Trump Oil Conspiracy

It will be very interesting to see what Trump and Tillerson decide to do to the oil market. Trump wants the US to pump more oil and be independent from the middle east. That would require massive amounts of new drilling from the US and Canada. Which requires a high price of oil. Tillerson has a large stake in arctic drilling, which requires the US to remove its sanction on Russia, and a higher price of oil. The sanctions will be lifted from Russia. With all of the Putin cronies surrounding Trump, that will happen almost immediately. The trick is then raising the price of oil to hold steadily over $70 a barrel. That will be harder. OPEC introduced their production cut, but it is too little and all of the countries involved will cheat and over produce. So while the price will slowly creep up, it could take years before the price gets to where those two men want it. The fastest way to reach their goals is to suddenly take a few million barrels per day off the market. And the easiest way to do that is the re sanction Iran. Trump has been laying the ground work for months now. And we now live in the Trump world where the right thing to do and the best thing for Trump to do are far apart. Screwing over Iran means nothing to Trump or his supporters. They are all dangerous terrorists. And of all the fights that the Democrats will need to make in the next few years, Iran is not worth the effort. And its an action that will win kudos at home. The surge in oil prices will be an immediate help to the US oil industry. And as much as they have plans in the country Russia will not stop the US. They benefit from high oil prices by just as much. So now we all wait for January 20th when Trump is officially sworn it and the anti Iran rhetoric starts.

Numbers In Perspective

Here is the thing about OPEC, Russia, and their proposed production cuts. Those numbers look well and good, but are quite misleading. Lets take Russia. They have said that they will join in the OPEC deal and cut production by 300K barrels per day. Great. That’s a lot, and should ease the glut. But it really doesn’t when you look at the big picture. Because the Ruble has been almost halved in value since 2014 and oil is all sold in good old American greenbacks, the price slide of the past few years has barely affected the big Russian oil companies. And they have spent the past few years ramping up production hard. In November they were able to output 11.2 million barrels per day. They now have production almost up to the peak levels of the old Soviet Union. And in November they were able to product almost a half million barrels more per day than they were in August of this year. So while yes they will cut production, they are still producing at almost record levels. And this cut is if anything, it is just a way to bring output down to sustainable levels while looking like heroes who are helping the entire industry. And to really put the scope of this con in perspective, Russia was only producing about 10.6 million barrels per day at the time of the price crash. So while OPEC and the US were pointing fingers and blaming each other for record outputs, it was actually Russia who has been quietly unbalancing the market.

Vienna

They done did it. OPEC actually reached a deal with significant production cuts. Now we will have to see if they will actually follow through with this. They say that they want to rest of the world to cut production by 600k BPD. And that will be a lot harder to enforce. If there is to be any hope of any other global reduction it will have to come from Russia. The US is made up of two many small operators, and Trump will be president. The man who wants to bring back coal. There is no way he would even consider a production cut.

And today Russia said that they will cut production by 300k BPD. Now what that actually means to Russia is a whole other matter. Does that mean 300k barrels less than they are producing now? Or 300k barrels less than what they budget their production to be in 2017. Or will they just do what they want, and say what the market wants to hear so that they can make a few extra dollars. Who knows. And as I have learned from following OPEC, words are wind and proof is in the pudding.

Summit

It is going to be really interesting to see if OPEC actually agrees on anything tomorrow. They Sauds have been positioning for a cut for a while. They are producing at record levels for over a year. Slashing a million barrels per day of production would be nothing for them. Iran and Iraq know this and are playing a game where they say that they will not cut production. So the Sauds came back on the weekend and said that they are willing to not cut production and wait for the market to balance itself in 2017. Considering OPEC is an organization that likes to think of itself as a cartel, there is a lot of public posturing and infighting going on. This is all happening while Argentina is rolling around on fire, begging for a shred of relief. And Nigeria like Hydra desperately hopes that the Avengers don’t show up again.

The odds of an OPEC production cut are slim to none. The best case scenario for the market is a production freeze. It would be meaningless and accomplish almost nothing, but would be held up by the group as an accomplishment while they blame the rest of the world (America) for the oil glut.

Trump And OPEC

It will be interesting to see what the Trump administration will do in regards to oil and OPEC. Trump is a hater of all things middle eastern, and all “bad deals”. Obama lifting the sanctions on Iran qualifies as both. Leading up to the election Trump was outspoken against that deal, as is the Republican party as a whole. So it would make sense for Trump to reverse it and put the sanctions back. It’s no skin off his nose, and he gets to both spite Obama and win praise from congress. It would also take millions of barrels of production per day out of the market which would significantly boost the price of oil and make a lot of US petroleum companies happy. It seems like a no brainer. The fallout of that deal would be interesting to see. The Sauds would be thrilled. It would both boost the price and oil and reduce Iran’s clout in the region. While also allowing OPEC to flatten their production numbers without Saudi Arabia or Iraq being forced to cut their production. It would mess with Russia and their aspirations in the region. Russia has been making large investments into the Iran. However it would push the Iranians further under Russia’s umbrella strengthening Russia’s alliances in the region. The Chinese would be put in an interesting position. They have been purchasing as much cheap oil as possible to build their reserves and offset the continuing decline of their domestic production. As the largest importer of oil and exporter of manufactured goods, this period of cheap oil is helping them immensely. However as much as they can threaten to cut off the US supply of iphones, they are terrified of getting on the wrong side of Trump. They know he can and will sanction the hell out of them, even if it will hurt the US more. So with renewed US sanctions they will have to avoid Iranian oil completely. We will have to wait and see when happens when Trump is finally able to put pen to legislation.

The Problems With Fracking

Over the weekend Oklahoma suffered a 5.0 magnitude earthquake. Normally something like this wouldn’t even be a blip in the news, except that it happened just a few miles from Cushing. The same Cushing where the US has a half trillion barrels of oil in storage. And that should be deeply troubling. Those tanks are not built to withstand earthquakes, and why should they be. They are in Oklahoma, not normally a hotspot of seismic activity. Except that in recent years it has become one. And all of it can be traced directly to the oil and gas industry. Oklahoma is the poster child of hydraulic fracturing, so it is no surprise that they are the first place to feel the negative effects of it. It has long been established that pumping fracking fluid into the ground will contaminate drinking water, but the earthquakes are a new phenomenon. It turns out that fracturing rock and then pumping waste water deep underground will mess with fault lines and create man made earth quakes. This has been going on for years, but the quakes have been mostly so small that they are only perceptible to seismometers. They are now ramping up. Multiple quakes have now happened over a 5.0, a strength where they can now be felt and cause damage. And as the state continues fracking this will not stop. Right now they are still in the slight denial/make it go away stage. Oil companies are being forced to stop injecting waste water near towns that are experiencing earth quakes. It will be interesting to see how far this continues and just how strong these man made quakes can become. This is all uncharted territory to geologists. Never before has human kind been able to create earth quakes. And we are now creating thousands with no sign of stopping.

Time For The Sauds To Nut Up

It was inevitable, but the tentative deal that OPEC struck to curb production is falling apart. Iran wants to keep increasing output to get back to their pre sanction levels, Libya seems to have it together enough that they can increase output, Venezuela has manipulated their bond market enough to keep the creditors off their backs for another year. Even Nigeria seems to have made enough peace with the Avengers that production is on the rise. But the death knell is Iraq. They are in the process of taking back Mosul from ISIS, and want to increase production to pay for this military action. So this deal looks doomed, and the price of oil will drop back under $50. Unless somehow Saudi Arabia unexpectedly decides to grow a pair and slash their production. There is precedent for them to do it. Shaving a few million barrels per day off of their output would bring the market into stability and would drive the price per barrel up to the $70 per barrel range. It would bring them some goodwill with a lot of countries and show that they are still a power in the market. And knowing that they legitimately have a few million barrels per day in reserve would give them a lot more clout when they threaten to flood the market. Even if they cut production, they would still be the largest producer in OPEC and the de facto power within that organization. And if the price of oil does come back up the rest of the member countries would have enough financial breathing room that they would be more amicable to production decreases of their own, and the orders of the Sauds. However it makes too much sense and the Sauds are too bitter and petty, so the deal next month will fall apart and the current status quo will remain.

