Out In the Cold

September 4, 2018

 

Above is a  2017 photo of cold-stacked drilling barges in Morgan City, Louisiana; innocent bystanders of the US LTO drive-by-shooting where overleveraged oversupply of shale oil drove the price of WTI  down from the low $90's to the high $30's in late 2014-2015. Over 240,000 good men and women lost their oil related jobs as a result. Some have gone back to work since then, most have not.

 

America, of course, hates OPEC for its past transgressions on world oil prices, as it should. So the American shale oil industry, cleverly looking for a scapegoat to its already existing financial woes, blamed OPEC for increasing its production and causing the fall in oil prices. 

 

But as we can see in this chart below, that is clearly not true. OPEC oil production actually declined from 1Q 2012 to 3Q 2014:

 

Beginning in late 2009, and the onslaught of the shale oil phenomena, US production rose   steadily. America ultimately added 4.5MM BPD of light tight oil to a fairly "balanced" world oil market and by mid 2014 American production exceeded the KSA's production by nearly 2.4MM BOPD, below, and the price of oil collapsed.

 

                                                                          Please ignore the dumb reference to "Saudi America."

 

OPEC responded to this onslaught of American LTO production in 1Q 2015 by raising it's production, in essence to "regain market share" and slow US shale oil exports. 

 

So when folks blame OPEC for the price collapse in 2014 there is no evidence to support that other than OPEC simply failed to cut its production to make room for more American LTO, as though that was an obligation it had to American entitlement.

 

But by January 2017 OPEC, Russia, and most of the worlds oil producing countries did, in fact,  cut their production in hope of raising the worldwide price of oil. The American shale oil industry, in the spirit of global cooperation, responded by borrowing close to $170 billion more dollars and growing more LTO production. Accordingly, oil prices remained in the low $50's until 2Q 2017 when prices began to rise over supply concerns associated with lack of worldwide capital investment.   

 

I don't give a rats ass about OPEC, but the facts are that the only thing OPEC was ever "guilty" of in 2014 and 2015  was not cutting its production to make room for exploding American LTO in the world market. If the roles had been reversed, would America have cut its production to make room for exploding OPEC production? 

 

Hell no.  

 

Two of three semi-submersible rigs stacked  in the Port Aransas shipping channel in South Texas, 2017. In the foreground is a Euronav VLCC inbound to Corpus Christi to load out light tight oil from the Eagle Ford/Permian shale basins for exporting to foreign entities. Historically GOM oil gravities and sulfur contents are favorable to American refiners. US light tight oil is not and there is now not much left to do with it other than export it and huge discounts to Brent prices. So, while one faction of our domestic industry suffers, the other excels, but almost entirely on credit/debt.

 

 

 

 

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