Andrew Butter

Special situations, contrarian
Andrew Butter
Special situations, contrarian
Contributor since: 2009
Company: ABMC
Tough to time when a bubble will pop - but when it does everything becomes clear
I disagree about shale oil - they are short-term players see my previous article, they will be fine - just go on holiday for a few years
You are correct about J.M. Keynes quote - I was predicting this route in 2012, and I have to admit, I didn't see it coming - I knew it was, just when?
Correct on what it "costs" the Saudi's - they are already "under-producing" traditionally they do 13% now they are about 10%.
Incorrect on the idea that they have a "PLAN" to break US shale or anyone...if everyone decides to jointly cut back the 2 million b/d that will be needed to bring prices even to what they say is the "Fair Price" - that's everyone cutting back 2.3%. I'm sure if everyone said...let's do that, the Saudi's would agree.
By why in Heaven should they cut 20% so everyone else can make more money?
It's not a "war" - it's just the Saudi's believe that eventually everyone else will cut. So let them.
Took SA two days to post it
I don't know - I'm a long way away. But the idea of a Ponzi is for me if there is no value - in this case there is value. My impression is that the shale oil operators are small guys working on leverage to the hilt - that's not Ponzi, that's life. Good luck to them.
Nah - I think there is a learning curve here, I really do not expect that Saudi will be bombed any time soon...Iran is of course always a possibility
A story I heard was that the 2008 oil-spike was caused in part by George Bush Junior going into the market and buying oil at silly prices, because someone told him "The Terrorists Are Coming"
Shale oil IS America's strategic oil reserve
You clearly thought harder about this than I did - of course the financing is not well-by-well, but you give an aggregate to the bankers and they say..."OK but we want you to hedge X or we won't play".
Don't see the bond market turning hostile - in fact I'm surprised people tell me these guys are priced at junk - they should let me pitch their story line, I'll get 'em 7% on ten years no sweat.
You are right - but all I was trying to do was say "it's a good model" - when you start putting up links, explanations, and "proof", you start sounding like a Prima Donna...I figured, let them join the dot's.
OK you joined the dot's
Thank you
Yeah - someone else said that.
HEY I'm dyslexic, that's a DISABILITY, didn't you know it is politically incorrect to make fun of people with disabilities!!! One of these days I'm going to get myself a disabled parking permit - then who will be laughing!!!
Thank you
You are correct, just the big problem they got is dealing with the Canadian Government. What those guys need to do is buy a couple of nuclear reactors - sell the electricity in the winter for heating, and in the summer, use the heat to distill out the oil. The cost of oil sands is the cost of distillation - crazy to do that with fossil fuels.
Quite so - shale-oil folks eat pizza and they don't care if it's thin and crispy or the other one, BIG OIL guys spend three weeks deciding what they want for lunch, three more weeks deciding what they want to pay for it, and then another three weeks getting someone to sign it off - AFTER doing the HSE risk analysis.
Don't agree oil price will go down. I'm good on bottoms (pretty lousy on tops), I put out $67 Brent in June 2012 and I'm STILL sticking with it:
http://bit.ly/12lQCfU
You make a good point that high oil prices are REALLY BAD for the world economy - this latest bubble has done no-one any favors, except for the U.S. shale oil folks - who have made silly money all on leveraged plays. But it's helped finance a kind of pathological irresponsibility...ISIS is a good example, there are others. You can criticize the Saudi's as much as you like ...actually I spent lot of time there in the 90's - and it's a great place with great people, if perhaps a little "excitable" if they take a dislike to you. I been in jail in Jeddah, Riyadh and Damman...and there is always one onery SOB want's to take you out the back and shoot you - but at heart very generous and hospitable...and at least they behave like grown-ups with the money they got.
