Masters Of War

Come you masters of war You that build all the guns You that build the death planes You that build all the bombs You that hide behind walls You that hide behind desks I just want you to know I can see through your masks. You that never done nothin' But build to destroy You play with my world Like it's your little toy You put a gun in my hand And you hide from my eyes And you turn and run farther When the fast bullets fly. Like Judas of old You lie and deceive A world war can be won You want me to believe But I see through your eyes And I see through your brain Like I see through the water That runs down my drain. You fasten all the triggers For the others to fire Then you set back and watch When the death count gets higher You hide in your mansion' As young people's blood Flows out of their bodies And is buried in the mud. You've thrown the worst fear That can ever be hurled Fear to bring children Into the world For threatening my baby Unborn and unnamed You ain't worth the blood That runs in your veins. How much do I know To talk out of turn You might say that I'm young You might say I'm unlearned But there's one thing I know Though I'm younger than you That even Jesus would never Forgive what you do. Let me ask you one question Is your money that good Will it buy you forgiveness Do you think that it could I think you will find When your death takes its toll All the money you made Will never buy back your soul. And I hope that you die And your death'll come soon I will follow your casket In the pale afternoon And I'll watch while you're lowered Down to your deathbed And I'll stand over your grave 'Til I'm sure that you're dead.------- Bob Dylan 1963

Sunday, November 29, 2015

oil & oil products glut increases again, & why the frackers aint bankrupt yet..