Make OPEC Great Again

The seventies were a different time man. Back then the US had just hit peak oil, you could count your car’s MPG on your hands, Russia was just warming up, the Canadian oil sands were just a gooey sludge, and OPEC had all the power in the world. US oil demand was continually increasing and with their unexpected peak in production, quickly needed other sources of oil. The Sauds and OPEC took advantage and created the 1973 oil crisis. These Arab countries were flexing their newly discovered political and economic muscles, and had the US over a barrel (pun 100% intended). Never before and probably never again would such a militarily powerless group be able to pressure the US like that economically. With OPEC still producing a sizeable fraction of the world’s oil, why are they not still the economic power that they once were. And the reason is progress. Back in the seventies, the OPEC countries were mostly all poor and undeveloped with small tribal populations and few major cities. Back in the day exerting their influence on the global stage was far more important than profit margins. These countries had no one to answer to. The populaces were small and poor and the leaders barely had to answer to them. And after multiple world wars in their region and the meddling of foreign powers these countries were all eager to make a name for themselves. They had a chance to stick their thumbs in the eyes of the imperial powers and gladly took it. It is a different world these days. All of those countries have grown up and have booming populations that require ever increasing amounts of GDP. And through neglect and hubris most of their economies are completely controlled by their respective oil industries. So when the current oil crisis hit, they all were more concerned with market share and the bottom line than exerting influence. OPEC countries have all become to corporately minded. The fear of losing market share to a  rival is now far more important than wielding influence. They have all become so tied to oil profits that they are no longer able or willing to make large production swings to correct the market. So they all produce as much as they can in order to try and stay in the black while further depressing the price. The price of oil will no longer be corrected by any OPEC actions, but by the changes in production of the global market. The actions of the past year and especially the past month have shown that OPEC is no longer able to function as one entity and make changes to affect the market. OPEC is for all intents and purposes dead as a global political force.

Alaska And The Problem With Pipes

The US has long known that there were oil reserves in Alaska. In the early part of the century when the US Navy was transitioning from coal to oil, Alaska was marked as being of strategic importance due to its reserves. However due to its remoteness and inhospitable environment it was left untapped. That changed with the oil embargo in the seventies. The US needed more domestic oil and needed it quick. People started poking around in the north shore of Alaska and fully realized the potential of Prudhoe bay. The only problem was how to get the oil out. There was too much pack ice for traditional tankers. So what to do. Build a pipe and transport the oil further south to a clear harbor. And thus the Trans-Alaskan pipeline was born. This 4ft diameter pipe is designed to transport millions of barrels per day and has done so for over thirty years. However its future is not looking so bright. And for an unexpected reason. Alaska is no longer producing enough oil. Alaskan oil comes out of the ground warm and enters the pipe at around 45 degrees Celsius, it then enters the pipe and gets pumped along at around 4mph. The pipe is designed to handle over two million barrels per day, and in the early eighties that much was flowing through it. However due to the natural decline of the field, only around a half million barrels travel through the pipe now. And this is approaching the lower limit of what it can handle. Much less and the oil will start to cool too much and start separating, creating blockages and freezing in the pipe. There was a hope that arctic drilling would start and provide a fresh influx of oil through the pipe. All of those plans are shelved and Alaska is stuck with the ever decreasing amount that is coming out of Prudhoe bay. So now they have to start looking at other ways to keep it flowing. Either installing heaters or and insert to shrink its diameter. Or just hoping that global warming kicks in enough that the waters of northern Alaska remain ice free. It will be interesting to see what happens.

China To Keep On Keeping On

The amount of oil in the US petroleum reserve appears to have peaked and has actually been slowly been decreasing over the past few weeks. Despite a few new gulf rigs coming online, US oil production remains flat. But OPEC is still producing at record levels and there is still a global surplus, so where is all this extra oil going? To the same place it has been going for the past two years. China. It has long been known that China has spent the last two years using cheap oil prices to rapidly building their reserves from almost nothing, to several hundred million barrels. But there has always been secrecy about it. And a fear that they would declare themselves full and stop adding to it, creating an out of control glut. It was assumed that once they hit around 500 million barrels, they would be done. It now appears that they are far from it.
The tanks they have been using all have a floating roof design. Using satellite data and tracking the shadows in the tanks, the west has been able to figure out what China is actually up to. And its kind of surprising. They have way more oil than anyone gave them credit for. An estimated 600 million barrels in surface storage. Plus an unknown amount that is stores in caves underground. But that is not all. They are not anywhere near full capacity. From what was spotted, China has a current storage capacity of some 900 million barrels. Potentially double what the US keeps. They realized that oil is at a price far below what it should be, and have been using this deflated price to buy as much as possible for years. They have even cut domestic production way back. It is really impressive that they were able to buy this much yet not tip off the markets or cause the price to spike. It will be interesting to see what they do in the years ahead. If they will just draw on these stockpiles when the price spikes, or use it to make the market appear flooded while they gobble up cheap futures contracts. That is an absurd amount of oil, and if China has ever proved anything, it is that they will do what they can to make a buck.

Iran's New Deal

Well now it looks like Iran has finally caved. They issued a new oil contract for $2.4 billion. There are not really any details about it yet, but it sounds like they are now playing ball. If so, this is a big. Iran is one of the last bastions of cheap undeveloped crude. Even at $50 oil, they have a lot of profitable fields. Big petro companies will be giving them a look. It will be interesting to see what, or if the Saudi response is.

Iraq?

The tentative deal that OPEC cooked up this week was bound to fail, but not by the country that I assumed. It looks like it will be undone by Iraq of all countries. At the meeting OPEC rolled out their numbers showing how much all the member countries were producing. And will use those number to determine how much each country will need to cut production by. Well Iraq is now taking offense to those numbers, saying that their output was underestimated by some 200k to 400k barrels per day. Those are big numbers if true and if Iraq is told to roll back to where OPEC wants them to be, that could be almost a half million barrels a day of production that would need to be shelved. This has the secondary effect of other member countries saying that their numbers were low balled as well, starting a chain reaction that undoes everything. It will be interesting to see how this plays out. If a back door deal with Iraq will happen, or the whole deal falls apart like is expected. Either way, this shows that OPEC is nowhere near the cohesive force that it once was and the Sauds no longer have the control they once had.

OPEC Says Jump

OPEC agreed to a production cut. This is huge. This is game changing. This is probably not going to happen. What they did was an amazing head fake. They announced that they would cut production, but said they would not announce any details until the next meeting in November. What an amazing con. No one expected any production caps to be enacted, so then they go and surprise everyone with the announcement. No one looks at more than the surface of the announcement, and the price of oil spikes. All the OPEC countries make a few extra millions, and no one is the wiser. And the status quo gets to be maintained for a few more months. And once November rolls around the bickering can begin anew, the Sauds and Iranians can blame each other and this “deal” can fall apart.

