Although this article is trying to put a little positive spin on US shale, there is one point in it that jumps straight out at me.
http://oilprice.com/Energy/Energy-General/US-Shale-Is-Too-Adaptive-For-The-Saudis-To-Kill.html
"Every spike above $50, as happened last week, is met by a wave of hedging from shale companies. Late last week, U.S. producers locked in new production at north of $50 for 2016 and 2017 delivery. As prices reached about $53, any further rise was limited by sellers locking in prices. Even so only some 11 percent of expected 2016 production is forward sold according to
IHS Energy, quoted in Reuters."
If it is true that only 11% of expected 2016 shale production is forward sold then as I've been saying all along 2016 should be the year this industry breaks. They can keep buying hedges as the price spikes over $50 but this is probably not even breakeven for most.
I can see this cycle of oil price rises and pull backs going on for a little while longer (if there are no left field catalysts out of the middle east that cause a violent spike in price of course). But what that statement above doesn't say is how much production is currently forward sold? If currently a large percentage is forward sold and only 11% is currently estimated to be forward sold for 2016 then many shale companies are probably waiting for the price to rise before renewing contracts. The problem is they can't wait forever for prices to improve to points that justify their individual businesses cases. So what do they do when their hedging runs out. Tell their bond holders/financiers/bankers that they are going to buy hedges that guarantee loss making production? Sell their oil into a spot market at a loss? or shut up shop? Well the world of finance has proven itself to be an unpredictable and unintuitive place now for many years and people have been willing to throw zero interest rate dollars at building over capacity in almost every commodity sector that we can think of. The reality now though is that the penny has dropped, look at the Glencore debt tantrum for example. The money won't be there when the shale industry puts its hand out for the next free ride. This time around they'll need to get a ticket at the gate or be left outside to watch the others having a gay old time on the thrill rides at the carnival. Once the oil futures traders see crowds of disappointed children at the carnival gates the penny will drop, the prices will continue to rise and we will see a sentiment driven change in the shares prices for oil producers that actually make a buck at the then prevailing price of oil at the time.
2016 will IMO be a good time to be holding a lot of shares in Cooper Basin oil stocks. I truly believe that 67cents for DLS will look very cheap in one years time. The people who backed the truck in at 50cent levels will look really smart then in my opinion. My lowest purchase was 54cents as I took a wait and see attitude when catching the falling knife after the oil stocks didn't react to the big bounce off the bottom and continued to fall (how dumb was the market then?). I did however alert my father to the opportunity and he backed his truck in at 53cents and then again at 48cents. He was already thanking me when DLS got to 60cents. I can't imagine what he will be saying this same time next year.
Eshmun
