Fuck all.
Yes oil tanked right after, but that is just because day traders are idiots and pee their pants at any scary news. It has since tecoveted.
Even when Britain inevitably implodes, their effect on the market will be minimal. A contraction of their economy will only drop consumption by a few tens of thousands of barrels per day. The North Sea oil fields will decline faster than Britain's demand.
Quick. Everyone fly down and become a citizen of Guyana. They discovered a reserve of 700 million barrels offshore. Not a huge amount of oil. But when you divide that between the 800,000 people who live in the country.... Guyanans gonna get paid.
Venezuela says they need $50 oil just to be able to pay their debts. That assumes that production levels can be maintained. In May alone they declined 300k BPD, and things will only get worse. Oil production is hard on equipment, especially the heavy crude that Venezuela mostly produces. They are a country that can not afford food. Expensive parts and maintenance are well beyond their ability to afford. As the blackouts continue and their infrastructure continues to break down, their production will inexorably decline. Declining oil production will drop government revenue, and the whole process will keep continuing to get worse. Opec won't help them. Venezuela imploding will only boost all of their profits. Only continued Chinese support could possibly hope to keep them running. Unfortunately it is the Chinese that they already owe a mountain of money to.
In the past thirty years China has gone from an oil exporter to the largest importer in the world. And as their domestic production continues to drop, their usage keeps rising by consumers and industry. So more than any country, they benefit from cheap oil. They have spent the past two years stockpiling as much oil as they can. And unlike the US, they can and probably will use that stockpile to affect the market. We are just approaching a tipping point where global production is dropping to meet demand. When production drops below, the price of oil will inevitably rise. What happens if China cuts their imports by a few million barrels? They wouldn't even need to dip into their stockpiles, just stop adding to them. They have the potential to mess up the whole global supply and demand balance. They could keep the price of oil deflated for months.
The people who actually write about oil for a living are stupid.
“The implication was that Saudi Arabia owned the victory. But a three-week-long resurgence of US oil drilling after 21 months of decline suggests that Saudi and the US fought to a draw.”
The US is down over 1200 rigs in the past two years. An uptick of 20 in the past month is neither fighting to a draw or a resurgence, it’s a statistical blip. The US oil industry was beaten to the ground, and stomped on for two solid years. Just because the Sauds stopped kicking doesn’t mean that the US fought them to a draw.
And the US rig count was down again this week. Morons.
Global production has been exceeding consumption for a few years now. So what is happening to that extra oil? It's been going into storage. Most people only look at Cushing numbers and assume that the US is taking on most of it. And the US has added a lot. Since the beginning of 2014, the US has added about 150 million barrels to its reserves. But it's actually been China who has taken the majority. They have added around 350 million barrels to their strategic reserves in the past year and a half, and have no signs of stopping. They are taking on so much that it's causing a traffic jam of tanker ships in all of their ports. Oil is being delivered faster than they are able to offload it. To the point where decommissioned ships are being floated out to act as storage, just to help ease the backlog.
In another sign that the US production will do nothing but decline, it is being estimated that the amount of money spent on developnent and exploration in 2016 will be half of what it was last year. It's like they say you gotta spend money to make money. Unfortunately the inverse is true as well.
As a further sign of how much the big petro companies are still hurting, a bunch of them are starting to sell off refineries. That is not something that happens very often. Refineries are cash cows. Regardless of the price of oil, they operate and make money.
So they are being sold off to make a quick buck. But why. To stay in the black, or to finance some new drilling operations. Time will tell, but they know the state of the industry better than anyone, and see the inevitable return of hundred dollar oil.
Unlike most of the world where the big petro companies like BP and Shell are in charge of the fields, in Saudi Arabia everything is controlled by the state company Saudi Aramco. And they control every facet. Exploration, drilling, refining, and transport. What is happening in the next year or two is the biggest change since the Americans were booted out in the seventies. They are auctioning off a 5% share of the company. That doesn't sound like a lot, but the Sauds value the company in the trillions, so this auction is expected to be worth north of a hundred billion dollars. Any time any normal company would have an auction like this, they would open their books and be put through the ringer. Not with the Sauds. They value their company, and if you want a piece of the pie, you gotta fork out big.
This should scare the hell out of anyone. Spending a fortune for a completely unknown reward. Saudi Arabia allegedly has the largest reserves of conventional crude. Who does all the exploration and keeps track of those reserves? Saudi Arabia. That should be a big red flag. Despite losing hundreds of billions in the past few years the Sauds still have money in the bank. Their reason is to finance the new plan for the country. The scheme where they create enough alternate sources of income to be oil independent. So they plan to auction a tiny piece of a company in order to finance a plan to become independent from the proceeds of that company.
