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Eternal Sunshine of a Spotless Mind on Crude Oil


Crude oil prices are on the rise today, but energy investors have been on quite a tumultuous ride so far this year. The severe ups and downs have led to excessively negative sentiment. Perhaps investors would benefit from a memory wipe.

United States Oil (USO) has risen 0.95% so far on Friday. Energy stocks, on the other hand, aren’t seeing as much of a lift with Energy Select Sector SPDR (XLE) up only 0.38%.

Ned Davis Research‘s energy strategist Warren Pies, who remains bullish on oil, titled his latest oil note “Oil — A First Half to Forget.” Last Thursday, the EIA reported that U.S. stockpiles for the week ended June 30 was more than 16 million barrels below the five-year average. Pies pointed out that a 15 million plus barrel divergence from the average is a rare occurrence, having happened only six other weeks since the mid-1990s and bodes well for crude prices. The problem: depressed sentiment. Pies wrote:

Returning to the theme of 2017, sentiment remains severely depressed. So far, the market has proven adept at finding the negative underbelly of seemingly positive data points. As each rally fizzles, more bulls capitulate.

More reason to forget the first half. Pies noted that sentiment and price action does not match fundamental data. Technical indicators have eroded and the likelihood of oil making new multi-year highs, implying a more than 30% rally, has diminished, but Ned Davis continues to “see more upside to oil prices than downside.” Basically, they’re cautiously optimistic, which is easier when you don’t remember how brutal the first half was.

Photo by CARL COURT/AFP/Getty Images


11 Comments on "Eternal Sunshine of a Spotless Mind on Crude Oil"

  1. Sissyfuss on Sat, 15th Jul 2017 2:04 pm 

    Young couple sunning by the Golf of Mexico.
    “Honey, do you smell something foul?”
    “Yes dear and what’s that large black glob on your head? A new type of sunscreen?”

  2. shortonoil on Sun, 16th Jul 2017 8:53 am 

    Production hasn’t gone down, and consumption hasn’t gone up. Now what happened to all of the oil?

  3. bobinget on Sun, 16th Jul 2017 9:49 am 

    Shotonoil makes these statements reminding one of a Trump Whitehouse. ‘Backed solely by his own rhetoric with no ‘alternative facts’.

  4. bobinget on Sun, 16th Jul 2017 10:26 am 

    Ben Ten sez;
    If this is what is going on – they are taking Manifa offline for a period – it could prove useful for the Saudis to shape backwardation. It allows the Saudis to save face and keep the image out there that they have patience and are not desperate.

    The 9 month OPEC extension is structured to help form backwardation but the weakness with this is the market can start pricing in OPEC doing “whatever it takes” and extending and this can allow future hedging for US shale at near spot prices.

    Saudis want to convince hedge funds to price in a high probability that future production WILL or can definitely come back online so as to enable backwardation to form the next time US shale companies look to hedge their forward production for 2018…

    This price move down in 2Q and 3Q 2017 in my thinking has set the stage for this as the next time oil pops up around 55 to test that resistance level we will have a recency cognitive bias set up.

    The big brokers dropping future price projections will help as well. This is basically signalling anyone going long to buy that future production that there is not much upside in the trade…although there is downside…

    The problem with the brokers – thinking from the Saudi perspective here – is that they are fickle and if they think they can make more money by enabling the hedging to take place guess what they might do…raise forecasts again…

    At some point in Q3 or Q4 this year US shale companies will be looking to sell 50 to 100 billion of oil yet to be produced through 2018…

    And when the first of the big shale players start shorting the forward curve in size this is when hedge funds have to buy that future production otherwise we get backwardation forming.

    I expect Saudis will be watching the curve closely and jawboning backwardation if possible. Manifa coming back online in a few months would help and this could factor into any decisions Saudis make around bringing it off or back online. A card like Manifa is something Saudis control 100% whereas OPEC is more of a group decision so Saudi jawboning around OPEC is not 100%.

