American Oil and Gas Reporter - April 2016 - 111

ConventionCoverage: Texas Independent Producers & Royalty Owners

Oil Market Showing Signs
Of Finding Equilibrium
By Del Torkelson
SAN ANTONIO-Oil markets have
been wildly out of balance, but some
significant indicators suggest the world
glut is draining away, indicated Bob
Brackett, senior vice president and senior
analyst for Sanford Bernstein, on the first
day of the Texas Independent Producers
& Royalty Owners Association's 2016
annual convention, Feb. 22-24 in San
Antonio.
Remarks the following day at TIPRO's
luncheon by Continental Resources President and Chief Executive Officer Harold
Hamm also offered producers reasons to
hope oil prices would recover soon.
Hamm pointed to 2000 and 2009 as
examples of a 1 percent supply swing
moving oil prices $35. The oversupply
in early 2016 stood at 1.8 million barrels
a day, Hamm said, but the lion's share of
that was a necessary floor. "The system
needs about 1 MMbbl/d to work, so we
are getting fairly close," he assessed.
"You cannot run a grocery store without
some bread on the shelf. You cannot
pump oil straight to refineries without
having about 1 million barrels in tanks
somewhere."
Global View
Brackett's presentation opened with
metrics that demonstrated oil's historically
low value. He noted that although most
commodities were struggling, crude's
slump was the worst. He also called the
drop in upstream capital spending extraordinary, since the sector's capital expenditures had never declined two consecutive years going back to at least the
mid-1990s, but had dropped in both 2014
and 2015, and were on pace to slide another 30 percent in 2016.
To remove the statistical noise of fluctuating currency values, Brackett offered
a historical look at how much oil an
ounce of gold would buy. Based on prices
recorded a few weeks before TIPRO's
convention, he said, an ounce of gold
could purchase an unprecedented 47.5
barrels. "When oil is expensive, an ounce
of gold may get me 10 barrels; when oil

Drilled, uncompleted (DUC) wells are not
poised to flood the market with new production, predicts Sanford Bernstein analyst Bob Brackett. Brackett, who spoke
on the first day of TIPRO's 70th annual
convention, Feb. 22-24 in San Antonio,
indicated that his firm estimated new
output from DUCs was unlikely to top
200,000 barrels a day.

Agency statistics show that worldwide
oil demand grew 1.6 MMbbl/d in 2015.
"A global economy that grows between
3.0 and 4.5 percent typically adds 1.0
MMbbl/d-1.5 MMbbl/d," he detailed.
"Frankly, 1.6 MMbbl/d is fantastic."
However, he continued, supply expanded 2.7 MMbbl/d, almost all of which
was attributable to Saudi Arabia and Iraq.
Saudi Arabia added barrels from its spare
capacity to an already oversupplied market
either to defend market share, out of worries about carbon taxes and electric vehicles, or to weaken Russia and the Shia
states, Brackett hypothesized. Meanwhile,
he suggested, Iraqi supply growth stems
from the country's technical service contracts with foreign operators.
"TSCs are structured so that if I spend
a dollar drilling, I get back a dollar and a
little more," he described. "Those terms
stink when the oil price is high, but when
the oil price is low, those become the
easiest places to put capital. The Iraqis
now want to renegotiate those contracts
to something more aligned with production
sharing agreements. Nonetheless, we understand why Iraq grew the way it did."

is cheap, that ounce of gold gets me 30
barrels," he remarked. "Oil was not this
cheap during the Great Depression, the
Panic of 1907, nor the Panic of 1893.
Something is really different."
Looking for demand-side culprits,
Brackett started with China's cooling
markets, which he noted had weakened
all commodities. "OPEC does not control
the price of copper and there is no shale
revolution for iron ore," he observed.
"The lock-step correlation between China's
market and commodities tells us there is
demand disruption."
Nevertheless, he reflected, although
Chinese oil demand has slowed from recent years' double-digit growth, the country's leading indicator of gasoline demand-automobile sales-still is growing
20 percent a year. "The Chinese are
falling in love with sport utility vehicles,"
Brackett commented.
In fact, he noted, International Energy

U.S. Output Drop
Meanwhile, Brackett reasoned, U.S.
output stayed aloft temporarily because
the U.S. rig count lags three months
behind the price signal, after which it
takes another six months for that drop to
affect production. Interestingly, he suggested, those principles also work in reverse. "You commonly will hear it takes
two weeks to a drill shale well, so the
supply is only two weeks away. That is
incorrect," Brackett stated. "If we ask
North America for more barrels than we
have today, there will be a nine-month
lag."
Citing permitting data from the Texas
Railroad Commission, he indicated that
it required months and not weeks to construct, drill, complete and tie in shale
wells and bring them to peak rates. "You
can drill some of those wells in a couple
weeks, but the whole point of the shale
revolution is that these wells do not flow
without massive hydraulic stimulation,"
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