Self-Sabotage: What Are US Oil Producers Thinking?

This image truly sums up their complete idiocy right now.

By Dan Dicker, Oil & Energy Insider:

It’s absolutely maddening watching the first quarter results float in from the large-cap energy companies. And the one image I continue seeing in my mind that I can’t shake is of lemmings going over a cliff:

This image alone truly sums up the complete idiocy of virtually all of the U.S. oil producers right now; they are showing no creativity or independence, doing what everyone else is doing, despite the fact that this behavior is leading them all to a very, very sad moment, if not their own ultimate demise.

What has become increasingly clear to me is that without a change in the mass behavior of major and mini-major oil exploration and production companies (E+Ps), we’re still a long way from the end of the oil bust, and therefore from the next oil boom.

Oil has been overproduced since late in 2013. That glut decimated oil prices in 2014, finally bottoming at a low price below $30 and now recovered towards $50, but still well below a price that enables anyone to make a decent profit except for the conventional Middle East producers – and even THEY need a far better margin to support their national budgets.

But how have oil companies reacted? Did they stop drilling oil at a loss? No, not really – instead they cut their budgets for investments in new projects, trimmed costs to the bone and called on technology to make getting a barrel of oil out of the ground as cheap as possible.

Then, having merely cut the SPEED of their losses, they patted themselves on the back, planned on INCREASED production, got Wall Street to restructure and reinvest in their losing ways, and sat back and waited for oil prices – and their profits – to recover.

Oil producers didn’t plan on this self-destructive strategy. They all needed continued cash flow to service bond issues and dividends. They also reflexively continued to pump oil at a loss to fulfill the wrongheaded expectations of analysts – and shareholders, where production growth is, for no good reason, the gold standard for progress.

The end result, however, has been incredibly self-destructive. Gluts have stubbornly refused to clear, pushing global rebalancing time lines further and further into the future – and putting hard caps on oil prices.

The latest quarterly reports are showing just how disastrous this lemming-like behavior has been for virtually all U.S. independent E+P’s. Check out the reaction to Noble Energy’s (NBL) latest quarter – down 6%. Devon Energy – down 2%. Apache – down 4%.

And the ever snake-bit Anadarko Corp. – last week the victim of a Colorado house fire caused by waylaid Anadarko wells leaking and exploding, killing two – is now bearing up under another disappointing quarter. Down more than 9%!

So, now what? What do you do with these lemmings, taking their money and most assuredly ours, over the cliff with them?

There are those that have walked over the edge with all the others, but have still managed to deploy at least a partial parachute – and finding these better equipped creatures will be my job over the next several columns, as oil resets for a second (or third) move that necessarily must force at least a few more oil producers to stop selling ever increasing amounts of oil on the market at a loss.

For now, we are in no rush – for a while, we’ll sit back – content to watch the lemmings plummet downwards without us. By Dan Dicker, Oil & Energy Insider

And now we have a gasoline glut as we enter the “summer driving season.” Read… What Crack Spreads Say about Oil Prices

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  42 comments for “Self-Sabotage: What Are US Oil Producers Thinking?

  1. R Davis says:

    “selling ever increasing amounts of oil on the market at a loss”

    Is it possible that the customers cannot afford to by / cannot afford to pay market prices ?
    What happens to you, when your customers can only afford to stand outside the window of your store, gazing at your products with desire & empty pockets.
    What do you do ?
    Pull down the blinds to minimize your pain & anguish.
    Oil keeps .. right
    It does not have a used by date .. right
    Phew !
    In the meantime the consumer will have to go without .. causing discontent, panic, civil unrest bla, bla, bla.

    • Mark says:

      Yep, the US get to punish their foes by giving unlimited credit to US drillers, let’s face all that money is expected to be written off, not paid back. US gets cheap oil, driller get work and good return, banksters make a killing on bonds and the US economy (the most oil depend) gets a shot in the arm.
      Seams so obvious…?? Brilliant

      • RepubAnon says:

        “It’s like the party’s over and the last one to leave gets stuck with the check.” – Men in Black 1

        Here, the party consists of conning investors into buying the various investment products… at some point, the party will be over, and the folks holding this paper will realize that it isn’t even 2-ply, pleasantly scented, and soft.

  2. michael Engel says:

    If the strong hands are going to feast on the weaker hands,- whales eating small fish in the big ocean -,
    few conditions have to be fulfilled.
    1) prepare in advance a WAR CHEST, of cash and cheap credit.
    It must be large in order for be able to handle a long slog
    of attrition war.
    2) new innovations reduced the break even cost, enabling the weak
    hands to survive for a longer time, to adjust. Therefore oil prices
    must be even lower, MUCH LOWER, and stay low.
    3) interest rates of junk credit is too low, – that’s the credit the
    weaker hands use to finance themselves, – it must be lifted and
    separated from top rated % rates. It cannot start without some
    kind of financial crisis, that will raise rates to an in tolerated
    4) watch for whales fight, they are not the only big fish in the ocean.
    the smartest fish will have the best meal.
    i think we all know his name well.

