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The end of dollar hegemony is near August 27, 2018

Posted by hslu in China, 石油, 美國, Economics, Energy, Oil, Russia, Trade, Trump, U.S. dollar, 川普, 中國.
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Source: Yahoo News

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http://flip.it/DMljla

The unintended consequence of U.S. sanctions against Russia, Iran, Turkey, China and many other countries, companies and individuals in the world is the rise of Renminbi as an alternative to U.S. dollar in global trades.

The U.S. sanctions forced these nations to come up with a new “SWIFT” system to move money without the use of the current SWIFT network which is controlled by the America.

Trump initiated the sanctions against the world and China’s currency received wider acceptance.

因果報應啊。

Another thing which reduces the global demand of the U.S. currency is, strangely enough, the rise of the shale oil production in the U.S. As America produces more from tight formations, oil imports from foreign countries is reduced by as much as 6 million barrels every day. At roughly $70 per barrel for WTI, that’s a reduction of $420 million of U.S. dollar in global commodity trades every day.

And what might be the consequence of that? It is hard to say now but it will happen when people are least expected.

I bet you have never seen this before September 4, 2015

Posted by hslu in Energy, Oil.
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oil price and other charts

Each dot on this Williston, North Dakota, map is a wellhead. The lines on the map are horizontal wells. They range from several thousand feet to more than a mile or two miles long.

Many wells here are 10,000 feet below the surface.

All wells are heavily fracked with chemicals, water, treated sand or ceramic.

The big Roll Over no one is talking about September 4, 2015

Posted by hslu in Oil.
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Last year, many enthusiastic U. S. media houses couldn’t hold back their excitement over the possibility that the United States would be the king of black gold in the world.

Back then. the headlines on every national TV company and print media, as well as many websites on the Internet, talked about how this new found wealth from shale oil formations would change the landscape of crude oil production and how the United States would soon be exporting oil to other nations.

Some even declared that the United States would soon be oil independent and this would change American’s Middle East policy. Politicians of all stripes and activists urged lifting the decades long oil export ban so that America could sell shale oil to Europe, exert political pressure on Russia and China and influence the oil market in the world .

Slide1

 

 

In essence, the U.S. media gave Saudi and Russia a collective middle finger and announced that a new king of the world oil market has been crowned.

Fast forward a year or so to the summer of 2015.

Price of WTI has tanked by about 60%. US rig count has dropped by about half. Layoffs in the oil patch numbered in the thousands and more pink slips are sure to come in the months ahead. Some shale oil companies has declared bankruptcy. M&A activities have picked up. CAPEX of every U.S. oil company has been slashed. Dividends of oil company stocks have been cut. Some companies have eliminated the dividends all together.

And what did the new king in the oil market do to protect its crown?

Well, American oil production promptly rolled over and the U.S. handed the crown back to Saudi on a sliver platter as we speak.

Slide2

 

But strangely enough, not very many new media companies pick up this event probably because they want to forget the articles they wrote a year ago.

Well, you might not believe the small drop in oil production this week amounts to a roll over because the level of reduction was very small.

That 200,000 bbls/day reduction qualifies as a rollover alright。

That 200,000 bbls/day reduction qualifies as a rollover alright。

Boom and bust.

Boom and bust.

Well, come back next month and you’ll see the decline accelerates. Don’t look for this news on CNN, WP, NYT or LAT. This event is not news worthy to them. They have better things to report, like Obama vacation, gay marriage, Planned Parenthood, cop killing, and Ferguson, these days.

US oil production is the highest in the world, BUT July 7, 2015

Posted by hslu in Economics, Energy, Oil.
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You see, there is always a proverbial BUT somewhere even as the almighty United States replaces Russia to be the largest oil producer in the world.

The BUT is this:soon the United States will surrender that No. 1 position back to Russia or the Saudis。 The American shale oil boom would be remembered as a bubble because one can’t fight the mother nature.

The U.S. got to the top producer position by drilling and fracking the hell out of Bakken of North Dakota (image below), Woodford in Oklahoma, Niobrara in Colorado and Spraberry and Eagle Ford in Texas.

Source: Internet image.