I absolutely don't agree with you that $90 oil let alone $100 is on the cards for at least four years. If you didn't look at it, have a look at the article I wrote in 2010 about, amongst other things, feeding Ritalin to six year old's
http://bit.ly/1vmyGgr
I bet you will find it amusing
Thanks
OK...OK. But look at your source - Reuters!!! They have a bee-in-their bonnet about Saudi Arabia.
USA is by far the biggest customer for Saudi Arabia, what they are saying is like saying a farmer sells 60% of his production at "X" to Wall Mart and sells down at the local market at "X x 2" and that's a "conspiracy". Selling at a higher price to the smaller buyers is a way of cutting back production, without saying you are doing it. Don't get the logic of why USA should complain it's getting a preferential price
Here's another "conspiracy" theory - Saudi is selling oil more expensive to others so that it can support the cause of ISIS who are selling oil at $30!! That way ISIS can get more money to fund their cause!!!
Thank you for the compliment - I shall enjoy telling my lovely wife I have been compared favorably to Usain Bolt.
Prediction #1: The bottom axis (X-Axis) is the outcome of a formula that says:
New Production (thousand barrels per day) =
+ 0.62 x {Total produced last year)
+ 6.25 x {Oil Price average in the year in question}
- 1,080
I plotted that result against "Actual" to get the graph. It's a actually a pretty scruffy model, you can build a better model from the chart of % increase per year against - but by the time I figured that out I was getting tired.
You are correct - it's really not "good science" to say anything with so few data points, this is more like an explanatory model; the model on annual increase month-by-month is much better - and as you can see, does test WTI at low prices.
To get a really hard estimate, a lot more analysis could be done and indeed you can get tons of monthly data from EIA broken down by the main producing areas... what amazes me is no one seems to do the analysis.
What you see is what you can do in an afternoon - in the unlikely event I get someone to pay me to do an analysis, give me a week and I'll get a much harder number, problem is they won't let me put it out.
All the same, quite often the first-shot "back of the envelope", is quite often pretty close. For example - I put out a number of a bottom on Brent at $67 - two or three years ago - I worked that out in about an hour, I'm amazed it's got so close.
I shall be interested to have another look in a year's time at shale oil.
Dear Mr. Miller,
You are correct - that's the town where my brother lives. I have also learned, just now that it's "Buffett" not "Buffet"
Thank you
I agree - and I've had other comments, that likely new well production will start to slow by mid 2015 and could be zero by Q-3 2015. I think the main thing there is how many operators were hedged and how many were flying by the seat of their pants.
But I'd be very surprised to see Brent bottom less than $67 which is my estimate of the fundamental divided by 1.45 or so which was the maximum over-pricing above the fundamental.
I don't know how Wood MacKenzie got to 600,000 b/d - I'm saying the wells currently producing, plus the ones being drilled now, will add 2.3 million b/d between now and end 2015, and the wells being drilled now, will get finished because their output is mostly hedged. Let's see whether their "detailed breakeven analysis" trumps my "back of the envelope analysis"!!
I agree with all that - on reflection I also think my 2015 number is high, and yes I would tend to agree Q3-2015 will be when a lot of drilling stops. Also it's quite possible only 75% got hedged...it's expensive to do that, and from what little I know about the industry I'll bet no one hedged unless the bank told them too, if that's the case some may go out of business, given how much everyone seems to be leveraged. Could be a buying opportunity? On the other hand, like you said, a significant part of the cost is up-front overhead, that money's gone, plus the cost of drilling will likely go down significantly. Thanks for the comments.
I take your point about "academic" although to be fair the author did actually talk to people, and if you read his bio he is not an "academic".
I totally agree that "sometimes" market prices speak the truth - my whole core belief is that "on average" they absolutely do.
Sometimes they don't, as in "bubble & Pop". I shall be investigating whether the notes that plunged 29% and 26% and 34% were perhaps the "sometimes" the market does not tell the truth...could be a buy if my analysis is correct.
