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What Does OPEC’s Strategy Shift Mean for the Oil Market?

What Does OPEC’s Strategy Shift Mean for the Oil Market?

OPEC+ changes course, announcing plans…

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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Top 6 Myths Driving Oil Prices Down

Top 6 Myths Driving Oil Prices Down

“Whoever would overthrow the liberty of a nation must begin by subduing the freeness of speech.”

Benjamin Franklin, Silence Dogood, The Busy-Body, and Early Writings

I start with that quote because once the media, as well as politicians for that matter, have no accountability for actions or words then liberty will dissolve. Over the last few weeks I have witnessed another litany of lies that the media insists on putting forth. They come in the form of statements presented as facts to sway opinion while others are opinions quoted by others. Either way, the bias in talking down oil prices, reinforcing the “glut” that is fueled in part by misleading EIA and IEA data, is readily apparent.

Earlier in the year I documented half a dozen media reports which turned out to be 100 percent false. Now I expose another half dozen in just the past few weeks. Prices remain unchanged as a result of the largest drop in production in a year, as well as a large inventory draw this week via the EIA. The very fact that prices haven’t responded demonstrates my points. This comes despite the dollar index (UUP) over the last month remaining essentially flat while USO has fallen over 15 percent (so much for that relationship, except when the dollar rises right?)… Related: A Reality Check For U.S. Natural Gas Ambitions

Even at the time of this article the dollar index is down 1 percent yet oil is down as well.

Here is a list of the latest lies:

1. Iran Agreement to flood market. FALSE. OPEC has even stated that the natural 1.0 to 1.5 million barrels per day (MB/D) rise in demand in 2016 will more than offset any production rises in Iran which, contrary to earlier reports, won’t come on line until early 2016. In addition, China will open up refining to third party, non-state-owned refineries which will reportedly add another 600,000 B/D in demand in 2016.

2. Iran floating storage will flood market. FALSE. As initially reported in the media, it was Iranian oil floating in storage but it now turns out to be low grade condensate as stated by PIRA on Bloomberg a few weeks back and then supported by tankers attempting to move inventory to Asia. Later media reports corrected earlier ones that the storage is in fact condensate while failing to report on its grade.

3. U.S. production resilient. FALSE. The latest EIA data refutes this as does data via EPS calls at Whiting Petroleum (WLL) & Hess Corporation (HES). Yes, some are increasing production such as Concho resources (CXO), but in the Bakken both companies confirm that 2H15 production will decline due to lower rigs and depletion. HES raised production for the year as a result of 1H15 production being higher than expected by some 5 percent. All in all, next week should see further production drops.

4. U.S. Inventory resilient. FALSE. EIA data would have fallen last week by some 4MB as it did this week ex import surges and continues to be overstated by “adjustments” made to production that amount to millions of barrels in daily production.

5. Cushing inventory fears revived. FALSE…see above.

6. OPEC supply will continue. The Saudis, as OPEC’s largest producer and largest contributor to growth in 2015, have already stated that they will reduce output by 200,000-300,000 by summers end. Yes true, OPEC as an entity won’t formally announce a cut but isn’t it misleading to report this? Related: Where In The World Is The Shale Gas Revolution?

I should note that WLL also refuted Goldman Sachs’ call that, at $60, U.S. production and rig count increases would resume. Before the most recent fall in oil, that call admittedly looked true as rigs did rise and Pioneer Natural Resources (PXD) was reportedly going to add 2 rigs a month until early 2016.

WLL, however, finally drew a line in the sand as they stated on their EPS call that they would not add a rig until 4-6 months after oil remained at $60 or better. PXD, if they are smart, will follow suit and, I suspect, the oil industry has finally come to realize that the “Trillion Dollar Swindle” in oil is very real and normal supply and demand dynamics no longer apply. The law of diminishing returns in more supply is real thanks to media hype.

Lastly, I wish to emphasize that freedom of speech not only comes as the freedom to express yourself, as I am doing here now, as others have done freely in the media, presenting both bullish and bearish cases. However, the number of statements that have been proven false and not retracted, as well as the obvious bias should raise serious questions about the role of media in the current oil bust. Which industry will be under attack next? Related: Low Oil Prices Enable India To Abolish Subsidies And Start Taxing Fuels

Meanwhile, an industry which by simple math cannot generate free cash flow (FCF) on $100 oil is disintegrating before our eyes, with millions affected by the fallout. Targeting individuals has become a regular theme in the media but now it appears to have moved to certain industries.

Below demonstrates that even on $100 oil shale isn’t self-sustainable on a FCF basis, never mind $50 oil.


Below is the estimated CF deficits for 2016 according to Jefferies with hedges:

(Click to enlarge)

How one on the sell side or media can argue for even lower oil to balance the market demonstrates the lack of detailed research and understanding of shale economics.

By Leonard Brecken of Oilprice.com

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Leave a comment
  • steve from virginia on July 31 2015 said:
    - Oil prices are declining because oil product end users around the world are broke and cannot borrow. They cannot borrow b/c they are insolvent, they are insolvent b/c they cannot borrow.

