Are we at the bottom or will it go to $20 a barrel and then rebound?

Im in for opinions. I was thinking about posting this thread before.

My dad works for plains marketing and is expecting a pay cut at a driver meeting on tuesday.

So people say that they pay around 8.00 to transport it in pipeline. I would venture a guess that the cost on getting it there is in excess of 12.00. So they will shut it in before they pay to sell it.



 

We gotta keep those costs up ........ can't give the suckers buying that shit a break.

chirp.......chirp......chirp

Oil reached 32.40 in 2008.

We should see if there is resistance at that level.

I read a paper from Raymond James that forescasts oil dipping lower in the first quarter and then a rise up to near $50 by the end of 2016. They made a pretty compelling case for their forecast and have been reasonably close on their past forecasts.

I know of companies starting to shut in Naturial Gas ASAP . We can only speculate what the future holds.

im looking for it to get to around 28.50 area as it is a FIB ext. level

I'm thinking we are 6 months out from seeing the supply really start to slow.  It takes time to permit and drill a well, and for frac wells, they produce hot and heavy for a few good months, and then they start to trickle unless they are refractured.  Since a lot of companies didn't stop drilling new stuff until mid/late 2015, we won't see the effects of that until mid 2016.  If new projects are not ready to start, there will be a sizable gap in production which will force the price up, assuming a foreign entity doesn't fill that gap.

This started happening last year, but enough of the small players had not gone out of business yet, and they were able to jump right back into the fray and drive the price down again with quick production.  Those people are going under right now, and if they don't make it, we won't see the triple dip when it starts to go up again.

It doesn't really work that way.

Then enlighten me.



 

I'm not familiar with oil but with commodities in general, you can bet they will pay to sell it. Just how production of commodities works.

I'm in the dairy industry, when times are bad milk is often 3 or 4 dollars a cwt less than what it costs to make it. Doesn't sound like much but that can be 5 to 25k a day for a lot of dairies. A dairy can lose millions in a bad year. They have to keep producing. If they shut down there is still overhead associated with keeping things dormant and when prices recover, they have no way to start up again.

Lets use this example. Take a small area that has a few hundred wells and 100 men and trucks/pickups associated with the production. Prices go low, screw it, lets shut it down.

Saved a lot of money, right?

What happens in 3 months or 6 months after the equipment is all liquidated and the men moved on to other jobs? Not a darn thing. You can't ramp up that quickly again.

Sure people might cut back but the idea of just shutting down is fantasy. There is also legal issues with having dormant wells that aren't plugged and whether or not the well will produce the same after sitting for months. I don't know the answers to those questions but its something to think about.

Men have produced commodities at a loss for hundreds of years. It isn't going to change. We just hope we can set back enough on the good years to make it through the bad.

For milk, we always count on 1 great, 1 terrible, and 2 mediocre years every 4 years. They might change in what order they come but it usually works out that way it seems.

These guys are running CO2 or other systems to boost recovery(OIL SIDE) They will have a limited volume when they shut in the expensive recovery practices. I have customers who are returning equipment and shutting in wells. Manpower has been RIFed and people are going under. This is the oilfield way always was always will be.



 

Fella explained it very well.   Cash flow is king.   Sure, there will be some gradual decrease in volume, but plenty of operations will sell at a loss for a long time.    The Airlines sold tickets at a loss for Ten Years, until they had enough bankruptcies and consolidations to return to profitability.     United was losing $60 a seat on every flight, but trying to make it up on volume.  

The market just isn't as rational as you would like to think.   That's what causes these boom and bust cycles.

It sound illogical. Producers are dealing with the planet. Shelf life is much better than a cow or a plane. You have a short window of return on the latter.  




 
 

Well you have to consider the cost to produce oil is extremely front loaded, and once that front loaded cost is incurred, they can't stop without consequences.

Once completed, a well operates itself for the most part.  It will either pump into a line and get pushed using compressors that run on the same thing it is pumping out of the ground, or they have to haul it with a truck.  I read a couple weeks ago that it costs somewhere around $3 per barrel to ship our oil from California to Japan, and while shipping transportation is cheap compared to trucking, trucking can't be more than $10 per barrel save for the most remote locations.  Remember, they just have to get it "to market" then it is someone else's problem.  If a well is complete, all cost is sunk save for getting the oil to market and keeping up with regulatory inspections and the occasional repair.  It can still make money at $20 so long as the transport distance isn't too far.

Also consider lease terms.  I dealt with a lot of West Texas leases when I did O&G royalty accounting.  RRC of Texas says that wells must be paying royalty owners "producing quantities" no less than every 3rd month, lest they violate the lease terms, and that usually means the land owner can take it back and go sell it elsewhere.  So you're Sandridge, you drilled a $4mil well on my land, and decide that at $31 a barrel, it isn't worth the cost to produce that oil so you shut it down.  In 3 months, you lose the rights to your proven reserves, not only wasting that initial investment, but decreasing your assets, because oil companies consider the oil reserves under lease to be assets.  