OPEC Got Fucked

To the surprise of no one OPEC will not get a deal done on a production freeze. Was it due to some backdoor deal with Russia? Is it to keep kicking the US in the nuts? Is it because everyone hates Venezuela? Nope. It is because the Sauds hate the Iranians. The story is the Saudi Arabia will not just freeze production, but decrease it if Iran agrees to a production cap. Something that Iran will absolutely not do as they are trying to ramp back up to pre sanction levels. So now the Sauds can act all shocked that such a reasonable offer of theirs was rejected by the barbaric Iranians, and keep flooding the world in cheap oil. All the while shrugging and saying that there is nothing they can do, its all Iran’s fault. The question now is how much is that needless BS, and will the Sauds decrease production anyways. Saudi Arabia is currently producing at record levels, and has been for a few years now. But how long can they really sustain that. Its not like they have tapped into fresh new wells. Most of their production is coming from very old fields and from all indications all of them are producing at maximum. And despite what tricks are used, all oil fields decline. And the Sauds are running out of tricks. They have been injecting both water and CO2 into Ghawar for decades. The only way they were able to increase production and maintain those levels is to bring every well they have online and run them at full capacity. So the only question that remains is can they use their inevitable decline and drag down Iranian production, or will they just concede and roll production levels back and try to suck up a little good will.

OPEC = Fail

So it sounds like there with not be an OPEC deal at their meetings this month. And that is really not surprising. As much as the low price of oil sucks for them, it is not severly hurting Russia and the Sauds. Both are weathering this price deflation, and can easily continue to do so for the rest of the year. So what reason do they have to cave. The Sauds don’t wont Iran to receive foreign investment that will boost up their economy, and Russia would love to swoop in and low ball some Iranian contracts. As for the rest of OPEC, there is nothing they can do. They are all small fish to be led about by the Sauds. And Saudi Arabia still dangles the struggling US industry in front of them. And they have numbers. Aside from the Permian basin, all US shale fields are in major decline. And despite the “analysts” freaking out about insignificant weekly rig count changes, they will continue to do so. Even with the boost from the Permian and few new wells in the gulf of Mexico coming online, US production is holding flat. And once the cheap plays in the Permian are all tapped, US production will sharply decline. This is the end goal of the Sauds and has been since 2014. And as much as the rest of OPEC may want a deal, the Sauds are inevitable the only ones who can enact it.

Cash All Gone (Or Why The Petro's Have Cancelled All Megaprojects)

For all the talk about the US shale fields, their wildcat operators, and their impact on the global oil market, the present and future of oil is the large mega projects. Huge platforms and fields of wells over vast deposits. Where shale wells put out a few hundred barrels per day, the big fields produce hundreds of thousands. The latest one that might coming online is the Kashagan (cash all gone) field in Kazakhstan. However, it is the boogey man that has spooked the big petro’s away from big projects since the price crash.

First discovered in 2000, it sits offshore in the north end of the Caspian sea. But it is a big field, one of the largest ones found in the past decade with an estimate 13 billion barrels of crude. This had people drooling despite its risks. And this field is no walk in the park. It sits in the middle of the Caspian sea where the weather is about as inhospitable as it gets. Highs of 40C in the summer with lows of -40C in the winter. Temperatures so cold in the winter that sea ice becomes an issue that must be accounted for.  And the oil itself is laced with sodium hydroxide. But risks be damned that is a whole lot of oil. Some three hundred billion worth in 2001 oil prices. So in 2001 construction started, and went on, and on with innumerable delays and cost overruns. The companies in charge estimate the total cost of the project is currently just over $50 billion, CNN thinks that it is double that amount. Plus there are the fines. The sodium hydroxide is strong enough that it corroded the pipes planned for transport that lead to leaks and the excess gas being burned. That led to tens of millions in fines. But it appears now that most of the kinks have been worked out and production will start in earnest this fall. They claim that this will be producing 370k barrels per day. A lot of experts doubt that they will be able to hit that number for at least a decade due to ongoing issues. But lets look at what happens if they do. Not in terms of how it will affect the global market, but what it will do to the bottom line of everyone involved. 370K barrels per day at current prices is about $16 million dollars per day, almost six billion dollars per year. A lot of money, but not when it is paying down a fifty or hundred billion dollar investment. Until the price of oil skyrockets this project will run in the red. Even when oil gets back to $100 per barrel it will take decades before it breaks even. And that is why investment dollars have dried up. When a huge field like this one is such a money hole, why take a chance. A lot of the petro’s are barely skating by. The thought of investing so much money in something this risky makes no sense. They will keep biding their time, investing in smaller, sure things and wait until they are flush with cash again before embarking on projects like this.

Venezuela And China

It is starting to look like Venezuela is losing their last friend in the world. China seems to be done with them. This is not too surprising as Venezuela is such a disaster that they rate below Syria for safety. The bigger issue is of course money. Venezuela is fast running out of hard cash, and has almost none coming in. More than any other OPEC country, the Oil crash is hurting them the hardest. The drop in income is affecting their infrastructure and ability to keep producing oil. Production rates have steeply declined, and that is affecting their relationship with China.

The leader of Venezuela Nicolás Maduro is an idiot. One who desperately clings onto his belief in socialism. And when oil prices were high he could. Because he was flush with oil money, he could institute price caps for basic goods. This made the poor happy, but made it so that it was not profitable for anything to be produces domestically, be it goods or food. This was OK. He just took that pile of oil money and threw it at neighboring countries for food, and traded oil to China for cheap manufactured goods. Some 600K barrels per day. China loved this. They needed oil, and could get it for the price of some cheap electronics. They started throwing money at Venezuela, some sixty billion dollars worth of loans. They gained what they needed an ally with oil. A socialist friend. And a toe hold in Latin America where they could keep the US in check. Now with Venezuela struggling to produce any oil, they don’t have anywhere near the capacity required to trade oil for goods. They need to sell every drop they can just to keep creditors at bay. And of course China is the biggest creditor. They are owed some $40 billion dollars still, and it doesn’t look like they will be getting it any time soon. Maduro has been pleading with them for more loans so he can keep his country afloat. But it looks like China has finally had enough. No more money appears to be incoming. And there are rumblings that China is speaking to Maduro’s opposition about how they plan on addressing China’s loans when they finally take power. If that is they case, then there is absolutely no hope left for the current regime. They country is in a death spiral. And if China is now on the sidelines waiting for it to play out, then there is no hope of recovery until the government is overthrown. Maduro has no more friends, and no more lifelines.

The Futility Of The Sauds (Or How The US Is Getting Rich From Dead Shiite Muslims)

Because history loves to repeat itself, Saudi Arabia is again waging proxy wars against Iran. In the eighties they threw money at Sadaam to fight Iran. This worked out well, because the Soviets were supplying military hardware, and the US had the CIA meddling. Oil prices had surged and they easily had the capital to write some cheques and know that it was going towards furthering their causes. That war ended and Iran may have “won”, but it was a pyrrhic victory. Their economy and infrastructure was in shambles, and the western world had sanctioned the hell out of them. Short of their absolute destruction, this was pretty much a best case scenario for the Sauds. With Iran (and Iraq) in down and out, and the Soviet Union collapsing, they were then able to leverage their huge oil fields to become the global oil power. Then the Sauds spent the next two decades peddling their influence into all sorts nonsense and groups that the US now declares as terrorists. And no one could do anything except kiss ass, because they had the oil. Well, now we live in the era of the shale boom, and a resurgent Russia. Saudi Arabia by keeping the taps open, has lost enough global influence that he could unleash Iran without much backlash. So the Sauds are doing what they can to retain regional power. Fighting Shiites. With the war in Yemen and their meddling in Syria. However this time is different. Unlike the eighties, no one really cares about Iran. So the Sauds are alone in their wars. They are now both bankrolling and supplying the military hardware. And unlike the Russians make their own military hardware, the Sauds import everything and are paying markup prices. They are handing the US billions a year for arms and munitions. And while the US is normally super happy to sell guns to anyone, there are even a few rumblings that maybe congress shouldn’t sell weapons to a country that is using them to bomb schools and hospitals. So now the Sauds are waging multiple proxy wars with no one on their side against a country that now has the backing of Russia. While also depressing the price of oil. Waging an economic war against America, military one against Yemen, and ideological one against Iran is bleeding them dry. It will be really interesting to see what gives first over there. 

