It’s Always Darkest Before The Dawn

Oil is brutal. But for those prepared to survive this bust….

By Dan Dicker, Oil & Energy Insider:

The trading environment is brutal, there’s no denying it. Slowing Chinese growth and impending Fed rate hikes make playing the market a crap game, with wavering momentum and heart-stopping entry points.

In energy, the news only seems to get worse. Production here in the U.S. hasn’t dropped one ounce since October of last year and is down only marginally, perhaps 300,000 barrels a day, since hitting its record highs in April. Permian production is actually growing a bit, despite National rig counts that have been slashed by over 1100. Another stockpile increase reported today of over 4 million barrels sent prices again towards $40 and oil stocks are going down with it – again.

On the geopolitical front, Syria has made headway against the rebels, giving Russia and Iran more credibility at the “peace” talks in Paris and further isolating Saudi Arabia. The Saudis clearly have only one weapon left at their disposal and it’s a full-on oil price war to cripple the economies both of their rival Iranians and Russians. With sanctions about to come off, the Iranians will potentially add half a million barrels a day to global supply next year. Libyan on-again, off-again production will certainly rebound soon and the Russian Petro-state won’t stop producing for a moment either.

And yet, through all of this, I say there is room – even compulsory need – to look for opportunities in the oil space.

The International Energy Agency says oil won’t reach $80 before 2020, and could stay below $80 to 2040. I say the IEA is all wet. Their forecast called for oil to be averaging $110 a barrel now, if we only go back a few years on their fantastically adept prognostications. $50 oil for even two more years will bankrupt the majority of U.S. independents, not to mention the sovereign balance sheets of Mexico, Venezuela, Iran, Nigeria and Russia.

Now, that might happen and a second global credit meltdown in response as well – but the result won’t be $50 oil, or $1000 gold.

Here are the alternative long-term facts: Demand continues to increase, up close to 1 million barrels a day every year, as it has been growing since the 1960’s despite current slow global economic growth. Production here in the U.S. is about to fall off a cliff, as overworked core areas start to dry up and deferred new wells stack up for lack of spending.

Scott Sheffield, CEO of Pioneer Natural Resources (PXD) is convinced that the Permian is the only remaining core area left in the U.S. That’s it, Scott? The Bakken is dry? The Eagle Ford? He’s talking his position, as usual, but he also correctly sees a very real trend forming. Next year will see a 1 million barrel a day drop in production, with another at least 1 million barrels a day coming out in 2017. That’s already a 4 million barrel a day shift in supply/demand economics less than 20 months from now.

And OPEC? Are they made of money? Nah – Saudi Arabia has shown that their 11 million barrels a day is as much as they can reasonably pump. Iraq has no money or the stability to expand and no major oil company wants aggressive Iranian access, with their ‘new’ oil ministry going ‘fee based’ and refusing to share marketing profits.

And I haven’t even touched upon the threats to Canadian oil sands with their local carbon sequestering tax and offshore future projects in Brazil, Australia and here in the Gulf of Mexico.

Short term, things look bleak – but long term, I can’t imagine a more bullish scenario for those that have prepared to survive this bust.

Again, look for the short term drops in oil prices and associated stocks to increase holdings in oil producers with the best assets, cleaner balance sheets, minimal cash burn and staying power. I won’t mention the names again; you’ve heard them from me too often now. And remember, it’s always darkest before the dawn. By Dan Dicker, Oil & Energy Insider

Now it’s getting serious. Read… Giant Sucking Sound of Capital Destruction in US Oil & Gas

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  24 comments for “It’s Always Darkest Before The Dawn

  1. NY Geezer says:

    “it’s always darkest before the dawn”.

    I do not such find statements to be informative. In fact they could be misleading if one were to read into it the implication that the dawn is only seconds or even minutes away. If conditions deteriorate further the writer has left himself plenty of wiggle room.

    • NotSoSure says:

      This. As someone mentioned before, financial markets are not linear. That dawn could be 10 years away for all we know. I am going to wait till there are “green shoots” before dipping in.

  2. Bob Miller says:

    I assumed the greedy fools would have sucked earth dry by now. As far as I am concerned this evil empire has seen its best days.

    “The darkest places in hell are reserved for those who maintain their neutrality in times of moral crisis.” Horace Greeley

    And the home of the free and the brave alone will fill those places.

  3. Paulo says:

    I am disappointed this excellent site posts such an obvious investor ‘pimp’ piece.

    “Short term, things look bleak – but long term, I can’t imagine a more bullish scenario for those that have prepared to survive this bust.”

    Cheap oil kills oil companies, and expensive oil kills economies. It is a simplictic view, nevertheless, correct. Furthermore, all economies have tried to replace cheap energy with cheap debt, hence ZIRP over the entire globe for the last 8 years? Even NIRP and threats of banning cash (as read on this blog site) are being tried in some countries. The inescapable fact is that the cheap, nearly free energy of the past has all been pumped and burned. This ‘so called’ glut of today is simply expensive oil offered for sale at any price in a vain attempt to keep shale and other high cost producers from immediately shutting down. Some cash flow is better than none, even if every barrel sold is at a loss. All of us have seen this at every ‘closing out’ sale ever witnessed.