With the obvious damage to the environment aside, the real problem with shale “revolution” is the rapid decline of the oil production rate which is anywhere between 50 and 65% in the first year. As a result, the shale oil companies have no option but to keep drilling if they want to keep the overall oil production rate of the field at a steady pace.

So, what do they do?

They borrow and borrow and borrow;sometimes at 8 to 10% interest rates to pay the service companies to drill and drill, often with multiple rigs at the same time.

Now, here is the catch according to an article on Yahoo:

“The problem for shale drillers is that they’ve consistently spent money faster than they’ve made it, even when oil was $100 a barrel. The companies in the Bloomberg index spent $4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year earlier, while pushing U.S. oil production to the highest in more than 30 years.”

Source:  “The Shale Industry Could Be Swallowed by Its Own Debt”

http://finance.yahoo.com/news/shale-industry-could-swallowed-own-052327361.html

How can any company survive in this kind of situation?

The answer is “None” and the Saudis will make sure many of American shale drillers won’t survive in the long run.

I used to call American shale oil companies “敗家子“ and gave them four to five years to spend the new found wealth. Unfortunately, they only last 2 years thanks to their own success of producing oil from the ultra tight formations.

The shale drillers still have many wells on their backlog and collectively these companies have hundreds if not thousands of wells already drilled but not fracked. Some shale oil companies will frack theses wells once oil price recovers to the $60 to $65 level because they still can make some money at that level. Others will have to frack these backlog wells because they have to get oil out of the ground at any price just to pay the interests on their loans.

It seems to me that the shale oil bubble is bursting and the day of reckoning for American shale drillers is fast approaching.

Cheap money from the banks and enthusiastic investors made the “shale revolution” possible using $100/barrel oil in the ground as collateral. With WTI selling at ~$50/bbl,these companies have a tough time to make it though.

They conveniently forgot one thing: technical success wasn’t the same as economic success.

 

敗家子沒折了 January 9, 2015

Posted by hslu in Economics, Energy, Global Affair, jobs, Oil, stocks.
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I have said that American shale oil producers acted like 敗家子 because they tried everything they could to get shale oil out of the ground as fast as they physically can without considering the future or preserving some for the raining days.

https://hslu.wordpress.com/tag/敗家子/

https://hslu.wordpress.com/2014/11/29/saudis-weapon-of-mass-destruction/

In the process, these oil producers ran up a huge debt to fund a frantic drilling program because shale oil production rate drops like a rock once it begins production. As much as 40% annual decline, sometimes faster, forced them to drill longer and closer to each other, frack them with ever increasing pressure and prop the fractures up with more propants and chemicals.

In the mean time, they hired more roughnecks to run the rigs and hundreds of trucks to haul drilling and fracking equipment.

Oil production ramped up quickly along with company profits. CEO’s options were jacked up as company stocks ran through the roof. The happy 敗家子 saw their personal wealth blooming and everyone in the shale oil business was happy with the year end bonuses and the rising market value of their 401(k)s.

The media talks about the good time is here to stay and America will be the king of the world again. Production will surpass 10 million barrels per day and America will be the largest oil producing country in the world.

Again.

People who could only find jobs at local truck stops flipping burgers or at local 7-11 selling hot dogs, quit their $8 an hour job, drove to North Dakota, Texas and Pennsylvenia searching for $25 an hour career and a better life.

Around cities where shale oil boom started about 5 years ago, trailer homes spread out in the country side. Rent skyrocketed. Bars popping up everywhere. The oldest business was revived. Roads are crowded. Triffic lights were added at town center. Housing markets were hot and condo prices went tmup by 20, 30 or even 40% a year. Cities tried to catch up with more roads and increase civil services. Schools, hospitals and police stations were built as fast as they could.

Everyone was happy. The good time is rolling and it is here to stay as oil flows and flows while money just seemly coming down from the sky.

Then the bloom popped almost over night.

The price of WTI came down and down and down. $100. $90. $80. $70. And then $60. Analysts then stressed the psychologically important $50. Predicts come out every day on CNBC and even more on the Internet.

And boom, WTI is below $50.

Now what?

What will the 敗家子 do?

Not much but to watch the price of WTI drops futher and their stock price cut by 50, 60 and even 70%.

