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Definitive Oil & Gas Discussion

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2 years 6 months ago #61 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
If oil correction is coming up, how low can oil go lower?

www.321energy.com/editorials/maund/maund052016.html

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2 years 6 months ago #62 by jmsvett
Replied by jmsvett on topic Definitive Oil & Gas Discussion
In a perfect world:

Libya comes on full tilt
A rate hike in June
Sentiment turns negative on oil
Canada and Nigeria come back on full tilt

$30-$35

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2 years 6 months ago #63 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
My guess is there will be no rate hike in June.

Erik, Jim Rogers is writing this interesting article, do you plan to invite him again?

www.businessinsider.com/jim-rogers-on-ch...s-for-forever-2016-5

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2 years 6 months ago #64 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
This guy argued high oil storage doesn't mean low oil prices because there is an anticipation of supply disruption and increase of demand.

www.bloomberg.com/gadfly/articles/2016-0...rent-crashing-prices

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2 years 6 months ago #65 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Erik, this guy seems to have some similar bearish points like you, and he also thinks oil price was manipulated.

www.safehaven.com/article/41547/oil-mark...ppen-with-oil-prices

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2 years 6 months ago #66 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
India will drive oil demand, I hope to see $100 oil again.

business.financialpost.com/investing/glo...river-of-consumption

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2 years 6 months ago #67 by MrToad
Replied by MrToad on topic Definitive Oil & Gas Discussion
Middle east power struggles will be more important than rig counts and inventory levels:
seekingalpha.com/article/3978590-holy-sh...ec-banned-pilgrimage

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2 years 6 months ago #68 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Erik, this analyst thinks with contango gone, tanker storage will be forced to liquidate, any truth to that?

www.streetwisereports.com/pub/na/16997?u...3-16&utm_id=31894984

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2 years 6 months ago #69 by ErikTownsend
Replied by ErikTownsend on topic Definitive Oil & Gas Discussion
@tankumo,

The trend we're seeing (rather amazing) is that rather than liquidating, they're looking for bank financing to allow them to keep the oil in floating storage.

To me, the most interesting question is why the contango is evaporating to start with. The only explanation I can come up with is that front-month prices are being pushed up by speculators, while back-month prices are being held down by active hedging activity. That makes sense in the very short term, but frankly I wouldn't expect such a phenomenon to last more than a very short while.

The need to store oil remains very high. Spare storage capacity at Cushing, OK in particular has never been tighter. That should RESULT in steep contango at the front of the curve, but it's not happening.

The other puzzling part of the tanker story is how they got themselves into this predicament to start with. The well-known "tanker contango arbitrage" trade has to do with SIMULTANEOUSLY buying the front month and selling a far-dated month, for the sake of capturing the contango profit that existed when the trade was put on. But the point is, the end is known - you're short a bunch of long-dated futures, and after storing the oil for X months, that becomes the front month so you bring your ship to port and deliver into that contract.

These guys don't appear to be speculators benefiting from that contango arbitrage. They appear to be oil industry players looking for a place to store their oil, and no longer able to subsidize their storage costs by being short futures and rolling the position every month. If they can get financing to keep on storing the oil AND THE PRICE KEEPS GOING UP, they can survive. But if the price goes down they could be forced to liquidate in a hurry, and that could drive a really nasty move down in prices.

Erik

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2 years 5 months ago #70 by CaFldEngr
Replied by CaFldEngr on topic Definitive Oil & Gas Discussion
Did anyone see this? Zerohedge is exactly the best source but there are some interesting tidbits.

oilprice.com/Energy/Crude-Oil/Iranian-Oi...-Return-To-Iran.html

Seems like Saudi might have came to some sort of agreement with Iran to cover all the recent outages and keep the market flooded.

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2 years 5 months ago #71 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Wow Erik, there are actually people looking at $20 oil even now!!!!

www.marketwatch.com/story/oil-could-plun...lyst-says-2016-06-15

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2 years 5 months ago #72 by T2Alpha
Replied by T2Alpha on topic Definitive Oil & Gas Discussion
Erik, I've watched as my family oil royalties have completely collapsed. No surprise. But some of the bankruptcies are surprising. Here's what I am thinking.
The possibility of calling in loans, not making short-term debt payments, or whatever causes the issue to come forward is a critical issue to oil firms because, generally, only "proven" oil reserves can be used as collateral for bank loans and large lines of credit. Likewise, most investment banks will only underwrite bond issues based on "proven" reserves. So to access the capital markets – to borrow money, issue bonds, or sell shares – oil companies need proven reserves and those reserves need to grow, year after year.

