The most powerful Hurricane to hit Texas in more than 50 years has devastated much of the coast, and the historic flooding is now causing havoc in the energy markets.

The rain is not over, and will continue over the next few days, spilling a year’s worth of rain within a week.

ExxonMobil shut down its Baytown refinery, the second largest in the United States with a capacity of 560,500 bpd. Royal Dutch Shell closed its 360,000 bpd Deer Park refinery, according to S&P Global Platts, and Phillips 66 shut down its 247,000 bpd Sweeny refinery. 

All port facilities in Houston and Corpus Christi were also shut down on Monday, not open to vessel traffic. That means that no refined products or crude oil will be either imported or exported for the time being.

The implications of the refinery outages and the port closures could be dramatic, although how long it will last is uncertain. The first obvious effect is a disruption to the production of refined products, which could have substantial effects on the U.S. fuel supply. As of Monday morning, more than 2.3 million barrels of daily refining capacity was knocked offline, according to Reuters, or about 13 percent of the nation’s total. That has already forced gasoline futures upby 7 percent to their highest levels in two years.

The effects will reverberate well outside of Texas. For example, the massive refineries on the Gulf Coast send gasoline through a major artery to the U.S. Mid-Atlantic and Northeast. The disruption will mean that much of the country could see higher gasoline prices soon. The Gulf Coast also exported 2.7 mb/d of refined products in May, much of which was sent to Latin America and Europe.

Related: Is Wall Street Funding A Shale Failure?.

In fact, as the world’s largest refined product exporter, disruptions in the U.S. will be felt around the world. “Any hiccup in U.S. refined product exports is highly disruptive to the supply chain given the dependency of nations like Mexico and other Latin American countries on the U.S.,” Michael Tran, director of global energy strategy at RBC Capital Markets, told Reuters. Worse, refined product output in Latin America has fallen recently, with Mexico and Venezuela most vulnerable to supply outages in Texas.

“If there are a lot of shutdowns, whatever capacity is running will get consumed in the U.S., it will have to be, so Latin America will have to get its barrels from elsewhere. It creates a domino effect,” Vikas Dwivedi, global oil and gas strategist at Macquarie, told Reuters.

Texas imported 1.9 mb/d of crude oil in May, while the Gulf Coast also exported 0.75 mb/d. The port outages will wreak havoc on oil differentials – Gulf Coast refiners import heavier crude to process, while coastal ports export lighter oil coming from Texas shale fields to customers overseas. In the short run, the U.S. could see a bit of a glut of lighter forms of oil, while heavy oil producers overseas will be hit by a temporary interruption of purchases from Texas refiners. There are reports that oil tankers are idling offshore in the Gulf, but they will likely have to wait a little while longer before they can dock.

Those disruptions could also inflict pain on upstream shale producers. S&P Global Platts reports that two crucial pipelines servicing the Permian Basin – the BridgeTex and Longhorn pipelines – saw operations suspended, taking 650,000 bpd of takeaway capacity offline. That could weigh on the prices that Permian shale drillers receive for their product. Other pipelines in the state were also temporarily idled.

Cheniere Energy’s Sabine Pass LNG export facility was spared, with only minor damage reported and no expected interruption to service.

Meanwhile, oil production offshore was also affected. S&P Global Platts says that an estimated 378,633 bpd of oil output was knocked offline as of August 27, or about a fifth of the total production in the Gulf of Mexico, while a quarter of the region’s natural gas output was also sidelined. More than 100 oil platforms in the Gulf were evacuated, although those platforms will probably come back online much quicker than the onshore refineries.

Related: Aggressive U.S. Oil Sanctions Could Bankrupt Venezuela

The damage to upstream shale production onshore is a bit more uncertain, although could be significant. ExxonMobil’s shale unit, XTO Energy, shut in all production that was situated in Hurricane Harvey’s path, although production details were not provided. S&P Global Platts says that thousands of wells could be affected in the Eagle Ford in South Texas, and Platts Analytics’ Bentek Energy says that the Eagle Ford is currently producing 1.34 mb/d, which is down slightly from the 1.41 mb/d the region is expected to average this month, according to EIA data.

Hurricane Harvey was one of the worst in Texas’ history, but even as the winds die down, the damage from rain remains. Another 15 to 25 inches of rain is possible by Friday, so the worst of the flooding is not over.