As for the shale oil bananza in the US, most of that will probably stay in the ground especially the marginal fields. Saudi will control the oil market and make sure shale oil will not be profitable again for at least a decade. Oil price will be kept within a range of $60 to $80 a barrel, just below the cost of most shale oil projects on a full cycle base.

Saudi will be happy with their $20/ barrel or below cost. They will see their market share bump up and OPEC will be the boss again. 

American 敗家子 will be broke. Some will bankrupt and American oil renaissance will fade into memory. Rig count will drop. Shale oil projects will be dropped. Finally pink slips will fly.

Plenty empty buildings will be standing still in the wind. Grass will grow. The good times will be a dream people talk about. Trucks will stop rolling down the street. Bars will be closed. Houses will remain half built. The roughnecks will go back to truck stops flipping burgers again. The boom will be over before people even know it had ended.

Not everything is lost though. Most of them will have a new car and a 72-month new car loan to pay off with their $8 an hour job.

Saudi’s Weapon of Mass Destruction November 29, 2014

Posted by hslu in Economics, Energy, Global Affair, Middle East, Oil, Putin.
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OPEC has decided to keep its oil production at 30 million barrels per day for the next 6 months.

Actually, Saudi decided the course of action and everyone else in OPEC had to go along with what the head of the family wants. The reason was very simple: Saudi is tired of being the swing producer and it is about time for someone else to take up the role.

Well, you might call it Saudi’s Weapon of Mass Destruction: Saudi’s WMD. We call it a WMD because the destruction reaches far and wide.

Consider the following:

1.  US shale oil producers, especially the marginal ones and companies with huge debt, will be desimated. They will see their cash flow cut immediately and they will feel the financial pain right away. Well, they are Saudi WMD’s primary targets and they have no place to hide. Projects will be delayed. Hiring on hold. CAPEX will be cut. Dividends will be eliminated. Pretty soon, some people who have flocked to North Dakota, Pennsylvania and Texas in search of petrodollars will be called into their supervisors’ office because they will be getting pink slips instead of paychecks. People who have paid ridiculous prices for condos or townhouses in these areas will be underwater because they will owe more than their houses are worth. All those petro taxes to the cities, states and the federal government will slow down to a trickle and US GDP growth will drop accodingly.

2.  Some US banks may have to set aside more reserves just to cover the bad debts many shales oil companies will not be able to service. The US shale oil boom was built on cheap loans just like the failed dot.com companies around 2000 which were financed by angle funds and easy money from the VCs. The US shale oil boom is likely about to burst. The 敗家子-like behavior of the American shale oil companies is about to bankrupt the American shale oil industry under the weight of Saudi’s WMD.

3.  Ever since the rumor of Saudi’s ‘no production cut’ position was reported in the news, stocks of oil companies, MLPs, oil drillers and oil service companies have shedded 30, 40 or even 50% of their market values. Many investors have seen the values of their portfolios, IRAs and 401(k)s dropped. Dividends from energy-related companies and midstream MLPs will be cut and a cyclical bear market for these company stocks will begin. We at this time do not know how long this bearish cycle will be because we have yet to see the full range of Saudi WMD’s total destruction force.

4.  Russia’s economy will be hugely affected negatively. Russian GDP growth will probably be negative soon now that the international sanction is in full swing made worse by the depressed crude oil price for any extended period of time. Ruble is down so much from the level just several months ago and millions of Russians are already poorer because of Ruble’s diminishing purchasing power. However, Russia’s huge foreign currency reserve will cuision the blow and the international events will accelerate its pivot to China.

5.  Iran is unfortunately in the same boat like Russia does. America may have played a role in Saudi’s WMD which actually killed two birds with one quick and dirty WMD. It is quite effective, isn’t it? The fact that Iran is the archenemy of Saudi is beside the point. Saudi will take every chance to punish Iran and giving the chance Saudi will not hesitate at all.

6.  There is only one country in OPEC which has negative current account balance: Ecuado. The lower oil price achieved by Saudi WMD will make Ecuado’s situation even worse. Ecaudo is running a budget deficit but the small country has a puny foreigh curency reserve: ~$2.6 billion. Capital will flee. Ecaudo will raise its short term interest rate to stem its currency from sliding to fast. The country will sink into recession and we may see a default coming soon.

