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Will U.S. Oil Producers Spoil The Party?

OPEC and non-OPEC members worked hard to reach an agreement that will, hopefully, move crude not only into balance but into supply deficit sooner rather than later. When deficit will occur is a matter of some debate. Some believe, such as the IEA that it will happen in First Half 2017. More energy traders seem to believe, based on the current spreads in futures contracts, that the deficit will not occur until Second Half 2017.   (See this week’s Ty’s Take for a very brief explanation of a very complex topic).

One thing I mentioned in last edition’s Ty’s Take is that I am scared the U.S. would blow up the party if producers jump too soon and rush to lock in cheap rig contracts and otherwise benefit from lower service pricing (as we all know, as demand goes up, if supply is constant, so do prices). Because the reality is this accord that has been reached amongst OPEC and non-OPEC members is only for six months, is very fragile, and while it theoretically throws the market into deficit (assuming compliance by signatories to the agreement), it is not that substantial of a deficit in the grand scheme of things. And one must wonder, if OPEC feels like it got the short end of the stick, might it turn the pumps back on in six months? Nevertheless, I tempered that with my note that banks, and others who control the purse strings, would have to loosen up and they were not likely to do so until they are confident that the recovery is sustainable.

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Trump Appears to Be Picking Pro-Energy Cabinet

One interesting thing we can gleam so far is Donald Trump appears to be picking a very pro-energy cabinet. Mr. Trump has selected numerous potential cabinet members with ties to the energy industry or who are known to be favorable to oil and gas.

As I have written about in the past, it is my firm personal belief (you may disagree), that energy jobs are some of the most important jobs in the country. And I am not just saying that because I benefit from this industry. Forgetting the strategic importance of U.S. oil and gas to our national defense and ability to remain independent, I believe in an economy driven primarily by middle class spending. The energy industry offers high paying jobs that allow families to not just enjoy substance but even abundance, often without advanced degrees. Their economic spending (think Ford 150 and new bass boat) further spurs economic development in other areas of the economy. While the car industry used to be that for America, that ship sailed a long time ago (for the most part).   Energy is now what drives high paying jobs to preserve America’s middle class.  

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The Week In Numbers for the Week Ending 12-02-2016

In each edition of the Standard, we strive to provide you a bare bones summary of what happened to the price of WTI, Natural Gas, and Brent Crude. In addition, we summarize the major reports from API and EIA on Inventory Data. And we also throw in the rig count for good measure.

WTI Open on November 28, 2016$45.43 WTI as of 12:00 PM November 2, 2016$51.38  Brent Open November 28, 2016$46.71Brent as of 12:00 PM on December 02, 2016$54.15  Natural Gas Open on November 28, 2016$3.130NG as of 12:00 PM on December 02, 2016$3.422

 

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Ty’s Take for the Week Ending 12-02-16

This week the big news is the OPEC freeze deal. As those of you who regularly read The Five Star Standard probably know, I have been a big cynic of OPEC and any freeze. Even OPEC doesn’t trust OPEC: that’s why they don’t just use each countries production numbers, they use independent, third parties because they know that countries fudge their production numbers.

But for this deal, I have a slightly different take.

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U.S. Shale Set to Compete with OPEC

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One of the frequent updates we have given you throughout the many editions of The Five Star Standard is what the breakeven production costs are in the United States? We have tackled this topic on several occasions, but it’s a topic worth continuous investigation as technology, service costs, employment costs, and other factors mean that this number is subject to some change over time. Now that OPEC has reached a deal, the question becomes: are U.S. shale producers drooling and about to start yelling “drill baby drill”?

As we have noted in prior editions, U.S. shale costs have been in a continuous decline since the market dropped. Some of these are structural costs savings (here to stay) and some of them have been driven off the backs of the service companies making pricing concessions to keep any market share they could in a drillers market.

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Paris Agreement On Climate Change Goes Into Effect. What Does it Mean for Oil?

In November 2016, the Paris Agreement on Climate Change went into effect. A total of 193 Nations are signatories, 115 of which have ratified the convention, including the United States. The aim of the convention is:

"(a) Holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change;

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OPEC Reaches Deal on Production Freeze

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History On The Deal

So finally, we get to give some good news!!!! We have a deal from OPEC on a production freeze. As you might remember, OPEC reached a preliminary deal in September to reduce their collective output to 32.5 million to 33 million barrels per day (compared to 33.6 million barrels the cartel pumped in October). The deal was, as I said in a prior Five Star Standard, an agreement to agree and very short on specifics. Certain countries appeared to be exempted, Iraq was pushing for more production, and the production cuts where not allocated amongst member countries.

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Biggest Oil Find Ever in US. Russia Also Gets A Boost.

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As everyone in the World knows, things are bigger in Texas. They just are. According to a survey released on November 18, 2016, by the US Geological Service, the Midland Basin of the Wolfcamp Shale area in the Permian Basin is now estimated to have 20 billion barrels of oil and 1.6 billion barrels of natural gas. Oil has been produced in the Wolfcamp since the 1980s via traditional horizontal wells. In fact, more than 3,000 horizontal wells are currently operating there. That makes it three times larger than the current assessment of recoverable oil in the Bakken formation in North Dakota.

On November 10, 2016, the USGS estimated a mean continuous oil of 12 billion barrels of oil and 75 trillion cubic feet of gas in the Bazhenov Formation of the West Siberian Basin Province, Russia. Click here to read more: https://pubs.er.usgs.gov/publication/fs20163083).

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Signs of Life For Oilfield Services.

Many of our customers are reporting an increase in business over the past few months. Some are actually getting “busy” again, and some are getting work for the first time in years. But almost all of our customers are seeing some increase in demand for their products and services. How much seems to depend on the customer, and who their customers are, and wether or not they are servicing domestic or international clients (or obviously a mix). We have also seen some signs of life and while we remain dramatically down for normal, we are noticing a slow trend upwards in terms of our sales volume. I would caution that given all of the layoffs and reduction in capacity, its easier to feel busy now than it was before the downturn.

Nevertheless, as we previously reported, the CEOs of major oilfield services companies all indicated that the market had reached bottom, and that they would seek to regain pricing concessions given during the downturn.   The good news is we are starting to see some preliminary evidence that this may, in fact, be the case – breathing life back into the services sector.

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Ty’s Take For the Week Ending 11-11-2016

Several people have asked me this week about what my opinions of the U.S. election results are. And at first, I hesitated to address those, but on further reflection, the election results will certainly have an impact on our business and we should address what that impact might be. Let me state at the onset of this week’s Ty’s Take, this is not intended to be a political article. I am not advocating for or against Mr. Trump, but rather I’m trying to isolate the implications of what we know about his policies and how they will affect energy.

Let’s start with the fundamental issue: we really don’t know that much about Mr. Trump’s energy policies. But we do have some inclination of where he stands.

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