    - Oil prices are declining as a direct result of worldwide QE and other forms of easing. Easing shifts purchasing power proportionately to banks and large firms away from product end users. Without funds the end users cannot retire the drillers' expanding debts => drillers fall bankrupt.

    - Oil prices are declining because using fuel does not offer any real returns, only vaporous 'utility' which is really pleasure. Oil is an indispensable form of capital, it has been squandered for 'thrills', we are now facing the consequences: end users who lack the means to support extraction efforts.

    Keep in mind, ongoing fuel supply constraints (!) adversely affect end users faster than declining prices can subsidize them; this is a self-amplifying process. When it takes hold there is no escape from it; oil prices will decline to near-zero and the price will still be too high.
  • Dai Cheng on July 31 2015 said:
    I absolutely agree with the author. Thanks for the article.
  • Joseph Castillo on August 01 2015 said:
    Thank you for your insights, Leonard. No one seems to be noticing the production rollover here in Texas, nor the growing disparity between the Texas numbers and the EIA numbers and forecasts. Yesterday the market punished oil because of a very small increase in the rig count. Amazingly, the market completely missed that the EIA finally reported a significant drop (on the order of 150,000 bbls/day) for both their monthly volumes as well as their July 31st weekly numbers. At some point these facts will have to be recognized. I am at a loss for how this goes unnoticed by the media and why "reputable" researchers at groups like Goldman-Sachs continue trumpeting the oil glut horn in direct conflict with the facts. Anyway, thanks for your work. It gives little guys like Bold Energy hope that we can survive.
  • Timothy Smith, SFO on August 02 2015 said:
    Enjoyed reading the article. I agree there are and will be some declines coming out of USA and Saudi but by in large global production should not see significant declines through 2016 in my opinion. The only factor in that case would be demand growth which has shown little to no support of significant change. - Timothy Smith, Petro Lucrum
  • Mike on August 02 2015 said:
    Timothy. Your statement about demand growth is wrong. There has been significant demand growth and if you look at actual statistics you will see that.

    I would not believe the fairy stories in Media news about demand though, because like most media stories at present, they seem to perpetuate a desired view rather than any effort to represent and true and honest account.
  • Shakespit on August 02 2015 said:
    Tone of article seems angry and strident, maybe desperate. How dare the media print anything that negatively affects oil pricing. The news stories are "myths," read "lies." Well surely if the stories are myths, reality will soon correct the price. I am no expert but have read energy news with interest since the first oil shock in 1973, I know that the statement that "...$100 oil shale isn’t self-sustainable ..." is a joke. Shale oil certainly is very sustainable at $100 per barrel; a lot of shale is sustainable at $50, as are Canadian tar sands. The cost floor for unconventional oil to be sustainable has been wildly exaggerated for several years. Not four months ago Shell's head of tar sands production in an NPR interview corrected a young-sounding reporterette, who was stating the tar sands production needed $70 a barrel to break even, to say that the actual break even point was $36 a barrel. A $36 a barrel price for most unconventional oil is about the break even point cited for decades in the literature--I think I'll stick with that figure as my understanding as the sustainable floor for most unconventional oil. Cheer up, myths can only hurt for so long, then the market will catch up and make it all better! So don't you worry about a thing! Thank you!!
  • Andrew on August 03 2015 said:
    Agree with Steve from Virginia. QE was the most blatant and convoluted blow at the laws of economics, supply and demand. By seeking to undermine the cyclical nature of the economy and save those who would have been justly taken down the Fed and the politicians have created huge distortions which will echo through the economy for years to come. They stopped the market from adjusting itself, rebalancing wealth distribution and asset values, removing inefficiencies and restoring consumers purchasing power.

    How this tinkering (this word is obviously inadequate to describe the meddling, a wrench in the gears is more appropriate) will propagate through the system is anybody's guess. I suppose the stats perversion in the oil industry and its subsequent degradation so aptly described by the author is one of them.
  • zorro6204 on August 03 2015 said:
    Myths don't drive the oil markets, supply and demand does. And the facts are that in spite of the price drop, production is not falling. I'm hard pressed to find any companies guiding to lower production, and neither could these guys:

    "Barclays said a group of 101 oil companies that it tracks, which cover around 40% of global oil production, show no slowdown in the pace of production growth in 2015. After growing by one million barrels a day in 2014, the companies plan to accelerate output growth to 1.4 million barrels a day this year and maintain that level into 2016." - WSJ
  • Matt on August 03 2015 said:
    What the large independents should've done (the majors never would. Heck, they may be behind this driving down of the price of oil so they can snatch up a CLR or someone cheap) is stack every rig. Not drill a darn well at all in 2015, pay all of their hands from cash flow,and reevaluate at year end. Most of us little guys have already done that.

    Shakespit is correct. If production is truly declining, the market will correct itself even if it is being manipulated psychologically or otherwise. When a buyer needs physical oil and it's not so easy to come by, the price offered will go up.
  • Jon on August 16 2015 said:
    All OTHER media writers are wrong... Only THIS author is correct?!?

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