7.  Venezuela isn’t safe from Saudi’s WMD either because its budget deficit will increase and its foreign currency reserve isn’t big enough to defend its currency: Bolivar. Economy will tank and people of Venezuela will sadly pay with a lower living standard and a cheaper Bolivar.

8.  The greatest transfer of wealth from oil consumers in the developed nations to oil exporters will slow down a bit. However, this is only temperary. In less than two years, just a guess, oil price will recover and wealth transfer will resume.

9.  Saudi kings, princes and princesses will make less money. They are very rich already so the damage isn’t that bad.

10.  Saudi’s WMD also has many winners. Many countries will pay less for their oil imports: e.g., US, China, Korea and Japan. China in particular will be happy to add to its strategic oil reserve with cheaper oil. Consumers in general will keep more money in their pockets which will stimulate the economy. Sooner than later, economy will pick up and oil demand will rise. Oil production in the world will drop because marginal fields will shut down. Saudi will then remove the WMD and good old days will come back. Saudi will be a happy guy again.

OPEC, oil price and unintended consequences November 28, 2014

Posted by hslu in Economics, Energy, Middle East, Oil.
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OPEC has decided to keep its production at 30 million barrels a day which was expected by the market. WTI is down to $70/bbl right after the news was announced. I guess that shale oil is selling below $60/bbl now which is below the costs of many shale oil projects.

Many articles talked about decline of US shale oil production which it will in time. But there is another angle to this headline: heavy oil and oil produced from oil sand projects face even higher pressure because prices for heavy oil are even lower but they cost more to produce.

Oil price will drift lower into the $60 range and more pain will be felt in the oil industry. Oil company stocks will face downward pressure until things stablize in the supply and demand picture in the world.

Wait to pick up some bargains when there is blood on the street.

There are fights breaking out on the main street but only some blood is spilled. More actions will come.

If I have to guess, just a guess, the bottom is closer to current level than the top is.

Well, your guess is just as good as mine.

Saudi won’t. UAE won’t. Russia won’t. Hmmm…, the US? November 26, 2014

Posted by hslu in China, Cold War, Economics, Energy, Global Affair, Middle East, Oil, Politics.
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Maybe US should.

Imaging, please, for just one nano-second of a press conference announcement from DOE in Washington, DC:

EOG, WLL, CXO, SRE, CLR, XOM, CVX, PXD and COP have agreed that they will cut their U.S. production by 2 million barrels per day starting January 1, 2015.

What will that do to the oil price and stocks of foreign oil companies?

Nah. It won’t happen.

But, aren’t some of them the ‘始作俑者’ of oil price decline by 30+% since June?

The best way to achieve a stable oil price is every oil producing country cut its oil production by about 2.5% because there is 2 million barrels of  excessive oil production in the world.

Nah, that won’t happen either.

Every country is in it for itself. The one which carry the biggest stick dictates the outcome.

And we are talking about Saudi. Period.

I talked about America acted like a ‘敗家子’ when it comes to producing shale oil without any consideration of long term national security in an earlier post on my blog.

image

Source: Businesd Insider.

Now, it is likely that Saudi will let the crude oil market to stablize itself.

With the total production costs of American shale oil around $60-$80/bbl vs Saudi oil’s $20/bbl, there is no argument here who is the onw with a big stick.

Imaging for a minute now, what if Saudi let oil price drops to $60/bbl and keep it for 2 years.

Of course, there is a consparicy that White House told Saudi to keep oil production up so that Russia will be weakened as a new run of cold war begins to take shape.

Well, your guess is as good as mine on this.

Do you know who is the biggest beneficiary on this?

Yes, you guessed. It is China.

China gets to import cheaper oil and it will save ‘BIG MONEY’ because it is the largest oil importer in the world. China will buy even more oil than its economy requires because China is building its strategic oil reserve from the current 10 day supply, or about 91 million barrels, to about 90 days of net import. China still has a long way to go so that it will take the opportunity to ‘fill it up’ with cheap oil.

Americans will benefit because we will keep more money in our pockets instead of sending it into oil producing countries. But, the only bright spot of the US economy, shale oil productions, drilling and oil transportation by rail will suffer. CAPEX spending will be cut. Marginal project will be delayed or eliminated. Finally, pink slips will fly. ‘敗家子’ will be broke again. Oil import to the US will rise.