Oklahoma

Oklahoma, once the poster child for US hydraulic fracturing may be on the way out.
The state has long been one of the most important oil producers in the US. Despite peaking at over 700k barrels per day in the twenties, they were still producing over four hundred thousand BBD well into the late eighties. However like a lot of the US onshore fields, they rapidly aged and production dropped below 200k BPD. When hydraulic fracturing came to be in vogue the state benefitted immensely. Production more than doubled from numbers in the year 2000. Peaking at over 450k BPD in 2015. numbers not seen since the early eighties. Things are not looking so rosy these days though. Due to its higher cost per well, rig counts have plummeted. Most of the new shale drilling has moved to more profitable fields in Texas. And what happened this weekend may be the death knell. A 5.6 magnitude earthquake. We have known for a while that fracking causes little quakes. With the number in the state increasing from around five a year to hundreds. But this last one was big. Not an in perceptible tremor, but one with some force. It will be interesting to see if this causes enough of a public panic that a fracking ban or hiatus is instituted.

Apache

The Apache Corp just dropped a bombshell on the world. They claim to have found three billion barrels of oil and 75 trillion cubic feet worth of gas in west Texas. A tiny portion of the greater Permian formation, called the Delaware basin. The US estimates that they have 36 billion barrels of reserves left. So this find is of huge importance. It’s a game changer, and true paradigm shifter, and probably too good to be true.
The area has long been known to geologists and avoided. The rock is thought to be in too much of a jumble and the ground too permeated by clay. Both factors would severely limit the effectiveness of hydraulic fracturing. The area is also pockmarked with dry exploratory wells.
We will have to see if the geologists have been wrong all this time, and Apache did find a huge haul. We won’t know for sure until they start drilling in earnest or release some seismological data.

Russia And Iran

Well, well, well. There just might be an OPEC freeze after all.
The two stumbling blocks to a deal have always been Iran and Russia. Iran wants to be free to increase their production levels to what they were before all the international sanction. And Russia are just dicks who like to meddle. Well Russia has now said that they will horror a freeze as long as Iran gets to produce at pre sanction levels. This is kind of a big deal. It means that a freeze will probably happen at the OPEC meetings later this month. OPEC will be able to save a little face and retain some semblance of a cohesive entity, and the markets will stop fearing the Sauds and their empty threats to produce another million barrels or two per day.
But why is this happening. Well Iran will get their production up regardless of what OPEC decides. Saudi Arabia might be able to drive the oil price back up for their Aramco auction without being obvious about it, and the rest of OPEC gets to keep doing what they are doing and make more money. So what does Russia get out of all of this. More power in the region, and the ability to continue their proxy way with the US along the Sunni/Shiite split.
It is becoming more and more clear that Russia has its sights set on the region. They swooped in after the attempted coup in Turkey to be their BFF’s, and have long been assisting the Assad regime in Syria. This also draws a line in the sand. Russia is firmly behind the Shiite Iran and Assad. While the US is supporting the Sunni Saudi Arabia and Iraq, and the Syrian rebels. Its like Vietnam all over again, hooray!

Oh Those Sauds

After two years of being dicks, Saudi Arabia finally appears willing to play ball and do something about oil prices. Shocking! It's almost as of they realized that they are holding an auction next month for shares of a multi trillion dollar company, whose value is tied directly to the price of oil.
And to reiterate, this auction is to earn some cash for them to cover part of their $100 billion dollar yearly budget deficit.  THAT THEY CAUSED BY TANKING THE PRICE OF OIL.
I would almost feel bad for their incompetence except for the fact that the Saudi government are complete assholes.
A young man was sentenced to 10 years jail and 2000 lashes for declaring that he is an atheist.
And their military is fighting a proxy war against Iran in Yemen where the Sauds are bombing schools and hospitals.
So fuck them.

Permian

The American oil market continues to be run by people with zero vision or forethought.
The price of oil in depressed by the Arabs and Russia having a pissing contest over market share. That has been going on for years and is showing no sign of abating. As long as they go at it, there will be a global surplus that will spook the markets into keeping the price down. The US shale fields have mostly become unprofitable at these prices. Dozens of companies have filed for bankruptcy, costing banks billions. But some companies are holding on, and even squeaking out small profits at the Permian basin in Texas. You would think that the companies still in the mix would be laying low, waiting for the market to balance itself out and the price to creep up to where a healthy profit can again be made. We know that oil has to rise in price. We are running out. New finds are not even close to meeting current demand. And existing fields are becoming more expensive to extract from.
Nope. More and more companies are flooding into Texas to bust their humps for a nickel. The latest is Blackstone Group who is investing $1.5 billion into the Permian fields. To MAYBE make five dollars a barrel. When your costs are fixed at $40 a barrel, why rush in? Oil WILL go up in price, and your costs remain flat. Producing a year from now will greatly increase profits. I just don't get it.

The Future

While everyone spends these days panicking over an increases of one or two drilling rigs, and potential OPEC production cuts. Lets look beyond that, to where production will be years down the road.
Humanity uses close to a hundred million barrels per day. More than thirty billion barrels over the course of a year. That is a whole lot of oil. So where will we get it from in the future? As wells and fields go dry we need to keep bringing new fields online to keep up production. And the petroleum industry spends billions a year in exploration. We have spent decades cataloging fields and building a global backlog of untapped fields. However that appears to be coming to an end, and fast. When the price of oil collapsed, so did exploration budgets. A 60% drop across the industry. And the effects of that are becoming apparent. In 2015 we only discovered 2.7 billion barrels of new reserves, a month’s worth and the lowest amount found in a year since 1947. This year is even worse. Just 700 million barrels by the end of July. Barely a week’s worth, found in seven months’ time. And with the price of oil remaining in the forties, budgets for next year are expected to be just as small.
So what does this mean going forward. There are no new super fields that will save us. Humanity will have to make due with what we have already found. Large aging fields. Small low yield fields. And a few large offshore fields that are technically very difficult to access. None of these options are cheap to produce. We may be in the midst of a glut, but something will give. For years now large projects have been shelved. Big offshore rigs cost a fortune and all new projects have been put on hold. Everyone is trying to get by with small horizontal wells. Those are fine for short term production, but are not a long term answer. They will give out and with the natural declines from the big fields, global production will plummet sharply in a short time. How long this will take will be hard to ascertain. A lot of people think the 2020's.

Iraq Getting Cheap

Iraq. The birthplace of civilization, and currently a smoking mess. After decades of war under Saddam, and another decade of civil war after he was deposed, ISIS is there still fighting away. All of that adds up to a constant stream of military expenditure and disruptions.
But that is fine, they could pay for it, because they have oil. A lot of oil. An estimated 10% of the remaining global reserves. Its why the US invaded both times. The oil has to flow to keep the world moving ahead. After Saddam fell and the country stabilized a little bit, oil companies came in to start reaping the profits. Iraq had contracts where the companies were paid based on how much production was brought online. That was fine, oil was worth a lot, and Iraq had plans to produce a lot. They originally had plans to be pumping over ten million barrels per day by 2020. That kind of fell apart when ISIS started their nonsense, but production has been rising and everyone was making money. That was until the price crash.
Iraqi oil contracts are paid out by the government after they sell the oil. So a lot of oil companies who spent years working old fields to increase they production were screwed over. In 2015 payouts to these companies significantly dropped or were withheld. The same is happening this year. the Iraqi government is currently pleading with the oil companies to increase drilling and production, saying that as more oil is sold, Iraq will have more money to pay them. This puts the petros in a bind. They want to get paid, but don’t want to be expending a lot of capital and resources when they are already having trouble collecting. And this spotty record of payment will keep companies away from developing new fields. Until the price of oil starts making some serious headway Iraq is in the same boat as Iran. A lot of oil, that just isn’t worth the trouble of getting at. 