    If current remedies worked, we would now be experiencing a massive growth resurgence based on these supposedly low oil prices. Today’s cheap oil is still almost 1.5X what it was in the 80s and 90s when adjusted for inflation.

    “Throughout much of the twentieth century, the price of U.S. petroleum was heavily regulated through production or price controls. In the post World War II era, U.S. oil prices at the wellhead averaged $28.52 per barrel adjusted for inflation to 2010 dollars. In the absence of price controls, the U.S. price would have tracked the world price averaging near $30.54. Over the same post war period, the median for the domestic and the adjusted world price of crude oil was $20.53 in 2010 prices. Adjusted for inflation, from 1947 to 2010 oil prices only exceeded $20.53 per barrel 50 percent of the time.

    Until March 28, 2000 when OPEC adopted the $22-$28 price band for the OPEC basket of crude, real oil prices only exceeded $30.00 per barrel in response to war or conflict in the Middle East. With limited spare production capacity, OPEC abandoned its price band in 2005 and was powerless to stem a surge in oil prices, which was reminiscent of the late 1970s.

    At today’s prices even the majors are losing their ‘shirts’. At today’s ‘glut prices’, there isn’t one healthy economy left on earth from what I can see. If any investor can see through the hype and find a healthy oil company to invest in, why fill your boots. If any investor believes a higher oil price will ‘lift’ our economic fortunes and burn even more fossil fuel energy products, well what are you waiting for?

    Personally, my money is accumulating in insured term deposits and GICs at a local Credit Union. We are saving money because we do not have debt, and watch our home expenses. Our needs are modest and our wants and happiness is not based on buying ‘stuff’. My advice to investors is get used to slow growth (if any) and learn to live modestly and within your means. There is no magic and marvellous investment vehicle outside of criminal windfalls, which increasingly seems to be the world’s rigged stockmarkets. My other piece of investment advice is for people to re-read ‘The Ant and the Grasshopper”.


    • Wolf Richter says:

      Look, Paulo, you can disagree on this site, and you can be wrong on this site, but you can’t insult our authors [“obvious investor pimp piece”].

      Dan Dicker is an oil markets professional. He knows what he is talking about. “Long term” he is going to be right. But no one knows when “long term” is.

      Here is the thing: at the current price of oil, many oil companies will collapse. Investment in oil exploration has already been cut down very sharply. I’ve always said: watch the money.

      When the money is running out, these companies that are losing money on every well can’t go on. And then production will come down sharply.

      This isn’t going to happen this year – but the money is already running out: see my reporting on junk bonds, leveraged loans, etc. So the fact that investors and banks are now refusing to fund this negative cash flow from these companies tells you that they will eventually run of money to keep operating.

      Then production will fall, and fairly sharply. Demand will eat through storage in a relatively short time – and then prices will have to rise to where the surviving drillers can make money. And that’s the “long term” opportunity Dan was talking about. And he is right about it. It always happens that way. We just don’t know when.

      • Jerry Bear says:

        Well, events run like a river and no river runs straight. I think a possible promising place for future oil exploration may be Southern California, especially the L.A. area. In the second half of the 19th/early 20th Century there were thousands of oil wells in the Los Angeles basin. they dried up long ago but now petroleum is seeping back in and recharging the oil fields. The result has been flames erupting from cracks in sidewalks, oozing parking lots and gas seeping into basements and blowing buildings up sky high. The La Brea tar pits show that petroleum can come pretty close to the surface there. The city fathers do not seem to be anxious to advertise the situation so it is not all that well known but then this might lead to good investment opportunities when the price of oil goes up.
        I wonder if this is happening in any other old oil fields?

      • Sean says:

        But not one word about Climate Change and if we can afford to keep burning fossil fuels. Our ecosystem is collapsing while we are happy motoring over the abyss.

  4. Travis says:

    Just in time for Tesla, BMW, and GM to ramp up production of electric vehicles. Oh and dont forget about Toyotas plunge into fuel cells. Not to mention ratcheting up CAFE standards for gas engines in years to come.

    Chinese economy is leading the global economy down so their “insatiable” thirst for commodities is ending. Look to copper, coal, and steel as examples.

    Oil as all commodities are priced on margin. Sure there will probably be one last hurrah in oil but it will be short lived and go out with a wimper.

    • NIck says:

      We have passed the Rubicon where alternative energy becomes ever cheaper, as efficiency increases with technological developments. All bodes well for US companies such as Tesla, and other renewables.

  5. OutLookingIn says:

    This article is nothing more than whistling past the graveyard!

    A global credit meltdown is already underway. Market place liquidity has dried up. The shale oil producers are starving for credit and most will end their days, with investors holding worthless junk paper.

    Glencore is in deep crisis. Their latest attempt to raise capital has pushed CDS rates past 15% with few interested, except those willing to take on very high risk.

    Speaking of high risk in the junk bond market, the volume of liquidity in the market has crashed. The S&P/LSTA Leveraged Loan 100 Index has been cliff diving since a small bounce at the beginning of the year. This is a leading indicator of credit availability. There is none!