Crude oil market will finally stablize again.

Big stick has spoken.

We will see what comes down after November 29.

Oil Price to drop. U.S. shale oil producers will feel the pain October 4, 2014

Posted by hslu in China, Cold War, Economics, Global Affair, Middle East, Oil.
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CNBC Headline; 10-2-2014: “Saudi signals price skirmish as oil heads to bear market” 

http://www.cnbc.com/id/102053966

I saw this headline this morning on CNBC website and all the sudden what I talked to my friends about last night became so real right in front of my eyes.

Saudi has lowered the price of oil it exports without telling other OPEC members. I think Saudi is basically tired of seeing its market share drops even though oil prices stayed at $100+ level. To Saudi and a few other OPEC countries, even though oil price will drop, higher oil production rate will keep total oil revenue at more or less the same level. Some people predicted that oil will eventually drop to $75. WTI traded today at one time below $90 and finished at slightly higher than $90 at the close. I don’t know where oil will be traded at because no one is smart enough to call the price of oil with any kind of consistency.

One thing is for sure, oil price will head lower if Saudi carries out its plan.

Basically what Saudi wants to do is to keep Saudi’s oil production at a higher level to maintain its market share which Saudi has the spare capacity to do so and move oil price lower.

The implications of Saudi’s plan will be huge depending on how hard it wants to push price of oil down:

  1. Oil price will drop until it finds a floor, i.e., market find a new equilibrium point where high cost producers will drop out of the market and whoever can keep its production and development cost at a competitive level will survive. The ones who can’t will drop out of the market for now.

 

  1. S Gasoline prices will decrease to below $3/gal in many parts of the U.S. soon. Consumers will have more disposable money to spend. Lower gasoline prices will make people less likely to switch to all electric cars. America will increase oil import and trade deficit will move higher.

 

  1. Canadian oil sand and U.S. shale oil projects will suffer. Some companies will go out of business and layoff will happen sometime later. U.S. economy will take a small hit from lower activities in the oil patch. Canadian GDP will be negatively affected as well. Their production costs are simply too high to compete with those from oil producing nations in the Middle East. Oil companies operated in the Bakken will suffer more than the ones operating in the Eagle Ford area in Texas. Both will feel the pressure though.

 

  1. The financial situations for several OPEC countries will be positive even though oil price drops. The bottom line for OPEC countries is that total oil revenue will be kept at roughly the same level because production rates are higher. North Sea oil productions will decline as oil price moves lower. South American and African countries will see unrest as oil export decline. Civil unrest may happen if their oil exports decline.

 

  1. Russia will suffer the most because of sanctions and low oil prices. It will accelerate Russia’s alliance with China.

 

  1. Oil importers such as China, Japan, Korea, Taiwan and many SE Asian countries will benefit from lower oil price. It will help their economies grow.

 

  1. Inflation will come down globally. Pressure on the Fed to raise interest rate will ease. Consumers all over the world will pay less for transportation.

 

  1. Gold may drop in price too as commodity may move in sympathy. Natural gas may move in sync with price of oil too.

 

  1. Saudi will be less inclined to listen to what U.S. wants in the Mid East.

American exceptionalism on Display October 4, 2014

Posted by hslu in Cold War, Economics, Energy, Global Affair, Middle East, Oil.
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Take a look of this excerp from a CNBC story on Saudi’s intention to lower the price of its crude.

image

What do you see?

Cramer thinks Saudis ‘should’ be cutting supply to try and stablize prices.

Why ‘should’ Saudis do it but not the U.S.?

Subconsciously Cramer showed his American exceptionalism and questioning Saudi’s rational. Cramer forgot free market and capitalism are at work here. Why didn’t Cramer ask EOG, CXO, PXD, CLR and WLL cut back on their shale oil productions? It will stablize price of oil too, won’t it? Saudi oil or American oil, what’s difference?

If you are Saudi’s oil minister, what will you do? Should you defend your market share or should you just watch your shares of the pie slipping away?

America promote free market and capitalism at every chance it has. Saudis is doing just that.

If you can’t compete, please go to the  back of the line.

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