By Nick Cunningham of Oilprice.com

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The U.S. Shale Oil Industry is in serious trouble as its debt spirals higher due to its massive production decline rates.  While the Mainstream media continues to put out hype that the shale oil industry can produce oil at $30 or $40 a barrel, the reality shows that it’s becoming difficult just to finance its debt.

Yes, it’s true.  Many of the shale oil companies are bringing on new wells just to pay the interest on their debt.  Now, this wasn’t the case back in 2008 when the U.S. Shale Oil Industry first took off as most of the shale energy companies held very little debt and paid a tiny percentage of their operating income to finance its debt.

For example, Continental Resources who labels itself as “America’s Oil Champion” is one of the larger shale oil producers in the Bakken Shale Oil Field in North Dakota.  Before Continental Resources started to pour money into the Bakken, its total debt was $165 million, and its annual interest expense was a paltry $13 million in 2007:.

However, if we scan across the table above, we can see that Continental Resources paid $321 million in 2016 just to service its debt that has now ballooned to $6.5 billion.  If we divide the $321 million interest expense by its $6.5 billion in debt, it turns out to be about an average 5% interest charges.   Can you imagine paying nearly one-third of a billion dollars in an interest payment?

To get a better idea how bad the financial situation is at Continental Resources, let’s look at their Q2 2017 report:

You will notice that Continental Resources recorded a $29 million operating income loss in the second quarter.  Unfortunately, they did not have the funds to pay their $72.7 interest expense that quarter.  We can also see in the first half of 2017, Continental Resources made an operating income profit of $48.1 million, but their interest expense was $144 million.

So…. what we have here is one of the larger shale oil producers in the Bakken that didn’t make enough operating income just to cover its interest expense.  If the oil price does not rise to $70-$80, these shale oil producers are going to have difficulty paying their interest expense.

Now, the reason Continental Resources and other shale oil companies in the Bakken are in such financial distress is due to the information displayed in the graph below:

This chart shows the estimated net cash flows of the shale energy companies producing in the Bakken.  The BLACK BARS represent the monthly net cash flows, and the RED AREA show the cumulative negative free cash flow in the Bakken.  According to an energy analyst, Rune Likvern of Fractional Flow, he estimates the cumulative free cash flow in producing oil in the Bakken from 2009 to the middle of 2016 was a negative $32 billion.

The graph above reveals to anyone who can do simple grade-school math is that producing shale oil in the Bakken came a huge loss.  Because the energy companies couldn’t make a profit producing oil in the Bakken, they borrowed $32+ billion of investor money to continue drilling wells.

The main factor that is causing the utter failure of the U.S. Shale Oil Industry is the massive decline rates being experienced by the different shale plays.  According to the EIA- U.S. Energy Information Agency’s recent Drilling Productivity Report, the top five Shale Oil Fields (Basins & Regions) will suffer decline rates ranging from 71% to 88% in September:

The Permian Region in Texas will lose 71% of its production in September, while the Niobrara will decline 75%, the Anadarko, 78%, the Bakken, 84%, and the Eagle Ford a stunning 88%.  The average decline rate for these five shale oil plays will average 78% next month.  That is one heck of a lot of oil.

NOTE:  The EIA puts out a Drilling Productivity Report each month where they estimate what the decline rate and new production amount will be the following month.

Again, using the data put out by the EIA, here is the decline of barrels per day:

These five shale plays are estimated to lose nearly 400,000 barrels per day of oil in September.  If we multiply that by 30 days, it comes out to be a whopping 12 million barrels per oil. Again, that is in just one month.

However, these five shale oil fields will be adding more oil in September to offset what they lost to in production declines.  For example, even though the Permian will lose 158,000 barrels per day (bd) of production next month, they are forecasted to add 222,000 bd of new oil per day.  Thus, the net result is an addition of 64,000 bd in September.

Unfortunately, the Permian Region is going to experience the same fate as the Bakken and Eagle Ford.  Both of those shale oil fields peaked and will likely decline shortly after when investors realize they are throwing away good money after bad.  Here is the estimated oil production decline for the Permian in September:

Once the U.S. Shale Oil Industry finally peaks and declines, it could get gruesome.  Also, when investors realize they will not be getting back their initial investment, we are going to hear a great big SUCKING SOUND of money leaving the Shale Oil Industry.  Thus, rapidly falling investment means a massive reduction in drilling activity… and then a significant drop in shale oil production

As the world realizes shale oil production wasn’t even profitable at $100, few will be stupid enough to copy the “U.S PAY ME NOW, AND I WON’T PAY YOU BACK LATER” business model.  It was a Ponzi scheme from day one.

