Why this Oil-Price Bust will Drag Out a Lot Longer than the US Oil Industry Claims, by Wolf Richter

Oil markets are glutted and will stay so for a long time. From Wolf Richter at wolfstreet.com:

The flood of new money began re-surging.

Despite prolific jabbering about output cuts by various OPEC oil potentates, and despite promises by Saudi Arabia that Russia would cut in conjunction with OPEC, OPEC’s production in October rose to 33.64 million barrels per day, the highest in many years, up 1.05 million barrels per day from May, on surging production in Iran and Iraq and near record production in Saudi Arabia. Russia set a post-Soviet record in October, with 11.2 mmbpd.

Global demand for crude oil has crept up to 97.3 mmbpd in the third quarter, but production has risen to 98.3 mmbpd. In other words, in the quarter, the world produced 1 million barrels per day on average that went into storage, from where it will exert pressure on prices in the future.

On Sunday, Iran’s Oil Ministry cited President Hassan Rouhani at a ceremony to formally open the project west of the Karoun River, near the border with Iraq. Production there had jumped from 65,000 barrels per day in 2013 to 250,000 barrels per day now, Rouhani said. And it “must reach one million barrels per day.”

There will be more OPEC meetings, more jabbering, and more promises, but none of this is likely to make significant headway in cutting production.

And in the US, new money has begun to surge back into the sector. In select locations, production is soaring. The US matters because it has become the global “swing producer” – the oil producer with the most excess capacity that can be unleashed on short notice.

While production has begun to decline in May 2015, it has recently started to perk up again. The EIA, in its most recent Short-Term Energy Outlook, forecasts that production will continue to increase through the second quarter of 2017.

According to law firm Haynes and Boone, there have been 105 oil and gas bankruptcies in the US and Canada since the beginning of 2015, involving $67.9 billion in debt – so small fry. The US companies in bankruptcy account for only about 5% of US oil-and-gas production. None of the bigger whales have washed up on the beach.

These companies and the many companies that have held a gun to their bondholders’ heads and have “restructured” their debts outside of bankruptcy court have gotten fresh money, and they continue to exist. They’re drilling and producing, some in a zombie state, others with more vigor.

The flood of new money began re-surging months ago. In the US, oil production isn’t governed by one monolithic oil company, such as in Saudi Arabia, but by money flow and by numerous producers fighting against each other and the world.

But money flow and production growth has shifted to the Permian Basin (which ranges over parts of West Texas and into southeastern New Mexico), at the expense of other major oil fields in the US. The number of active drilling rigs in the Permian has soared 65% since the low point in April, to 218, compared to 234 rigs in the rest of the US combined!

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