The Current State Of 'Murrica

The weekly EIA data is out. The US added a two and a half million barrels to storage this past week. The markets saw that, did their thing and panicked. But let’s look at the numbers that really matter. The weekly field production numbers. After a huge 150K BPD spike in production last week, this week was a 50K drop. An almost 800k BPD drop from this time last year. And a 671k BPD decrease from the beginning of the year.
As much of a drop as this appears, it can get a lot worse. Since the beginning of the year four large oil platforms came online in the Gulf Of Mexico. Those were in the works for years and were funded back before the crash. They have boosted Gulf oil significantly. So the decline is being caused by the onshore fields. While rig counts are ticking up, and well efficiency is at its highest levels, there is only so much that can be done at $50 oil. Already the Eagle Ridge And Bakken shale formations are being abandoned. While there is still a huge amount of oil in those fields, most of it is not profitable to drill at these prices. All of the new US drilling is happening in the Permian basin in Texas. These wells are allegedly profitable at $40-$45 dollars. So at current oil process, they have to be just scraping by. The US will start running out of these cheap Permian deposits soon, and unless oil starts creeping back up to the seventy dollar range, drilling in the US will start tapering off again.

Talk Is Cheap

It is an amusing game that OPEC plays. When oil prices drop, a country or two makes rumblings about them all banding together to cut production. The markets celebrate, the price of oil rises, OPEC countries make tens of million more dollars before anyone realizes that no deal will happen, and the price drops down again. This has been going on since the price crash, and its amusing how much the markets still bite. This go around it is Iran with Russia making some slight lip service.

Oh silly day traders, when will you learn. Ignore what OPEC says, pay attention to what they do.

The Sauds Can Never Win

It is becoming increasingly apparent that while the Sauds were able to damage the US fracking industry in its price war, it was a Pyrrhic victory. The only losers are US banks.
When oil was holding steady at $100 per barrel and the US started to tap into their shale reserves, the banks went nuts. At that price of oil almost any well was profitable. Anyone could get a loan and the money ran free. People were drilling in previously unprofitable fields, and with horizontal drilling and hydraulic fracturing the wells were producing. It was a true free for all where there were almost no losers. Everyone was getting rich. And like everything that seemed too good to be true, it was. The US was adding millions of barrels per day to a stable market. This was delayed by the US adding to its strategic reserve, but once Cushing showed some signs of being at capacity, the market panicked and over corrected. Oil dropped to the twenties, and things started screeching to a halt. US rig counts plummeted as banks were no longer lending money to finance new drilling. All the fly by night companies were not able to operate with oil being that cheap, folded under their debts. A wave of bankruptcies flowed across the industry, and the lenders are the ones who took the hit. The US is left with the companies who are the most skilled and efficient, and can drill a well in record time. A core of skilled drillers who are profitable at $40 per barrel. And their knowledge and skills are trickling across the rest of the industry. Even with the current undervalued oil price, the US rig count is ticking up. I will take something drastic to get the US rig counts back over a thousand, but this is not a crippled industry. They were beaten down, but not broken. And the Sauds can not hurt them anymore. Despite what they say, Saudi Arabia is producing at max capacity. And the price of oil is creeping back up. As global production drops, the price of oil will keep increasing and more and more US shale fields will become profitable again. All the Sauds managed to do in their insane market share grab was destroy their own GDP and hurt some US bankers. All the while losing Saudi Arabia the important designation of global swing producer.

Uncompleted Wells

In May and June there was a lot of talk about uncompleted wells. This mythical amount of pre drilled wells that were only waiting for the prices to hit a certain dollar amount before they would all come online and flood the world anew with oil. Its pretty safe to say now that this was another industry boogey man. At the end of May, the price of WTI had risen to $50 per barrel. The invisible barrier that speculators pegged as the price required to complete all of those wells. We are now two and a half months past that point, we should be seeing all of that production coming online. Here is the weekly EIA US production numbers.

May 06                  8.80 mbd
May 13                  8.79 mbd
May 20                  8.77 mbd
May 27                  8.74 mbd
June 03                 8.74 mbd
June 10                 8.72 mbd
June 17                 8.68 mbd
June 24                 8.62 mbd
July 1                     8.43 mbd
July 8                     8.49 mbd
July 15                   8.49 mbd
July 22                   8.52 mbd
Aug 5                      8.45 mbd

There is no rise in production. Aside from a few weekly blips in July, US production is still trending downhill. But it may not be that simple. Maybe the flood of oil from completed wells has come online and is just hidden by the data. It takes about a month to complete a well after drilling. Assuming a lot of wells were being brought online near the beginning of June, we should have started to see production hitting the market in the past few weeks. And maybe we are. From May to June there was a 100,000 barrel per day drop, and from June to July There was a 300,000bpd drop. Yet July to August remained flat. There could have been a surge in shale production, but it was only enough to offset the current decline. Time will tell if that is the case. The US is still barely drilling, and if the backlog of uncompleted wells has been used up, then production in the months ahead will steeply drop. 

STRIPPERS!

Or stripper wells to be more specific.
In any well oil production will inevitably drop. Well what happens when production drops too much? Normally they are just sealed off and abandoned by the petro companies as they move on to newer, more productive fields. Without using any enhanced recovery techniques the vast majority of the oil is left remaining in the resevoir. In the last hundred odd years of US oil production, hundreds of thousands of abandoned wells have been accumulating. When the price of oil rose some enterprising people started looking at these old wells. And with some minimal work, they began producing again. These reclaimed fields are now referred to as stripper wells. The EIA designation of which is a well that produces no more than 15 barrels per day. That doesn't seem like a lot, but there are a lot if these wells operating. An estimated four hundred thousand. And these wells add up to about 10% of the US total production.
And like a lot of oil projects. These fields are in danger. With the price of oil still deflated, the minimal amount of enhanced recovery that these fields require is starting to become uneconomical. Most operators are very small, and getting any sort of bank loan for an oil project is difficult to obtain. Hopefully the oul price recovers, and the slow trickle from stripper fields will continue to drip on.

Rig Counts Explained

Every week all I see in endless panicking over rig counts. If the count moves up 10 rigs in a week the world will become flooded in oil if you listen to some people. But will it really? Not even close.
It takes about a month of 24/7 rig activity to actually drill the hole. Then another month to do the fracking and complete a well. And that is the best case scenario. Lets say the crew is really good, there are no break downs and it takes only a few weeks to assemble/disassemble a drilling rig and transport it to a new location. So a rig can drill about six wells a year. How much production would that bring online though? Thanks to the EIA we have access to that information. The Permian basin in Texas is currently the hot area for new drilling, and the average production per well is continually rising. It currently sits at about 500 barrels per day, per well. That is not very much at all. So in a year a rig would bring online maybe 3000 barrels per day. A proverbial drop in the bucket compared to the 100 million barrels per day currently being produced. Even taking into account the 464 total rigs that the US has in operation, that is only 1.4 million barrels a year of new production, not nearly enough to offset the declines of existing wells across the US. These shale fields also have a severe drop off in production, up to a 75% decline after the first year. And because there are currently no secondary recovery methods for horizontal wells, these drop offs will continue.
So when people get all excited about the fluctuation of a few dozen oil rigs, you can ignore their inane blather. You only need to get excited if the rig count starts creeping back up to be anywhere close to the 1600 that the US was running at the beginning of 2015. A single new oil rig will only add about 0.00003% to the global production total in the course of a year. No reason to panic at all.