  3. Jonathan says:

    Prisoner’s Dilemma + cash starved = ?

    Maybe I’m off, but there’s that.

  4. hidflect says:

    There are those that have walked over the edge with all the others, but have still managed to deploy at least a partial parachute – and finding these better equipped creatures will be my job…


  5. Jim Hosmer says:

    Hmmm. No mention of the state of world oil reserves. I looked this week and best estimates say that we have about 70 years of oil in world oil reserves based not on “proven reserves” but rather on probable reserves. I wonder who’s giving some thought to the social, political and economic impacts of near exhaustion?

    • Wolf Richter says:

      I always say, we’ll run out of clean air to breathe before we’ll run out of hydrocarbons to burn. So don’t worry


      • TJ Martin says:

        Brother you got that one right as we once again fall down ‘ Alice’s Rabbit’s Hole ‘ of the logic of illogic amidst a never ending Potemkin Village as far as the eye can see .

        But hey … who needs to breath anyway

        As a musical aside … this little tune sums it up quite nicely [ pay special attention to the ‘ radio announcer ‘ in the middle ]

        • Wayne says:

          Thanks for putting in the comment about the “radio announcer”, otherwise I would have missed it. It really sums up the pathetic state of financial reporting by the media.

      • KMOUT says:

        What happened to that “Peak Oil” guy from the early 2000z? Every time the linear extrapolators say we are done, some Hairold Hamm guy comes along and blows the liberals up.

    • onsiterepair says:

      The whole oil thing is a misdirection, we know how to grow oil via algae off human and agriculture waste and with vertical hydroponics could replace the entire US needs with desert area the size of 10% of New Mexico on non-arable land.

      the aquatic species program worked thru this decades ago, and its
      been public knowledge for over 10 years. Some countries in Europe
      such as Spain have already started doing this.

  6. Paid Minion says:

    Like home builders and developers, they will continue to pump oil, because it’s all they know how to do.

    Coupled with the worldview that “I don’t have to be faster than the bear, I only have to be faster than you.” In a zero growth world, the “slow” won’t be able to change careers, they will be eaten. And join the rest of us losers who work for 40% less, even if they are lucky enough to find a new full time job.

    Believe me, going from “oil baron” to “Home Depot Department Manager” is a money and ego hit that many of them won’t be able to stand.

    Us guys turning into closet “Socialists” might say that this is where the adults step in, and manage this problem before it blows up and/or becomes a crisis. But noooo, that would be interfering with “free markets”. So the only strategy is figuring out who to bet on. Which is problematic for Joe Q Public, when the world is filled with “fake data”

    • Coaster Noster says:

      I think you have the correct thinking here. Most would prefer to sit on cash at home….another job? No, it will “bounce back in 2019” so wait at low/no pay, and resume in a couple of years.
      Everyone thinks their company is smarter. All losing money, but he who can manage losses the smallest and longest, lives to see 2019. All mid-range Cos think this. And, do their investors.

    • Bill Shortell says:

      OPEC has managed an approximation of cooperation, enough to partially manage price. Before the fracking boom, US production, likewise was carefully calibrated, thru illegal collusion, capped at 100 m barrels, year after year, winked at by authorities to preserve what was then thought to be dwindling reserves.

      The lemming behavior of private capital, of course, is not limited to oil. In periods of dwindling demand in a sphere that still maintains competition, each corporation will continue to produce as if they are alone in the field, cooperative restraint being illegal, and against the strategy of eliminating the competition. This collective insanity leads inevitable to recession.

  7. Terry Steichen says:

    Very good questions – and sparse answers. It’s hard for most of us to believe that the oil producers are as stupid as they appear to be. They “must” know something we don’t.

    And that’s consistent with your cynical comment: “I always say, we’ll run out of clean air to breathe before we’ll run out of hydrocarbons to burn. So don’t worry “

    • Kent says:

      Oil producers are up to their eyeballs in debt and have to pump as much as fast as they can before Mr Bank comes and takes their oil company away. And the only way Mr Bank gets his money back is to pump. The stupid ones here are the bankers who loaned the money in the first place.

      • Coaster Noster says:

        The banks remain stupid, because they have no choice. Extend, and pretend. Once your debt is significant, your banker is not your creditor, she’s your partner. Partners have more patience, than creditors.