Not quite sure how...."Will the Oil Bubble Pop Down to $67 This Time: If so that’s Good News" published in June 2012 could not have been more "straightforward"
Yesterday Brent went to $70, that's a 4% variance on $67 explained by an increase in the fundamental over 30-months
I am not aware of any other models predicting $67 Brent or anything like that 30-months ago. As I said, the timing of the pop is impossible to model - the quantum is, according to the thesis I have proposed, predictable.
What I've seen in reports is that shale oil is OK environmentally - except you get more blowouts. The problem with your thesis is that America has to borrow a huge amount of money to buy oil - "national treasure" great, but the cost is being in hock to unpleasant creditors
You are right. It's a convoluted chain....but I'm not trying to "duck-and-dive".
The central argument of the link I put up is a methodology for figuring out what is the correct price of oil, the $67 is implicit. I put that up because in retrospect I think that gives the clearest explanation of the idea. I wrote a number of subsequent articles following that theme - basically saying $110 oil (Brent) was a bubble and this had to end with tears: If you go on my author's page on Market Oracle you will find them, some examples:
http://bit.ly/12lQCfU
http://bit.ly/12lQD3u
I didn't elaborate because, (a) who cares particularly whether I am great (b) my article in any case is not about proving what a great guy I am - I'm really not trying to say "Andrew Butter is a genius guru and he can predict the future".
What I was trying to say was " seems to me THAT model pretty much predicted where we are now and, that gives some confidence that it might be a good model".
I spent five-years, wondering which nuance of the model works, I was surprised this didn't happen earlier. I don't know all the answers and I get things wrong a lot of the time. But DO think it's a good way to look at what's driving what's happening.
Looked at the article - if it's right them I'm wrong. I was relying on the "Harvard" analysis - perhaps I should have done more research, if indeed you don't get pay-back for seven years, that's a totally different story. With regard to Saudi - my view is that yes they are concerned about investments made for the wrong reason...but they don't particularly have a grand plan...just they think the correct price of oil was $90 and now -debatable, perhaps $95 (Brent), and that the four years of possibly bad investment fueled by a four-year bubble, needs to stop. I really don't think the Saudi's want to "kick" anyone, they just want make sure no one "relieves themselves" in the soup.
Good question. My interest here was simply what rate they would likely produce. What surprised me was that the pay-back is so short, how people run that business and debt they decide to take on is something else. I'm wondering why anyone who has a proven model - drilling a new hole in a field he drilled before, who can hedge his price forward to cover the pay-back - will be paying 10%. Perhaps a lot of cowboys in the business....Hey I'm just a macro-guy, but that's a very interesting line of thought.
I don't imagine oil will get pumped just to store it unless some folks start to believe prices will go up dramatically. In that case there are plenty of old oil tankers waiting to be scrapped.
Sorry I don't know, the sum total of my knowledge of the shale oil industry in Leonardo's paper, plus a general involvement on the periphery of BIG Oil for years. You are correct that someone somewhere who sold the hedges is probably feeling uncomfortable. But for every gambler who bets oil prices will stay high - there has to be one who bets they will go down, so long as the hedging was balanced the "system" should, theoretically be fine. I'm sorry also, I know nothing about the debt on shale oil either, but I imagine you could finance ten years, if so when the hedges come off, some of that debt might start to look shaky.
Ha!! I did actually have a treatment of what could be done to push prices up, and certainly bombing, or much better, getting the Russians to bomb; would be a "solution". I dropped it - funny but probably in bad taste, and you never know perhaps someone might be mad enough to take that seriously. There is another way, more controversial and much less palatable to U.S. voters, which would be to raise taxes on gasoline; right now U.S.A. gasoline is taxed much less than Europe, and U.S.A. generates half the GDP per barrel of oil that Europe does - on that score it's only a little better than China. That would "protect" local industries and help push down demand, and would also perhaps mean the silly speed limits on U.S. highways could be lifted. One other way would be to take away the mad subsidies on ethanol from corn, which use up as much diesel as they save.