Morning Update March 3, 2020

First up, something to think about. I found this article yesterday at Shale Drillers Need A Miracle To Keep Production From Falling. In a statement by Olivier Le Peuch, chief executive of Schlumberger, “Shale production growth will go to a new normal … unless technology helps us crack the code”. I feel this statement is all encompassing to the oilfield. There will be the Permian exception, but they have their limits as well. As a whole, I believe Mr. Le Peuch is under the impression that production growth is going to be quite the challenge from here on out.

This statement by Le Peuch supports my focus that producers are running out of efficiency increases. So producers go after their best wells first, using the best technology they have available. Producers flood the market, and just as the demand catches up to supply, the best wells have already been produced… I know there is more to it than that. I know greed drives operators (producing companies) to produce as much as possible while prices are up, causing an oversupplied market. Horizontal drilling and fracking into shale discoveries has simply made it easier to overproduce oil/gas. This all happened in 2015ish, the natgas market was much smaller at the time. Overall production has grown approximately 30% from the beginning of 2016 to the beginning of 2020. This increase is now the standard, now that demand has caught up.

The question going forward is can production keep up once demand growth finally surpasses supply. In the near term, without a doubt. I don’t believe Le Peuch’s statement strongly enough to say next year gas prices are going above $6 or whatever… I think he is simply saying this is coming. I’m sure he’s looking at long term projections for his company. The truth is, production would still be growing, had prices supported the idea. There is still plenty of gas in the ground, and with horizontal drilling and fracking, it’s easy to get to. My efficiency argument is only so strong. Over the next 10 years there may exist this shift to oil and gas production reaching a plateau where it is just not feasible to produce any faster. Between now and then, prices will still fluctuate as they have the past 10 years. This is what i truly believe. I do think production is about to hit a lagging period. Operators have cut back a lot on spending for new wells and demand growth may have slowed, but is still fast enough to cause another 2016/17 swing in pricing. Then we will repeat the cycle again, but with small variations. For example, next time production ramps up, it may not increase by 30% in 4 years. Next time production ramps up, LNG demand may or may not be growing.

Time to get to work. I’ll stop here. I’m still have 75% invested in UNG. It would be nice to see $15 this week for another reduction back to 50%. That’s all I’ve got for now.