it seemed like a slow week in the fracking patch, but when it's a holiday week like this one was, it's hard to tell if it was really slow, or if whatever news that might have come out just wasn't being written up because all the reporters cut out in the middle of the week...even the regular Friday release of the rig count data was relegated to Wednesday, so we only have 5 days of news on that, although we did manage to notch the largest drop in the total rig count in the past 7 weeks over that short span....there was certainly plenty of oil & gas related news in the conflict zones of the Ukraine and the Middle East, such as our NATO ally Turkey's shooting down a Russian jet after Russia had taken out a convey of ISIS oil tankers that were delivering stolen oil to Bilal Erdogan, the son of Turkey's president, but since that kind of news is outside of the purview of our focus on fracking in these letters, we'll just relegate the stories on all of that to the links below...so we'll just catch up on an old issue i've been meaning to get back to while we're waiting for the semi-annual OPEC meeting next Friday, and cover what little new fracking patch data we do have for this week..
two months ago, when explaining the oil industry's debt service needs and cash flow, we forecast that most of the fracker's banks lines of credit would be cut off when their economically recoverable reserves were reevaluated at current oil prices in their October semi-annual review by the banks, and because, for the most past, their cash flow couldn't pay the 11% interest being demanded for new energy bonds, most would be forced in bankruptcy by Thanksgiving....well, Thanksgiving has come and gone, and most of the frackers are still up and running, and continuing to lose money hand over fist, like we saw when we reviewed their third quarter results two weeks ago....so what did i get wrong, and why are these unprofitable enterprises, some losing two dollars for every dollar they take in, still afloat? 
basically, what i hadn't counted on was that the banks would step in and bail the insolvent frackers out, putting themselves at risk for their losses....the first inkling we had about what was going down was in an October Financial Times article (paywalled, but transcribed here) which reported that "the covenants on 72 out of the 74 loans to the oil and gas sector had recently been modified,” obviously suggesting that without such modifications, the original terms of the loans would have probably called for immediate repayment or default, likely because the value of the oil reserves on which the loans had been made was now half what it was when credit was first extended, or as the FT put it "banks are quietly relaxing the borrowing conditions, to avoid the embarrassment of seeing loans it has made go into default."
of course, these risky loans have not escaped the attention of the bank regulators...in a review earlier this month of loans made by federally regulated institutions, federal regulators gave a negative classification to $372.6 billion out of $3.9 trillion of the loans reviewed, specifically citing worry about oil and gas loans that received the three most negative ratings of "substandard," "doubtful," and "loss" ....the press release from the Fed on the problem, titled Review Notes High Credit Risk and Weaknesses Related to Leveraged Lending and Oil and Gas, was typical Fedspeak obfuscation,  with warnings to the banks veiled in language like "structural deficiencies found in loan underwriting...warrant continued attention", noting an increase in weakness among credits related to oil and gas exploration, production, and energy services following the decline in energy prices since mid-2014...and just this week, the chairman of the Federal Deposit Insurance Corp warned that "[bank] Loan portfolios in regions that depend on oil and gas revenue are increasingly at risk due to the significant decline in energy prices,”...these statements might seem like pablum compared to the political rhetoric we're used to, but considering the sources, who normally take a 'speak no evil' approach to their charges, they are clear messages to the banks who are making those loans; as the Wall Street Journal says, "Bankers likely will have to answer questions about these topics when their examiners come to visit in the coming months"....simply put, we've just been through a financial crisis on the back of housing loans going bad, and no one in authority wants to see another banking crisis on their watch...
The Latest Oil Stats from the EIA
the weekly oil patch data published on Wednesday by the US Energy Information Administration indicated crude oil imports increased significantly, wellhead production of oil was down a bit, refineries consumed more of that production and those imports than last week, but we still had a nearly million more barrels of crude leftover at the end of the week to add to our accumulating glut of oil in storage...in the week ending November 20th, our volatile imports of crude oil rose by 365,000 barrels per day to 7,333,000 barrels per day, just about reversing last week's drop to a five month low of 6,968,000 barrels per day...but this week's imports were still 1.9% below the 7,473,000 barrels per day we imported in the 3rd week of November last year, and brought our 4 week average of imports up to 7.2 million barrels a day, still just 0.1% less than the same 4 week period last year...
on the other hand, our field production of crude oil slipped to 9,165,000 barrels per day in this weeks report, a decrease of 17,000 barrels per day from the production rate of 9,182,000 barrels per day during the week ending November 13th...this week's output was just 1.0% more than our production of 9,077,000 barrels per day during the 3rd  week of November last year, and it's now 4.6% below the modern weekly record production of 9,610,000 barrels per day that was set in the first week of June this year...however, over the past eleven weeks, the output of crude oil from US wells has held steady in a narrow range, fluctuating less than 1%, between 9,096,000 barrels per day and 9,185,000 barrels per day...
meanwhile, refineries continued to ramp up following their fall maintenance downtime, as crude oil used by US refineries jumped by another 304,000 barrels per day to 16,380,000 barrels per day during the third week of November, which is now more than a million barrels a day crude than they were processing 5 weeks earlier...this week's crude oil refinery inputs were also 2.7% above last year's pace, and if this year follows the season pattern, they'll continue at this level or higher till year end, as the refinery utilization rate rose to 92.0% from 90.3% a week earlier....oddly, though, both production of gasoline and production of distillate fuels fell, with gasoline output down 14,000 barrels per day to 9,544,000 barrels per day, and output of distillates down 9,000 barrels per day to 5,023,000 barrels per day...however, production of kerosene type jet fuels rose by 58,000 barrels per day to 1,648,000 barrels per day and production of propane/propylene feedstocks rose 40,000 barrels per day to 1,668,000 barrels per day..
