The U.S. Shale Oil Industry Bloodbath Spreads As Oil Price Meltdown Continues

There is no better way to describe what is currently taking place in the U.S. Shale Oil Industry, than a bloodbath.  Unfortunately, if the situation wasn’t bad enough for the shale oil industry when prices were 30-40% higher, today it’s a complete disaster.   While some might think that a bit of an overstatement, I can assure you that these low oil prices are doing serious damage to an already weakened shale industry.

The major problem with the U.S. shale oil industry from the get-go was that the huge decline rates, indicative of horizontal fracking, devour a massive amount of capital.  Furthermore, capital expenditures that are used to frack a shale well is a much different animal than building a gold mine.  Because shale oil wells experience a 75-80% decline rate in the first few years, the industry must continue to spend even more capital to offset oil production losses.  However, capital spent on a gold mine will last for 15-20+ years before the deposit is depleted.

So, capital spent in the U.S. shale oil industry is not really a long-term investment as would be a gold mine.  Thus, the capital expenditures in the shale oil industry behave more like “COSTS” than “INVESTMENTS.”

The Oil Price Meltdown Continues

If energy analysts thought oil prices were getting a bit oversold last week, this week the market has now entered into a “Meltdown phase.”  A few weeks ago, I published this chart showing the change in various oil spot prices since the peak in early October:

All across the board, oil prices fell considerably.  The worst performer in the group was Tar Sands Oil (Western Canadian Select) when bottlenecks of too much oil in Alberta with no place to go pushed prices down to the low “teens.”  However, the Alberta government finally stepped in and announced a mandatory cut in production (insisted by the tar sands industry) which had a dramatic impact on the Western Canadian Select spot price.  The very next day, the price more than doubled.

I believe the Western Canadian Select oil price reached $28 before correcting lower to $21 with the downward pressure in the overall market.  Here is a new update of the chart above.  As you can see, the BIG LOSER now is in the Bakken.

According to the oil price quotes from The OilPrice.com site, the Williston Sweet crude fell to a gut-wrenching low of $20 from $39.55 back on Dec 1st.  I encourage my readers to check out the OilPrice.com site for their excellent articles and the over 100+ spot prices.  You can look at all the various spot prices here: OilPrice.com Oil Price Charts.

So, the irony of the figures in the chart above is that the higher-cost unconventional oil supplies out of the Bakken and Alberta tar sands are receiving the lowest price.  This is like buying a Mercedes but trying to pay for it with a salary as a Fry Chef at McFats Burgers-R-Us.  At some point, the lousy economics will finally catch up.

The Oil Price Meltdown = Shale Oil Industry Bloodbath

As the oil prices continue to fall, the bloodbath spreads to more of the shale industry.  I will explain why in a minute, but let’s look at some of the details behind oil meltdown.

The falling oil price wasn’t a surprise to me.  However, it took a bit longer to occur.  I started writing about the coming oil price crash in the early part of 2018 when the stock market was at its all-time highs.  In early 2018, the Commercial net short position in oil was a record 761,000 contracts.  However, as the oil price finally declined, the Commercials liquidated their short positions and now only hold 331,000.  But, when the oil price reached a low of $28 in January 2016, the Commercial net short position fell to 169,000 contracts.  So, we can see that there is still plenty of room for the oil price to drop as Commercials still hold 162,000 more net short contracts then they did in January 2016:

For those new to understanding the commercial net short position, the higher the number of contracts the higher the oil price goes.  When the oil price starts to decline, the Commercials cover or liquidate their short positions.  So, the graph of the oil price (BLACK LINE) and the Commercial net short position (BLUE LINE) are inverted; they run opposite to each other.

Okay, let’s take a look at the next two monthly oil price charts.  I posted the first chart on December 7th showing how the oil price was stuck between two critical technical levels:

I stated that there was a “Tug of war” between the traders, but in the end, the bears would likely win as the conditions in the oil market would continue to weaken in the winter months.  Here is an update of the chart:

With the oil price now firmly below both of those technical levels (50 MA – BLUE & 300 MA – ORANGE), it seems that it will move toward the next level (400 MA – PINK), to the lower $40’s.  If the oil price falls below that level, it can quickly drop to $40 or lower.  However, nothing goes down in a straight line, and we could see higher oil prices first.  But, if the oil price does fall to $40, make sure you send some Holiday Care Packages to the shale oil companies… they’ll need it.