So here is my question. Banks don't mark to market oil prices. And they sure don't know anything about contango or backwardation, but when most of these oil companies raised money or got loans from local banks, they based the loan on 'current oil prices' and what's in the ground. The price has changed but the value of that oil during the time of the transaction was at appealing price for both parties. So why wouldn't the loans be reset to show current pricing and not what was in the contract pricing. I guess it's not perfect and I've seen this in our four fields we have that negotiation like this was plausible for only one of six locations. Mainly because the consensus is oil is never returning above $100. But these loans show a loan to book value of oil in the ground, cash flow from proceeds of sales, and the perspective that payments have been received in full and on-time.

What are your thoughts? Should the companies redo most or ALL of the contracts based on current prices?

I know North Dakota has one of the best banking systems in the country and they manage that state better than anyone. I guess that's why only 6% or so of the loan book we've talked to people about has not be re-negotiated. I feel this is just inexperience on the part of the new oil business metrics and what banks already know in like contacts.
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2 years 5 months ago #73 by jimbud
Replied by jimbud on topic Definitive Oil & Gas Discussion
Mike, that's exactly the question I'm asking as well. I tend to have long time horizons, and so tend not to trade commodities directly. My understanding (and it is possibly from one of the Erik-Art discussions) is that there will be a forced revaluation as loans come due which will drive some of these folks into bankruptcy. Separately, having been through several bubbles, my personal "rule of crashes" as well is that businesses can do all sorts of P/L work, and even a bit of cash flow work to put off the inevitable, but 18 months after the downward spike hits the truth comes out. And that is when the value investor can get to work....

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2 years 5 months ago #74 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Erik, I am sure if we have another Canadian wild fire, oil will rise. It's going to be a hot and dry summer!!!!

www.safehaven.com/article/41742/canada-w...cial-oil-inventories

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2 years 5 months ago #75 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Erik, is fracking really that bad for oil?

www.safehaven.com/article/41745/hydraulic-fracturing

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2 years 5 months ago #76 by ErikTownsend
Replied by ErikTownsend on topic Definitive Oil & Gas Discussion
@T2Alpha

Thanks for a great question, and sorry for the delayed response.

I don't pretend to be an expert on such matters, but here's my gut reaction: Banks evaluate wisk on WHETHER to make loans much differently than they do on when to CALL IN a callable loan. What making the initial loan, they are deciding whether or not to take the risk based on fairly objective criteria - they don't want to lose money, and they base a lot of their lending on what the borrower can hedge 2 yrs or so out.

But calling a loan that is technically "performing" (because the payments are being made - for now) just because the collateral (proven reserves) value has declined precipitously is risky business for the lender. First of all, they take a loan that was "performing" on their books - even if the bankers know it will default sooner or later, and they accelerate the default event. Viewing a single loan in isolation, sure, you can make an argument that it makes sense to call the loan before it defaults. But to what end? That potentially triggers a market-wide reaction where everyone panics at once. Now maybe the other borrowers who were more solid start defaulting on their payments because they think their loans being called is inevitable.

Again, I don't pretend to be expert on such matters. But my general feeling is that the bankers don't want to start an avalanche. Whether the collateral is good or not, everyone is crossing their fingers right now that oil prices will recover quickly and nobody will have to default. I think that's extremely wishful thinking, but probably what's driving the decision making. Watch out for when the defaults start in earnest. That's when the bankers can be expected to get more aggressive with calling loans and otherwise tightening credit.

Just my guesses on this one...

Erik
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2 years 5 months ago #77 by MichaelMedici
Replied by MichaelMedici on topic Definitive Oil & Gas Discussion
@T2Alpha I'm not exactly sure of the question, but hopefully I can share some of my knowledge and you can utilize it as a resource to help answer your question.

(apologies if this is all simplistic for you, as it sounds like you know what you are talking about, but i think others will benefit from it as well)

First, banks making loans to E&P companies do know about backwardation and contango. Typically, banks have their own "price deck" which is essentially their forecasted oil prices.

Now, it is possible with the local banks you're talking about don't do this, I do not know about that, but the banks in Houston all have specific reserve-based lending groups that exclusively do this type of work, I know because I work with someone who did this job before coming to my company.