    The corporate game of M&A by way of leveraged loans, to boost their numbers and therefore executive bonuses, is now dead.

  6. Jack Black says:

    Oil is bursting world wide. This article fails to identify the MASSIVE oil field that Israel discovered last month. It fails to identify that demand has in fact fallen off of a cliff as the world economies implode. How oil is not trading in the teens is case in point that QE is alive and well.

    • Wolf Richter says:

      Demand has not “fallen off a cliff.” On the contrary. It’s up, but just not enough. Check the data.

      • Cameron says:

        OPEC says global storage is “topping off”. So storage tanks are filling up and oil is increasingly being diverted to tanker storage at sea. The Financial Times reported that oil tanker storage has hit 100 million barrels. That’s partly why the demand has been up. Filling up storage.
        I mean a lot of countries have been filling up their strategic reserves as well as whatever storage they can find anywhere. Asking tanker operators to sail slower is an indication that the demand could “fall off a cliff” sooner than later. And the next recession is around the corner as well. So the demand will fall sharply within the next two years when the recession hits. The darkest is not here yet.
        Speculators have been salivating over future price rises. They’ve mostly been clueless. These same people never saw the over-capacity/over-production/over-investment in the oil industry.

  7. mark says:

    Believe or not, just one tanker burns as much oil as 50 million cars, not to mention countless cruise ships, airplanes, navy carriers, submarines, diesel trains, heating homes, etc. . And yet you are blabbering (bloggers)about falling oil consumption. Oil consumption is increasing steady year after year and it will in the future. This political game price fixing will soon be over and those smart enough to see opportunities in oil companies stock prices will benefit dearly as mentioned in text. So pleas have respect and educate yourself.

    • Jerry Bear says:

      I must challenge your statement that one tanker burns as much oil as 50 million cars. I find that figure implausible. Where are you getting your numbers?

  8. Marc Silver says:

    One would have thought that most if not all of the banks, involved on the other side of the oil hedges over the past 18 months would have gone bankrupt by now. Some serious money has been lost.
    What banks are now lending to the oil industry?
    Going to be interesting these next 3 – 6 months I think!

  9. d'Cynic says:

    The global oil consumption is nearing 100M barrels a day, or more than 30B barrels a year. In the meantime, new oil finds of 5-10B barrels are labeled as massive, or giant. I am guessing the authors are math challenged. Former oil exporting countries, i.e. Indonesia became net importers. Saudi Arabia has a rapid population growth, and may need all the oil for domestic consumption within a decade or so. Some oil companies are exploring for oil in the arctic, but the finds need to be truly massive to justify the difficulties. Basically, the short era of gushing oil is behind us.
    For those who smoke the hopium of electric cars, here is a math challenge; 70% of oil in the US is consumed in transportation. How much electricity would it take to replace even half of that oil, and where would the prices go if that happened? And that’s only part of the challenge.
    The topic of electricity storage and lithium industry would warrant it’s own article. The same for coal, and nuclear, and so called renewables.

  10. walter map says:

    Please. It’s always darkest just before it goes pitch black.

    And it could be that the purpose of your life is only to serve as a warning to others.

  11. night-train says:

    For the large oil fields that the majors require to be competitive, they are having to go off-shore in deeper and deeper water. And costing ever more to drill and produce. $60 bbl won’t do it. Probably not $80 bbl either. Above $80 bbl, shale oil looks good again to the short sighted. When we reach a price point where shale is really profitable, I will leave that to the market players. But I hope we have cars getting 200 mpg and/or consumers with much larger salaries than we have currently.

    • Jerry Bear says:

      One obvious alternative is not being mentioned. It costs about a dollar to synthesize a gallon of gasoline from coal. Although coal in the traditional coal regions back East has become exorbitant to mine. it is available in mass quantities from Montana for $12 a ton. If oil gets to high, coal will become competitive indeed.There is much more coal available in reserves than oil.

  12. Sean says:

    When we write an article about fossil fuels and their price in 2030…maybe we should talk about Climate Change and our capability to survive a burning, drowning, drought infested planet. Or don’t you believe in science or the laws of physics?
    Look around… Climate Change is coming on fast. Or don’t you believe your own eyes?

    • Jerry Bear says:

      I think the powers that be really don’t care. I suspect they think there are way too many of us anyway.

    • ManAboutDallas says:

      That’s right, Sean; there’s a new ICE AGE fast approaching, and it’ll be here sooner than anyone thinks.

      Stock up on plenty of those bunny-foot pajamas so you’ll keep nice and warm while Mommy reads you Bedtime Stories.

  13. merlin says:

    Climate change is an ongoing incremental dynamic just as it has always been. Catastrophic climate change is manifest only in natural events that are obvious in their effect, e.g., Mt. Tambora in 1815. Man-made climate change with predictable devastation to human and natural ecosystems is simply junk science.

    In regard to this article, the lifeblood of global economy has been and is still petroleum and will be for generations to come. Fluctuations in supply, demand and price are simply noise in the long-term use of this wonderful, natural substance. In terms of supply, I have a book on my shelf titled “When the Oil Wells Run Dry” written in 1940!! :)

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