Nope not dodgy at all.
Going forward, Iran will be a hugely important country. They have vast amounts of untapped oil reserves and with the removal of most economic sanctions, will finally be able to utilize them. The problem is the current state of their industry. And to understand that it requires a bit of a history lesson.
Way back in the day, the sixties and seventies. Iran and the US were BFFS forever. Iran had oil they were happy to sell, and the US needed oil. Plus the Shah loved everything American including its luxuries and military hardware. Unlike the Arab rulers of today, he was incredibly progressive and looked to modernize his country and Americanize it. He brought in huge numbers of skilled foreign workers to tap into those oil fields and became a global superpower. Iran got their production numbers up to around six million barrels per day, and that brought in huge amounts of wealth to the country. A sudden crush of wealth to a country that was ill prepared for it. The ruling family became absurdly wealthy, and corruption and inflation was rampant. This did not sit well with the general populace who started to listen to the Ayatollah and his calls for revolution. Things started to boil to a head, and then the US reneged on their deals with Iran and instead decided to buy their oil from the Sauds. The country exploded, the Ayatollah and his people took over got rid of anything linked to the west, like foreign or well trained oil workers. Shortly after, Sadam looked at a country in turmoil and attacked. Iran then spent most of the eighties throwing waves of soldiers to their death to keep Iraq at bay. All this time neglecting their infrastructure and losing all capable workers. By the time that war ended, most of the world was mad at Iran and shunned them and their oil. Which brings us to today. They are a country that may have the reserves to produce more oil than the Sauds, but their infrastructure and drilling methods and antiquated. And they lack the capitol and know how to modernize their existing fields and properly tap in to new ones. As long as the price of oil stays low no one is willing to invest in a country still that crazy. Once the price creeps back up to the $75 dollar range, companies will start to overlook that and start investing hard in the country.
Globally we have spent the past few years producing a few million barrels of oil every day than we use. Where that oil goes, are the strategic reserves. Government owned oil that is sat on in case of emergency. The US unsurprisingly has the largest reserve at just shy of 700 million barrels. China has a few hundred million right now, and is buying as much oil as they can right now to push theirs up to a half billion barrels. And Japan who has over five hundred million barrels of storage. Having these full is a good thing. They allow for security in case of massive disruptions, or general Saudi dickery. They are also part of when led to the massive price collapse last year. When Cushing (the main US storage hub) was getting full, it started a panic about running out of global storage. That fear failed to pan out, but it did shed light on the global overproduction levels.
Mexico has never been a colossal producer, but an important one especially in the Americas. Unfortunately their time seems to be done. They are a country that has spent the past few decades burning through their reserves as fast as possible. They peaked at almost three and a half million BPD in the two thousands, and have been dropping ever since. Production in May this year was just over two million barrels per day. With all of their main fields continuing to age, production will only continue to decline, and they will eventually become an importing nation.
There is a lot of talk that sixty dollar oil with bring the US frackers back. That may be true, but how much extra production will that even bring on line?
Horizontal drilling and fracking opened up a lot of the US shales for business. And like any new field, production surged. Over a thousand new rigs popped up, drilling accross multiple shale fields. We all know the price plummeted and the number of operating rigs did as well. Despite the massive drop in rigs over a year ago, US production has only started to drop. That tells us that the rigs still in operation are supremely effective and the twelve hundred odd ones were not. Finding oil is not an exact science. Multiple test wells need to be drilled to find the sweet spots within formations. And with sixteen hundred operational wells, that's a lot of holes. It's pretty safe to assume that a lot of the honey holes have been found and are currently being produced. So even if the frackers do come back in droves, how much is even left. Yes there is a whole lot of raw oil down there, but the average quality of well would almost certainly be significantly lower than it was in 2011.
These huge shale formations need to be looked at as one field each. And as such they have all peaked and are now in decline. I can't see enough companies coming back and operating whild oil is under a hundred dollars to do anything other than just offset the current US decline. Unless they completely open up the Arctic for drilling and there are huge finds up there, I don't think the US will ever hit nine million BPD again.
