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US oil floated on cheap money

Production

How much has the US oil industry been inflated, crushed and generally distorted by the Federal Reserve’s monetary force-feeding over the past nine years? According to my probing along the stages of production and trading, the answer is “a lot”. Yes, there have been dramatic developments in hydrocarbon production technology, but those looked even better through the distorted lens of quantitative easing. Oil and gas pricing have now stabilised, in the sense of finding a finance-friendly range somewhere north of $50 per barrel. There have been lay-offs and bankruptcies, but fewer than in the oil bust of the 1980s. Manhattan and Oklahoma City were treated relatively well by quantitative easing. In many ways it is easier for cheap money to find its way into the energy business than into the rest of the US economy, thanks to the breadth, depth and long-dated terms offered by the futures markets. As Jim Bianco, president of Bianco Research, the analytics company in Chicago, points out: “There are active oil futures contracts all the way out to December of 2025, while, say, copper futures are only liquid out for a couple of years. So a private equity or hedge fund investor figured that if he got [an energy investment] wrong, he could easily hedge out his exposure.” Also, the operating people in the US oil and gas business have been very knowledgeable about public equity and debt markets for a long time. After 2008, when the banking system was reluctant to take risk, they knew how to turn around and sell a story such as “shale” to public investors. Since interest rates were artificially low, investors were willing to discount the projected revenues from imaginatively estimated oil and gas reserves at unrealistic levels.

Even after prices peaked in 2011, exploration and production operators could raise the money to fund aggressive capital spending. A significant part of the excess production was put into storage, where it was cheaply financed by naive city people who did not get the joke. Crude oil storage capacity at Cushing, Oklahoma, the centre of West Texas Intermediate oil deliveries, increased from 45m barrels in 2011 to 76m today. “This wasn’t some sort of smart play,” says one commodities investor. “It was a giant mistake.” Sign up to the Energy Source email, weekly Review the week’s must-read energy news, comment and analysis. weekly Just how big a mistake was not immediately evident, since official statistics did not capture how much oil was being crammed under the mattress. Todd Dauphinais, a principal at Clavis Capital, a Dallas private equity firm, led a 2016 buyout of Alliance Tank Service, an oil storage-tank manufacturer. The Alliance Tank deal was not premised on the direction of oil prices, but on the industry’s need to replace old facilities. Good thing, too. “Even as prices crashed, people still had to pump it out of the ground. It got stuffed in every available storage vessel, such as rail cars or oil barges, which really don’t make a lot of sense,” Mr Dauphinais recalls. “A lot of that would not have been reported at the time, and we figured that was all over and above what the [official numbers] said. “When we bought Alliance, Cushing was reported to be at 87 per cent of capacity, but since the 13 per cent was really operating margin, it was really completely full.”

In a normal world, some of the oil producers who signed long-term drilling contracts in the good years would have gone bankrupt from 2011 on, but they kept getting refinanced. As Tom Ward, a longtime exploration and production person from Oklahoma City, says: “Quantitative easing really was driving the whole energy market after 2008. The producers had three- to five-year contracts for rigs left from 2014 and before, and they had to pay whether they drilled or not.” So they continued to drill until this past year Recommended US oil majors lose money on home oil and gas production Bullish oil bets favour Brent over US WTI contract US shale investors tire of ‘growth at any cost’ model Not all the wells were completed, as in fracked, cased and connected to the gathering systems. That means that oil and gas were not only stored in above-ground tanks, but in drilled but uncompleted wells that are only gradually being finished and hooked up to the markets. Over the past year, equity and bond investors have forced onshore E&P companies to be more disciplined about their capital spending. That does not mean spending only their internally generated cash flow, of course. That would be like asking a prima ballerina to live within her salary. But the onshore industry is in much better shape than it was.

The US offshore industry in the Gulf of Mexico, on the other hand, has not really recovered. William New, president of New Industries in Morgan City, Louisiana, which makes pressure vessels, piping and the like for offshore projects, is still waiting for the good times to roll again. “The problem is even when [the customers] go bankrupt, the equipment doesn’t go away. In the 1980s it took 10 years to come back, and we are only in the third year,” he says. So there will be fewer offshore US mega-wells to upset the balance. With inventories having fallen even more sharply than the reported numbers, the oil and gas industry is not badly prepared for rising interest rates.

[Financial Times]



111 Comments on "US oil floated on cheap money"

  1. Davy on Tue, 31st Oct 2017 4:42 am 

    “Where exactly did he do that? Quotes please.”
    There is no room for all of them but this is the one I am refereeing to:
    “clog has a PINK swastika tattooed to his lower back so his Nazi fagboy buddies can look at it when they take him for a drive.”

  2. Cloggie on Tue, 31st Oct 2017 4:54 am 

    https://twitter.com/SamvanRooy1/status/924919160462807041

    Racism in action! Turks and Kurds go after each other in Hoboken/Antwerp/Belgium.

    Soon in a city near you.

    Multiculturalism, the stupidest thing invented after Bolshevism and from the same (((source))).

  3. Davy on Tue, 31st Oct 2017 4:54 am 

    “Americans after say 2025, same story.”

    At least we are a big nation. You are a pimple sized country with far too many people and now with 11% of your population procreating much quicker than you whining whites. Your nation will be over in a generation.

    MMIGRANTS TO PUSH NETHERLANDS POPULATION OVER 17 MILLION
    http://tinyurl.com/ydchaw9z

    “The Netherlands’ population grew by about 79 thousand people to a total of 16.9 million inhabitants last year. The growth is largely due to immigration – many refugees and migrant workers made the Netherlands their home in 2015, according to Statistics Netherlands. Statistics Netherlands expects that immigration will increase further this year, pushing the population over the 17 million border.”

