FGE Chairman Fereidun Fesharaki thinks maybe US shale oil producers are on a suicide mission to destroy the world.
In a Tuesday note, Fesharaki said what we’ve been saying for months. Namely that this ramp in US production is a road to nowhere. Fesharaki calls it “effectively a path to self-destruction.”
We’ve long said OPEC can wait this out and let US-based producers pump themselves into an early grave. Don’t forget, the Saudis can borrow to plug budget gaps. There is no imminent fiscal crisis in Riyadh.
And while it’s pretty clear that by pumping at full tilt, US operators are sowing the seeds of their own demise by effectively working their asses off to drive down the price of the very commodity they’re producing, Fesharaki is worried they’re going to end up “taking the industry down with them.”
Given that, we imagine he wasn’t exactly pleased with the API data we got on Tuesday afternoon:
- Crude inventories rose 851k bbl last week
- Gasoline +1.35m bbl
- Distillate +678k bbl
Those were shit prints if you’re a bull. The median forecast of analysts surveyed by Bloomberg is for a 2m bbl decline in U.S. stockpiles last week. We’ll get the EIA number later this morning.
“The rise in U.S. tight oil production is close to madness!,” Fesharaki contends, in the same note cited above. It is, one might say, “blasphemy”:
Fesharaki goes on to write that balancing the market under these conditions is “mission impossible,” before concluding that “production is rising mindlessly and no one considers the consequences.”
Well, we don’t know what people are and aren’t “considering” Fereidun, but what we do know is what the chart looks like, and it looks like this:
Some other fun highlights from Fereidun:
- OPEC failed to stabilize prices in $50-$60/bbl range because of the surge in U.S. shale output of some 800k b/d from Dec. 2016 to Dec. 2017
- Production increase may be 1m-1.2m b/d by end of 2018, if prices remain near the top of that range
- As many tight oil producers are hedged through year-end, output likely to see y/y growth even if prices decline; inventories may continue to build if oil remains in $45-$50/bbl range
- “It is apparent that the downward pressure tight oil producers are generating will not stop until they are seriously crippled by their own actions in a world of lower prices around $30-$35/bbl”
- Real trouble likely in 2018; the year will start with huge level of production, of which only 10%-15% is currently hedged
- Junk bond spreads are already beginning to widen, which is a sign money may soon start drying up; within a year, massive restructuring, many bankruptcies will follow
- OPEC itself can let prices sink; now may be the most opportune time to let U.S. tight oil producers “self-destruct”
- If Saudis maintain production at 10m b/d prices will decline to $30- $35/bbl
- “Let the price sink and do not rescue the market till 2019 at the earliest. Postpone the Aramco IPO and swallow the pain”
- However, for OPEC to follow this path, impact on their own economies will be “devastating” and “pain may be too hard to tolerate”
- Short-term solution will be to cut output significantly by ~700k b/d, mostly from Saudi Arabia, to push prices above $50
- “That will only postpone the inevitable to later in 2018”
Meanwhile, the shorts are piling on. Spec shorts in Brent hit 169 million barrels last week. That’s the highest on record.
Here are WTI shorts:
And do you know who isn’t helping? Those fucking journalists, that’s who. Because all they want to do is write about crude in a bear market.
Fortunately, as we noted a few nights ago, that’s usually a contrarian indicator:
Of course positioning itself is often a contrarian indicator and amusingly, the same journalist who produced the chart shown above (Bloomberg’s Chief Energy Correspondent Javier Blas) is out calling for a short squeeze not based on his own bearish articles, but on stretched bets.
“Oil’s ripe for a so-called ‘short-covering’ rally — where traders who sold contracts hoping to benefit from falling prices buy them back to take profits or avoid losses,” Blas writes on Tuesday, adding that stretched positioning is “a signal prices are vulnerable to a sudden, sharp rebound.”
So who, besides US producers, is exposed to a sharp and sustained downturn in prices? Well, banks of course, who have perpetuated the deflationary dynamic whereby keeping capital markets open to otherwise insolvent producers allowed those operators to hibernate during the downturn and live to pump another day.
“Commodity companies around the world have borrowed roughly $1.4 trillion in syndicated loans from about 1,000 banks with about $210 billion of that exposure being to borrowers that may not be investment grade,” Citi says. The “largest share of $210b exposure is with U.S. banks JPMorgan, Wells Fargo, Bank of America as well as Deutsche Bank, Barclays, Credit Suisse and Mitsubishi UFJ Financial.”
Place your bets.