Nigeria is showing just how fragile oil production can be. Earlier this year they were pumping 2.5 million barrels per day and were Africa's largest producer (10th largest in the world). Their current output is a little sketchy at the moment, but might be as low as just one million barrels. That is a staggering amount of loss. And why? The world's shittiest superhero team. The Niger Delta Avengers. While the Nigerian military is off fighting Book Haram, these guys have waged a war on the Nigerian oil industry. And are winning. They just keep blowing up pipelines and attacking oil rigs. To the point where Shell declared force majeure, then packed up and left the country. The Nigerian government was trying to negotiate a peace, but these guys said "nuts to that" and blew up another pipe in the process.
So a bunch of dudes with machine guns, some explosives, and a bunch of boats currently hold the country by the balls. And have drawn the blueprint for any rebels looking to disrupt a country.
Step one: blow up a pipeline
Step two: when pipeline is fixed, blow it up again
Step three: repeat
Venezuela can best be described a dumpster fire. The president is a nut job who has driven the country to the point of complete collapse. They are operating under rolling blackouts, there is no food or water, and criminals and vigilante mobs are slaughtering everyone. Inflation is in thr hundreds of percent, and they are about to default on loans.
That creates problems with industry. The big global petro companies have already abandoned the country. They cut off the distillates required to refine Venezuelan heavy crude. Despite this, Venezuela still pumps almost three million barrels per day. When the country inevitably collapses into either anarchy or martial law, the oil will stop flowing. It can very easily drop production to nothing literally overnight.
For decades Saudi Arabia’s status in the world of oil was that of a swing producer. They are rich enough that they have been running below full capacity so that they can raise and lower production levels to keep global demand in line and prices high enough. That changed recently. When the US lifted sanction on Iran, they got pissed. If there is any one thing the Sauds hate, it is Iran. Far more than one country should. And not a cheeky hate like the Brits and French, but a deep sated one that has gone back millennia. This should not affect their day to day operations, but it does, because they are not a country. They are a kingdom. A ruling family in complete economic and military control of the country. And they act like a family more than a country. Enacting revenge on their rivals takes far greater precedence than sound economic policies. It is why they kept the taps opened and have spent the last year pumping as much oil as they could, when there was a global oversupply. They had the ability to reign in their production to keep the prices high, but no. Low prices hurt their competition more. And who was their competition. Iran of course And the upstart US, who was in the midst of a fracking boom and had sided with Iran. The Sauds had the ability to hurt both countries. Keep the prices low to drive the US frackers out of business, and keep foreign investment out of Iran. This plan is working, but took far longer than expected. US rig counts are their lowest since the eighties with production due to plummet. Only the advent of horizontal drilling has managed to keep US production levels this high for this long. And Iran, despite having the largest proven reserves of conventional oil, is handicapped by obsolete equipment and methods. They could easily double their current output in a few years, but there is still too much risk for anyone to get the financing required to overhaul their entire infrastructure. The Sauds had to burn through a staggering amount of capital to do it, but it looks like they are finally winning.
Well done.
It is a good thing the US is sitting on a half billion barrels of stored oil, because they are soon to be in a lot of trouble. Production is down this year, by almost a million barrels per day. But that is just the start. To understand why, all you need to do is look at rig counts. In 2014 the US had over 1600 operational rigs. Today, less than 350. A massive drop. The thing with rigs is that they produce on a curve. Production ramps up, peaks, then declines. When the US was producing over nine million barrels per day last year, it was because a lot of rigs were peaking at once. This year the decline is starting. The thing is for the past year, no new rigs have come online. There is no new production to offset the decline. And it's a double whammy of rigs aging and coming offline. This points not to a gentle decline, but an incredibly steep one. One that we are just seeing the start of. I can see the US producing less than six million BPD by the end of the year. When that happens the price will surge to over $80 per barrel. That will be enough to get a lot of new rigs pumping, but not enough of them or fast enough. Even if there was a massive surge in new projects and rig counts doubled, that still leaves the US with just 700. A far cry from the 1600 they had two years ago.
There was a lot of excited talk last week with the US Rig Counts actually went up. A lot of people we speculating that a continued $50 per barrel price will get the fracking industry back on track. That unfortunately just won't happen. And for one very important reason. Capital. There is none. Over the past year dozens of companies have filed for bankrupcy, and those losses have totaled some fifty billion dollars. The few companies still in operation are just barely scraping by. No one has the money to do any new drilling. In the past that has not been an issue. They banks were financing any new operation, and that worked out great for them when oil was north of $100 a barrel. That is just nor the case anymore. After a year and a half of being burned by the industry, banks have become gun shy. They are a lot less likely to open their pockets and fork out a pile of cash up front on endeavors as risky as oil.