  4. Davy on Tue, 31st Oct 2017 5:01 am 

    “Last country going down? More Hollywood rubbish a la Davy.”

    It might be the last, dumb dutchman. It will likely last longer than your little overpopulated dumb dutchy. If we are the last what does it matter we are all going down together. You, like mad kat, live that deadly serious game of denial that you old men face your mortality. This bleeds into your little world you inhabit. Two decrepit old men bashing others and talking up themselves. This obviously happens to some people as they age and they lose their mental and physical faculties. It is a desperate attempt to hang on to a youth gone.

  5. Cloggie on Tue, 31st Oct 2017 5:01 am 

    “Where exactly did he do that? Quotes please.”

    Ah I see, Davy is impressed by a sneer without any substance. That is what you folks thrive on, sneering.

    I am against immigration and race/culture mixing anymore.

    Hahaha, stupid Davy, who loves to suck apneakikes dick, now all of a sudden gets a little nervous and turns into a little racist/natzee himself after all. And you seriously think that anybody is going to listen to your wishes as if you own your own country?

    Of course you don’t: “it’s a big club and you ain’t in it” (G. Carlin)

    This is what is going to happen to you, or rather to those who are not in a position to cowardly flee to Italy with the tail between the legs, like you:

    http://tinyurl.com/yaxtf9ks

  6. Davy on Tue, 31st Oct 2017 5:06 am 

    This is awesome I have both the board pricks pegged and gutted. What’s da matter dumb dutchy am I under your skin. I thought you had a job lined up and would be posting less? Did that fall through? You are just like mad kat with his fantasy farm you two are incapably of work. It was likely just fantasy to begin with you know you were trying hard to talk yourself up.

  7. Davy on Tue, 31st Oct 2017 5:11 am 

    “Americans after say 2025, same story.”
    Same story?
    “Friedman: Almost All Countries In Europe Have Border Issues”
    http://tinyurl.com/y9aqkrjx

    “Europe, of course, has no solution to the problem. That we would be talking about an independent Scotland and Catalonia in 2017 would seem preposterous. No economist would see it as a rational discussion. Nations matter because Europe is merely a continent, and the EU is merely a treaty. It is a useful entity, and being useful is the only thing that justifies it. If it loses its utility, it loses its legitimacy. And that would also mean that the boundaries it has set would wither and die. Almost all current nations in Europe have border issues and some parts that want to be independent. Most are quiet at the moment. But they are watching Scotland and Catalonia. And they know where border issues in Europe lead.”

  8. Cloggie on Tue, 31st Oct 2017 5:47 am 

    Cloggie 100% renewables is a total fantasy. And Jackobson’s 100% renewable paper that Obama, Leo and Bernie often sited. Was just debunked this year by 29 scholars at MIT…Re

    Links please.
    I’m in a “killing mood”.lol

  9. Cloggie on Tue, 31st Oct 2017 5:56 am 

    “Europe, of course, has no solution to the problem. That we would be talking about an independent Scotland and Catalonia in 2017 would seem preposterous. No economist would see it as a rational discussion. Nations matter because Europe is merely a continent, and the EU is merely a treaty. It is a useful entity, and being useful is the only thing that justifies it. If it loses its utility, it loses its legitimacy. And that would also mean that the boundaries it has set would wither and die. Almost all current nations in Europe have border issues and some parts that want to be independent. Most are quiet at the moment. But they are watching Scotland and Catalonia. And they know where border issues in Europe lead.”

    OMG, Davy again, putting the boot of a (((Friedman)) in his neck, like the good Friday that he is.

    Friedman loves to see Catalan and Scottish independence in terms of “economy”, that is money, the only categories Americans can think. Identity doesn’t exist in his.

    Catalan independence is just called off with its “leader” applying for asylum in Belgium and a massiv counter demonstration in Barcelona of 300,000 or more.

    Scottish independence, in itself rejected 45-55, has a new lease on on life because of Brexit.

    Currently, the EU has broad support in Europe, despite everything, first and foremost its immigration policy dictated by the likes of Soros, carried out by US vassals in Europe. But vassals don’t have eternal life:

    http://touristinromania.net/wp-content/uploads/2014/03/ceausescu-executie.jpg

    Won’t be different with Merkel, the worst German “leader” ever.

    Everybody in Europe senses that America is on the way out and that the EU is the vehicle to bring Europe back to were it belongs: on top of things and that with Russia, we can “liberate America back”, so to speak.

  10. Davy on Tue, 31st Oct 2017 6:01 am 

    “Links please. I’m in a “killing mood”.lol”

    Prove it bitch. It is you who lives in the fantasy future yet to be proven renewable world.

  11. Davy on Tue, 31st Oct 2017 6:09 am 

    “Everybody in Europe senses that America is on the way out and that the EU is the vehicle to bring Europe back to were it belongs: on top of things and that with Russia, we can “liberate America back”, so to speak.”

    LOL, everybody????, typical dumbass talk kind of like the 10MIL men under arms on the Korean peninsula from a few days ago. That exaggeration you finally admitted to. This is your problem dumb dutchy, you sense the other guy is on the way out as the floor is crumbling under your feet. Keep dreaming of empire and golden decades. Peons like you need false hope and fantasies or your fragile egos collapse in depression. You have no backbone hence your lack of self-esteem witnessed by your attempt to lower others to advance your own self-reflection. IOW you are a fraud personally and intellectually.

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