Way more complex than thinking that this is an item on a shelf, and if you can't sell it for more than it costs you, you'll just sit on it until the price rebounds.

yet, it is, what it is.     If your theory was true, there would be no boom or bust cycle.    Is there?  in oil?  

The bust as we know it comes from spending like oil is always going to be 120 per barrel. Then it dips and creditors sell your Rigs.



 

oil companies cannot afford to pump oil, but they can afford even less to NOT pump oil.  So, companies kep pumping hoping that the other companies will give out first and then maybe supply will get tight and prices will go up. If they can't make it, maybe they can just take the money and run and declare bankruptcy, then they don't have to pay all the cleanup costs, gov will have to foot the bill for that shit.  Maybe that was the plan from the beginning.

of course, traditional type operations are alright, it is the higer cost operations I am referring too.

I trade technical info but i am waiting for Saudi Arabia and Iran to start "something" to artificially elevate prices. if something like that happens we'll see oil back over $100 if not higher then the $150 technical level.

The floor in oil prices comes when production and supply don't meet with demand.  Oil is useless until its refined and made useful.  Who can store it and wait?  Who has the lowest production costs.  Gas prices are as low as $1.40 right now.  You know they won't stay that way forever, as they have proven that gas can sell for as much as $4 in the US.  Timing the reversal is the hard part.  The floor is when they drive the suppliers out of business who need $70 oil to make money.  When that day comes the price will not only rise, but you can look for $200 a barrel oil to make up for this loss for the cheap sellers.  The cheap sellers also are losing money right now, but they know that and plan to make it up.  They will...you watch.

What is causing the price of oil to collapse?

You mean what is causing it to go back to normal price

Surplus.  Too much in storage and nothing to do with it.  Same thing a grocery store does when they have too much produce, they put it on sale hoping to clear inventory before it goes bad.  Problem is, oil doesn't go bad, so they keep reducing the sale price until it moves, and when they will continue to do that until it hits bottom.  Bottom will cause high cost producers to go out of business, followed by decrease in stored oil, followed by shortage and higher prices until more high cost producers come on line and start adding to supply.  Rinse and repeat, its how oil works.  Always has, always will.  The big players buy up the resources owned by the high cost producers when they fold, and they ride the gravy train all the way back to the top.  

We saw a rise last summer, which was premature.  High cost producers had not shut their doors yet, so they jumped right back into the fray and doubled down on production, driving the price down further than before.  Now they are going bankrupt, so next spike should ride, but the world is uncertain because Iran is coming on, and global output has only began to drop by 200k barrels a month.  Global output is still 1.1mil barrels per month above demand, so the expensive guys have to keep folding.  Meanwhile, you're looking at the new normal.

Makes sense, thanks

Some above said supply.  Certain entities normally control production at a certain rate.  Don't flood the market, don't go broke attitude.  However, recently oil prices increased enough for companies to go into boom mode.  The problem was/is that the higher oil price wasn't really a true price.  It was inflated (kind of like the 2012 panic).

Couple a weak economy (no one using oil) with certain entities producing at full throttle and you have little demand with a ton of supply.

As said above, shutting down isn't really and option.  Some oil production facilities cost billions and billions to build.  A large company can't just shut them in and say 'fuck it'.  So now you are in a spiral of companies need to produce to stay in business, but producing is driving the prices even lower.

One thing most people don't think about is Economic cost, and instead look to accounting cost.  Once they've drilled a well, everything they spent on it is sunk.  What is not sunk, however, is the debt payments that they will have to make whether they produce from that facility or not.  So if you have to pay 200k a month to finance debt, and $1k a month to operate a well that makes you $10k, you are net ahead $9k a month producing the well from that point forward, as opposed to shutting it down and continuing to make debt payments on a well that produces you nothing.  The only time it makes sense to shut it down, is if they are losing money, and they don't believe they can hang on long enough for a rebound.

Oil prices have been falling since before Oct 2014.  Oct 2014 the Saudis announced that they are not going to scale back production in response to the slack in demand for crude.  That sent oil prices falling.  Since then they are still not backing off production to stabilize the market price.

They are attempting to slow the growth rate of US Shale production, as they see it as a threat to their market share.  

There is literally a glut of crude on the supply side at the moment and demand isn't picking up as emerging market economies are slowing: Brazil, China, etc.

DO NOT underestimate the part in red.  The US, China, and India all have economies that are moving at a crawl pace.  Demand is down.


CMOS

price is too low, someone will blink soon, russia, brazil, saudi,