Shale Oil Reboots With A Vengeance: So Much For OPEC's Cunning Plan

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Andrew Butter

Summary

Shale oil initial production is exploding.

This changes everything.

And re-sets the price of oil.

Forget about rig counts and all the theory about well-head breakeven...and the pretty colored charts from Rystad Energy. The number to watch, if you are interested in the likely trajectory of the price of oil; is initial production of shale oil; that's what you get out when you crank open the tap on day-1 and these days that's what dictates the marginal cost of production of new oil, i.e. the price.

You can work that out two ways from EIA Drilling Productivity Reports. It requires the arithmetical skills of a 10-year-old, which could perhaps explain why neither journalists nor oil-price analysts seem to have figured out how to do that: methodology in footnotes.

It's worth the effort, here's the story:

Notice the 4-month lag - works in other places.

WTI has been pretty steady at about $50 for six months, at that price, regardless of whether anyone is making money, initial production of newly completed shale-oil wells (IP) doubled from 160,000 barrels per day per month (BPD/M), in May 2016, to 350,000 BPD/M in January 2017.

Initial production net of legacy loss went from minus (-) 140,000 BPD/M to plus (+) 68,000 BPD/M. That hasn't translated into an increase in total production...yet...just because you can get it out of the hole doesn't mean you can ship it, but it looks like the bottom was September 2016 at 4.72 million barrels per day.

Trend line at $50 WPI total production (i.e. net of legacy loss) is set to go up by easily a million barrels per day over the next 12-months. That's about what OPEC and Russia have committed to take off the table...thank you very much!!

The caveat of course is will the price of oil stay at current levels?

Just before the OPEC meeting last year, the one where Saudi Arabia decided that they had pretty much mortally damaged the U.S. Shale oil industry; and good for them - the market is a tough place; and so they decided to cut back, I wrote an article where I argued that's what they would probably do.

My logic was first, Permian can make money at $30 Brent, so there is nothing you can do about that, but second, the other plays needed $60 Brent to reboot. So keeping the price down was cutting off nose to spite face.

I noticed the latest "exclusive news" on Reuters and Al JAZEERA; from "sources familiar with the subject...who cannot be named" seems to be pretty much a re-hash of my September article. They are saying oil could go to $60 Brent, without re-igniting shale oil. Mmm...Perhaps they read my stuff?

Except that I got it COMPLETELY wrong!!

Oops!!

SORRY!!

That's the danger of buying free advice; it's worth approximately what you paid for it. Here's an idea for anyone looking to make multi-billion dollar decisions based on free advice...that often works out better if you pay for it.

My idea in September took up 32 brain cells for a total of 38 seconds. Just for the record for paying clients I deploy one-million brain cells, for as long as it takes. Take your pick.

So for a 32/38 encore, my "free-advice" to anyone who has low cost oil is..."KEEP PUMPING" before shale oil drives you completely out of business. Hey $40 is not so bad if it costs you $10 to keep the tap open, can't have apricots every day.

The bad news for anyone in the oil industry is that $60 looks from here like a mirage in the desert, that's what you need to get offshore to make sense. That's pretty hard news for a lot of people I know.

Footnotes: Working out IP

1. (1) EIA reports rigs deployed per month and IP per rig - multiply those two numbers and you get total IP

2. (2) They also report legacy loss, so IP (shipped) is this month's total; minus last month's, take away legacy loss.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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