OPINIONS UPDATE FROM AN ENGINEER

[sageo]

Thanks for sharing your thoughts Kaliboo. The thing I disagree with is the idea that storage levels in the US are about to reach capacity. At Cushing all storage is leased, but there still is available space...a good bit of it in fact. The space is leased because of the contango situation in the futures strip. This allows buyers to buy spot oil and sell it forward at a price high enough to pay for storage and make a profit...without risk. Some who have leased storage space are just looking to sublease at a higher price. This will continue as long as the market will justify it. Another factor that leads me to believe oil prices are unlikely to plummet into the $30's is the increase in demand in the US. Look at the weekly product demand number...more gasoline, diesel and jet fuel are being burned. In fact demand is up enough to consume over 500,000 more bpd than last year. That ain't hay. Anyway I appreciate the effort you put into posting your thoughts and I respect the experience behind them.

Gerald - Your last sentence echoes my thoughts as well. Appreciating the effort and respecting the experience behind them is what it's all about. Kindness and respect are always good in my "book",even when we don't agree on every point made by someone. Hagd !

[Palm]

Good comments Gerald and I agree. Our economy is starting to show more signs of life and more importantly wage growth. Kaliboo mentions India and on Friday S&P increased its expected growth by India. And though people talk about the slowdown in China it's still growth way beyond most of the world. Many analysts, oil majors and OPEC believe the bottom is likely already in. Still a lot of uncertainty out there but if one quotes people like Buffet you also need to include their thoughts on extremism. It's like the bell curve and you can usually throw out the extreme lows as well as the extreme highs and expect the swings to be more in the middle. We're a far cry from the conditions of 2007-08 and also likely not to see those extremes. Not saying it won't absolutely happen, but IMO it's not very likely.

[Stavros]

Here are my too cents:

As I recall, the lowest oil price in 2008, at the nadir of the Great Recession, was $33.87.
That happened due to a very large drop in Demand without an immediate commensurate drop in Supply.
Personally, I can't see oil price dropping to anywhere near that level in 2015, despite the fact that Short Sellers such as Goldman Sachs, JP Morgan and Citi desperately want it even lower.

The drop in Crude Oil price that started in 3Q2014 was also caused by a Demand/Supply gap, but it occurred in a different dynamic ... Demand continues to rise even today (albeit slower than expected) while Supply increased slightly (but not to a great extent) but should soon reduce for many reasons:

1. Hedges are nearly played out. Producers who had them felt no pain whatsoever over the past several months but will be reluctant to continue producing at high levels when their hedges are over
2. It's unlikely that producers will increase Supply. Why increase production and risk a 50% drop in price when they can reduce production across the board by 1% and keep prices at current levels (or see the price increase)
3. Summer driving season is fast approaching (US and Europe). That means refineries are now re-tooling to shift from Fuel production to Gasoline production. That's the major reason why their storage levels are increasing. They will soon increase refinery Crude Oil throughputs and start building Gasoline inventories
4. Libya is in chaos and may not ramp up production again for quite some time
5. It's highly unlikely that Iran will increase Crude Oil exports anytime soon. Sanctions may slowly be lifted over the next 10-20 years IF a deal is reached.
6. Middle East winter in nearly over ( yes it gets cold there ). They will ramp up their internal consumptions of Fuel Oil and Crude Oil that they burn to generate massive quantities of power for aircon and desalination.
7. Oil Demand is already increasing somewhat due to the lower price ( as mentioned by others )

The drop in oil price in 2H 2014 happened for one and only one reason:

The Saudis wanted to put an end to the incessant ( and repulsive to them ) increase in Light Tight Oil production emanating from the US and heavy oil production from Canada. To do that was very simply executed... they drove the price down by discounting their Crude Oil heavily until the price no longer covered the costs of US producers two drill for replacement oil.

Now they'll do what's necessary to keep the price at a level that allows for some increase in Crude Oil Supply but not two much. Perhaps a steady price of $80-85 by early 2016?

[Kaliboo]

Beautiful day where I am.  Thought I'd collect some thoughts and share with this board.  As always use or flush (as someone brilliantly coined the phrase).  This is the view from the 36 year experience oilfield engineer.

