Oil in the age of coronavirus: a U.S. shale bust like no other

BUSINESS NEWS
APRIL 15, 2020 / 1:06 AM / UPDATED 7 HOURS AGO

Oil in the age of coronavirus: a U.S. shale bust like no other

Jennifer Hiller, Liz Hampton
7 MIN READ

HOUSTON/DENVER (Reuters) – Texas oilman Mike Shellman has kept his MCA Petroleum Corp going for four decades, drilling wells through booms and busts and always selling his crude to U.S. oil refiners.

FILE PHOTO: The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. REUTERS/Angus Mordant/File Photo

But now the second-generation oilman has abandoned drilling any new wells this year and postponed some maintenance amid a sharp drop in global oil prices and brimming storage tanks. He is considering shutting most of his production down, for the first time ever.

Oil fields from Texas and New Mexico to Oklahoma and North Dakota are going quiet as drilling halts and tens of thousands of oil workers lose their livelihood. Fuel demand has plunged by as much as 30 million barrels per day (bpd) – or 30% – as efforts to fight the coronavirus pandemic have grounded aircraft, reduced vehicle usage and pushed economies worldwide toward recession.

“What scares me is not even being able to sell the product,” the grizzled oil hand said from his firm’s San Marcos, Texas, headquarters.

Refiners and other buyers are warning they may refuse his oil once contracts expire this month, he said. Or they may offer to buy at a price below his costs, so he is preparing to dip into retirement savings to pay employees, he said.

The governments of global oil producers and consumers are seeking to make unprecedented cuts to overall supply of some 19.5 million bpd. U.S. President Donald Trump heralded the deal to cut supply as one that would save hundreds of thousands of U.S. jobs.

But oil prices fell again this week, dropping as much as 10% on Tuesday, because even those cuts may fail to stem the glut. Prices remain far below production costs for many U.S. producers, including those in the U.S. shale fields – the scene of a revolution in the energy industry over the past decade that made the United States the world’s top producer.

 

Across the United States, up to 240,000 oil-related jobs will be lost this year, about a third of the onshore and offshore oilfield workforce, estimates consultancy Rystad Energy.

The U.S. oil boom died on March 6, the day Saudi Arabia and Russia ended a four-year pact that curbed output and gave shale a price umbrella. Shale firms have accrued hefty debt during the years of expansion, leaving them exposed to the price crash that followed.

In March, U.S. oil futures tumbled to $20 a barrel, a third of the January price and less than half what many require to cover production costs. The March drop led dozens of shale producers to cut spending and several retained debt advisors.

“As soon as the virus hit and oil prices dropped, they sent everybody home,” said Joel Rodriguez, chief administrator of La Salle County, home of Texas’s second-most productive oilfield.

Shale oil producers face well closures and “industry wide financial distress” even after the OPEC cuts, said Artem Abramov, head of shale at consultancy Rystad Energy. In some fields, he expects regional prices will hit single-digits per barrel, he said. (For a graphic, click here)

Spending on oil field services will fall 21% to $211 billion this year, the lowest since 2005, according to researcher Spears & Associates.

 

Unlike the 2014-2016 oil bust, lenders are not making more financing available to producers, said Raoul Nowitz, head of restructuring at SOLIC Capital Advisors. He predicts up to 60 oil producers will seek protection from creditors this year, and many will not emerge under new owners. Some banks are setting up operations to take over and run failed producers.

LAYOFFS AND SHUT-INS

OPEC’s cuts may not be deep enough for oil producer Texland Petroleum, which operates 1,200 wells in the Permian Basin, the top U.S. oilfield. U.S. refiner and pipeline operator Phillips 66 asked President Jim Wilkes to reduce his deliveries by 15%, and another buyer canceled his contract outright.

“We’ve never had a time when we couldn’t sell the oil we produce. And that’s going to happen this time,” said Wilkes.

Average daily U.S. oil production this year will fall 500,000 bpd, to 11.8 million bpd and sink another 700,000 bpd next year, the Energy Information Administration estimated. (For a graphic, click: here)

Production cuts are too late for workers like Jeremy Davis, a 36-year-old who in March lost his business development job at Advanced BioCatalytics, which makes chemicals for hydraulic fracturing.

