|
There is no better way to describe what is currently taking place in
the U.S. Shale Oil Industry, then a bloodbath. Unfortunately, if the
situation wasn’t bad enough for the shale oil industry when prices were
30-40% higher, today it’s a complete disaster. While some might
think that a bit of an overstatement, I can assure you that these low oil
prices are doing serious damage to an already weakened shale industry.
The major problem with the U.S. shale oil industry from the get-go was
that the huge decline rates, indicative of horizontal fracking, devour a
massive amount of capital. Furthermore, capital expenditures that are
used to frack a shale well is a much different animal than building a gold
mine. Because shale oil wells experience a 75-80% decline rate in the
first few years, the industry must continue to spend even more capital to
offset oil production losses. However, capital spent on a gold mine
will last for 15-20+ years before the deposit is depleted.
So, capital spent in the U.S. shale oil industry is not really a
long-term investment as would be a gold mine. Thus, the capital
expenditures in the shale oil industry behave more like “COSTS” than
“INVESTMENTS.”
The Oil Price Meltdown Continues
If energy analysts thought oil prices were getting a bit oversold last
week, this week the market has now entered into a “Meltdown phase.” A
few weeks ago, I published this chart showing the change in various oil spot
prices since the peak in early October:
All across the board, oil prices fell considerably. The worst
performer in the group was Tar Sands Oil (Western Canadian Select) when
bottlenecks of too much oil in Alberta with no place to go pushed prices down
to the low “teens.” However, the Alberta government finally stepped in
and announced a mandatory cut in production (insisted by the tar sands
industry) which had a dramatic impact on the Western Canadian Select spot
price. The very next day, the price more than doubled.
I believe the Western Canadian Select oil price reached $28 before
correcting lower to $21 with the downward pressure in the overall
market. Here is a new update of the chart above. As you can see,
the BIG LOSER now is in the Bakken.
According to the oil price quotes from The OilPrice.com site,
the Williston Sweet crude fell to a gut-wrenching low of $20 from $39.55 back
on Dec 1st. I encourage my readers to check out the OilPrice.com
site for their excellent articles and the over 100+ spot prices. You
can look at all the various spot prices here: OilPrice.com Oil Price
Charts.
So, the irony of the figures in the chart above is that the higher-cost
unconventional oil supplies out of the Bakken and Alberta tar sands
are receiving the lowest price. This is like buying a Mercedes but
trying to pay for it with a salary as a Fry Chef at McFats Burgers-R-Us.
At some point, the lousy economics will finally catch up.
The Oil Price Meltdown = Shale Oil Industry Bloodbath
As the oil prices continue to fall, the bloodbath spreads to more of the
shale industry. I will explain why in a minute, but let’s look at some
of the details behind oil meltdown.
The falling oil price wasn’t a surprise to me. However, it took a
bit longer to occur. I started writing about the coming oil price crash
in the early part of 2018 when the stock market was at its all-time
highs. In early 2018, the Commercial net short position in oil was a
record 761,000 contracts. However, as the oil price finally declined,
the Commercials liquidated their short positions and now only hold
331,000. But, when the oil price reached a low of $28 in January 2016,
the Commercial net short position fell to 169,000 contracts.
So, we can see that there is still plenty of room for the oil price to drop
as Commercials still hold 162,000 more net short contracts then they did in
January 2016:
For those new to understanding the commercial net short position, the
higher the number of contracts the higher the oil price goes. When the
oil price starts to decline, the Commercials cover or liquidate their short
positions. So, the graph of the oil price (BLACK LINE)
and the Commercial net short position (BLUE LINE) are
inverted; they run opposite to each other.
Okay, let’s take a look at the next two monthly oil price charts. I
posted the first chart on December 7th showing how the oil price was stuck
between two critical technical levels:
I stated that there was a “Tug of war” between the traders, but in the
end, the bears would likely win as the conditions in the oil market would
continue to weaken in the winter months. Here is an update of the
chart:
With the oil price now firmly below both of those technical levels (50 MA
– BLUE & 300 MA – ORANGE), it
seems that it will move toward the next level (400 MA – PINK),
to the lower $40’s. If the oil price falls below that level, it can
quickly drop to $40 or lower. However, nothing goes down in a straight
line, and we could see higher oil prices first. But, if the oil price
does fall to $40, make sure you send some Holiday Care Packages to the shale
oil companies… they’ll need it.
Now, It doesn’t take a rocket scientist to figure out that investors in
the Shale Industry must be dumb as a box of rocks. Please understand, I
don’t mean to be disrespectful, but enough is enough. According to my
analysis, the majority of the shale oil industry continues to spend more money
than they make. So, why would anyone invest in a company that continues
to lose money? I gather if rocks could talk, they would probably be
offended that I compared them with shale energy investors.
Regardless, energy analyst Art Berman also puts the shale oil industry
into proper perspective. In one of his recent charts, he showed
how only 33% of the companies producing shale oil made positive free cash
flow. The data in this chart was based on the average oil
price of $67.95 in the third quarter of 2018:
Chart by Art Berman with my current oil price line annotation
I added my own line with the new current $47.50 oil price. Any
company above that line is now losing money. Which means the
33% of companies making money are now more like 15% or 3-4 companies at the
most. Or, it could be even worse than that. So, I
imagine Mr. Berman will probably update that chart showing a lot more RED
BARS. Furthermore, the situation for the companies in the Bakken
will be hit much harder due to the huge reduction of the Williston Sweet oil
price versus the West Texas Oil price.
And while fourth-quarter results in the shale patch will be impacted
negatively due to lower oil prices, I believe the financials will be even
worse in the first two-quarters of 2019. We must remember, oil prices
were still quite high in October, so the average price for Q4 won’t be that
low. However, next year, the average oil price could be in the low
$40’s.
Well, it looks like Santa Claus won’t be bringing any gifts or good cheer
for the U.S. Shale Industry this year.
|
|