Now, It doesn’t take a rocket scientist to figure out that investors in the Shale Industry must be dumb as a box of rocks.  Please understand, I don’t mean to be disrespectful, but enough is enough.  According to my analysis, the majority of the shale oil industry continues to spend more money than they make.  So, why would anyone invest in a company that continues to lose money?  I gather if rocks could talk, they would probably be offended that I compared them with shale energy investors.

Regardless, energy analyst Art Berman also puts the shale oil industry into proper perspective.  In one of his recent charts, he showed how only 33% of the companies producing shale oil made positive free cash flow.  The data in this chart was based on the average oil price of $69.75 in the third quarter of 2018:

Chart by Art Berman with my current oil price line annotation

I added my own line with the new current $47.50 oil price.  Any company above that line is now losing money.  Which means the 33% of companies making money are now more like 15% or 3-4 companies at the most.  Or, it could be even worse than that.  So, I imagine Mr. Berman will probably update that chart showing a lot more RED BARS.  Furthermore, the situation for the companies in the Bakken will be hit much harder due to the huge reduction of the Williston Sweet oil price versus the West Texas Oil price.

And while fourth-quarter results in the shale patch will be impacted negatively due to lower oil prices, I believe the financials will be even worse in the first two-quarters of 2019.  We must remember, oil prices were still quite high in October, so the average price for Q4 won’t be that low.  However, next year, the average oil price could be in the low $40’s.

Well, it looks like Santa Claus won’t be bringing any gifts or good cheer for the U.S. Shale Industry this year.

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20 Comments on "The U.S. Shale Oil Industry Bloodbath Spreads As Oil Price Meltdown Continues"

  1. Hard to feel bad for all the shale drillers. They did this to themselves.

    • Who did this to the bankers who kept extending and enlarging the loans?

      • that’s the part I’m not 100% sure. What I’ve heard so far is that the bankers are happy to keep lending because they’re making money on fees and the interest that’s being paid so far and as long as the payments are made then everything is great. But what happens once the payments stop and the bankers start losing their capital? I don’t know. My theory (only a theory) is that in bankers’ minds the higher the loan amounts go the more systemic risk they’ll pose to the wider economy hence the greater chance of getting bailed out by the government. Which government will let the fracking industry go belly up if it means a trillion dollar collapse + national security + energy independence … you get the picture.

  2. Michael Kohlhaas | December 20, 2018 at 9:50 am |

    This is just the beginning. The whole crap will crumble down! 2019 will be spectacular!

  3. I suspect it has more to do with the MBAs/CEOs who think in an economic vacuum. Economics is complete BS. I have far more respect for the theoretical astrophysicists who are actually very limited in their ability to test their theories.
    In contrast, the financial/monetary/business models are littered with the corpses of failures of fiat currencies/businesses/societies interspersed with manias and collapses. You’d think these egg heads would learn, but their stupidity is reinforced.

    “Investors” looking for yield in an environment of artificially created zero interest fiat, and with no knowledge of energy use/efficiency, drilling, mining, refining, transportation, geology, demographics etc.

    Of course there is going to be a major clusterfk.

    • dont be so naive. do you recognize that this egg heads got everything for free for the last 45 years. everything that was build for the last 45y egg heads build for themself for their own good for free. afcourse they did know how it gonna end when they put fiat on. But now they got a problem coz china and russia dont wanna play this transit with US. Im not saying that russia or china are good, what im saying is that US is a chicken without a head right now. not know what to do.

      Hey look like double top was a play. so in the meantime when this collapse is happening we can guess how many flashcrash will be in oil and stock market until the end of januar.

  4. Steve, What is your take on palladium and platinum? They have reached inflection points.

    • Ed,

      I believe both platinum and palladium will not do well in a Deflationary Economic Recession-Depression. However, platinum may not fall as much in percentage terms as palladium, because palladium’s price has surged due to record automobile gasoline engine manufacturing. Platinum is used more in Autocatalysts in diesel engines while palladium is used for gasoline.

      Due to the increased demand for palladium and the ongoing large annual deficit, its price has been driven up to new highs. However, when the global economy rolls over, I see the palladium price falling a great deal more than platinum.

      I would stick with Gold & Silver.

      steve

      • @SRSrocco

        I think they are going to keep lending money no matter how much money is lost. Its going to be an endless spigot that they will keep printing.

        How do you think they are going to stop doing what they are doing?

        Since industrial civilization depends on oil currently so they are going to keep losing money as much as they could and nothing but technology being unable to extract anymore oil is going to stop that.