Oil Price Outlook: My view in the last 2 months is the same as I first commented, only further convicted.  Crude prices in the US could momentarily drop below $30 and this could happen several times.  Reportedly US storage space is about to reach capacity in the next few months.  Without ability to export much, producers will have to sell or shut-in, rather than produce and sell or store.  Unless the Feds act soon, that could drive a big domestic price crash.  But even if they do, the global price could also fall as much.  Many companies have dropped a lot of rigs.  But for onshore what they have done is drilled and cased the wells but NOT completed them.  These horzontal wells (many in the range of a mile long horizontal) are simply waiting to be completed, which in most cases does not require a drilling rig and takes just a few days, but due to the ~30 separate frac treatments per well, can account for 60% of total well cost.  So to put these wells on production is like switching on a light switch.  Production can rapidly ramp up if prices are there, without rehiring drilling rigs for quite a while.  Some companies have moved remaining drilling rigs to gas prospects where they can get better pricing in some locales and lower drilling costs.  So all of this makes the USA the "swing producer", not Saudi Arabia, which is why they are trying to snuff us out.  So this fact means for the short term, prices will be volatile, as we have seen, but trending downward as supply continues to increase faster than demand.  The really big factor that will cause prices to rise very high and stay high for a much longer time is the availability of skilled oilfield workers.  This is a light switch right now, meaning industry can ramp up quickly by simply rehiring all the laid off workers, but before long, they won't be available due to re-employment elsewhere, retirement/death, and lower enrollments in the most relevant sciences & engineering.  This is exactly what has happened before.  It takes time - years of suppressed prices to gradually reduce the skilled workforce, especially the professional engineering and geosciences guys.  So availability of skilled labor will eventually become the controlling factor affecting prices unless demand rises soon and/or there is some "agreement" globally to reduce supply more aggressively.  The shortage of skilled labor coupled with continually growing world demand may send prices skyrocketing well beyond $100, keeping them there for a few years, until outrageous salaries and signing bonuses re-stimulate growth in graduations in the key technical fields.  So this outlook I have is unchanged.

Demand is of course a blacker box.  The shorter term bright light there could be India, who reportedly has the fastest growing economy in the world.  If their faster growing demand can outpace the global economic downturn and slower growing demand in China and elsewhere, then the a supply/demand balance has a chance to be restored.  Maybe the blackest box of all is the Middle East.  Reportedly Libya, whose production had peaked recently, is now down again due to the Islamic insanity causing chaos in much of that region.  I think this instability is likely to worsen, and could become another "swing effect" driving down supply.  This more complex economic system, where the USA is no longer the dominant swing consumer, but instead the swing producer, makes accurate predicting, an increasingly unlike result (especially "about the future" as Yogi Berra would say). So I spend time trying to to watch and undestand if we are going to shift to the long term high price scenario, as that is the direction we are headed as long as layoffs continue to occur.  Of course once we shift to that 100+ price world, if the price gets too high and hangs there too long, then a lot of negative fallout could follow.  It takes 4-5 years (5 for two of my kids) to get a PETE degree.  Then another 5 years of experience to develop enough competence to be able to make a serious contribution.  So you can begin to picture a very long term, high price world to follow which will be directly related to the length of time prices stay down.

IOC PPS Outlook: This board amazes me as to the depth of detail you have in analysis and opinions.  Mine are higher level observations since I don't have the time for more depth.  But nevertheless, here's what I see.  Hession, true to his word, is delivering, but much slower (which means more costly), than I want and only offers vague updates.  Nothing new there.  But as many of you have stated, this is all going to come foreward.  I believe that there are large volumes in E/A and elsewhere in IOC's PNG holding to be developed and have no doubt it will eventually.  Hession has the best approach for E/A with the near term and later term recertification rights which can add tremendous additional value to IOC.  So the uncertainties regarding the resource side of this and the vehicle to get it to market (i.e., Total and an future LNG plant) are dramatically de-risked from even a year ago, and those residual risks will mostly vanish by around year end.  From there on it's a question of time, cost, product prices, and politics (both PNG and global).  Cost is driven by market timing/negotiating, competency (where IOC has lagged poorly), and God's structure of these reservoirs.  The latter one of these will determine how many wells and lengthy flowlines will be required to drain the reserves, and in almost every field, this is a learning process over time as the field is produced.  The appraisal wells will remove a big part of this risk, but there will be a large residual remaining which will mostly affect the upside outcome.  The timing it takes to deliver an LNG plant and additional wells, will become much more predicatble as we go foreward.  But until contracts for construction and gas sales are announced, the revenue/cost predictions needed to project future value accurately, still IMHO have high uncertainty.  My thinking is that the volumes and location in PNG, that IOC has control over, can override a lot of these concerns and risks by making them a lowest cost global producer, as several of you have suggested.  But I suspect at some point the politicians will exploit that situation with higher taxes or other schemes designed to take value away from the companies and transfer it to the government and/or people of PNG, which seems to be an eventual certainty.  It's just a question of when and how much.  Witness Indonesia's government intervention in the copper industry, violating prior agreements, forcing processing of the ore in country, which up to now has been done elsewhere.  By having to build these plants in country and process the ore there, huge costs have been imposed on the operating companies in order to create more economic prosperity for Indonesians.  This is just what governments do.  Remember the Windfall Profits Tax applied to crude oil produced here in the USA in the 1970/80's? Assuming that IOC/TOT/OSH will be hugely successful in PNG, then it will happen in some shape or form eventually.  But I think that could be 10+ years off; not a worry now.