  8. nick kelly says:

    The supplier end has parties who must produce or starve: Russia, Saudi and Venezuela have no significant other sources of hard currency. To suggest that chaotic Venezuela would adhere to production limits is absurd. As well as shipped, oil is trucked out of the country by paying bribes at the border. You can fill an SUV for the price of a chocolate bar One irony, a lot has been sold to ‘friend’ China at $5 to create an imaginary alliance against the US.
    They immediately resold it to the US for market price.

    • robt says:

      Vz have been shipping oil to China to pay 10s of billions of dollars in loans, and they’re so far behind schedule that China’s sending people over to try to get things moving. The $5 you mention may be a kickback from the deemed price to give PDVSA enough cash to buy the diluent to blend with the sludge/tar-like crude that they produce. They have problems paying for sufficient diluent to make shipments and all production is 60% below forecasts of 5 million/day, currently at about 2 million barrels a day.
      For China, I believe the committment to pay the loans was a million barrels a day but they’re only shipping something like 600K.
      About the cross-border thing – what was happening was that people in Vz would fill up their vehicles and drive across the border to sell the gas. In Vz it’s 6 bolivars a liter (and there’s 5000 bolivars to the US dollar), in Colombia, it’s about 2 bucks. Even sold at a discount, it’s a good markup, and they’d use the profit to buy food.

      • Jonathan says:

        That’s more proof that China is playing the international economic game better than U.S ever would.

        As an overseas Chinese guy I already find it horrifying about how effective China is playing their economic chess board, while yet the average American still puts their head in the sand towards China and believe Freedum blessed Amurica will always be the best.

    • FLR says:

      Is this a covert way to starve Russia, etc? Saving these banks is probably cheaper than $1B planes and human capital, correct?

  9. Jacko says:

    YES, but the idea that US is producing more oil is a complete farce. Illogical and flies in the face of geology and physics. The Red Queen Syndrome associated with Shale means the US cannot increase production for more than a few months because the decline rate of wells is so massive. 60-70% in the first year. Leaves a trail of stripper wells within 4 years, but where they are kept going producing toxic sludge because the companies have not made proper provision for plugging and abandoning, which will cost around $3m a well.

    Think about it, shale is tight geology, hence the need for long laterals and hydraulic fraccing to increase the surface area and allow tight oil to flow in any real quantity, as otherwise they would have drilled verticals, producing a fraction of the oil as it intersected a fraction of the producing area.

    The upshot of this is because all wells start off as deviated or vertical anywhere, the idea of horizontal wells being cheaper is ridiculous, as a vertical or deviated well has no long laterals, and consequently nowhere near the amount of proppant used in hydraulic fraccing.

    Worse though is the fact that the decline rates make it a hiding to nothing because of Red Queen Syndrome.

    1000 wells producing 1000bopd in 6 months only produces 500bopd per well and so on….requiring vast expenditure on more wells just to make up for the lost production and so on.

    • Nicko2 says:

      Plenty of untapped oil in the Gulf and Alaska….and Trump just relaxed drilling restrictions.

    • nick kelly says:

      Oil is hard to get- nat gas is EVERYWHERE. Propane at some Alberta sites has negative value- you pay to have it removed.
      There were nat gas taxis in the 70’s-80’s but the tank takes up the trunk. Here in Nanaimo all the buses are nat gas powered.
      Nat gas will wipe out coal and may give electrics a run for their money.
      You can refill a nat gas tank in five minutes so the tank could be smaller.
      BTW: the Guardian reports that if as few of 10 electrics all plug in at the same time a local brown out can occur, depending on the location’s capacity.

  10. michael Engel says:

    Non of the conditions I have mentions above are valid.
    $WTIC had test the support line, close, but from above.
    It wasn’t breached, yet ! And moved up.
    So, it might be an opportunity to buy oil companies at a low price.

  11. Jungle Jim says:

    Whenever someone does something peculiar involving money, I assume they know something I don’t. As a principle, it is right more often than wrong.

    This situation is just screwy enough to start me thinking. Is there any chance that the oil companies are carrying a lot of off the books debt that they don’t want to acknowledge but have to service and they need the clash flow to do it ?

  12. nick kelly says:

    I’ve been telling everyone that a Fed hike at next meeting is certain- but now once again, who knows?
    The crash in oil is not alone. Iron ore cratered 5% in one day, in the last trading day. That was limit down in the Chinese market.
    It seems like every time the Fed ought to hike, some weird outside factor intervenes. The Greek crisis, the 50% crash in the Chinese stock market, now a commodities down- turn from an already low point.
    And in Miami, for one, a condo crash.

    Dare the Fed tighten? Does Janet feel lucky?

    • Smingles says:

      “Dare the Fed tighten? Does Janet feel lucky?”

      I think they’re dead-set.

      Q1’s abysmal quarter was “transitory.”

      Oil prices last year (when they hit the $20s) were “transitory” before they recovered, and now that they’re crashing are once again “transitory.”