    Basically from the supply side at this point I am waiting for however long it takes for offshore oil production to start declining…finally…and am hoping this begins in 2018…and at the latest in 2019…

    And from the demand side I am hoping it keeps increasing gradually. At low prices this should encourage developing countries to motorize unless there is a big macro shock like in 2008…a mild recession in the US does not concern me that much…developing markets are what is important at this point.

  5. bobinget on Sun, 16th Jul 2017 10:40 am 

    some folks must believe I’ve been nuts harping on Venezuela for the past year.

    Well Guys, (typical YouTube opening) Here’s what real journalists are reporting;

  6. Davy on Sun, 16th Jul 2017 11:07 am 

    “some folks must believe I’ve been nuts harping on Venezuela for the past year.”

    Yea bob, the part about China is mostly a mind fabrication. Some of the other stuff is good.

  7. bobinget on Sun, 16th Jul 2017 5:49 pm 

    Davy, How many other observers predicted a Chinese ‘takeover’ of Venezuela almost two years ago? Yes, I know it hasn’t happened yet, ‘it’ will.

    Only Goldman Sacks had the balls to buy
    a few million V Bonds at ridiculous prices. Everyone overlooks the fact that V has more solid, proven crude reserves than US, KSA, Iran or Iraq.

    The Trump White House is far too busy to notice Venezuela. The US State Dept. is running on habit alone with dozens of top positions remain empty.
    WHEN, not if, we ‘lose’ Venezuela, the blame game begins. (all Obama’s fault)

    You heard it here first, when Ven production ultimately collapses, China steps in with medicines, consumer goods, more hard currency loans. Russia, also a major creditor, will happily provide technical assistance getting production up and running.

    Few, besides Davy, understand the gravity of this situation. Not only have we ‘lost Venezuelan crude’
    we have been bested in our own backyard.

    Because markets value oil not by consumption, but inventories on hand, crude prices will rocket out of proportion to affordability. US oil exports from money losing shale operations will slow for a week or two then stop altogether. Remember, Washington genius continues to sell SPR.

    NEXT: Exposing mighty shale Ponzi operation.

  8. bobinget on Sun, 16th Jul 2017 5:50 pm 

    The Mighty U.S. Shale Oil Industry To Lose Another $20 Billion In 2017- PONZI SCHEME.
    — Published: Sunday, 16 July 2017 | Print | Comment – New!

    By Steve St. Angelo, SRSrocco Report

    Well, it looks like the U.S. shale oil industry is going to chalk up another lousy year of financial losses in 2017. This shouldn’t be a surprise as the U.S. shale oil industry hasn’t made any real money since 2008. However, I still read articles suggesting that the United States will still become energy independent by ramping up its Mighty Shale Oil Machine.

    Unfortunately, the country’s shale oil industry will never allow the United States to become energy independent, but it will sure go BROKE trying to do so.

    According to the article by Nick Cunnigham, Is Wall Street Funding A Shale Failure, he made the following remarks:

    Investors hungry for yield are throwing money into companies who then drill more, and the surge in production is hurting the industry as a whole. Despite efficiency improvements, the shale industry is expected to be cash flow negative by a combined $20 billion this year as oil prices sink.

    ….. Investors are slowly waking up to the idea that they may not be able to make juicy profits by betting on a sharp rebound in oil prices. There is some early evidence that Big Finance is pulling back, with new equity issuance down recently.

    As Nick stated in his article, the U.S. shale oil industry is expected to tack on another $20 billion in NEGATIVE free cash flow. Thus, they spent another $20 billion more than they made in operating cash. If you have been reading my energy articles for the past several years, this is no surprise.

    Looking at the chart below, I estimate the U.S. shale oil industry will produce about 5 million barrels of oil per day in 2017. This equals about 1.8 billion barrels for the year. In producing those 1.8 billion barrels of oil, the U.S. shale oil industry lost $20 billion. Yes, I know, its not a net income loss, rather it’s negative free cash flow. However, free cash flow is a better metric in determining the health of a company:

    In order to stop the negative free cash flow hemorrhaging, the U.S. oil industry decided to cut back on its CAPEX (capital) spending. According to the EIA report, U.S. Oil Producers Paying Off Debt, But Higher Costs Restrict Cash Flow Growth:

    From 2012 through the end of 2015, debt was a significant source of capital for the producers included in the analysis, with the addition of a cumulative $55.3 billion in net debt. Since the beginning of 2016, however, these producers have reduced debt by $1.4 billion.