Two Twenties

Oil is currently hovering around $40 a barrel. An absurdly low price. I have dropped more than forty bucks to feed my family lunch at Wendy's for christs sake.
We are now in the realm where almost no fracking in the US is profitable. The prime spots in the Texas Permian basin have around a $36 per barrel break even point.
A lot of countries and petro companies are auctioning off materials and drilling rights just to stay in the black.
Most OPEC countries are running a budget deficit.
Canada is losing money on its oil sands. They are only still going because that operation is too big to stop.
China has given up on maintaining domestic production, and letting that dwindle down as Arab countries lowball themselves to get their business.
And the US the only country who releases the only accurate and current data on inventory and production numbers dropped these bombshells this week. Gasoline inventories had a large drop, oil inventories dropped, and oil production remained flat.
And oil still hovers around $40 a barrel.

Brazil

While the dumpster fire that is Venezuela continues to burn, Brazil is poised to be the oil superpower of South America. However like a lot of the world they are handicapped by the current oil devaluation.

Brazil currently produces about three million barrels per day, mostly from the Campos basin. A shallow water offshore collection of fields located around Rio De Janeiro. These fields are maturing, but still hold an estimated eight billion barrels. This puts Brazil as an important oil producing country, but not a vital one. Where Brazil can vault into a global player is the pre salt layer. A huge amount of oil covered by a layer of salt. It is a massive offshore field that has produced from every exploratory well that has been drilled into it. People are salivating at the thought of bringing it online. Preliminary reports are that it has eight billion barrels of recoverable oil, but as its is fully explored that number will surely rise. Top end estimates are in the 35-50 billion barrel range (70-100 NFL units worth of oil).

There is just one teeny problem. This oil is not exactly easy to get at. The field is about 250km offshore. In 2000m deep water. The salt layer is under 2000m of rock. And the salt layer is about 2000m thick. So the oil is only 6km below the surface, in the depths of the ocean. Not the easiest thing to get to. And that’s the rub. Brazil needs that oil to help fix their economy. But they don’t have the capital to develop the field. So they are doing the next best thing. Auctioning off parcels of the field to foreign companies. The first of which was just sold for 2.5 billion to Norway. Once oil rebounds to above $100 USD, there will be drilling all over that salt patch, and sweet crude will flow free. Until that point it will just sit out there undeveloped. Mocking Brazil, as the countries’ Olympic debts mount.

Why Is Russia Pumping So Hard

Russia is producing oil at record levels.
Their most productive fields are all old and have been exploited since the Soviet era. With modern techniques they were revived became as productive as they were in their hey day. But even with advanced techniques those fields are entering into decline again. With the price of oil severely depressed, why increase production? Politics. Or more specifically Putin. All of the heads of the Russian oil companies are his cronies, and they funnel money to him. Everyone is supremely rich. And that may not last. As much as he tries, Putin can not stay in power forever. If he goes, there might be real change in Russia. The oil barons could be cast out. So what better way to protect your future than to build up as large a nest egg as possible. The hell with Russia's economy in the future. Get rich now, let the peasants deal with future problems.

Oil Is Killing Communism

There are not a lot of communist countries left. Two of them reside in Central America. Venezuela and Cuba. Being socialist BFF'S, they like to share things. Like oil. Cuba gets oil, and Venezuela gets teachers and social workers. This has been going on for years and everyone was happy. Until now. Venezuela is broke and their oil production is steadily dropping. They can no longer afford to hand away free crude. Exports to Cuba are down 20% already and further drops are expected to continue. Cuba doest have the strongest economy to begin with, so having to import oil from other sources is a tough pill to swallow. Venezuela is so broke that foreign drillers have cut them off over unpaid bills. So their death spiral will continue unabated.

North Sea

While people panic over inventory data, there is trouble a brewing in the North Sea. Workers are holding a one day strike, and are threatening more work stoppages over pay cuts and longer shifts. This may be just a blip now, but could blow up into a major outage if it continues.

The Sauds Are Full Of Shit Part 2

For the past few years the Sauds have been pumping at a record pace of ten and a half million barrels per day. They claim that this is still two million barrels a day off of their theoretical peak, but few beleive that they have that much spare capacity. Mostly because they are currently exporting more than they produce. For the past few months they have been drawing from their stockpiles to meet foreign demand.

Tight Oil

The current oil glut and the future of production is and will be driven by "tight oil", as made famous by the US oil shales.
Conventional oil reserves are big pockets of oil and gas that can be drilled straight down into, and can produce large amounts of oil for decades. Tight oil requires a lot more work for a lot less reward. Instead of one large reservoir, the fields are small pockets spread out over a larger area. Drilling straight down into them is not practical or economical at any price. It was not until horizontal drilling became established, and hydraulic fracturing was employed that these fields started being looked at. And when the price in the twenty tens surged to well over a hundred dollars a barrel, there was enough profit to develop those fields. With the surge of the US shale fields, other countries started to look in their own backyards. There are vast shale fields in Russia, Canada, and Argentina.

The future of global oil is these tight fields. There are tens of billions of barrels. The current issue is the economics. A typical oil well in the US Bakken or Eagle Ridge field only produces about a hundred barrels per day. And because of the specialized drilling and hydraulic fracturing required, the cost per barrel at those fields is around $60. The more economical Permian basin in Texas still costs about $40. Both are a far cry from the big Arab fields that cost less than ten bucks a barrel. 

Tight oil is also why US rig count data is so important. Conventional US oil is in decline, with most fields being fully mature. So it requires thousands of wells for oil shales to swing US production a million barrels one way or another. So when the rig count drops by 80% in a few months, it is a forecast of the US supply constraints in the future.

Tight oil is also why this current price devaluation can not continue for much longer. Global conventional crude has peaked. Tight oil is making up the difference, and will keep increasing as a percentage of total oil. Petro companies can not run those fields at a loss, so to meet global dand in the coming years the price of oil will be pulled up by production costs if nothing else.

Russia

The oil collapse severely hurt most of the large petroleum companies, except the Russian ones. Because Russia's economy revolves around oil, the Ruble tanked in value. This benefited the petros though. Globally oil is bought and sold in USD. So while every barrel is worth a third of what it was two years ago in USD in Russia it only experienced a twenty percent drop in Rubles. So by fucking over the country by over producing, the Russian petros (Putin) can continue to over produce and still take in all of the money. It's a beautiful thing.

The Idiocy Of US Drawdown Data

Every week day traders get all worked up over fluctuations of a few million barrels in Cushing. And the global price of oil swings one way or another. It is not a very good metric though. What should be more concerning is how much oil is at sea. The Arabic countries are increasing their production, and all of this extra production is being transported by ship to ports in Asia. And these ports are receiving ships faster than they can be offloaded. This is enough of a problem that the Saudi's have ordered thirty odd new VLCC class tankers. Each ship with a two million barrel capacity. That is a hell of a lot of additional oil that will go out to sea. And should be a lot more concerning than one or two million barrels in Oklahoma.

Canada

Canada is in a wierd place for oil production. Like the US, light oil peaked in the seventies, but we still produce enough to meet domestic needs. Where Canada is special is the oil sands. An almost unfathomable amount of bitumen. A reserve that will last for over 200 years at extraction rates of four million barrels per day. It has only been developed recently because of the extreme difficulty in mining it. Bitumen differs in crude in that it has a lower hydrogen content and more carbon. Crude at room temperature is a fluid, that makes it nice and easy to pump. Bitumen is a solid. It will only flow if heated or disolved. And because of this, it has a hight cost per barrel to extract. It only became economical to develop those fields once the price of oil reached a suitable level. But now that the industry has been set up, it has vaulted Canada into being a global partner and a hugely important partner to the US.
But while Canada has a damn near infinite amount of oil within driving distance of the US, we have a whole lot more. In northern Alberta and the Northwest Territories there is a vast shale field that potentially rivals the American Bakken formation. It has not been touched for one tiny reason. It is in the middle of absolute nowhere. It is very hard to set up a major oil drilling operation when the only roads exist in winter when trucks can drive on frozen lakes and rivers. Eventually though when other global reserves deplete, those fields will become economical. And by that point most of the Arctic should be melted, and we will have access to any fields in the Arctic Circle as well.