“They won’t be fracking many wells for the rest of the year,” said Davis, who after 16 years in the oilfield would now consider work outside the oil business. “I can’t wait around for the industry to come back,” he said.

Wall Street investors had already pulled back on the shale sector over the past couple of years because of poor returns, leaving producers with limited options for refinancing, said industry executives and analysts.

“There is no more lifeline,” said Lance Loeffler, the finance chief at top U.S. fracking service provider Halliburton Co.

PayZone Directional Services, a Denver-based driller, threw in the towel last month.

We could have stayed open and run until the money was gone but sometimes you just have to know when to cash in your chips and leave the table,” said Beth Thibodeaux, chief executive officer.

TIME TO MOVE ON

So much unsold oil is sloshing around that some pipeline operators, fearful of having their lines clogged, are insisting that producers halt connecting new wells and prove they have buyers or storage outlets before oil from existing wells can be put into a line.

They have warned “by mid-May storage is full” and will refuse to take any more, said Scott Sheffield, CEO at Permian Basin producer Pioneer Natural Resources.

He and some other executives in Texas and Oklahoma want state regulators to mandate up to 20% output cuts, sparing only the smallest producers. In Texas, energy regulators on Tuesday heard Sheffield call for a state order to halt 1 million bpd from its shale fields to prevent sale at below production cost.

 

MCA Petroleum owner Shellman said he tells friends who lost their jobs that it is time to leave the oil business. “It’s not ever going to be like it was.”

Shellman, who as a youngster got his first taste of the oil business accompanying his parents to their own oil wells, has promised to pay his employees from savings even if they have to shut in wells. But the pain goes well beyond Shellman’s wallet.

“From an emotional standpoint, this is killing me,” he said.

Reporting by Jennifer Hiller in Houston, Liz Hampton in Denver; editing by Gary McWilliams and Edward Tobin

First Trader Convicted of Spoofing Gets 3-Year Prison Term – Bloomberg

July 13, 2016 — 12:05 PM EDT Updated on July 13, 2016 — 4:11 PM ED

Panther Energy Trading’s Coscia was charged under Dodd-Frank

Greed is only explanation for illegal trades, judge says
Michael Coscia, the first person convicted of spoofing after it was made a crime under the Dodd-Frank Act, was sentenced to less than half the prison time sought by federal prosecutors.

Coscia, 54, who had argued for probation, was sentenced Wednesday to three years in prison by U.S. District Judge Harry Leinenweber in Chicago. The only explanation for Coscia engaging in fraud while he was making $150,000 a month trading futures and had a net worth of $15 million was greed, the judge said.

“This is a serious crime with serious consequences,” Leinenweber said before handing down the sentence. He noted that spoofing has been going on for a long time.
Spoofing, which became illegal under the Dodd-Frank Act, carries a maximum of 10 years in prison. The practice typically consists of systematically placing orders without intending to execute them to trick the market into thinking there’s interest in buying or selling that doesn’t actually exist.

Coscia was convicted by a jury in November of manipulating futures markets by placing unusually large orders he didn’t intend to execute and then filling smaller trades on the opposite side. Prosecutors said it was a bait and switch scheme that yielded Coscia, the head of Panther Energy Trading LLC, more than $1 million over 2 1/2 months in 2011. The scheme resulted in losses to high frequency trading houses that were placing and executing orders at the same time.

Prosecutors had sought a term as long as seven years and three months. Coscia’s lawyers said sentencing guidelines allowed for a term of only four to 10 months. His three-year prison term is to be followed by two years of supervised release.
Coscia will appeal his conviction and ask to remain free on bond in the meantime, his lawyer said. If that request is denied, Coscia will have to surrender on Sept. 30.
Stephen Senderowitz, Coscia’s lawyer, told the judge his client had paid back $1.4 million gained through the trades at issue and cooperated with a Commodity Futures Trading Commission investigation. He also paid a $3 million fine in connection with the regulatory action against him.
‘Not an Ogre’
Senderowitz described Coscia as a devoted family man who is supporting and caring for his “gravely ill mother.”

