Monday, February 29, 2016

Frackers are the monkey on OPECs back: U.S. shale's message for OPEC: above $40, we are coming back

From Reuters via Yahoo News:
For leading U.S. shale oil producers, $40 is the new $70.

Less than a year ago major shale firms were saying they needed oil above $60 a barrel to produce more; now some say they will settle for far less in deciding whether to crank up output after the worst oil price crash in a generation.

Their latest comments highlight the industry's remarkable resilience, but also serve as a warning to rivals and traders: a retreat in U.S. oil production that would help ease global oversupply and let prices recover may prove shorter than some may have expected.

Continental Resources Inc , led by billionaire wildcatter Harold Hamm, is prepared to increase capital spending if U.S. crude reaches the low- to mid-$40s range, allowing it to boost 2017 production by more than 10 percent, chief financial official John Hart said last week.

Rival Whiting Petroleum Corp , the biggest producer in North Dakota's Bakken formation, will stop fracking new wells by the end of March, but would "consider completing some of these wells" if oil reached $40 to $45 a barrel, Chairman and CEO Jim Volker told analysts. Less than a year ago, when the company was still in spending mode, Volker said it might deploy more rigs if U.S. crude hit $70.
Yup.  Just like I said earlier.  And who is to blame?  Well, it's OPEC's fault.  They tried their Tet Offensive with shock and awe. And what a bloodbath there was!  And is!  We're not even finished with  the OPEC shock and awe.  But in the end, what good will it do them?

Frackers are throwing in the towel and defaulting on loans. And when liquidating their companies, the price of their assets aren't anywhere near what they had on the books.  Sure, you bought that proppant injection system for your fracking and that cost is on the books and looks good.  But the reality is, those bright and shiny machines are being liquidated at pennies on the dollar.  And these assets are getting picked up by other frackers, lowering their capital costs.

Add to that, more efficient ways to frack, you now have the ability to pull oil and natural gas out of the ground at a price much lower than what they thought it would cost a few years ago.

Now we find OPEC and other world oil providers in a short term crunch.  What is their way out?  There is only ONE way out. And that is when the world economies finally expand again. The world "pie" of buyers of oil starts to expand and is able to accommodate a natural rise in the price of the commodity.

But until we see that huge expansion of demand, OPEC is essentially dead in the water. They can never EVER raise prices whenever they want.  They are subject to market forces and are forced to abide by them.  From now until eternity.

But this is really not a bad thing for OPEC. It means that their reserves will last much longer.  But from what I can tell, that's the only advantage.

I'll say it again, but in big, bold letters (all upper caps) CAPITALISM HAS WON.

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