the movement of oil prices was again the overriding story affecting the fracking patch this past week, as they fell by more than 6% from last week on Monday, hit the same 6 and a half year lows on Wednesday, only to rise over 17% over Thursday and Friday to close higher for the first time in the last 9 weeks...after falling nearly 5% to $40.45 a barrel last week, oil prices crashed with the rest of the global markets on Monday, with the near term contract briefly trading with a 37 handle before steadying and closing at $38.24...oil prices then recovered Tuesday when the western stock markets rallied, closing at $39.31, only to slip back to close at $38.60 on Wednesday...with word of a Chinese stimulus and rising global markets continuing on Thursday, oil prices jumped 10% as "the shorts", or those who had sold oil that they didn't own earlier in the week, were forced to cover their positions (ie, buy oil to cover what they sold) at increasingly higher prices...the short covering rally continued on Friday, adding another 6% to oil prices, as the media attributed the price increase to Saudi military action in Yemen and a tropical storm approaching Florida as a threat to the Gulf of Mexico...
so you can all see what that price swing looked like in relationship to the recent collapse in oil prices, we'll include a chart below that tracks the price of the current oil contract on the NY Mercantile Exchange over the past 3 months…at the beginning of that period, you can see that oil had been trading around $60 a barrel, a price it had reached and stabilized at in early April, after dropping into the 40s in both January and March, which precipitated the shutdown of half the oil rigs that had been working in the US before the OPEC meeting that started the oil price crash...you can see that the $60 price level broke down in early July, when a confluence of issues in Europe and Asia made a global slowdown appear likely, and that oil prices have fallen steadily since...while we're looking at that, also note the little red and green rods at the bottom of the chart, which show the volume of trading on up (green) or down (red) days for each day for this contract (for delivery of oil in October)...notice that the volume of oil contracts traded spiked in early August, indicating a large number of contracts changing hands near the $45 a barrel price...that was the same price that oil had bottomed at in January and March, and apparently a lot of traders were betting that the same would happen here in August, but they were overwhelmed by those selling this paper oil...
now, although the media will attribute every move in the price of oil to some fundamental change, such as a buildup of oil inventories or a tropical storm threatening oil platforms in the Gulf, it seems pretty clear that the recent action on oil prices has largely been driven by bets placed by traders, which include those working the trading desks in the banks and commodity houses, rather than any fundamental change in the physical commodity or the demand for it....according to data from the Commodity Futures Trading Commission and NYMEX, hedge funds had accumulated one of the largest short positions in U.S. crude on record over the last two months, selling the equivalent of almost 160 million barrels of oil that they didn't own, in the hopes that they could buy oil back cheaper at some date in the future and deliver on their commitment to sell with a profit...once the price of oil started rising with the other global markets, they were on the wrong side of that trade and forced to buy oil to cover their positions, driving the price up farther than it would have otherwise risen...this short covering may not be over yet (there's no clear data on current positions) so we may see another few days or even weeks of volatile oil prices before they settle into a price range that is more representative of supply and demand factors rather than of gambling strategies...
nonetheless, even though the current oil prices are driven by market gamblers, it is those prices that the drillers must sell their oil at and the refineries must buy theirs at, except insofar as either drillers or users had already entered into a contract to buy or sell oil at an earlier price...at these prices, there is no doubt that the frackers are losing money on each barrel of oil that they produce, once all their overhead and expenses are accounted for...but stopping drilling and/or stopping production is not an option for them; they need to keep pumping out oil and selling it at whatever price they can get just to pay the interest on their debts; ie, whatever bank loans and or bond issues they had floated to finance their operations...at least 10 of them have gone bankrupt already, no doubt most of the rest of them are already zombies, virtually dead but still drilling and pumping out oil nonetheless...when we looked at 2nd quarter reports a few weeks back, most were already posting losses with oil at $60 a barrel; no doubt they're all operating in the red with oil prices at $45...
furthermore, their finances can only get worse from here...data compiled by Bloomberg this week indicates that the oil industry has $550 billion in bonds and loans that are due for repayment over the next five years, with bonds from 168 of those companies in North America, Europe and Asia now yielding more than 10%...of that, $72 billion in oil-related debt is maturing this year, $85 billion is due in 2016 and $129 billion matures in 2017...many of those bonds were originally sold to yield 3% or 4% when the oil patch was booming; so when they come due and must be reissued, the interest that they're paying on their bond principal will triple...in addition, many have borrowed money from banks based on the value of their recoverable reserves when last reviewed in October, when oil prices were still above $80 a barrel...if oil prices are still this low when the banks do their nextreview of oil company economically recoverable reserves two months from now, their bank lines of credit will be withdrawn...