  5. BLOODBATH

    A very apt description Steve.
    The situation in the Canadian oil province of Alberta, has gotten so serious that the Federal government has announced a $1.2 billion relief program for the countries oil industry.
    The bond market has announced by its price movements, that the looked for recession is here.
    The question now is, will this be another 2008 or more serious?
    I have a sense of foreboding that this will not be the same. Far from it. This time will be the “Great Reset” after a globally deep depression. Do we get through this without major military conflict? The odds don’t look good.

  6. Ok, understand the logic of what is going on for the price of oil Vs cosy of production.
    How much of this calamity of low oil price is due to market demand Vs opportunistic price manipulation
    by those with the financial means and knowledge to control the price.

    If the price is being artificially manipulated to fill the pockets of the manipulators surely it is in the national interest to regulate the oil price for the better good?

  7. As dr. Antonio Turiel forecasted when prices go down supply will be destroyed, when prices go up demand will be destroyed. Now it seems we are in the supply destruction phase and only a big injection of public funds can save the oil industry. Are we going to see Trump nationalizing the oil industry ? This would be socialism for the wealthy in its harshest form…
    All these oil companies may be the future General Motors…

  8. Merry Christmas Steve!
    Thanks again for all of your work in 2018. I look forward to reading more great information from you in 2019.
    Crayfish

  9. The spice must flow. They monetize, through your pension funds, your credit cards, your savings, your buying power, your unicorn mindset. They will monetize, through your sisters, your parents, your debts, your believes. They will monetize, through your backyard, your rabbits and your porn pics. They will monetize, through the deepest crotches in your well hidden cigar box. They will monetize until the Fogs of Fiat dissapear….

    Same as it ever was, on an unprecedented scale, with 7 billion people on finite recources and leveraged iou’s…

  10. Thanks Steve.

    ‘Bloodbaths’ are wealth-harvesting operations, when Physics doesn’t allow any more excess Energy yield.

    Analysts shouldn’t see them a bad events, but happy ones, like getting massive unsecured bank loans.

    Is it the Shale Oil industry alone? No. The video below shows the state of cities and towns in Iraq, a country that exports 6 million gold-grade barrels of crude oil a day, including smuggled supplies.

    In Iraq the locals believe their miserable, often deadly, reality will become even worse over time, as the country increases its oil-production and exporting capacities, planned to reach the 10 mil b/d in near future.

    ‘Bloodbaths’ in Shale Oil industry must turn more severe and frequent overtime, too – being the only product that industry can produce – by Physics!

    https://www.youtube.com/watch?v=SA0FyHHVBu0

  11. Carl Richardson | December 21, 2018 at 3:32 pm |

    Here is some recent info on Shale Oil production :
    ” The EIA said in its latest Drilling Productivity Report that it expects U.S. shale production to top 8.1 million barrels per day (mb/d) in January, rising by a massive 134,000 bpd month-on-month. The Permian alone will see production rise by 73,000 bpd next month. By way of context, the gains in the Permian are bigger than even some of the large monthly declines that we have seen in Venezuela . ” This was taken from Oilprice.com

    • DisappearingCulture | December 21, 2018 at 6:59 pm |

      Increase in production = multiplied losses.
      What a bizarre world; more work done to lose more $

  12. Oil is caught is the perfect storm right now. It will come back, the never ending cycle of being either priced too high, over shoot on the upside or priced too low, over shoot on the down.
    Smile at the filing station while you can. It can’t last.
    Author is correct for the time being, excellent example of an industry in turmoil.

  13. A couple of items to consider
    -revenue vs expenses are not matched due to 2000 uncompleted wells.
    -Technology improvement year to year are offsetting the decline rates discussed. Also you are not considering, after draining a reservoir, most of these wells in Permian have multiple pay zones, so they just move uphole and recomplete. Your decline rate comments is not recognizing this fact.

    -Companies are decreasing the cost to drill these wells as can be seen by several of companies you mention in financial discussions of their quarterly reports.

    Thought provoking article, not sure of your discussion on net commercials prediction as way to many traders which have nothing to do production vs. consumption

    Happy New Year

  14. I agree with the comments that there is an endless supply of “money” for fracking shale oil. Regardless of whether it is profitable or not. When it gets too expensive for the private sector, the government will subsidies it. The resource is too valuable to a county entirely dependent on oil. For the only metric that matters is EROEI. Once that gets down below 3:1, we may finally hit the wall.

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