No Deal

Jim Brown
 
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The oil ministers of Saudi Arabia and Venezuela met in Riyadh on Sunday. The Saudi minister, Ali al-Naimi, said he held "successful" talks on Sunday with his counterpart from Venezuela. In this case, successful did not mean productive.

The Venezuelan oil minister had held talks with Russia, Qatar, Oman and Iran in an attempt to get an emergency meeting of OPEC producers to cut production and lift prices. Even though the Venezuelan minister said the atmosphere in the meeting was "positive" nothing was accomplished. If there had been any agreement on a larger OPEC meeting or a meeting between Saudi Arabia and Russia the news would have been blasted across the headlines all around the world. When both ministers called the meeting successful and positive but refusing to say anything else, it does not take a genius to realize they were trying not to shock the market with the failure of the process.

If Saudi Arabia or Venezuela had come to the microphone after the meeting and said "Saudi Arabia is refusing to meet with Russia or call an emergency OPEC meeting" the price of oil would have crashed back to $25 in a matter of hours. Even with the neutral comments, the price dipped to $29.65 intraday before recovering slightly at the close.

Traders will have to live with the fact that the headline spam from Russia and Venezuela is probably over and the reality is that they will be an oil glut for many more months. U.S. inventories rose by +7.8 million barrels last week to 502.7 million and a record high. There are at least six more weeks of inventory builds ahead before the summer driving season and the end of refinery maintenance. The odds are very good we could see a new low during those six weeks unless a new headline appears.

The carnage in the oil patch is reaching a fever pitch. In 2015 42 U.S. energy companies filed bankruptcy with debts in excess of $17 billion. Over the last two weeks S&P cut its ratings on 13 energy companies. Moody's put 120 energy and mining companies on watch for a negative downgrade. Wolf Research said yesterday that one third of U.S. producers could file bankruptcy over the next 12-18 months. There is more than $60 billion in distressed energy debt owed by U.S. companies. There is another $50 billion in debt that is expected to become distressed this year.

Over the last year U.S. energy companies have lost more than $840 billion in market cap.

Chesapeake Energy (CHK) roiled the markets on Monday when it became known they had hired a bankruptcy-restructuring firm to provide assistance. Chesapeake said they had no intentions of filing bankruptcy "at this time." The company has $500 million in debt payments due in March, $60 0million in January and $1.1 billion in August 2017. They are the second largest gas producer in the USA.

Linn Energy (LINE) said on Friday they had exhausted their credit facility and were considering strategic options. With debt payments looming and cash flow shrinking the outlook is grim.

One of the challenges for producers in 2016 is that their hedges have expired. When oil prices began to decline in 2014 most producers had hedged 2015 production at much higher prices in the $70-$80 ranges. This allowed them to sell their oil in 2015 at prices much higher than the market. Unfortunately, very few have any hedges for 2016 at any price that really provides them some relief. The 2016 futures contracts at the beginning of 2015 were down in the $50 range and that quickly deteriorated as the year progressed. If you were trying to hedge production in 2017 today your price would be in the mid $40s. With WTI at $30 that is still an improvement but I am sure most producers expect prices to be over $40 by 2017 so they are not actively hedging.

For the week ended Friday Baker Hughes said active rigs declined by -48 with 31 of those oil rigs. The week before the company said active rigs could decline by 30% or more in 2016 because of the drastic cuts to capex spending by U.S. companies. Schlumberger said revenue in 2016 could decline another 25% because companies were running out of money and "sudden and unplanned" contract changes were becoming common place.

Hess Corp announced a capex cut of 40% that was 20% lower than their prior guidance. Continental Resources cut capex by 66% to $920 million to save cash. They said they were "cutting production" to 200,000 bpd to reduce costs. Noble Energy reported a 50% cut to capex for 2016. This is just a few of the dozens of announcements over the last two weeks. Conoco cut their dividend by 66% to 25 cents in order to preserve cash.

While some investors and funds are going "all in" on energy positions today at what they consider are bargain prices, there is one major investor that just went "all out." That was T. Boone Pickens who closed all his positions because of frustration with the market.

Pickens has been a legendary investor for the last 50 years. He has made and lost several fortunes in the oil patch and he is throwing in the towel on the current market. He added to positions in Q3 when crude prices bounce for a couple months. He sold those positions in Q4 when prices collapsed again. He closed out the rest of his positions in January because of the volatility.

He said he is staying in cash until inventories begin to decline. Normally that occurs in late April and early May. Inventories rise through refinery maintenance season which has already started. Refinery utilization fell to a three-month low at 86.6% last week.

Inventories rise until the refiners come back online and begin full production of summer blend fuels. That draws down inventories and prices rise ahead of the driving season. Pickens said he will begin to develop new positions when inventories begin to decline.

He believes the lows in WTI are behind us but he does expect some extreme volatility ahead as Iranian shipments begin to compete in price with other OPEC producers. Iran announced a 160,000 bpd sale to Total today as they move back into the market. He also believes the chance for a Saudi Arabia deal with Russia on production cuts is a fantasy. Saudi wants to pressure Russia with low prices to prevent them from funding more aggressive moves into the Middle East.

With U.S. production remaining flat rather than declining as expected and Iran, Iraq and Libya increasing production the outlook for prices is still "lower for longer." The odds are good we will retest the January lows in the weeks ahead.


This means we should see record inventories reach even higher levels in the next few weeks. Record inventories should mean low prices and that should be negative for the equity markets.

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.

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  Active Rigs

Active drilling rigs declined -48 to 571 for the week ended on Friday 2/5 and that is an 18 year low. Oil rigs fell -31 for the week to 467. Active gas rigs declined -17 to 110. Active rigs have now declined -1,360 since the high of 1,931 in September 2014. Active offshore rigs fell -2 to 24.


Oil Inventories Week Ended 1/29/16

Crude inventories rose +7.8 million barrels to 502.7 million and a record high.

Refinery utilization declined slightly from 87.4% to 86.6%.

U.S. production declined -7,000 bpd from 9.221 to 9.214 mbpd.

Cushing inventories rose from 63.4 million to 64.2 million and a record high. Cushing only has 3.0 million barrels of available capacity at that level.

Gasoline inventories rose +5.9 million barrels to 254.0.

Distillate inventories fell -0.8 million barrels to 159.7 million.

Details in the graphic are for the prior week. All numbers are not available until the Friday of the following week.

In the graphic below green represents a recent high and yellow a recent low. The blue-green represents a record high.


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.

Free Trial Now

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