FactSet StreetAccount Summary – US Weekly Recap: Dow +1.42%, S&P +1.75%, Nasdaq +3.25%, Russell 2000 +1.25%
The US shale industry has failed to crack as expected. North Sea oil drillers and high-cost producers off the coast of Africa are in dire straits, but America’s “flexi-frackers” remain largely unruffled.
One starts to glimpse the extraordinary possibility that the US oil industry could be the last one standing in a long and bitter price war for global market share, or may at least emerge as an energy superpower with greater political staying-power than Opec.
(…) “The freight train of North American tight oil has just kept on coming. This is a classic price discovery exercise,” said Rex Tillerson, head of Exxon Mobil, the big brother of the Western oil industry.
Mr Tillerson said shale producers are more agile than critics expected, which means that the price war will go on. “This is going to last for a while,” he said, warning that any rallies are likely to prove false dawns.
The US “rig count” – suddenly the most-watched indicator in global energy – has fallen from 1,608 in October to 747 last week. Yet output has to continued to rise, stabilizing only over the past five weeks.
Mr Tillerson said this is more or less what happened in the sister market for US shale gas. In 2009, some 1,200 rigs produced 5.5bn cubic feet (bcf) of gas per day at a market price near $8.
Today the price is just $2.50. Nobody would have believed back then that the industry would continue boosting supply to 7.3 bcf, and be able to do so with just 280 rigs.
“Will we see the same phenomenon in five years in tight oil? I don’t know, but this is a very resilient industry. I think people will be surprised,” Mr Tillerson said, speaking at the IHS CERAWeek forum in Houston.
“We’ve really only begun to scratch the surface. Shale can keep growing by 500,000 to 700,000 b/d easily,” said Harold Hamm, founder of Continental Resources. His company has cut costs by 20pc to 25pc over the past four months. (…)
IHS said an astonishing thing is happening as frackers keep discovering cleverer ways to extract oil, and switch tactically to better wells. Costs may plummet by 45pc this year, and by 60pc to 70pc before the end of 2016. “Break-even prices are going down across the board,” said the group’s Raoul LeBlanc.
Shale bosses have been lining up at this year’s “Energy Davos” to proclaim the fracking Gospel. “We have just drilled an 18,000 ft well in 16 days in the Permian Basis. Last year it took 30 days,” said Scott Sheffield, head of Pioneer Natural Resources.
“We’ve cut spud-to-spud time to 19 days,” said Hess Corporation’s John Hess, referring to the turnaround time between drilling. This is half the level in 2012. “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead,” he said.
IHS said shale is so competitive that it may “take off” again early next year after troughing in the fourth quarter, adding 500,000 b/d in 2016. (…)
Scotland’s oil industry can expect a smaller share and potential ruin, unless taxes are cut drastically, blowing apart the Conservatives’ fiscal plans. “We’re going to see massive restructuring. The North Sea is a very high cost basin,” said BP’s Bob Dudley.
Mr Dudley is resigned to a long drought for oil prices as shale refuses to yield, with Iran poised to add a further 500,000 b/d in short order if the nuclear deal goes through.
The International Monetary Fund listed a hierarchy of losers in a report last week. The North Sea is deemed the most vulnerable but Brazil, Australia, Gabon, Nigeria and Colombia, among others, are all less competitive than the US.
Few of the oil barons in Houston believe market chatter about a V-shaped rally ahead. “Prices are not going to snap back. People are in denial,” said Prince Nawaf Al-Sabah, head of Kuwait’s explorer, KUFPEC.
US oil inventories have risen to a record 480m barrels. The Chinese have filled their strategic petroleum reserves. The “Li Keqiang index” of Chinese GDP – rail freight, electricity use and bank loans – implies an industrial recession in the world’s marginal consumer of oil.
The Chinese have also taken advantage of the price slump to cut fuel subisidies and have raised the fuel consumption tax three times in two months (by 50pc in total). This is a pattern replicated across much of the emerging world. Recovery will run smack into a new headwind. (…)
Mr Hess said global oil producers may indeed face a deficit of $100bn a year to cover dividends and investment, but Opec faces a $500bn deficit to cover social costs and military spending.
The risk for the Saudis is that the fight against US shale turns into a destructive stalemate, eroding its foreign reserves and inflicting so much damage on Iraq, Algeria and Libya that its own political neighbourhood spins further out of control. (…)
“It is turning into a Sunni-Shia war and risks destabilizing the whole region,” said Patrick Pouyanne, Total’s chief. The Saudis risk sectarian “blow-back” into their own Eastern Province, where a restive Shia minority is sitting on the Kingdom’s oil reserves.
Caution is in order. The paradox of today’s oil markets is that global spare capacity is down to half its historical average. The Saudis have their foot to the floor, boosting output by 660,000 b/d over the past month to 10.3m.
PIRA Energy estimates that Saudi spare capacity is falling to 1.7m b/d, a wafer-thin buffer for the world. The market is primed for a sudden spike in prices if anything goes wrong. It is more than ever at the mercy of geopolitical events.
One thing is for sure. If and when prices rebound, US shale is ready to sweep in with lightning speed to snatch yet more market share. Opec has met its match.
Next OPEC meeting will be most interesting!
Last January, I posted about Jet.com (Amazon Bought This Man’s Company. Now He’s Coming for Them). Here’s a follow up:
Startup Jet.com’s Goal: $20 Billion Volume by 2020 E-commerce site Jet.com has yet to launch its marketplace, but it has landed a $600 million valuation and has been lauded for its business model.
Sotheby’s Bubble Indicator Not Sounding An Alarm Surges in Sotheby’s stock price have had an uncanny correlation with bubbles in general. (Evercore ISI)
Wait, wait! Things might get slippery pretty soon!