Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Newest Crude Oil Price Myth

Commodities / Crude Oil May 08, 2015 - 10:42 AM GMT

By: ...

Commodities

MoneyMorning.com Dr. Kent Moors writes: We’ve seen massive shifts in crude oil prices over the past two days.

Of course, this has brought back some rather specious arguments by talking heads on TV and pundits spinning the next Armageddon scenario. The latest is about how rising oil prices will prompt more volume to come online from a particular type of well (called DUCs), sending oil into another tailspin.


I’ll deal with that in a minute.

First, however, you should take away from the past 48 hours one salient fact. Despite a selloff in the last hour or so of trading Wednesday (profit-taking after a huge spike up in crude prices), we stand today with the pricing floor for oil raised.

West Texas Intermediate (WTI), the crude oil benchmark set each day in New York, is a full $2 higher a barrel, while Dated Brent (the other major benchmark set daily in London) is up $1.23.

I expect some further pullback as traders wrestle with the collision among crude prices, rising interest rates, and the overall strength of the dollar. But one thing is clear. The ratcheting effect I have been talking about – in which oil has an overall trajectory in one direction (in this case up) despite volatility in the other – is taking shape.

But there are analysts who disagree with me, and that’s what I want to talk about today.

Let’s go.

Here’s the Tale Being Spun by the “Short” Gang

It involves the thousands of wells drilled by U.S. operators which could be quickly turned into completed wells. The reasoning concludes that any protracted rise in oil prices will prompt companies desperate for revenue to complete the wells and drown the market in new volume, thereby sending crude into another tailspin.

Well, I have one word for this bit of creative fiction.

Horsepucky.

Aside from yet another example of why these lost souls need to take a course in Drilling Oil 101… it is simply misinformation masking as analysis.

Companies have always had a program of drilling wells and then completing them later. This type of well is called a DUC (for “Drilled but UnCompleted).

When prices are in excess of $80 a barrel (last summer, for example) and domestic demand is rising, DUCs are of no consequence.

But when concerns emerge about excess production and low pricing levels, when these wells kick in becomes the topic of conversation.


No wonder that the “explain the situation in a 30-second sound bite” crew would latch on to it. Remember, most attempts to persuade you that the price of oil is going down have a sponsored short position just below the surface.

Here’s the real picture – and two reasons they’re wrong.

First, It Comes Down to Just 0.8% of Daily Volume

My Oil Price Targets Hit (Early)

Recall that my targets are $65-$68 a barrel for WTI by the end of July; $73-$78 for Brent. Even with the pullback late yesterday and the expected further drift down today, we are within 6% in New York and 7% in London of reaching those ranges, with almost two months to go.

We actually breached those ranges during intraday trade Wednesday.

At those levels, there are plenty of ways we are going to be making money. This is good for many of the stocks and funds I’ve recommended here, and even better for the portfolio positions of my Energy Advantage and Energy Inner Circle members.

Stay tuned here for ongoing updates.

An analysis of the current state of DUCs indicates those using them to advance a bearish oil outlook may have seriously overstated the problem. Figures tell us the number of U.S. wells drilled over the past three years has averaged about 12,500 a year. At any given time, there are slightly more than 3,500 wells “in preparation.”

Yet there are no signals that companies re-drilling more wells with the express purpose of turning them into DUCs are awaiting a further rise in prices. In fact, after surveying some two dozen of the largest American E&P (exploration and production) companies, the analytical team at Bernstein has recently concluded no more than 400 of the wells drilled can be considered DUCs.

Even then, evidence indicates that some of these – perhaps as much as 25% of them – are meant as replacements for already producing but maturing wells. In other words, about 100 of these DUCs are not expected to add a single drop of additional oil to the total production nationwide.

Yet even if there were no replacement wells in the figures, the increase would be marginal at best. Should every one of these wells be completed, comprise new net volume additions, and be put into production at the same time, estimates put the aggregate additional oil coming on the market at no more than 80,000 barrels a day (and that is on the high side of the projections). Such an increase amounts to less than eight-tenths of one percent (0.8%) of total daily American production, easily absorbed by the rising demand.

And even then, all of my industry sources tell me that, if their companies had DUCs in their planning cycle, the intention would always be to complete and release the volume slowly through the end of 2016.

Even if there were far more volume available from DUCs, nobody in their right mind would flood the market short term, guaranteeing a decline in profits. That would be the budgetary equivalent of shooting yourself in the foot. Known oil in place and easily retrievable is a known (and booked) asset.

But that does not mean it is cheap.

And here is the major reason why DUCs do not pose any significant problem for oil prices.

Second, Completion Is a Multi-Million-Dollar Proposition

Completing a shale or tight oil well involves running the casing, fracking, moving in the blow out preventer (BOP), setting up pad wellhead production operations, among other matters. 

All of that comprises at least 60% of the costs involved in a well. Drilling the hole is the easy (and least expensive) part of the operation. With current horizontal, deep, fracked shale/tight oil wells, the completion part alone runs on average over $3 million in expenses… per DUC.

Average overall expenses for each of these wells now demands a market price of $74 a barrel. That’s well below the price likely to exist at least through September. Completing a DUC, unless it is a replacement well (and thereby does not add to the oil in the market), makes no sense. It is expensing a known asset at a loss.

Short of a collapse in the Persian Gulf situation or some similar geopolitical mess, we are not going to see any move to triple-digit oil this year, although the pricing floor will be rising.

The only “ducks” having any impact on oil prices are those found in a “Looney Tunes” view of the world.

Sincerely,

Kent

Source :http://oilandenergyinvestor.com/2015/05/the-newest-oil-price-myth-and-my-takedown/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules