Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

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