February 26, 2019 - 5:50 AM EST
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The Power of the Tweet

President Trump is proving once again the power of the tweet, writes senior market analyst at Price Futures Group Phil Flynn.

President Trump is proving once again the power of the tweet. Crude oil prices that were on the rise because of economic optimism surrounding U.S.-China trade talks and OPEC production cuts, not to mention the rising tensions in Venezuela, got slammed after President Trump decided to tweet about oil. “Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike - fragile!”

Oil and products retreated immediately following the tweet as the market remembers the President has a strong relationship with Saudi Arabia, the most influential member of OPEC. But it is the President that should really chill out because it is unlikely that OPEC would listen to him. OPEC and U.S. oil producers are still trying to recover from that last tweet engineered oil price crash that not only brought down oil but the whole stock market along with it. By granting waivers to Iran’s oil buyers, it caught not only OPEC producers by surprise, but it also caught U.S. shale producers off guard. This time OPEC will not listen to the tweet, even if the President signs the No Oil Producing and Exporting Cartels Act, commonly known as NOPEC.

The catalyst for the tweet was the rising cost of gasoline. The Lundberg Survey has risen 10¢ per gallon in the last two weeks. The current average at the pump is $2.395 per gallon as tracked by AAA. The President worried about rising gas prices and its impact on the consumers may be short sighted because these sharp price drops are taking its toll on U.S. producers as well.

One producer emailed me about the President’s tweet saying “In addition to the trouble it causes shale producers, it is also very difficult for little “stripper well” companies across the middle of the country. We are struggling to maintain employees, service debt, and have anything left over for capital expenditures in order to maintain our production levels.“

Oh, sure the U.S. is the world’s largest oil producer but getting to the top is one thing, staying there is another. The U.S. energy industry achieved a historic milestone by raising U.S. oil production to a record breaking 12 million barrels of oil per day, cementing our spot as the world’s biggest oil producer. The reason of course is no longer a secret. The U.S. energy industry transformed the world with innovations on fracking, combining it with directional drilling and are now making history. Instead of being held hostage to foreign countries for oil, we are now the biggest producer in the world improving not only our economy, but our national security as well. Fears of the U.S. running out of oil are gone and now we are talking about being self-sufficient. This upset the world oil order, which has dominated by OPEC, who in response to the increasing shale threat, tried to pump U.S. shale out of business back in 2014 but failed and now the U.S. continues to change the energy world. Yet while the upside on U.S. oil production seems almost unlimited; to keep that trajectory of rising oil production we will have to work harder as legacy production decline rates are accelerating at a quickening pace.

The EIA explains that the legacy production change is the change in total regional production from one month to the next, excluding production coming from newly drilled wells. Production from a well typically declines over time, as pressure from the formation around the wellbore is depleted. In the absence of new wells being drilled, the group of all existing wells in a region will decline in production from one month to the next. As such, the Department of Petroleum Resources (DPR) separates the wells in a region into groups of newly drilled wells and existing, or legacy, wells, measuring the production levels separately.

Each month, the group of newly drilled wells from the prior month is moved into the group of legacy wells, and a new group of newly drilled wells is measured. It is important to note that as the number of wells moving into the legacy group increases, the legacy production change tends to become more negative; i.e., greater total production declines from month to month. This method does not translate directly to what many people traditionally consider well decline curves or decline rates.

Still at the same time, in the U.S. shale patch, what it means is that shale oil drillers must drill more wells to keep production moving higher. Instead of just drill, drill, drill, they will have to keep drilling and drilling to offset the declines. To do that, shale operators will need a steady stream of cash and really cannot afford to see an oil price crash.

For example, let us look at the most prolific shale production area in the Permian basin. In the EIA’s last drilling productivity report it showed that new production in the region increased by 292,000 barrels-per-day. That is awesome, but the decline rate had you losing 249,000 barrels for a net gain of 43,000. Very impressive gain yet as production declines accelerate, it will still take intensive drilling to keep production moving higher. It’s not that the producer doesn’t have the technical ability to do that, they do, but it is going to take a lot of cash. Shale decline rates are faster than that of traditional projects so you can’t stop drilling and adding wells, or the production will continue to fall.

In other words, the best thing for U.S. energy producers are solid strong oil prices. Last year’s late break may cause a surprise drop in U.S. production later this year. The price crash in oil caused some firms to pull back investments because profits fell. Take Pioneer Resources (PXD), who the Wall Street Journal says is one of the biggest oil and gas producers in the hottest U.S. shale drilling region, the Permian Basin of West Texas and New Mexico, with a market capitalization of about $24 billion, according to FactSet. The break in the price caused Pioneer’s declared fourth-quarter profit of $324 million, a 51% decline from the same period a year earlier. Talk about a decline rate. They also had to spend about 20% more in capital than analysts expected.  So, in other words the company had to spend more and drill more to make a lot less. The Stock fell about 7% according to the Journal and it may have been a reason that CEO Timothy Dove decided to retire early.

Aljazeera reports that at least 19 people have been killed in southern Libya, according to a member of parliament, as forces loyal to strongman Khalifa Haftar fought for control of oilfields in the region. Speaking to Al Jazeera late on Sunday, Mohamed Linu, a member of Libya's internationally recognized parliament, said Haftar's Libyan National Army (LNA) killed civilians, including children, and set fire to more than 30 houses in the southern city of Murzuq, including his own. The politician said that farms were also destroyed, and more than 100 cars were stolen. Al Jazeera could not independently confirm the report. The battle for Murzuq, a city 900 kilometers south of the Libyan capital, Tripoli, is the first battle for a city fought by the LNA since it started a campaign to take control of oilfields in the south a month ago.

The tweet did not change the bullish outlook look for turnaround Tuesday and use this market weakness to hedge.

Source: MoneyShow.com (February 26, 2019 - 5:50 AM EST)

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