it appears there was little in the oil production or throughput stats that influenced this week's price swings, because although a few key metrics reversed last week's changes, they generally moved back into the range we'd seen them in all summer, when oil prices first began to fall...US field production of crude oil fell slightly, from 9,348,000 barrels per day in the week ending August 14th to 9,337,000 barrels per day in the week ending August 21st...although that's about 3% off the early June peak, it's still 8.9% higher than our output during the same week last year, when our overproduction first started putting downward pressure on oil prices...meanwhile, our imports of crude oil fell by 839,000 barrels per day from their 18 week high of last week to 7,199,000 barrels per day in the week ending August 21, which brought the 4 week average of imports down to 7.5 million barrels per day, 1.7% below the same four-week period last year...with the Whiting Indiana refinery still down, US refinery inputs of crude oil fell for the 3rd week in a row, dropping from 16,775,000 barrels per day in the week of August 14th to 16,658,000 barrels per day in the current report; still, that's 1.5% higher than the 16,418,000 barrel per day refinery inputs of the same week in August last year, so total output isn't suffering ...the weekly Petroleum Status Report (62 pp pdf) reports our refineries were operating at 94.5% of their operable capacity last week, which was down from the post recession record 96.1% of their capacity they were running at in the last week of July...
with production and imports down much more than refineries operations, oil companies made up the difference by drawing oil out of storage; our commercial crude oil inventories in storage, which doesn't include the federal Strategic Petroleum Reserve, fell from 456,213,000 barrels on August 14th to 450,761,000 barrels as of August 21st...that's still more than 24.3% higher than the 362,545,000 barrels of crude we had stored in the same week last year, and as you all know by now, the highest for this time of years in the 80 years that such records have been kept, a span that had never seen more than 400 million barrels of oil in storage before this year....
the price of oil has yet to put a major dent in the number of rigs the frackers have been operating....although Baker Hughes reported that the total rig count fell by 8 rigs to 877 in the week ending August 28th, the largest drop in their count since June 12th, it was gas rigs that were idled; total oil rigs rose for the 6th week in a row, as rigs drilling for oil increased from 674 last week to 675 this week, while rigs drilling for gas fell by 9 to 202....active oil rigs are now up by 37 from the 5 year low of 628 which they fell to on June 26th, but down 900 from the year ago count of 1575 and down 934 from the high of 1609 hit on October 10th of last year, while active gas rigs are down by 136 from a year ago and down by 154 from the recent peak of 356 gas rigs that were operating during the week of November 11th....
two more offshore platforms were idled this week, after 6 were shut down over the last two weeks, leaving 30 active, down from 66 offshore rigs that were operating a year ago....a net of 5 horizontal rigs were idled this week, bringing the fracking rig total down to 672, down from 1330 a year ago....including those offshore, 5 vertical well drillers were stacked, leaving 125 vertical rigs operating, down from 374 in the same week last year...meanwhile, 2 additional directional well drillers were put into operation, bringing the directional rig count up to 80, which was still down by 130 from the 210 directional rigs in use a year ago...
the major shale basins saw little change in total activity this week, as only the Eagle Ford in southeast Texas had two rigs idled, which dropped the count in that basin to 97, down from 203 a year earlier...on the other side of the state, drillers added 2 rigs in the Permian basin, which now has 255, down from 557 a year ago...but a total of 3 rigs were added in Texas oil & gas districts 5,and 10, which aren't demarcated by a major shale basin, so Texas ended the week up 3 rigs to 386, but still down from 900 rigs a year ago...outside of Texas, only 3 of the major shale basins tracked by Baker Hughes saw changes this week, with the Marcellus and Niobrara each dropping a rig, and the Haynesville adding one...
other than Texas, no state saw their rig count increase...the Louisiana rig count was down 6 to 71, which was also down from 117 a year ago...that included the 2 offshore, 2 on southern inland lakes, and 3 more on land in the southern part of the state, while one land rig was added in the north...other states shedding rigs included New Mexico, down 3 to 50, and down from 94 a year ago, Colorado, down 1 to 36 and down from 75 a year ago, Oklahoma, down 1 to 105, and down from 212 rigs a year ago, and Pennsylvania, down 1 to 35, and down from 55 a year ago...with 19 rigs, the rig count in Ohio was unchanged, as was the count in other states that weren't mentioned here...
(note: more fracking related news from this week can be found here)
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