“Michael Coscia is not an outlier,” he said. “He is not an ogre.”
Coscia’s sentencing follows a ruling Tuesday in a spoofing lawsuit brought by the Commodity Futures Trading Commission allowing a defendant to continue trading before a trial set for January. Igor Oystacher, of 3Red Trading LLC, was accused by the CFTC of continuing illegal trades even after it sued him.
A jury deliberated for one hour before finding Coscia guilty of six spoofing counts and six fraud counts. He was the first person tried under a provision of the 2010 Dodd-Frank Act that made it illegal to manipulate prices by placing orders without intending to execute them.
Renato Mariotti, who was a prosecutor in the case before leaving for private practice, said after the hearing that there was initially skepticism about whether the government could prove the charges.
“I think that skepticism is gone.” Mariotti said. “I think any trader who hears this sentence has to be thinking, ‘I don’t want to go to jail.”’
Testimony during the trial showed that Coscia, like many high-frequency traders, used an algorithm to place, cancel and execute orders. Coscia testified that he intended to execute all his orders at the time he placed them. He said he wasn’t aware of the provision of the Dodd-Frank Act and his lawyers argued in court filings that the law was unconstitutional.

Prosecutors presented trading data from the Chicago Mercantile Exchange and the ICE Futures Europe exchange showing that Coscia placed orders that were much larger than any others trading at the same time and also that he canceled those orders much more frequently.

Gold, Soybeans

During the trial, prosecutors focused on six transactions in the gold, euro, soybean meal, soybean oil, British pound, and copper futures markets. In total, these trades resulted in a profit of $1,070, according to testimony. Coscia conducted thousands of such trades, prosecutors told jurors.

U.S. Attorney Zachary Fardon in Chicago said after the hearing that it’s been suggested that such crimes are “murky” because of technology and the speed at which trading takes place. If there is harm to the market, the office’s Securities and Commodities Fraud Section will bring charges whether the conduct involved algorithmic trading in fractions of a second or manual trading, he said.
“It stands for the principle that if you commit fraud, we will find you and we will investigate you and punish you as appropriate,” Fardon said. “The key take-away is the government is not going to let technology get in the way.”
Three years is a substantial sentence for doing something that isn’t easily distinguished from every day cancellation of orders and will put high-frequency trading firms on alert, said Peter Henning, a law professor at Wayne State University’s Law School in Detroit.

“This should throw a scare into them,” Henning said. “They need to figure out where the line is between permissible trading strategies and spoofing.”
The case is U.S. v. Coscia, 14-cr-00551, U.S. District Court, Northern District of Illinois (Chicago).

These are the winners and losers of the commodities crash

Rosamond Hutt, World Economic Forum 1h 701

Commodities have already had a tough 2015 – but earlier this week, prices for everything, from crude oil to industrial metals such as iron ore and copper, plummeted even further.

The sector is contending with the lowest prices since the financial crisis, perhaps even this century. Here is a brief guide to what is happening, how each of the main commodities are faring, and why it matters for global growth.

How bad is this crunch?

Earlier this week, crude oil dipped below $40 a barrel for the first time since 2009. The situation was so dire that the Bloomberg Commodity Index, which covers a wide range of natural resources, dropped to its lowest level since June 1999. After two days of freefall, prices have plateaued, with the oil price managing a brief recovery.

What’s causing the slump?

A combination of oversupply and weak demand have wreaked havoc on the natural resources industry. The growth slowdown in China and other emerging economies such as Brazil has reduced demand for natural resources like steel, iron ore and crude oil. Meanwhile, on the supply side, cheap borrowing costs and a failure to predict China’s slowdown led producers to expand too much in recent years. Now there is a glut that analysts say might continue well into 2016, with prices unable to pick up until global supplies decrease.

Who are the winners and losers?

Falling commodity prices are forcing the world’s mining giants to restructure their businesses in order to stay afloat as they battle declining profits. The market capitalization of the top 40 global mining companies has fallen by nearly $300 billion this year.