OPEC Is Dead

Since it's inception OPEC has been the global power in oil. The handful of countries that make it up account for almost half of all global production and more than two thirds of the alleged oil reserves. It's problem is that the two most important members hate each other. Saudi Arabia and Iran have been at each other's throuts for decades. Since the Iranian Revolution the Sauds have been piling on Iran. First by funding a proxy war through Iraq, then influencing the US into continuing to sanction them. This has now come to a head, and has broken OPEC. Since it was first required in the seventies, OPEC has functioned as a swing producer. They have increased and decreased production as required to maintain a steady supply and a reasonable price. That ended in 2008. When the global financial crisis happened, the price of oil tanked by a hundred dollars a barrel. OPEC cut production, and the price rebounded. But not all member countries cut production, it was mostly the Sauds. And this pissed them right off. They bore all the responsibility, and all other member countries were rewarded. So when the price tanked again in 2014 and OPEC was expected to have a production cut, the Sauds raised production. That was a complete disaster that has maintained low price of oil to the current date. The Sauds say this was to drive out the US frackers, but a lot of this is to piss off Iran. The frackers are all small operators that can bounce back relatively quickly. Keeping investment dollars out of Iran hurts them for years. And as long as the Sauds are petty and working to undermine Iran, OPEC will not function as required. It is an organization with untold power, but is too busy bickering to wield it.

India

China is currently the key to the global oil market. They are the largest importer, and their strategic oil reserve has been soaking up a good majority of the excess oil produced in the past few years. However they might soon be playing second fiddle to India.
India is ramping up hard to be a global industrial power, and that requires a whole lot of natural resources. And oil is one thing that they are short of domestically. They currently consume around four and a half million barrels per day, and have to import 75% of that. It seems like a lot, but for their population density, it is a remarkably small amount of petroleum. Something around half a liter per person every day. China on the other hand consumes around a liter and a half per person. And a good old America consumes almost 10. So it would be almost expected for India to double their oil imports in the next few years. There is a growing middle class in India, and the number of automobiles on the road is rapidly expanding. Any fears that China’s economy is contracting will be more than offset by the rise of India. The two countries will continue to combine for increased petroleum demand for the next few years.
India may be the savior that Iran is looking for as well. India is already spending large amounts of money on foreign oil projects, and are not concerned with any future US sanctions of Iran. Those two countries will almost certainly join forces on some huge projects. Iran is in desperate need of investment and a stable trading partner, and India needs cheap oil.

Rusty Bolts

There are problems a coming for most of the US offshore rigs and wells. Rusty Bolts.
Up until this coming July 28th, oil companies didn't have to report equipment failures unless they resulted in something major like an oul leak. But in the new "You done fucked up BP" law, they need to start disclosing problems. And word is getting out that a lot of problems. A major one being that the bolts holding everything together are corroding and snapping. That sure ain't good. And with Deepwater Horizon still fresh in everyone's minds, they need to be replaced. Some 2400 platforms look to be affected. They each need to be taken offline for weeks to be brought up to snuff. This is unfortunate timing for the US. With production already plummeting, this will just be one more hit.

Learn To Count

Oil seems like an easy thing to count once it is in storage. You see how much is in each tank and add it all up. Or take the previous week’s data then add up all the oil added and drawn from the storage tanks in a given week. Seems easy enough. Yet somehow it is not. The API (American Petroleum Institute) came out this morning and said that US storage unexpectedly levels rose by 2.2 million barrels. Day traders peed their pants and the global price of oil dropped. So later this morning the EIA (Energy Information Administration) comes out and says. Um actually there was a 2.5 million barrel draw down and US storage is now at 522 million barrels. So the two agencies were off in their counts by five million barrels. That’s a one percent margin of error. No big deal. Except that most of the oil is static. Only around 15 millions barrels moves around the US in a day. So they were off by five percent this week.

Oops.

Wishful Thinking

Iran wants to double their exports in the next five years. Good for them. I would like to double my income in that time frame as well. Unfortunately these are both pipe dreams that will not happen without massive amounts of outside capital.
Iran has the oil. They are pumping four million BPD now, and exporting two of that. But this is a far cry from pre revolution levels. Back then they were putting out more than nine million barrels a day.
When pesky things like a revolution then a decade long war with your neighbor happen, it tends to put a halt on large infrastructure projects though.
And who has the money and knowledge to modernize Iran? Large petroleum companies. Most of which are western owned and run. And they get a little twitchy handing out money to anything called the Islamic Republic Of... at the best of times. And these are not good times. Banks are hesitant to hand out any loans, and a lot of companies are still operating in the red. So when a country run by religious hardliners (who have a history of being subjected to economic sanctions) wants a hundred billion dollars for new infrastructure, there aren't many takers.

Extraction Rates

For most of my life I assumed that when you drilled for oil, you hit a pocket and sucked it all up until the well was dry. For most of the twentieth century we were a hell of a lot lazier. Most of the time a well was drilled and the oil was under enough pressure that it would flow out on its own. This primary extraction is not very effective however. It will only recover 5-10% of a deposit.
To get more we need to employ secondary recovery methods. This mostly involves pumping huge amounts of water down an abandoned well. This will raise back up the pressure of a deposit and will keep the oil flowing through other wells. It's good for recovering another 30% or so. Better, but still not great.
So then we move into the enhanced recovery methods. The first of which is steam injection. This warms up the oil which lowers the viscosity and makes it flow easier. It is especially effective in recovering heavy oil. The other relatively new method is CO2 injection. At sufficent depth, the gas will permeate the oil and will both increase the pressure of the deposit and lower the viscosity. These techniques will add another ten or so percent recovery to a standard field and more to the heavy oil fields.
Even with all of these techniques, oil recovery is still little better than 50%. It goes to show just how much oil we still have sitting in the earth.

Numbers In Perspective

The world consumes almost a hundred million barrels of oil every day. That’s a big number, one that is hard to wrap your head around. Its easier to fathom when you have a visual reference, like a football stadium. Cowboy Stadium has an internal volume of 104 million cubic feet. If you do some quick math that works out to around 778 million gallons, or 18.5 million barrels of oil. So we use five a bit more than five Cowboy Stadiums worth of oil every day.
As the rest of the stadiums are smaller than Cowboy, I will assume that every stadium has a combined capacity of 500 million barrels. Henceforth I declare that five hundred million barrels of oil be declared one NFL unit.
Here is the thing. We have done a pretty good job mapping the earth. We have found most of the large oil deposits. The three NFL field discovered offshore of Guyana is the biggest find in years. And that is exciting. And it sounds like a lot of oil. And kind of is, except for the fact that its total production will only be enough to supply the planet for two weeks. When you look at it like that it starts to be troubling. Every year we are discovering less and less. The amount that we add to the global reserve every year is only a fraction now of what we consume. Is 2015 around six NFL’s worth was discovered compared to the SIXTY that was consumed. It means that we are increasingly dependent on existing fields. And the largest of those are in the hands of some of the least friendly countries. Saudi Arabi, Iran, Russia, and Venezuela. The US and Canada have the reserves to be energy independent from the middle east. However Europe and Asia do not. OPEC currently has their largest market share since 1975. That should scare people. That much power gives them an absurd amount of price control. Instead of dropping production to stay rich, they bullied the market to the point where they have control of it again. Time will only tell how they choose to abuse it.

