperception #10: OPEC is done. Maybe, but the Gulf Cooperation Council is not. Collectively, the 4 GCC members pump more than half of all OPEC production. They also have very low lifting costs and enormous cash reserves. Additionally, they have stamina and are going to maintain OPECs position of no cuts. There’s a long history of Russia or Venezuela filling reduced quotas. This time around the GCC is not going to let that happen. If Russia concedes there may be a cut in June. But it is looking unlikely even if they do. Look for Saudi Arabia to pick up market share.

Misperception #11: American shale producers are the new swing producers. No, their banks are.

Misperception #12: A deal with Iran will lower prices. Sort of. It will take Iran a year or two to add anything meaningful to our 93 MMBOPD global market but the fear of a nuclear Iran will create enough tension to offset the supply addition. Worries over a nuclear Iran, whether real or perceived, will create enough fear in the markets to more than counter balance the additional million barrels a day of supply that may come on.

In short, oil prices will increase as weekly EIA production numbers begin posting declines as we saw last week. Demand will increase. Inventories will start getting eaten into by midyear. Europe will contribute as will Asia and the Middle East. A shrinking Chinese market is still growing at 7% a year, and that market is much bigger now than when it was posting 10% yearly growth five years ago. Rich Kinder was right in calling the bottom in the low 40s and John Hofmeiser (former President of Shell Oil) and T. Boone Pickens are probably pretty close to being right with their call of $80 as the top in the next year or so. A solid $65 to $70 by year end is the more reasonable number and is just enough to hold off development of some offshore projects, oil sands work and a good amount of the non-core shale plays. A stronger dollar will also do its work here as will a Saudi Arabia hell bent on market share. There will be less and less for shorts to hold onto and very few will want to be stuck on the same side of the trade as the big investment banks.

By Dan Doyle for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • David Hrivnak on April 08 2015 said:
    Very well written and your logic seems sound. Thank you.
  • Irven on April 09 2015 said:
    I totally agreewith the Misperception #1 about the "Goldman Sucks". Thanks for your article.
  • matt Hudson on April 09 2015 said:
    Somebody put this guy on the TV! That's one of the first articles I've read that is conveying the truth. Just facts. Well done, you are smarter than anyone on bloomberg, Reuters, CNBC.
  • Lee James on April 10 2015 said:
    Maybe for oil men there's no mystery wrapped in an enigma. But I think for investors and citizens, there is.
  • Craig Maas on April 19 2015 said:
    Dan On point #5, "Analysts looking for a more ‘spot on’ number should start following the activity of fuel distributors who run nonstop between depots and frack jobs. Watch their sales for a more immediate indication of future production."

    Who or what function do the 'Fuel Distributors' play. I'm unclear who you're referring to?
  • Andrew on April 19 2015 said:
    well written article to clear up all the talking heads from major news media

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News