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Short Takes

This Week we are trying something different. As some of you may know, I review lots of articles to come up with those which I believe will be the most interesting for our customers. And then I try to combine them into a few featured articles. This week, I decided to provide you more of the articles I look at in summary form. Please let us know if you prefer the old format or the new one.

Saudi Arabia Lowering Price of Crude to Asia

Over the weekend, Saudi Arabia announced that it would sell cargoes of Arab Light in Asia during the month of September at $1.10 a barrel below Asia’s regional benchmark. This marks a pricing cut of $1.30 from August, the biggest drop since November. (http://www.livemint.com/Money/ygE8PCUnKnp2iuLea1HKBI/Saudi-Arabia-cuts-oil-price-to-Asia-as-battle-with-Iran-heat.html). Ty’s Take. This report was negative for the price of oil, although many see the move as largely directed at Saudi Arabia protecting market share against regional rival Iran.

Shale Wellhead Breakeven Trending Down

I found an interesting graph on Shale Oil Wellhead Breakeven Prices by Spud Year (average is now $40, a 22% decrease from 2013-2016).

https://pbs.twimg.com/media/CooTq1SWEAAyW4

wellhead graph

Ty’s Take.

I love this graph because it says it all. Prices for drilling are trending down and they support our earlier articles on the break even prices (http://www.fsmetals.com/about-us/newsletters/so-what-does-the-price-of-oil-have-to-be-to-turn-this-around and http://www.fsmetals.com/about-us/newsletters/cost-savings-may-be-here-to-stay). However, I would note that some of these cost savings will necessarily dissipate as markets correct and oilfield services companies experience increasing demand for their products and services. In our article reporting Schlumberger’s earnings, the CEO point blank said he was going to renegotiate unsustainable pricing arrangements. Nevertheless, this gives us some hope that the market will see some correction in the $50/bbl range – particularly once we have sustained over $50 for a reasonable period of time to create market confidence that we have found bottom.

Oil Trains Disappearing.

As someone who has been fascinated by trains my entire life (and airplanes), I include this news for both sentimental and practical reasons. The oil-train boom is probably disappearing. According to an article published in the Wall Street Journal, pipeline expansion may lead to significantly less demand for oil trains (http://www.wsj.com/articles/crude-slump-pipeline-expansion-mark-end-of-u-s-oil-train-boom-1469484016). Ty’s Take. This is important though because it marks further reduction in the break-even price per barrel and may encourage additional drilling activity at a lower price point.

U.S. Drillers Indicate They Are Waiting for $60.00

 In an article published by Bloomberg, several major shale companies indicated they were holding out until prices reached the $60.00 mark. (http://www.bloomberg.com/news/articles/2016-07-28/-60-is-the-new-50-for-u-s-oil-drillers-contemplating-rebound). Originally, several majors had said $50.00 would trigger their return to field development, but Anadarko and Hess both seemed to indicate $60.00 is the magic number before they deploy meaningful resources. Pioneer might be the exception as they continued development of their fields through the downturn (for more see our article this week on earnings). Ty’s Take. While certainly not good for the service industry as it indicates additional delay before we experience recovery, I actually think there is some wisdom and long-term, it may actually be better for the market for the companies to wait until $60.00. At $60.00, we have a more sustained recovery, greater divergence of supply and demand (thereby decreasing the risk of another glut), which may protect us from a rapid drop in prices. With the U.S. free market now being the world’s swing producer, we are in for a wild ride so some hesitation and conservatism by oil might actually be better for all of us over the coming years.

Hedge Funds Get More Bearish

 In the week ending July 26, 2016, Hedge funds and money managers added the equivalent of 56 million barrels of short positions in the three main Brent and WTI futures and options contracts. (http://uk.reuters.com/article/oil-global-kemp-idUKL8N1AI3GF). Unfortunately, they also added an extra 6 million barrels of short positions in main US gasoline futures and options. There was only a 3 million increase in long options and contracts for oil. Ty’s Take. This necessarily indicates a bearish market for the short term (next 90 days or less). We can see as WTI and Brent are decreasing the market is correcting again as a result of these positions. I believe the principle scare is the increasing gasoline inventory and concerns of less demand for crude from refiners. We shall see.

China Cuts Gas Distribution Prices to Increase Consumption’

China announced on August 1, 2016, that it would cut the price of natural gas as part of its effort to shift energy sources to cleaner burning fuels. Apparently, Chinese industry pays one of the highest natural gas cost in the world and policymakers are attempting to change that. In China, well-head prices and those charged at end users would be set by the market while government supervised prices would be reduced. Ty’s Take: This could get interesting given the number of ships in construction to transport Natural Gas, in combination with increased port capacity to export from the U.S. It may have no effect, but it may have some.

Apache and Chesapeake Indicate More Drilling

This week both Apache and Chesapeake indicated to expect their CAPEX to be on the high side of forecasts given the increasingly friendly environment. This seems to indicate they will increase drilling activities. Here is the link: http://www.rigzone.com/news/oil_gas/a/146024/Apache_Deploys_Additional_Capital_As_Oil_Prices_Improve. Ty’s Take: I provide my commentary on this issue in Ty’s Take for this week.

Canada’s Oil Sands CAPEX Could Reach $40.6 Billion by 2025

 In a recent Rigzone article, commentators expressed their view that CAPEX in Canada’s oil sands projects will grow. The article notes that with roughly $82.6 Billion of CAPEX investment in various stages of planning, about $40.6 Billion could happen in the next decade.   Ty’s Take: Oil is a long term commodity and many projects require long term planning. Despite current conditions and reductions of CAPEX by all the majors, I believe, realize that over the next decade we might actually experience shortage due to heavy reductions in new, expensive projects. This gives some indication that at least a few players foresee that problem.

Wood Group Workers On Strike

Hundreds of Wood Group workers on seven platforms operated by Royal Dutch Shell in the North Sea went on a 48 hour strike this week. Last month, workers went on a 24 hour strike. http://www.ft.com/cms/s/0/e655db44-5999-11e6-9f70-badea1b336d4.html#axzz4GO5Fxmsw.  Ty’s Take: As we spoke about in a prior FSM Standard, the North Sea is an incredibly expensive area in which to drill.   I suspect we will actually see many of these platforms taken offline in favor of lower cost production areas as many of the platforms are at or beyond their useful life and technological upgrades to extend their life is no longer economically feasible. I also think that while Shell has thus far avoided any production loss, such loss may become inevitable if terms cannot be reached.

Why Is Rebalancing Taking So Long?

One commentator I follow a lot is John Kemp of Reuters. In his recent opinion piece, he posited the question of why it is taking oil markets so long to rebalance. Mr. Kemp argues that the World’s leading producer experienced a significant economic boast when oil prices were high. This resulted in economic growth that drove demand. When prices slumped, these countries were hit hardest thereby making it more difficult to drive demand (with exceptions such as India and China). Here is the full piece: http://www.reuters.com/article/us-oil-global-kemp-idUSKCN10E1KG. Ty’s Take: I read Mr. Kemp’s work quite a bit as I know it is thoroughly researched. I highly recommend reading his commentary.

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

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The Week In Numbers for the Week Ending 8-5-2016
Ty’s Take For Week Ending 8-5-16