    So, the 58 public oil companies used in this analysis added $55.3 billion of debt from 2012 to 2015, but were able to pay down a net $1.4 billion in the past year? Does anyone else see something wrong here?? So, for three years, the U.S. oil companies added an average $18.4 billion in debt, but were able to pay down $1.4 billion in the past year??

    Sure, we can give the oil industry some kudos for paying down some debt, but how long is it going to take just to pay down the $54 billion of debt added from 2012-2015?

    Furthermore, to pay down that $1.4 billion in debt, the U.S. oil companies sold assets, sold shares and cut back on capital expenditures. This is not a good way to MAINTAIN or GROW production going forward. This is what I call the CANNIBALIZATION of the U.S. OIL INDUSTRY.

    Lastly, another excellent article titled, America’s Firms Don’t Give A Frack About Financials, by an individual who is not suffering from BRAIN DAMAGE, stated the following:

    Shale’s second coming is testament to Texan grit. But the industry’s never-say-die spirit may explain why it has done next to nothing about its dire finances. The business has burned up cash for 34 of the last 40 quarters, according to figures on the top 60 listed E&P firms collected by Bloomberg, a data provider. With the exception of airlines, Chinese state enterprises and Silicon Valley unicorns—private firms valued at more than $1bn—shale firms are on an unparalleled money-losing streak. About $11bn was torched in the latest quarter, as capital expenditures exceeded cashflows. The cash-burn rate may well rise again this year.

    But the fact that the industry makes huge accounting losses has not changed. It has burned up cash whether the oil price was at $100, as in 2014, or at about $50, as it was during the past three months. The biggest 60 firms in aggregate have used up $9bn per quarter on average for the past five years. As a result the industry has barely improved its finances despite raising $70bn of equity since 2014. Much of the new money got swallowed up by losses, so total debt remains high, at just over $200bn.

    So, the biggest 60 U.S. energy firms burned an average $9 billion in cash each quarter for the past five years… even at $100 a barrel oil. At some point, investors and the market will need to wake up and realize that Shale Energy was nice while it lasted, but it was just another PONZI SCHEME.

  9. Makati1 on Sun, 16th Jul 2017 6:18 pm 

    Ever increasing debt is the only thing keeping the U$ economy alive. The choice is to collapse now or an American version of the Weimer Republic, catastrophic inflation to collapse. Either way, the U$ is finished as a world leader and 1st world country. But that is already becoming obvious to more and more people outside the U$M$M Iron Curtain. They are cheering it on.

  10. Makati1 on Sun, 16th Jul 2017 6:38 pm 

    3rd World America: “Our Disneyland Economy”

    ” Every night growing numbers of homeless people sleep on the pavement just steps away from “the happiest place on Earth”. … because so many homeless people have been sleeping at bus shelters across from Disneyland lately authorities decided to completely remove the benches that they had been sleeping on… … A survey last year placed the number of those without shelter at 15,300 people, compared with 12,700 two years earlier. (Orange County, CA) … And in New York City, street homelessness is up 39 percent over the past year. …Homelessness is already worse in many parts of the nation that it was during the depths of the last recession, and what we are going to see during the next economic downturn is going to be absolutely unprecedented.”

    And the beat goes on…

  11. Makati1 on Sun, 16th Jul 2017 6:58 pm 

    World’s worst and biggest terrorist organization:

    “To maintain permanent domination in the world the US has always been seeking ways to remain the only country that would develop economically, technically and scientifically without any interference. To attend these goals a total of two world wars were organized, along with numerous revolutions and countless armed conflicts, in which America’s potential competitors would send each other back into the Stone Age.

    Therefore, we shouldn’t be surprised that now Washington turns to hydrocarbon racketeering in yet another attempt to subject the world to its will. And the show is in the full swing now, forcing the vassal states of the United States (including certain European countries) to play the game that somebody else started.”

    And the beat goes on…

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