Using this price deck, banks value the proven reserves of E&P companies, discounted at 9%, this is called PV-9. (PV-10 is the reserve value show on financial statements) This is the most important number that banks use when determining how much to loan as the reserves essentially act as collateral on the loan. This PV-9 number is *highly* dependent on oil prices. There are 3 classifications - proved, probable and possible. Classification depends not only on certainty of existance, but *economic* certainty, meaning reserves that are known to exist can still be considered "probable" if extraction does not make economic sense.

Now, official reserve reports are done annually, they aren't shown on 10-Q's only 10-K's, so it's essentially impossible (probably very very difficult but well say impossible) to constantly mark to market these loans, because by the time you revalue the reserves, the pricing assumptions and amount of reserves have already changed. It's a Heisenberg uncertainty issue.

Not only is it difficult, you wouldn't want to do it that often anyways because it would cause massive volatility and that's the last thing you want on your banks loans and the last thing you want on your borrowing base as a company beholden to commodity prices.

What is done more often is borrowing base re-determinations. This is the E&P companies credit card, what they can draw in the short term. (also called revolver and often people include things like lines of credit when calculated off of financial statements). This is done every fall and spring and is typically a good indicator of what you can expect to see on the upcoming reserve report.

Now lets talk about a couple reasons banks wouldn't want to just call in a bunch of loans cuz things look bleak.
1. As Eric said, it could cause others to stop paying their loans and just say "what's the point, if their just gonna call my loan might as well use the cash to try to drill and survive"
2. Business relationships - if you go out and start calling people's loans, when it comes time to start lending again you don't have that same trust and same relationships. E&P co's take their business elsewhere and your profits as a bank suffer because you need to lend to make money.

I hope at least some of this was helpful and i didn't just share a bunch of basic stuff that you already know. If you want to take a deeper dive on reserve based lending here's a primer that has floated around the industry.

www.bracewellgiuliani.com/assets/OGFJ%20April%202014.pdf
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2 years 5 months ago #78 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Erik, according to this article, the oil demand will be over supply in 2017.

www.safehaven.com/article/41776/increase...l-not-cap-oil-prices

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2 years 5 months ago #79 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Erik, there are still analysts calling for $10-$20 oil!!!

www.bloomberg.com/view/articles/2016-06-...s-low-as-10-a-barrel

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2 years 5 months ago #80 by Steve Johnson
Replied by Steve Johnson on topic Definitive Oil & Gas Discussion
Hi Erik, Nathan, and everyone. Thanks for your interesting podcasts and discussion. I joined today to post this article and ask a question. Here is another bearish oil article this morning on Bloomberg News. What do you think of JPM's analyst Ying Wang's argument about China's strategic reserve storage filling up by August?

www.bloomberg.com/news/articles/2016-06-...-done-amassing-crude

Many thanks in advance!

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2 years 5 months ago #81 by ErikTownsend
Replied by ErikTownsend on topic Definitive Oil & Gas Discussion
Hi Steve,

Thanks for the link! In future feel free to send links like this to us at This email address is being protected from spambots. You need JavaScript enabled to view it., and we'll get them out to our listeners in the weekly e-mail as well. Unfortunately we just missed the deadline for this week.

I agree that China's SPR reaching capacity is a very real and meaningful factor. But I think it might be given just a wee bit too much importance by this article. Consider that Venezuela produces 2.3mm bbl/day. Production hasn't YET been affected, but foreign contractors who are ESSENTIAL to that country's ability to continue production are threatening to walk if they don't get paid $2bn in overdue payments. Meanwhile SOME analysts (not me, yet) are predicting that Brexit will imminently start another 2008-size crisis. My point is simply that there are factors in both directions that could be MUCH bigger than China's SPR. I'm not saying it's not important; it is. Just not as important as other major factors in play... Canada wildfires... Nigeria... Libya... lots of factors in play and China's SPR is but one of them.

All the best, and welcome aboard Steve!

Erik

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2 years 4 months ago #82 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Oil is not dead yet.

In fact I think commodity will be back.

www.cnbc.com/2016/07/16/india-will-be-a-...103792364&yptr=yahoo

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2 years 4 months ago #83 by Pepe le Moko
Replied by Pepe le Moko on topic Definitive Oil & Gas Discussion
What is going on with Art Berman? He wrote an article on July 3, titled "The coming moonshot in oil prices". Now he has written this one
oilprice.com/Energy/Energy-General/Why-O...t-Never-Recover.html
It looks like an about face.

