The 3 Week Diet System

Wednesday, May 13, 2015

Is The Shale Oil Production Peak The Key Inflection Point For The Stabilization And Continual Rise Of Oil?

May 13:


  • The U.S. has lost 1 percent of its shale oil production this month.
  • Oil production from the major U.S. shale plays is expected to fall 86,000 bpd in June of 2015.
  • The supply of oil worldwide still is higher than the worldwide demand for oil.
Has there been a production peak at the notable Eagle Ford and Bakken shale play areas? According to the most recent EIA report the former statement could yield a yes. The EIA has forecasted that oil production from the seven major U.S. shale plays which include Bakken, Eagle Ford, Utica, Niobrara, Marcellus, Haynesville and Permian, will fall by 86,000 bpd in June of 2015. This month the U.S. has lost 1 percent of its shale oil production, and most analysts believe that this is just the beginning.
On Wednesday, May 13, 2015, oil rose towards its five month high. The factors contributing to the rise were: U.S. crude oil stock piles falling for a second week straight, a weaker dollar, and tensions in the Middle East.
Percentage Change
Percentage Change
Crude Oil
The weekly difference in the U.S. crude oil stock piles has fallen 3.9% just from last week. YOY there is an 8.0% increase and a 7.9% increase in two years' time difference. If U.S. inventories of crude oil continue to fall in the future, there will be more upward pressure on the price of oil.
When the U.S. dollar weakens, oil becomes cheaper to buyers using foreign currency. The Euro rose against the dollar on Tuesday, on the Greece crisis relief. Since Greece averted a bankruptcy default, the U.S. dollar became weaker against the Euro. Short term gains from the dollar weakening are pure speculative and should not be held reliable for long term gains on crude oil.
Finally, there is still a conflict in Yemen due to the Houthi rebellion. Saudi Arabia has led many airstrikes against the Houthi rebels. This has weakened the rebellion, but they have not be destroyed. Iran has gotten involved in this situation via propaganda on supplying the Houthi rebels with more armed weapons. Although, the possible ships that were going to supply the Houthi rebels turned away due to American Warships blocking the path. If there are continual tensions in the Middle East, and Yemen in general, the price of oil will have short upward pressures.
The biggest dictation of where the long term price of oil will be in the future is not from the greenback weakening or geopolitical tensions. Supply and demand is the most powerful dictator on the price of oil in the future. 1Q15 demand for oil was 91.32 mb/d and the supply was 95.047mb/d. Even though supply been higher than demand, WTI prices have risen 14% higher in April compared to March.
(click to enlarge)
(click to enlarge)
The bulls of oil believe that supply and demand spread will soon start closing due to lower U.S. shale production. On the other hand OPEC has increased its production to 31.21 mb/d in April, which is the highest it has been since 2012. It has seemed like OPEC has won the price war against the U.S. shale producers. If there are not future production cuts, the price of oil in the long run will start to decline based on supply and demand theory. The theory that production has peaked in the shale plays in the U.S., and supply is expected to decline in the future, may be the key to decrease the spread between supply and demand. At least this is what the bulls of oil are hoping for.
What we do know is true is that there has been bankruptcies and M&A activity due to the volatility. So far four U.S shale players have filed for bankruptcy. These players are: American Eagle Energy (NYSEMKT:AMZG), Quicksilver Resources (NYSE:KWK), BPZ Resources (OTCPK:BPZRQ), and WBH Energy. If the price of oil does not stabilize investors should expect more bankruptcies in the future. I would love to hear some commentary by some short sellers on the next firm to declare bankruptcy who is a shale player.
There has also been M&A activity in the oil and gas industry due to the low oil price this year. So far Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI), Royal Dutch Shell (NYSE:RDS.A) and BG Group (LON: BG), and Noble Energy (NYSE:NBL) and Rosetta Resources (NASDAQ:ROSE) are all M&A deals currently playing out. I believe that there will be further M&A announcements in 2015 but I will not speculate on which companies I believe are good takeovers.


Oil has been a hot topic for the investing community this year. Investors who bought oil at the lows of ~45 per barrel have made small fortunes in a short period of time. If production continues to decline in the shale areas in the U.S., there will be continual upward pressure on the price of oil. The spread between supply and demand must come closer together though in order for oil to hold these gains. In my opinion I believe that supply will continue to decrease and oil will continue to rise. Only time will tell who will win the price war, the bulls or the bears.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.


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