Stupid Speculators

OMG the US oil rig counts are up! The Cushing stockpile is down less than expected! Oil will go back to a dollar a barrel!
This is why looking at short term trends is idiotic. If you poke around in crusty government websites you can find real data of actual importance. Like how much oil the US is actually producing on a weekly basis. And you get to see real numbers like the US is down over almost a million barrels per day in production from peak. Almost a 200K BPD decline in the past week alone. The expected US collapse is happening. The only question is will the drop off in production be as sharp as the drop in drilling was last year. Next week’s data will be telling. It will almost certainly show a decline in production, but will it be as steep as the 200k BPD drop?

The US will still shed another few million BPD in the next year or two. Before the shale boom the US was producing just five and a half million barrels per day. With the continued lack of investment capitol and drilling the US could foreseeably drop back to those numbers.

Iranian Contracts

Iran is in the process shooting itself in the foot over oil contracts. Historically Iran has been offering the big oil companies “buy back” contracts to develop their fields. The way these work is an oil company comes in and does all the work to get a well up and running, then sells the operation to the national Iranian petroleum company. They are then reimbursed for the start up costs and an agreed upon amount out of the profits. This seems like an OK deal, but they never really work out to be one. If a field is not productive then the Iranians won’t pay for it and the oil companies are on the hook for all of the costs while Iran bears no risk. This doesn’t sit well with the big petros, some of whom have lost a lot of money on these deals. This year though things looked like they were changing. Iran’s new president Hassan Rouhani is somewhat of a moderate (in terms of Iranian rulers) and has been trying to make changes towards working with the west. One of his initiatives has been to rewrite the oil contracts to make them more enticing to oil companies. This sparked a lot of interest and seems to be just what was needed to jump start Iran’s floundering oil industry. However it looks like this might all come crashing down. The hard line Iranian oil minister looks like he will not sign off on the new contracts, and wants to stick with the old buy back deals. And he is not doing this for any good reason, it looks to be a purely political motivation. It is all to spite the president and make him look bad. Unless this is worked out it looks like Iran will continue on their path and delay their development into a global petroleum powerhouse.

The Saudi's Are Full Of Shit Part 1 Of Many

All Saudi oil is owned and controlled by the state company Saudi Aramco. They control all production, exploration, transport, everything. Any and all information on the state of their oil is known only to them. This wasn't always the case. Back in the thirties it was American companies who first started drilling and found oil. And for the next forty years American companies were pumping like mad. This went on until the end of the seventies when the Sauds booted them out in favour of a state company. When they left they took all of their knowledge and disclosed the state of the country to the US Senate. In 1979 they declared that the Sauds had about 110 billion barrels remaining of recoverable oil. This continues until the eighties when the Sauds declared that they now had 170 billion barrels left. Then a few years later 260 billion barrels. And today they estimate 220 billion barrels.
Where did this oil come from? No major fields have been found since the seventies. They have pumped 90 odd billion barrels since 1979 too. Yes we have improved recovery techniques and proven reserves creep up for all fields, but doubling your reserves? While still pumping? I'm sorry Saudi Arabia. I call bullshit.
The only question is how much do they really have left? With Aramco in total control, we may never know. Or at least won't know until their output sharply declines.

Fragility

If the Niger Delta Avengers are proving anything to the world, it is how fragile oil infrastructure is. A small group of people are able to severely damage the production of a country with minimal amounts of effort.
Huge amounts of oil moves around the world in above ground pipelines. It only takes a small amount of explosives to completely destroy one. And with the vast distances that these pipes travel, they are impossible to protect. A small dedicated group like the NDA easily roams around, and can damage pipes faster than they could ever be repaired. The same could be done to the wells themselves. A lot of those are unmanned or barely staffed. If a group was inclined it would not be hard to create a repeat of the Kuwait fires of the Gulf War. ISIS seems to be turning its attention to Saudi Arabia, and there is no better way to hurt them than to go after their oil. Damaging production would piss off the Sauds, something major like a refinery fire would hurt them.
If a terrorist group wanted to make their point, knocking a few million barrels out of production would get the world listening. Because unfortunately, affecting the stock market gets more global attention then the slaughter of innocents.

Make American Production Great Again

Unfortunately no one can.
US production has crested the cliff and is now in free fall. Daily barrels per day is now a million less than its peak last year. With a 100k BPD drop in June alone.
There is talk about completing all of the drilled wells, and how that will bring production levels back up. If it was that simple, then companies would have already done do. There are no shortages of workers or equipment. If the petro companies don't think they are worth completing, then the estimated yields are not worth the cost of completing them ar $50 per barrel. And if they are not worth that, then they don't have a chance at stopping the US drop, let alone reversing this decline.
America still has a lot of oil in the ground. It is just in small deposits that are hard to get to, and cost a lot per barrel. It's why the catastrophic drop in rig counts should be concerning. These shale fields deplete quick, and new wells are required to keep coming online to replace them. These past 18 months have ground all progress to a halt though. Nothing is being developed, and everything is aging. The big offshore rigs in the Gulf will decline slowly, but the shale fields are starting to run out quick. And the numbers are showing it. I can only see this decline increasing. By the end of the year the US could be down another million BPD.

Looking Ahead

In the past four years we have found five new fields larger than 500 million barrels. That's a lot of oil. Well yes it is. But in the big scheme of things those fields don't account for much. Globally we use close to a hundred million barrels a day. So a half billion barrel field will only last humanity a week. So as fields age and dry the new ones we bring online are less and less plentiful. Long gone are the new hundred billion barrel fields. Those are already tapped. It is now a case of diminishing returns.
The new field found offshore of Guyana is exciting. At 800-1400 million barrels it is a huge new find. One that will cost almost twenty billion to bring online though. At current prices the entire field is only worth forty billion. Not quite the gold mine is seems at first glance.

Effect Brexit Will Have On Oil

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.

Guyana

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 Part 2

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.

China Can Fuck It All Up

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.

Heads In Asses

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.

Where Is The Excess Going?

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.

Investment Dollars

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.

Refinery Sales

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.

The Aramco Auction

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.

Iran

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.

Strategic Oil Reserves

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.

Where Mexico Is At

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.

What The US Has Left

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.

Niger Delta Avengers

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

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.

How We Got Here

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.

US Production

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.

US Rig Counts

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.

Oil Pricing

It is kind of amazing at how much tunnel vision oil traders have. Canada’s output has dropped by about a million barrels per day since the fire and Nigeria has had huge disruptions as well. So oil has been creeping up for the past few weeks. But traders are all panicking that the oil inventory in Cushing increased last week. It's like, calm down people. Oil doesn’t move around at the speed of light. A good quantity of it is still transported by tanker. There is a lag in shortages affecting stockpiles. Its why oil was at $120 per barrel despite the there being a global over supply. No one who traded in it could take a step back and see the big picture. Then once the glut became known, everyone panicked and the price crashed as hard as it did. It seems to be in a weird point where the price is being pulled in two directions. The speculators who know the price is due to surge due to upcoming shorages, and the day to day traders who only care about inventory data, and threats from the Sauds to flood the market. 
The Saudi plan to bankrupt the US frackers is coming to a head. A lot of them were only staying afloat because of futures contracts, where they agreed to sell on a negotiated price from a year or two ago. Those were at significantly higher than this market value. Those have run out, and now these companies cant afford to operate. More and more companies keep filing for bankruptcy. I was reading that something like $50 billion dollars worth of bankruptcy protection has been filed for so far. And more join the list every week.