Oil producers are continuing to slash costs every quarter but they are still raising production. This has got to be OPEC's worst nightmare.
OPEC or rather Saudi Arabia is at war with high cost producers around the world. The Saudi game plan is to sell crude oil cheaper than most companies/countries can produce it. Since operating at a low is a good way to go out of business the high cost producers were expected to shut down unprofitable production and therefore reduce the amount of oil on the market. That has not worked out as Saudi Arabia planned.
We are deep into the Q3 earnings cycle and the stories are almost all the same. Producers are reporting losses or minor profits and announcing another cut in capex expenses and slowdown in drilling. The decline in drilling is playing out as Saudi hoped but production is still rising and that has got to be driving Saudi crazy.
The next OPEC production meeting is December 4th but they are not expected to cut production unless Russia also agrees to a cut. That is not likely to happen and Iran and Iraq are both gearing up to increase production and neither of those countries are going to agree to any production cuts.
Devon Energy (DVN) said they were making additional cuts to spending that could fall into double-digit percentages. Devon said it would cut exploration spending to $2.0-$2.5 billion for 2016, down from $4.0 billion in 2015.
Chesapeake Energy (CHK) said 2016 spending would be "cut in a meaningful way." Chesapeake is expected to cut spending again by 10-15% in 2016.
Marathon Oil (MRO) is cutting spending by $1 billion. Oasis Petroleum (OAS) said they were cutting spending from $550 million to $350 million in 2016.
Continental Resources (CLR) said it was cutting exploration spending from $3.4 billion to $1.55 billion in 2016.
Chevron (CVX) said it was eliminating up to 7,000 jobs as it cuts exploration spending. They are cutting spending by 25% in 2016 to $25-$28 billion and will cut further in 2017 to $20-$24 billion.
ConocoPhillips (COP) said it was cutting again from $11.0 billion to $10.2 billion. Exxon, with a $34 billion exploration budget also said they were cutting for 2016.
With all that cost cutting you would expect oil production to be dropping like a rock. However, production of 9.16 mbpd last week was a five week high.
Continental Resources raised its production outlook for the full year after a 25% increase in Q3 to 228,278 Boe/d. They now expect the full year production to rise 24-26% compared to prior guidance of 16-20%.
Exxon Mobil produced 3.9 million Boe/d, up +2.3% and guided for another +3% gain in Q4 and higher in 2016.
Chevron's production in the U.S. rose +7.8% in Q3 with total international production at 2.539 million Boe/d.
Laredo Petroleum (LPI) reported a 16% increase in production in Q3. Carrizon Oil & Gas (CRZO) raised full year guidance for the second straight quarter with an 18% increase in Q3 production. Oasis Petroleum said Q3 production rose +10%.
While this constant increase in production rates cannot last it is going to prolong the pain for Saudi Arabia. The industry cannot survive on $45 oil because you can only cut costs so far. Companies have to continue to spend to drill new wells to offset depletion from old wells.
At some point the cash burn rate will take precedence over the cash flow rate. Companies can produce oil at a minor loss just to keep the cash flowing but every month depletes the cash balance in the bank and the available credit line. Eventually production will actually slow.
Analysts expect crude prices in the $60-$65 range in 2016 and mid $80s in 2017 because some of these companies are going to run out of cash and drilling will slow abruptly. However, once crude prices start edging up again the rigs will go back to work but at a much slower pace.
Producers are still working against their hedges they put in place a year or two ago. As those hedges expire in 2016 and they are forced to sell their oil at market prices we could see a dramatic production decline.
There are hundreds of oil and gas properties for sale but nobody is buying. Everyone still believes their properties are worth a lot more than buyers are offering today. Reportedly there is more than $100 billion in energy money searching for assets but until producers become desperate enough the deals will not happen.
If you do not get the posts made to the OilSlick Facebook page, please like our page so you will receive the posts on energy in the coming weeks.
Active drilling rigs declined -4 to 771 for the week ended on Friday and that is another 10 year low. Oil rigs fell -6 for the week to 572. Active gas rigs rose +2 to 199. Active rigs have now declined -1,160 since the high of 1,931 in September 2014. That is a -64% drop. Active offshore rigs declined -1 to 32.
Baker Hughes reported the international rig counts for October and active rigs declined -85 to 2,086. That is down -1,571 from the 3,657 active in October 2014.
Crude inventories rose +2.8 million barrels to 482.8 million. That is only 8.1 million below an 80-year high.
Refinery utilization rose slightly from 87.6% to 88.7%. That is down from the high of 96.1% on August 7th.
U.S. production rose slightly from 9.112 to 9.160 mbpd, down from the 9.61 mbpd and 40-year high in June.
Cushing inventories declined slightly to 53.1 million.
Gasoline inventories fell -3.3 million barrels to 215.3 million.
Distillate inventories fell -1.3 million barrels to 140.8 million.
In the graphic below green represents a recent high and yellow a recent low.
The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.
This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.