"PEAK OIL TODAY"
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Peak Oil Review – 25 April 2016
By Tom Whipple
Quote of the Week
“What we are experiencing today is far beyond headwinds; it is unsustainable. My definition of an unsustainable market is one where all service companies are losing money in North America, which is where we are now.”
Jeff Miller, President ,Halliburton
Contents
1. Oil and the Global Economy
2. The Middle East & North Africa
3. China
4. Russia/Ukraine
5. The Briefs
1. Oil and the Global Economy
US crude stocks continued to increase the week before last while the gasoline inventory fell by more than expected. US drivers appear to be taking full advantage of the low gas prices by buying larger, less fuel-efficient cars and driving more as the weather gets better. Occasionally somebody wonders whether at least some of the increased demand for gasoline is going to exports. Goldman Sachs continues to say flat-out that the markets are still oversupplied, and that meaningful “rebalancing” is not happening as quickly as speculators would hope, and the IEA is forecasting.
One interesting phenomenon of the two-year price slump is the amount of oil that is still being produced by companies undergoing bankruptcy. Many drillers already had large backlogs of drilled but not-yet-fracked wells when the price slump began. As much of the cost producing the oil has already been sunk, the marginal profit of continuing to operate producing wells makes sense even when in bankruptcy. Despite the rapid depletion curves for shale oil wells, overall production is holding up remarkably well considering the large cut in active drilling rigs and overall capital expenditures. The EIA and IEA keep forecasting large cuts in US oil production. However, when the actual figures come out a couple of months later, these show that in comparison to the size of the estimated overproduction, the forecast drop in US production does not seem to be “rebalancing” the markets as rapidly as forecast. Thus, with Chapter 11 protections keeping the creditors away, many oil companies find it profitable to keep already completed wells pumping.
First quarter reports for the oil industry have been coming out, and the results are not good. While the producing oil companies have the flexibility to reduce capital expenditures as much as necessary to maintain dividends or stay solvent, the oil service companies which are mostly dependent on fees for supporting new drilling operations are being hurt badly. Halliburton says it cut 6,000 jobs in the first quarter as its revenue slumped by 40 percent from last year. Schlumberger saw a 36 percent drop from the 1st quarter of last year and has now cut 36,000 jobs since the oil price downturn began in 2014. The company’s CEO expects business will continue to deteriorate in the 2nd quarter as prices are not yet high enough to spur much capital investment. Much of the drilling still going on is in the massive offshore megaprojects that have too much already invested to suspend completion.
Concerns are rising about the future of the oil industry. Total industry debt now has increased to roughly $3 trillion with at least $1 trillion being spent on unprofitable projects. Goldman Sachs recently concluded that two-thirds of the world 400 largest oil projects are unprofitable with oil selling below $70 a barrel. Should these projects stop producing due to unprofitability, the world economy would be in danger from much higher prices. Then there is the carbon emissions issue which says that the world simply cannot burn all the oil being unlocked by $3 trillion in capital spending. This fear is beginning to impact investment decisions with people asking why invest in new oil production projects if the oil can never be sold due to environmental constraints. In many regions, including the US, China, and the EU, this fear is already becoming a reality for the coal industry.
Market sentiment has switched to the opinion that prices are not going much lower, despite warnings from Goldman Sachs and other respected observers that there is no fundamental support for higher prices at this time. Last week various pieces of slightly bullish news that are usually are ignored by the markets were enough to move prices higher for the eighth time in the last ten weeks. Crude now is up 67 percent since February, closing on Friday at $43.73 in New York and $45.11 in London.
US crude stocks continued to increase the week before last while the gasoline inventory fell by more than expected. US drivers appear to be taking full advantage of the low gas prices by buying larger, less fuel-efficient cars and driving more as the weather gets better. Occasionally somebody wonders whether at least some of the increased demand for gasoline is going to exports. Goldman Sachs continues to say flat-out that the markets are still oversupplied, and that meaningful “rebalancing” is not happening as quickly as speculators would hope, and the IEA is forecasting.
Having been burned by false prices rebounds in the past year, US shale drillers are showing no sign of increasing production as yet. The US oil-rig count was down by another seven units last week. Many US drillers are busy working their way through bankruptcy proceedings, selling off assets, or negotiating for lines of credit to continue their unprofitable operations.
One interesting phenomenon of the two-year price slump is the amount of oil that is still being produced by companies undergoing bankruptcy. Many drillers already had large backlogs of drilled but not-yet-fracked wells when the price slump began. As much of the cost producing the oil has already been sunk, the marginal profit of continuing to operate producing wells makes sense even when in bankruptcy. Despite the rapid depletion curves for shale oil wells, overall production is holding up remarkably well considering the large cut in active drilling rigs and overall capital expenditures. The EIA and IEA keep forecasting large cuts in US oil production. However, when the actual figures come out a couple of months later, these show that in comparison to the size of the estimated overproduction, the forecast drop in US production does not seem to be “rebalancing” the markets as rapidly as forecast. Thus, with Chapter 11 protections keeping the creditors away, many oil companies find it profitable to keep already completed wells pumping.First quarter reports for the oil industry have been coming out, and the results are not good. While the producing oil companies have the flexibility to reduce capital expenditures as much as necessary to maintain dividends or stay solvent, the oil service companies which are mostly dependent on fees for supporting new drilling operations are being hurt badly. Halliburton says it cut 6,000 jobs in the first quarter as its revenue slumped by 40 percent from last year. Schlumberger saw a 36 percent drop from the 1st quarter of last year and has now cut 36,000 jobs since the oil price downturn began in 2014. The company’s CEO expects business will continue to deteriorate in the 2nd quarter as prices are not yet high enough to spur much capital investment. Much of the drilling still going on is in the massive offshore megaprojects that have too much already invested to suspend completion.
Given the large losses that US banks are suffering on the loans to the oilindustry, it will likely take much higher prices continuing for a while before the oilindustry considers increasing drilling. While $60oil would be great for the economies of some of the low-cost OPEC producers, it is doubtful that high-cost producers such as the deep-water drillers, tar sands companies and those working in the less productive shale oil acreage will be doing much new drilling until selling prices start approaching $100 a barrel again.