Check back for new articles and updates at the SRSrocco Report.

In our previous article PART I (Delinquencies Pile Up – Will Commodities Make A Massive Move Soon?) we explained and showed you the delinquencies rising in various areas of the credit market and what it means.

Now, we get to the fun part of our research.  Assuming our Head-n-Shoulders Top formation continues to play out and the US and Global markets continue to play the Credit/Debt game (and we are really watching China as recent news from the IMF and others is that China is trying to hide massive debt defaults), what do we expect the markets will do and how can we profit from these moves?

In short, we are cautiously watching the global markets for signs of continued weakness and signs of a debt contagion situation.  There has been quite a bit of news that global debt is an issue with China, Italy, Venezuela, Greece, Puerto Rico and others.  Our concern is this debt issue turns into a cancer like disease for the rest of the globe.  And in our opinion, it would be rather easy for government, banking or corporate institutions to become a “black hole” that creates another crisis event.

Our recent article reviewing the potential of a Technology “DOT COM Do-Over” clearly illustrated the hype that is current found within the global technology markets.  Technology has been on fire for the past 3+ year because global ROI has languished and the global FANGS have provided a much greater ROI opportunity than almost anything else.  This focus on technology may setup to become an issue that drives a substantial market correction.

….for larger charts & more analysis continue reading HERE

Oil stocks have been performing dismally this year, and oil prices have failed to sustain a rally, so why are these stocks still attractive? Low valuations and high dividend yields, say analysts. 

Supermajor oil companies are living a new reality that is based on new profits in a forever-low oil price environment—and globally, analysts say, the oil sector is a great investment.

Value has returned, because international oil giants have adapted.

The initial enthusiasm over OPEC’s production cut deal died out rather unceremoniously, and oil prices only enjoyed a brief rally, hammered down continually by rising U.S. supply and slower-than-expected drawdowns on inventory.

Since the beginning of the year, the oil stocks have underperformed the broader market indices both in the U.S. and in Europe.

As of the early morning on August 18, the Stoxx Europe 600 Oil & Gas index—which includes Europe’s majors Shell, BP, Total, Statoil, and Eni, among others–was down 11.94 percent year to date.

At the same time, the Stoxx Europe 600 index was up 4.27 percent year to date.

It’s all rather bleak. Until you look at dividend yields and valuations.

Take the oil sector in Europe, for example. It has the highest dividend yield, so there’s value in investing, according to two analysts who spoke to CNBC’s Squawk Box this week.

In the European market, the oil sector has a high dividend yield of about 6 percent—the highest there is—which adds up to real value, says Nick Nelson, head of global and European equity strategy at UBS.

According to Nelson, oil prices could move up toward US$60 by the end of the year, due to underinvestment in projects in 2015 and 2016, which could lead to a crunch in supplies in 2019 and 2020.

The looming shortfall in supplies in just a few years is not a new prediction.

In March this year, the International Energy Agency (IEA) said that unless the industry approves fresh investments in new projects, global oil supply may be struggling to catch up with demand after 2020, which could result in a sharp jump in oil prices. 

For the nearest term by the end of this year, another expert, Beat Wittmann, a partner at Porta Advisors, told CNBC that he saw the range for oil prices somewhere at between US$45 and US$60.

Related: Russia Claims To Have Invented Alternative To Fracking

The upper end of that projection–oil prices at US$60–is below most of the current analyst forecasts, with expectations for the WTI price predominantly in the low US$50s, or below.

Like Nelson, Wittmann also believes that there’s “great value in supermajor oil companies.”

Supermajors have slashed costs and capex, and “they’ve digested and readjusted balance sheets and quite frankly that investment case does not so much depend on if the oil price is at $50 or $60,” Wittmann argues.

The oil sector globally is an attractive play for investors right now, according to the expert.

Supermajors have indeed realigned plans and investments to the new normal in oil–around US$50—half the oil price they were accustomed to in the 2014 pre-crash dizzy spending days.

Now Shell is getting ready for ‘lower forever’ oil prices, its chief executive Ben van Beurden said at the Q2 results release last month/

BP is also setting its strategies for the lower-for-longer oil reality.