Another prediction I have is a global LNG glut is coming.  It's inevitable just like oil gluts are inevitable.  It's just a question of when.  Prices have already dropped, in part due to the linkage with crude, causing many LNG projects to be cancelled.  Technology is too good and getting better at producing oversupplies of everything on earth.  The nice thing about PNG as everyone keeps saying, is that LNG produced there is likely to be the lowest cost LNG at least for the Asian market.  So that threat, as it grows, may actually help IOC ultimately, by reducing new development in more costly places, and thus reducing supplies.  I.e., exactly as the Saudi's are hoping for crude oil right now.  So PNG could become a swing producer somewhere down the road and greatly capitalize when LNG prices climb back upward.  But for me, this is not a big factor now in considering the value of IOC, but definitely something to keep an eye on.

So in summary, from my viewpoint the picture looks much improved for IOC pps.  Much uncertainty is derisked and more will be derisked in this year, in addition to the payments and announcements, which should help PPS.  The current low PPS is out of balance with the current realities.  I think fear of where oil prices are headed are driving much of that.  If we were still in an $80+ oil price world, I have no doubt the PPS would be a whole lot higher.  Market conditions for LNG, costs (especially around the number of wells required per TCF), and politics are the big needle movers I will focus on going foward in addition to crude prices.  The gas volumes in place are there, and estimates are only going up from here for many years to come, I feel fairly confident of that, based on drilling results today and current leases.    So my investment outlook?  I hope oil prices drag IOC down below ~40 again before Concept Selection announcement and/or recertification payment and/or FID, and then buy IOC.   And if it stays down long enough, my company just might once again have a nice staff reduction, with a lucrative severance package.  I think the probability of both of those events occurring this year or next is far from zero.

Have a nice weekend.

Kaliboo

Update since February.  Again I'm just an aging engineer not a financial guru.  Much of the above is now history or coming true, especially the last few sentences.  Refinery turnarounds and maintenance this fall may well cause a perfect storm for crude which already is affecting pps of oil companies and IOC.  Also my company did offer me a lucrative severance and retirement incentive as predicted and I'm taking it.  LNG glut will happen but I can't say when.  And I still own IOC.  Have a good day.

[jft310]

Citi says oil lower buy oil stocks
A bottom for commodities? It’s not as crazy as you think
By Barbara Kollmeyer
Published: Aug 20, 2015 7:22 a.m. ET


Critical information ahead of the market’s open
Twentieth Century Fox
Oil’s latest victim: Kazakhstan.
Today is working up to be anything but the lazy, hazy summer day for trading you might expect.

Let’s start with the nation that inspired “Borat.” Kazakhstan’s official currency, the tenge, took a sharp hit after the government moved it into free float. The Asian nation exports oil. Enough said. (See our chart of the day).

And the slick stuff continues to get crushed this morning, in the wake of gluttish inventory data. “The bias is lower. The only bulls left are bull ants. They are small,” Richard Hastings, strategist at Global Hunter Securities, said yesterday as oil sank 4%.

Brace for a much bigger drop, say some analysts.

“Given where we are now, there is a 90% likelihood that we will dip into the $30s,” Chris Main, Citigroup’s oil strategist, told The Wall Street Journal. Citi’s equity strategists suggested earlier this week that now is the time to get into oil stocks. We’ll be looking to see if they have a rethink at all.

Our call of the day, though, goes out on a somewhat contrarian limb. It looks at what would happen if commodities turned it around and gave the dollar a kick, and ultimately stocks fell. That looks a little out there, from the vantage point of oil prices, though maybe not of gold. Still, worth a read.

Piling it on for investors, Chinese stocks got crushed. And while the market has been able to brush aside some down days out of China, this morning may be an exception. The Fed — which didn’t calm anyone’s nerves with its mixed signals on a rate hike yesterday — definitely has China on its radar.

Still a week or so in this “dullish” August left to go.


Key market gauges
Futures on the Dow YMU5, -0.82% and the S&P ESU5, -0.77% point to an ugly open for Wall Street, which would make for a third-straight down session. No support from oil prices CLU5, -0.76% which are inching closer to $40-a-barrel. There was red ink all over Asia ADOW, -1.68% where the Hang Seng HSI, -1.77% moved into bear-market territory and the Shanghai Composite SHCOMP, -3.42% shed 3%. Naturally, Europe SXXP, -1.50% is down as well.

Dovish views on the Fed minutes yesterday are giving gold GCU5, +0.91% a boost.

The dollar DXY, -0.23% has flattened out. On the emerging-currency front, the yuan USDCNY, -0.1047% and Turkish lira USDTRY, +1.3502% got hit hard today.

The quote
“Monetary policy actions have sizable and significant effects on house prices in advanced economies.” — S.F. Fed chief President John Williams warns about using rate hikes to burst housing bubbles. Read more.

The economy
Weekly jobless claims are coming at 8:30 a.m. Eastern. They’re followed by the August Philly Fed index, and existing-home sales and leading indicators for July, at 10 a.m. Eastern.

Earnings
Gap GPS, -1.59% Hewlett-Packard HPQ, -2.29% and Salesforce CRM, -0.74% will report earnings ahead of the bell. Sears led them out by posting a swing to profit.

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