Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

The U.S. Shale Oil Industry Bloodbath Spreads

By Steve St. AngeloCommoditiesDec 20, 2018 08:11AM ET
www.investing.com/analysis/the-us-shale-oil-industry-bloodbath-spreads-as-oil-price-meltdown-continues-200369785
The U.S. Shale Oil Industry Bloodbath Spreads
By Steve St. Angelo   |  Dec 20, 2018 08:11AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

There is no better way to describe what is currently taking place in the U.S. Shale Oil Industry, then a bloodbath. Unfortunately, the situation was bad enough when the shale oil industry prices were 30-40% higher, but 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). 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 (OTC:BKEN).

According to the oil price quotes from The OilPrice.com, the Williston Sweet crude fell to a gut-wrenching low of $20 from $39.55 back on December 1st.

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 Equal 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:

Crude Oil Hedgers Position
Crude Oil Hedgers Position

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.

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:

Light Crude Oil Dec 7
Light Crude Oil Dec 7

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:

Light Crude Oil Dec 19
Light Crude Oil Dec 19

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.

According to my analysis, the majority of the shale oil industry continues to spend more money than they make. Why would anyone invest in a company that continues to lose money?

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 $67.95 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.

Original post

The U.S. Shale Oil Industry Bloodbath Spreads
 

Related Articles

Phil Flynn
Energy Report: Dangerous Gains By Phil Flynn - Apr 09, 2021 4

While the world becomes more dangerous, the oil market gets quiet. Tensions between Russia and Ukraine as well as the Israeli-Iranian shadow war, is creating a situation where...

Yuri Papshev
Brent Oil Trading Recommendations By Yuri Papshev - Apr 09, 2021 1

Despite the decline, Brent Oil is traded in the bull market. The price found support at 62.70, while technical indicators OSMA and Stochastic turned up on the daily chart,...

The U.S. Shale Oil Industry Bloodbath Spreads

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (3)
Ryan Oswald
Ryan Oswald Dec 20, 2018 9:37PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
great article/analysis like always thanks!
Daniel Yeo
Daniel Yeo Dec 20, 2018 7:33PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
but what about OPEC+ cutting production? I believe there's some balancing effects.
rich bar
rich bar Dec 20, 2018 10:55AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
thank you for sharing, great article
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email