by Steve St. Angelo, SRSRocco Report:
The Day of Reckoning is coming, and it won’t be pretty for the overall markets. While the Fed liquidity has pushed the major U.S. indexes to new highs, the underlying fundamentals in the economy continue to deteriorate. Without the record amount of Fed QE and Repo Operations, the market and economy would have gone into a tailspin in 2019.
Now, to give credit where credit is due, the term, “The Day of Reckoning” was the title from the Northman Trader’s most recent public article. What I like about Sven Heinrich’s work (the Northman Trader), is his ability to use technical and fundamental analysis to provide “PRICE DISCOVERY” in the markets.
Unfortunately, we don’t have price discovery anymore due to the Fed and Central bank decade-long propping up of the markets. This chart from the Northman Trader shows how the Fed’s interventions have come in to support the markets at key technical levels:
What is quite interesting more recently (2019) is the substantial Fed’s rate cuts, QE, and Repo Operations at a time when there isn’t a downturn in the U.S. economy. When the Fed started QE1 in 2009, the stock market had crashed to a low, and the economy was in a severe recession. The Fed continued to support the economy and markets with QE2, TWIST, and QE3 into 2013. Again, these Fed interventions took place during a struggling economy.
Today, the Fed is pulling out all the FIREPOWER when the markets are at new highs, and the economy is still rolling along nicely. This is a recipe for DISASTER at some point. Furthermore, the energy market that is one of the driving forces of the U.S. economy is in serious trouble.
As I mentioned in my last article, The U.S. Shale Industry Hit A Brick Wall In 2019. I posted this chart showing how U.S. shale oil production seemed to be peaking even though the well profile continued in the same trend:
The top right-hand chart displays the shale oil production from the top four fields in 2017-2019 (all prior years excluded), and the bottom right-hand graph shows the number of new wells added. Even though the industry continues to add more wells in the same upward trend, overall production is cresting. This is due to the negative impact of the rapid decline rate in the shale industry.
What took 20 months for 2017’s production to lose 2 million barrels per day (mbd), only took eight months in 2018’s production. The U.S. shale industry is now at a serious inflection point. If the Shale Industry doesn’t continue to increase the number of wells each year, production will ultimately peak and decline.
And, that is precisely what we see already. In 2018, the industry added 9,953 wells in these four fields but had only added 6,000 wells so far as of August. If the current trend continues, the total amount of wells would only reach approximately 9,000 for 2019.
Moreover, many shale companies are lowering their CAPEX spending for 2020. According to the article, U.S. Oil Producers To Slash Spending For Second Straight Year In 2020:
Occidental Petroleum Corp said it plans to slash capital spending by 40% next year to about $5.4 billion to generate cash and help pay down debt taken on to buy rival Anadarko Petroleum Corp.
Apache Corp expects to cut its upstream capital by 10% to 20% from this year’s $2.4 billion budget and plans to lay off 10% to 15% of its workforce by the end of March.
The Permian Basin, the top U.S. shale field, pumping 4.6 million bpd of oil, will likely “slow down significantly over the next several years,” Pioneer Natural Resources Co Chief Executive Scott Sheffield said during the company’s latest earnings call.
With many shale companies cutting CAPEX spending and staff, 2020 may turn out to be quite an interesting year. Although, industry analysts are still forecasting U.S. shale oil growth to slow next year between 400,000-780,000 bopd. I find those estimates quite optimistic based on the lackluster 2% growth for the first eight months of 2019 (based on Shaleprofile.com data, not including revisions).