In The Buzz:
-Saudi’s Reeling due to low oil prices?
-Is OPEC in jeopardy?
-Crude continues slide
Saudi Arabia just issued it’s first set of sovereign bonds since 2007. This is to cover a budget shortfall due to low oil prices, low oil prices it ushered in with the strategy to harm American oil producers in the face of the ‘Shale Revolution’.
While the term ‘cutting off your nose to spite your face’ comes to mind, the Saudi’s are not stupid, but that doesn’t mean their risk is going to pay off in the long run as they are producing as much crude as they can and they have very little spare capacity to add to the world markets.
This is different from the oil glut maneuverings of the 1980’s, when the Saudi’s still had ample amounts of excess capacity. This is pretty much the only card the Saudi’s had to play to regain more world market share. Estimates suggest Saudi Arabia needs crude oil prices to average $105/bbl to balance their budget.
This article has a tantalizing headline: Saudi Arabia May Go Broke Before the US Oil Industry Buckles. The fact that it’s written by a European media outlet strips away immediate risks of US bias.
The first two sentences are also interesting: “If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.”
This article is full of interesting quotes, links and data. I’d rate it a 8 out of 10 on the ‘you should read this’ PropaneBuzz.com index (I just made that up, but I think I may use that going forward).
If anything, the strategy by the Saudi’s (which the author of the linked item suggests means OPEC is no longer a viable entity and may as well shut down) has forced American oil producers to get leaner, which lowers the overall costs to extract oil. It spurs technological innovation, which has been the American way for decades.
From the article, John Hess, President of Hess Corporation, said this related to the costs for drilling shale wells: “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead…”
This quote followed Hess’ comments:
It was the same story from Scott Sheffield, head of Pioneer Natural Resources. “We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days,” he said.
And on the heels of that bit of info came this:
The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. “The freight train of North American tight oil has kept on coming,” said Rex Tillerson, head of Exxon Mobil. He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.
Maybe I am just an energy geek, but I am fascinated by this stuff and I also think the underlying message of this piece is a good one. In fact, I will raise the ‘must read’ to a 9 for this one.
For me, this was the money quote in the piece:
…even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good. The wells will still be there. The technology and infrastructure will still be there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 – since the threshold keeps falling – they will crank up production almost instantly. OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for “clean fracking” in China as plasma pulse technology cuts water needs. Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia’s giant Ghawar field, the biggest in the world. Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.
‘The wells will still be there.’ That is the ‘fracklog’ (as in backlog of available gas from fracking) that exists in the marketplace.
This is fascinating stuff…here is another entertaining and informative read: ‘US Big Oil Tells OPEC Anything You Can Do, I Can Do Better.’
The takeaway for you and me? I still believe the price for WTI crude will fall farther before a real rise occurs. That fall may be another dollar or so, it may be more. I cannot offer anything more than a guess on that aspect and it would truly be a guess. But there is too much oil in the marketplace right now, we are nearing the end of the summer driving season and we’ll see refiners shut down for maintenance which will cause crude stocks to build for a while. That will create an environment for crude oil to dip further, in my opinion. I have been consistent with that opinion spring and summer and nothing has changed in the fundamentals.
That said, I am more bullish on propane pricing for the winter of 2016-2017 than I am for this coming winter. I’ve discussed increased propane export capacity in a recent post and that will have an effect. Propane prices are so low that the gas is once again getting attention from the petchems as a feedstock of choice and some of them are buying the product out the curve, locking in costs. I am not saying that is happening en masse, but it is happening to some degree. The more propane drops, the more forward hedging we will see.
I can lock in pricing between October 1st, 2016 through March 31st, 2017 below $.7000 at every terminal I market out of. This includes Lebanon, Indiana. Scio, Ohio. Houston, PA. Apex, North Carolina. Milner, Georgia. Every terminal in Iowa and Illinois, South Carolina and Alabama.
I STRONGLY suggest you consider a plan to begin prebuy purchases for 2016-2017 RIGHT NOW, if you have not done so already. I’d say 15% of the clients I serve have already begun this process. I think being covered 10 to 20% for your anticipated 2016-2017 needs at these under $.7000 at the terminals level is a good idea.
You take potential geopolitical unrest right out of your supply concerns…and the more financial pressure we see arise in Saudi Arabia and other OPEC nations whose economies are dependent upon petro dollars, I feel the risk for geopolitical unrest in those nations and regions rises. We all know what events like that tend to do to oil prices, which will trickle down to propane prices.
Give me a call to discuss what pricing would be for your specific terminal or terminals for 2016-2017 and we can begin to put a plan in place.