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2 years 4 months ago #84 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Like Erik said, gasoline inventory is not going down, fuel usage is not that high, so I think by next fall we may have storage crisis.

I am looking at $40 oil but I don't know if it will go below that.

Looking at US dollar chart, I think US dollar may go up, if that is the case oil should go down.

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2 years 4 months ago #85 by ErikTownsend
Replied by ErikTownsend on topic Definitive Oil & Gas Discussion
I too was surprised by this latest piece, particularly with regard to the comments about how oil prices "might never" recover, which is definitely a change of opinion, to say the very least.

I'll e-mail Art and ask him whether his views have changed markedly, and see if he wants to talk about them on the show sometime.

Thanks for bringing this up! To be sure, we respect those who change their opinions when the facts change. But if Art has changed his opinion as dramatically as it might first appear, I'm not sure what prompted the change of perspective. I'll try to find out.

Best,
Erik

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2 years 4 months ago #86 by ErikTownsend
Replied by ErikTownsend on topic Definitive Oil & Gas Discussion
@Pepe le Moko: Thanks again for bringing this up. I've exchanged e-mails with Art, and he says that quite a few people had the reaction you and I did. He says that's not what he really meant. He still thinks prices are going to the moon. But only briefly. He thinks that there's a reflexive relationship where prices going to the moon will break the back of the global economy. This is exactly the phenomenon I described as the "Energy ceiling on the economy" in my Peak Oil investing videos. Here's the actual e-mail from art, re-posted here with his permission:

--- e-mail from Art Berman ---
Erik,

It is certainly good to hear from you.

I'm not certain whether I was just unclear about the implications of prices going to the moon or if you (and a few other thoughtful people) simply heard something different. I said that oil prices would spike and that would be a disaster for the global economy.

Oil prices will inevitably spike to unaffordable prices because of under-investment and a resulting deficit. The threshold capacity of the global economy is probably in the $50-60 per barrel range so price spikes will greatly damage an already weak economy and either demand destruction or resumption of high production rates and subsequent devaluation will push prices downward again. Rig counts have increased by 66 (tight oil by 47) since June.

We live in a world of price cyclicity. That is typical at the limits of resource affordability. Small imbalances in oil fundamentals, interest rates and other economic/monetary factors result in producer over- and undershoot and wild swings in supply and price.

Most people don't understand how fundamental energy cost is to economic growth. The world economy is so burdened by debt that oil prices around $30 per barrel are probably needed for growth. I wrote earlier this year that the problem with oil prices is that they weren't low enough for long enough and I stand by that. At the same time, producers and service providers need at least $60 to keep from going out of business. So we have competing forces for survival and so much of the world's investment now depends on energy that the death struggle is even more intense than in previous decades.

I see no graceful way out of all of this.

I would love to discuss it further. It is truly fascinating and despite the fact that most people will see my message as dark, I am quite positive that a good result will come from the upcoming trauma. You can spread it out over a decade and it will be painful or you can get it over with sooner and it will be painful.

I recommend that you listen to my friend Nate Hagens' recent Earth Day talk at the University of Wisconsin:


All the best,

Art

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2 years 4 months ago #87 by tankumo

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2 years 4 months ago #88 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Seriously, who should we listen to, there are both bull and bear calls out there, this one is bull.

www.streetwisereports.com/pub/na/17050?u...2-16&utm_id=32147231

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2 years 4 months ago #89 by tankumo
Replied by tankumo on topic Definitive Oil & Gas Discussion
Like Erik said, gasoline usage is not great, and oil prices may fall back in autumn.

I think Erik is right on, but how low can oil prices go down, all the way to February low?

Erik, do you have any projection? I missed the boat, I hope to catch the falling knife this time.

www.financialsense.com/contributors/oil-...d-send-oil-back-down

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2 years 4 months ago #90 by MrToad
Replied by MrToad on topic Definitive Oil & Gas Discussion
Robert Rapier would make a great guest. Here he argues that Electric Vehicles [EV's] are unlikely to reduce oil demand in the near to intermediate future [1-10yr]
www.energytrendsinsider.com/2016/07/29/w...f-electric-vehicles/

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