The Coming Bottom in Oil Prices Part I: Deep into Fundamentals with Art Berman

Posted in Audio/Video & Articles, Presentations, Presentations & Publications on February 29, 2016

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Erik Townsend welcomes geologist and energy industry consultant Art Berman to MacroVoices. Erik and Art discuss:

  • The crude oil backstory and the current oversupply
  • The likelihood of a future production cut from OPEC
  • Middle Eastern politics and how they will affect future oil prices
  • EIA/IEA and other government agency statistics – Are they reliable?
  • Oil storage considerations and the importance of Cushing, OK – How close are we to capacity?
  • The Baker Hughes Rig Count – Does it matter?
  • Iran and their ongoing production increases
  • The US shale patch operators and their associated junk bonds – What is the chance of widespread default?
  • Production decline rates for US shale producers
  • Libya’s potential to affect this market – ISIS standing in the way?
  • Identifying a bottom in the oil market and a whole lot more…

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3 comments on this entry


  1. Hi Art

    Total agree with all of that and I appreciated the explanation of how lack of storage would impact the ability to keep prices relatively stable by removing the option of taking oil out of the market today to be offered for future contracts as it simply can’t be stored.

    If production costs had really fallen then we would have to ask why for example did Marathon oil declare staggering operating losses of $2.2 billion for 2015 or why did Hess declare operating losses of $1.87 billion for Q4 of 2015 alone – and that’s with all their much vaunted efficiency improvements etc.

    For years now this industry has done capex spending something like 50% higher than revenues. How can any company or industry pull off such an irrational business model? They simply can’t. The shortfalls can only be made up by taking on or issuing debt or issuing more equity as the great oil investor dilution carries on. Since the financial crisis, relative to the general markets the oil companies have done terribly in terms of share price.

    They have only managed to persuade investors and banks into backing them to date by shifting focus from any strict cost/profit based accounting model to a paradigm that revolves around demonstrating they are delivering growth and continually increasing production whilst downplaying or ignoring the excessive costs of getting it out of the ground. They all trumpet that there are billions of barrels of oil in their assets but can’t be honest about the full costs of extracting it. Despite the massive shareholder dilution that has taken place from funding the shortfalls – they all parade maximizing shareholder value as the central tenet of their institutional being.

    As you know with the operational emergency they are currently facing and the imperative to get funds immediately – there has been a concerted global effort from these companies and the MSM to suggest that their break even costs have gone down to $40 a barrel in order to sell the false proposition that they might now be viable going concerns.

    http://www.telegraph.co.uk/business/2016/02/28/us-shale-frackers-eye-world-conquest-despite-bloodbath/

    http://www.reuters.com/article/us-usa-oil-shale-idUSKCN0W20JH

    Their accounts for 2015 don’t back any of those claims up. These companies have been misleading investors for years now with their perpetual jam tomorrow business models. This sort of thing is nothing short of fraud in my book.

    I find this a lot with oil companies all over the world. They look at their business and say stuff like the underlying business has been tested down to oil prices of $20 and is still profitable. A cynical rhetorical device built upon what you define your underlying business to be. If only they could just run their underlying business and sell off the rest!! Generally speaking they ignore most of their costs especially well/asset value depletion and debt servicing.

    We touched on how these companies were going to avoid insolvency previously and in the absence of any banks insane enough to offer them more loans its clearly wall street who are yet again persuading investors to bail out these companies as I believe $7.7 billion in new equity has already been issued this year and there is plenty more to come with Marathon and Hess having announced massive new issues coming recently.

    This is just a private form of QE in a way when companies just keep printing new shares in themselves to hide the fact that they are losing money year in and year out. It seems the same with all companies I look at. All this new funding will not get them out of jail it just drags out the inevitable day of reckoning. The oil market will not recover until all the unprofitable producers are pushed out and any investors pouring money into such companies will only lose most of their investments as they’re just covering on going losses for a little while longer. Its investor stupidity that have kept the shale companies as more resilient than most assumed and its was wall street who saved them in 2015 and whom are trying to pull off the same trick again in 2016. Neither Wall Street, the Banks nor the oil companies care who they fleece to get themselves off the hook.

    Regards

    Simon


  2. Simon,

    What you say is sadly true. I see surprising faith in technology and willingness to embrace distracting noise about efficiency and production growth without much attention to profitability. People are eager to confront my criticisms of the current E&P business model but are not prepared to address the underlying reality of massive losses every quarter.

    I had not thought about the analogy between this business model and QE but it is apt.

    Thanks for your insightful comments,

    Art


  3. Hi Art.. As a retired oilpatch hand (coiled tubing- a large part of it assisting frackers ie. sanded off, frack ports won’t shift, etc.) I really appreciated your interview on macro voices. I’m retired in Mexico and have been patiently trying to explain to my American friends how laying down 900 rigs freed-up about 4000 wells for immediate fracking and how rapidly the oil cos. ramped-up their fracking operation to try to maintain cash flow and service their huge debts.Alas, it’s a losing battle because they’d rather listen to the happy talk on bloomberg about increased efficiency and increased production from drilling rigs. If you wanted to demonstrate your ignorance in the patch ask a rig push how many barrels of oil per day his rig produces. Something I’ve been thinking about recently..There has apparently no decrease in wells being brought into production and yet as of Dec 2015 there has been a marginal decrease in shale production. Is this perhaps an indication of peak shale oil production? Could the retirement party be getting into full swing already. If so, people are going to feel betrayed when the price of oil increases significantly and shale oil production won’t ramp-up like it did before. I’d like to hear your thoughts on this. Scott Kerl