Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
They’ve got the Permian Basin blues. Nothing they can do. Orders rigs when prices were high and so they drill a hole and let it die.
While the rig counts rise, it is slowing the profits for shale operators and the cost of production is going up. Baker Hughes reported that drillers added just two oil rigs and over the last four weeks rig additions were the lowest since November. Smaller shale firms are feeling the pain and the economics in the shale patch will cause the reporting agencies to once again lower the US oil production forecast.The Energy Department on Tuesday lowered its forecast of U.S. oil production next year by 1 percent in what may be the beginning of a trend.
This weekend the Houston Chronicle wrote that small Permian shale producers are beginning to feel the impact of the recent slide in oil prices, warning they could postpone exploration and production plans, slow hiring and spend less on oil field services that underpin thousands of jobs in Houston area. The Chronicle says that even as larger companies plow full speed ahead in the nearby Permian Basin, these smaller, privately held firms are sending up the first signals that the industry’s recovery may be losing steam as oil prices remain stubbornly below $50.00 a barrel. Many oil producers had expected prices to reach about $55 a barrel by mid-2017 and built budgets around the expectation; now, with prices near $45, they are adjusting.
The Houston Chronicle says that Eagle Energy Inc., a small Canadian oil company that drills in Texas and has offices in Houston, recently said it plans to cut jobs, executive compensation and other costs as oil prices languish far lower than the firm expected. They also quote Jack Byrd, president of Byrd Operating Co., a small producer in Midland, who said oil prices slid far below levels needed for his company to expand operations, so instead, his firm has sold off some unprofitable property, steered away from drilling ventures with other companies and has avoided borrowing. “We’re back in a holding pattern at these lower prices,” said Byrd. “We won’t do any work that’s not absolutely necessary, and we won’t spend any money we don’t have to. It has to make economic sense.”
The Chronicle says that small oil producers tend to be more sensitive to falling prices because they don’t have the same access as larger competitors to capital through stock and bond markets to cushion the blow. Most of their capital comes from the oil they sell. And because of their smaller size, they struggle to negotiate the same discounts that oil field service firms give to larger companies. Still, the larger companies eventually might face the same pressures to scale back, analysts said. A great read.
At the same time costs are rising. John Kemp, a Reuters market analyst, wrote that U.S. oil and gas exploration and production companies are paying more to hire drilling rigs as the number of rigs still idle after the slump declines. He reports that drilling costs were up by 8 percent in June 2017 compared with their recent low in November 2016, according to preliminary data from the U.S. Bureau of Labor Statistics published on Thursday. Kemp says that the rise in drilling costs has barely started to reverse the previous 34 percent decline reported between March 2014 and November 2016, but it does mark an important turning point in the oilfield services costs cycle.
Drilling costs have been rising year-on-year since March and in June were almost 3 percent higher than in the corresponding month a year earlier. Kemp says that services costs are cyclical and follow changes in the rig count with a lag of a few months, but so far cost increases have been very modest compared with the resurgence in drilling activity. The number of active rigs has more than doubled over the last year, according to oilfield services company Baker Hughes, while costs have risen by less than 3 percent.
What we are seeing is the economics of shale come into question. The boasts that shale could be profitable in the 20-dollar handle and 30-dollar handle has been put to the challenge and it is clear that at this point, it is not the case. While shale oil is a global game changer it is still very sensitive to price. This means that shale will pull back just as prices start to rise. Due to the lag time on wells the price will have to rise significantly to stop what will be a slowing trend in US oil rig additions and oil rig completions.
This comes at a time when we saw more strong demand news out of China. Reuters reports that in a sign of strong demand, data on Monday showed refineries in China increased crude output in June to the second highest on record. OPEC is hoping higher demand in the second half will get rid of excess inventories.
And OPEC is right it probably will. US inventories are falling at a record pace and that trend will continue. Demand is king and we will see supply fall globally at an accelerated pace in the months ahead.
Questions? Ask Phil Flynn today at 312-264-4364
A Subsidiary of Price Holdings, Inc. – an Employee Owned Diversified Financial Services Firm. Member NIBA, NFA
Past results are not necessarily indicative of future results. Investing in futures can involve substantial risk of loss & is not suitable for everyone. Trading foreign exchange also involves a high degree of risk. The leverage created by trading on margin can work against you as well as for you, and losses can exceed your entire investment. Before opening an account and trading, you should seek advice from your advisors as appropriate to ensure that you understand the risks and can withstand the losses.
The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or futures. The Price Futures Group, its officers, directors, employees, and brokers may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Reproduction and/or distribution of any portion of this report are strictly prohibited without the written permission of the author. Trading in futures contracts, options on futures contracts, and forward contracts is not suitable for all investors and involves substantial risks. ©2017
Get the Power to Prosper all week-long! Stay tuned to the Fox Business Network! Call for a copy of my special gold report that is looking very timely. Also call to get a copy of my special Energy Webinar where trends that I touched on are already coming through, Call me at 888-264-5665 or email me at firstname.lastname@example.org
SubscribeReceive daily summaries of all Market Insights blog posts.
Enter email below.
Most Recent Posts
- October Grain Option Expiration & Autumn Begins. The Corn and Ethanol Report 09/22/17
- Oil Market Balance in an Unbalanced World. The Energy Report 09/22/17
- Scorching-Hot Midwest Burns the Most Canadian Gas Since May
- Deliveries Notices – ICE Cotton
- Morning Grains 09/21/17
- Morning Softs 09/21/17
- Happy Rosh Hashana. The Corn & Ethanol Report 09/21/17
- Diesel Dilemma. The Energy Report 09/21/17