“BP is continuing to plan for a lower oil price world,” chief executive Bob Dudley said earlier this month, adding that “I’m not expecting big shifts in prices anytime soon and a price of $50 a barrel looks like the right number to plan on for the rest of the decade.”

According to Goldman Sachs, Big Oil is now repositioning itself for better profitability and cash generation in the oil-at-US$50 world than they were in the US$100-oil price environment, due to simplification, standardization, and deflation.

Related: Natural Gas Prices Poised To Rise As Exports Boom

In the second quarter this year, Europe’s Big Oil generated cash capable of covering 91 percent of the companies’ combined outlays on dividends and capital expenses, Goldman Sachs said.

Oil stocks have suffered alongside oil bulls that had bet on significantly higher oil prices, but, according to the experts who spoke to CNBC, now may be a good time to invest in the energy sector.  

By Tsvetana Paraskova for Oilprice.com

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One of the key objectives for OPEC is to bring down inventories, a goal that has been elusive this year. But if the oil futures curve is anything to go by, the oil market is showing signs of tightening.

Brent futures have recently begun to exhibit a state of backwardation, which is when near-term oil futures trade at a premium to contracts dated further off into the future. This is the first time in years that backwardation has occurred, and most analysts are taking it as a sign that the oil market finally could be getting closer to rebalancing. In the past, backwardations have accompanied a rebound in the oil market after a bust, while a contango (the opposite of backwardation) tends to occur when the market crashes because of a supply glut.

There are several reasons why backwardation is bullish, which has been discussed in previous articles. A declining futures curve makes it uneconomical to store oil, so backwardation could accelerate the drawdown in inventories. It also complicates the hedging strategies of shale producers, which could hold back expansion plans. It also is a symptom of tightening near-term supplies, although, to be sure, the flip side of that argument is that it could merely be a reflection of expectations that the supply glut will reemerge at some point in the future.  Still, backwardation is occurring at a time when there are other bullish indicators starting to crop up. The U.S. has seen a sharp drawdown in inventories in recent months, down more than 60 million barrels since March. The IEA and OPEC both recently upgraded their oil demand estimates. “World economic growth has gained momentum,” OPEC said. “With the ongoing growth momentum and an expected continued dynamic in second-half 2017, there is still some room to the upside.”

Related: Oil Futures Point To Higher Oil Prices

The view of Wall Street is also becoming more bullish. Hedge funds and other money managers have amassed a large number of long positions on recent weeks. For the week ending on August 8, investors stepped up their bullish bets on Brent by the equivalent of 58 million barrels, according to the FT, which was the largest weekly increase towards net length since December.

“It’s hard to be aggressively negative if every week you’re getting stronger numbers,” Paul Horsnell, global head of commodities research at Standard Chartered, told the FT, although he added that “there is still resistance. The market is not willing to push prices too far up.”

Indeed, there is little prospect of oil prices moving much beyond $50 per barrel. Not everyone is even sold on the notion that the market is tightening. OPEC production is at its highest point so far in 2017, U.S. shale continues to rise, and some long-planned projects are coming online later this year in Canada and Brazil, for example. “There is no way this oil can be accommodated into the market so prices are going to have to give at some point,” Mr Dei-Michei of JBC Energy told the FT. “This bullish sentiment cannot last.”

In fact, swings in sentiment, like a pendulum, are typical. More than once this year, the bullish positions have built up too far, only to be undone when sentiment shifted, causing a steep selloff in oil prices. Following the price crash in June, the profoundly bearish positioning amongst hedge funds and other money managers also went too far, causing shorts to be liquidated and bullish bets to remerge – which, again, accompanied a rebound in prices.

All of that is to say that the most recent shift towards long bets on oil futures probably can’t carry oil prices all that far. The underlying fundamentals simply don’t justify significant price gains…at least for now. “They’re going to have to dig in for the long haul,” Neil Atkinson, head of the IEA’s oil markets and industry division, said on Bloomberg TV, referring to the OPEC cuts. “Re-balancing is a stubborn process.”

In short, the shift into backwardation in the futures market suggests that the supply balance is heading in the right direction, and it probably puts a floor beneath prices for the time being. But it doesn’t necessarily mean that oil be heading much higher than $50 per barrel anytime soon.

By Nick Cunningham of Oilprice.com

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