however, it now appears that since refineries are running flat out again, they're producing way more products than are being used or exported...our week ending supplies of gasoline jumped by 2,478,000 barrels to 216,732,000 barrels as of November 20th, more than 10 million barrels above the year ago 206,424,000 barrels, and well above the upper limit of the average range for this time of year...stockpiles of propane/propylene rose by 1,733,000 barrels to 106,202,000 barrels, a new record high that's almost twice the 58,372,000 barrels of propane/propylene inventories we had stored in the 3rd week of November two years ago...distillate fuel inventories (ie, diesel fuel and heat oil) were also up by more than a million barrels, rising from 140,318,000 barrels last week to 141,364,000 barrels with this report, and are now in the upper half of the average range for this time of year...and inventories of kerosene type jet fuels rose by 655,000 barrels to 37,216,000 barrels, but are still the only major refined product in the lower half of the average range for November, as the weekly Petroleum Status Report (62 pp pdf) tells us that over the last four weeks, jet fuel products supplied were up 4.1% compared to the same four week last year...
and finally, even with the increase in refinery throughput to above normal levels, the increase in our oil imports left us with nearly a million more barrels of crude oil sloshing around the country than we could use, meaning we also had to find space to store more of that...hence our inventory of crude oil in storage, not counting what's in the government's Strategic Petroleum Reserve, rose for the 9th week in a row, increasing from 487,286,000 barrels on November 13th to 488,247,000 barrels on November 20th, which is 105.2 million more barrels, or 27.5% more oil in storage, than the 381,078,000 barrels we had stored at the end of the third week of November a year ago, which at the time was an all time high for November...so we now have the most oil we ever had stored anytime in November in the 80 years of EIA record keeping, which had never seen more than 400 million barrels stored before this year, adding nearly 34.3 million barrels to our stores in the last 9 weeks, and we're closing in on the all time inventory record of 490,912,000 barrels set on April 24th this spring...
This Week's Rig Counts
as we mentioned in opening, active drilling rigs fell by the most since the week ending October 9th in this holiday shortened week that also saw oil and gas rigs both reduced in the same week for the first time since then....Baker Hughes reported that the total active rig count fell by 13 to 744, with their count of active oil rigs down by 9 to 555 and their count of active gas rigs down by 4 to 189; in 4th week of November a year ago, there were a total of 1572 oil rigs, 344 gas rigs, and one miscellaneous rig in use in the US...12 of the 13 rigs that were pulled this week were land based, while one was removed from an inland lake in southern Louisiana, where only 1 remains, down from 12 rigs on inland waters a year ago...Gulf of Mexico rigs were unchanged this week at 30, down from 52 a year earlier...
horizontal drillers took another big hit this week, as the net count for active horizontal rigs was down by 12 to 569, which was down from the 1371 horizontal rigs that were operating on the 26th of November last year...the number of directional rigs was reduced by 3 to 66, which was down from the 194 directional rigs that were deployed at this time last year..but two additional vertical rigs were started up, bringing the count of the conventional wells being drilled up to 109, which was still well down from the 352 vertical rigs that were working a year earlier..
of the major shale basins, the Permian of west Texas again saw the largest reduction, with 4 rigs pulled, leaving them with 221, which was down from 566 in the same week last year...the Eagle Ford of South Texas saw 2 rigs idled this week, leaving them with 73, which was down from 209 a year ago at this time...single rig additions were also made in five other major basins: the Barnett shale of the Dallas-Ft Worth area, the DJ-Niobrara chalk of the Rockies front range, the Granite Wash of the Oklahoma-Texas panhandle region, the Marcellus of Pennsylvania, and the Williston of North Dakota...those cuts left the Barnett with 7 rigs, down from 25 a year earlier, the Niobrara with 26 rigs, down from 62 a year earlier, the Granite Wash with 12, down from 59 rigs year ago, the Marcellus with 42, down from 82 a year earlier, and the Williston with 62, down from the 191 rigs that were drilling into that basin during the last week of November last year....in addition to those basins removing rigs, the Mississippian lime of the Kansas Oklahoma border saw 3 rigs added this week; they now have 12, which is still down from 74 last year at this time..
the state rig count tables shows Texas with the greatest reduction, down by 6 rigs to 336, which is down from 901 rigs working Texas fields a year ago...not included in the major basin counts, three rigs that had been deployed in drilling into shallow shale plays in Illinois were also removed, leaving Illinois frack free, and rig free for the first time this year...there were several states that saw only one rig removed: Alaska, California, Colorado, Louisiana, North Dakota, Pennsylvania, and Wyoming...those reductions left Alaska, the only state to see a year over year increase, with 12 rigs, up from 9 rigs a year ago, California with 9 rigs, down from 42 a year ago, Colorado with 28, down from 72 rigs a year ago, Louisiana with 64, down from last year's 110, North Dakota with 62 rigs, down from last year's 180, Pennsylvania with 29 rigs, down from last year's 56, and Wyoming with 20, down from last year's 60...states seeing drilling rig increases were New Mexico, where they were up 2 to 40 active rigs, but still down from 99 a year earlier, and Oklahoma, where they added 1 rig and were up to 82, but were still down from the 214 rigs working Oklahoma in the last week of November a year ago...btw, Oklahoma is now the most seismically active place on earth, as their year to date earthquake count has now topped 5,000...apparently they don't know when to quit...

(NB: more links here)

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