      Everything bad is “transitory” while positive economic news, whenever it appears, is indicative that everything is great.

      I expect them to raise rates, short of a catastrophe before now and then, if only to try to maintain some credibility. But they’re incompetent, and rates will be back at the zero bound before they ever reach historically normal levels.

  13. Coaster Noster says:

    From Oil Intel:
    U.S. offshore oil production still growing. Shale gets all of the attention, but production from the U.S. Gulf of Mexico is still on the rise. The Gulf of Mexico produced 1.76 million barrels per day in January and could add another 190,000 bpd by the end of the year. RBN Energy estimates that output will jump again next year by another 300,000 bpd. Offshore drilling is still a long-term, capital intensive proposition, but costs have come down with improved technology. Still, production gains are largely coming from projects planned years ago that are only now reaching fruition.

  14. robt says:

    This article could have been written by Rockefeller over 150 years ago.
    Boom and bust in prices, and overproduction, was the oil business until prices stabilised from 1880 to 1973 at nominal pricing of about 2 dollars a barrel, except for a couple of small blips due to wars.
    Then the US blinked, OPEC was allowed to happen to recycle dollars for US Treasuries and weapons purchases to help finance current account deficits, and the boom and bust era started again, with OPEC producers ‘cheating’ on quotas (now mirrored in recent US shale production though not subscribing to quotas, but junk financing), and incidentally concomitant with an historic monetary inflation cycle.
    The ‘hockey-stick’ chart for inflation:
    Happily however, look at the inflation-adjusted gasoline prices (in red), no change in 100 years, thanks to technology, and even incrementally including the modern era’s taxes (an average 50 cents a gallon today in the US), taxes which probably barely existed 100 years ago:

  15. Larster says:

    Follow Rex “The Wonder Secretary” at State. This was supposedly one of the best and brightest in the oil business. Guess, if they are all losers like him, you have your reason for the lemming action.

  16. Steve Phillips says:

    Oil prices will stay low until either Russia and Iran agree to accept the USA’s geopolitical primacy, or the budgetary shortfall in Saudi Arabia becomes so dire that the Petrodollar regime falls into jeopardy.

    • FLR says:

      I was thinking the same exact thing, Steve..war can be won many more ways than just military might, especially today.

  17. RD Blakeslee says:

    think small (and independent).

    Homegrown wildcat shale drillers are confounding the old “big-time”, international oil pricing straightjacket.

    Our country and its non-oligarch citizens will be the beneficiaries, for a change.

  18. Smingles says:

    “That glut decimated oil prices in 2014, finally bottoming at a low price below $30 and now recovered towards $50, but still well below a price that enables anyone to make a decent profit except for the conventional Middle East producers”

    This is not true. This was true two years ago, but technology has advanced at an incredible pace.

    In 2004, verticle wells had about 600 feet of horizontal access. In 2007, 6000 feet (about 1 mile). In 2017, wells can go 40 MILES horizontally, and be ‘stacked’ one on top of the other.

    Breakeven price in the big four fields (Marcellus, Barnett, Fayeteville, Haynesville) is about $40/barrel with the newer technology, and getting cheaper every month.

    It’s almost impossible to compare US oil production today to what it was a few years ago. You’re talking $90/barrel minimum for profit in 2012, down to $75 by 2014, down to $40 by the end of 2016. By 2020, $25/barrel will likely be profitable for those who can afford to invest the capital necessary.

    And along with the stuff being cheaper to get at, output is increasing, not decreasing as some have said will happen.

  19. Jeff says:

    I agree whole-heartedly.

    Even when you adjust for impairments, these folks aren’t clearing their cost of capital hurdle. You need $60 oil for even the A+ players to break even, in a fully-burdened sense.

    They aren’t generating enough cash to service their debt and fund their capex programs. It’s a pyramid scheme. As long as there is a market for new equity issues, they can keep kicking the can down the road.

    I think this thing gets much uglier before it gets prettier.

  20. Mr Trout says:

    The first 5 months of 2017 cuts were purely designed to take out all the floating storage from 2015/16. This has been achieved. This is why US production is largely unmoved or increasing.

    With floating storage no longer avaiable for traders to call on when things get ‘tight’ the market is without a doubt setting itself up for a massive uptick in oil prices.

    When that happens, US shale will book in some hedges. But that’s not going to cap the demand, it will purely enable US shale to continue as it is.

    Finally, US shale wells dry up fast. They have limited life spans before new wells are required. If you look at the rig count data, sure rigs are being added but they are still 50% below where they should be to deliver sustained US growth.

    Just need to wait for the likes of Goldman’s to buy up enough oil stock at cheap prices before they finally issue their declaration that the Oil market has rebalanced ….

    Draw upon draw upon draw is coming.

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