The crash is particularly devastating for economies that rely on export earnings from commodities. The oil-producing states of the Middle East, Russia, Brazil and a number of African nations have all been badly affected.

Conversely, in Britain and the Eurozone, low energy prices have benefited both consumers and business.

How are the big commodities faring?

Oil: China has been the biggest driver of oil demand in the past decade, so the country’s economic slowdown means bad news for crude consumption. Traders and investors are concerned that the oversupply will persist, with OPEC producers flooding the market.

Copper: Demand for copper in China has been weaker than expected this year, growing by about 2-3%. The metal fell to a six-year low this month, and is trading below the cost of production. Some analysts are blaming the drop on a slump in Chinese infrastructure investment, especially the power sector, which is one of the biggest consumers of copper.

Aluminium: The market for aluminium is oversupplied – global supplies rose more than 10.3% in the first half of the year. Meanwhile prices are trading at the lowest level in six years. China is also switching from being a customer to a producer of the metal, which is putting pressure on Western producers.

Iron ore: This base metal has done better than other commodities over the past few months. It hit a record low in July but has since recovered about 25% thanks to a reduction in exports from Brazil and Australia. However, supply continues to outweigh demand.

Gold: The precious metal has slipped 9% this year and is on track for its third year of losses. Traditionally gold has been viewed as a safe haven for investors, but analysts are watching carefully to see how prices will react to a predicted rise in US interest rates.

Read the original article on World Economic Forum. Copyright 2015.

The commodities bloodbath of 2015 in one chart

  

The commodities bloodbath of 2015 in one chartNOVEMBER 30, 2015 AT 11:27 AM

Business Insider / Jonathan Marino

Commodities have been getting creamed in 2015. 
And according to Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices, it isn’t going to get any better any time soon.
“Unfortunately for commodities, there’s no waking up from this nightmare.”
So far, 2015 has not yet been the worst year for any single commodity, Gunzberg noted in a November 30 report, but there are a number of commodities that are on pace for one of their worst years on record. 

“Aluminum is having its second worst year in history and gold is having its sixth worst year in history,” Gunzberg writes. 

The S&P tracked each commodity’s performance back to 1970 for its research. No fewer than 17 are having one of the their five worst years out of 45.

Natural gas is down more than 40% this year, according to S&P, and energy is down more than 30% — making 2015 the fifth-worst year for each. 

Already, Wall Street is bracing for big fallout. Wall Street banks are expecting more defaults in the energy sector as they see more loans underperforming. 

As Commodity Prices Plunge, Groceries May Be Next (NPR)

Anyone who has pulled up to a gas station this winter knows oil prices have fallen — down roughly 50 percent since June.

But it’s not just oil. Prices for many commodities — grains, metals and other bulk products — have been plunging too.

Here are a few of the changes since many prices peaked in recent years:

– Copper is $2.59 a pound, down from $4.50 in 2011.

– Corn costs $3.85 a bushel, compared with about $8 at its 2012 peak.

– Iron ore pellets go for about $104 a metric ton, down from nearly $220 four years ago.

The list could go on and on. Soybeans, tin, sugar, wheat, cotton — all are much cheaper than a few years ago. The changes have been putting a squeeze on farmers and miners, but so far at least, most of these commodity plunges haven’t done much to help U.S. shoppers.

With the exception of gasoline, “the price changes are not being immediately passed through to consumers,” said Sean Snaith, an economic forecasting professor at the University of Central Florida.

Snaith said U.S. companies know global commodity prices can be very volatile, so they are afraid to cut consumer prices — at least not until they are sure that cheaper raw material prices are here to stay.

“There’s an old saying: Prices go up like an arrow and come down like a feather,” he said.

But eventually, even a feather does float down. So some economists believe that later this year, retail prices for groceries and goods may start to decline.

Let’s look at what’s been happening with crops, like corn and wheat, and consider where we might be going this year:

Over the past decade, many people around the world, especially in China, kept getting richer and buying more food. That encouraged farmers everywhere to plant more seeds.

Global food output rose, but so did prices as demand continued to shoot up. By 2011, many people around the world were experiencing food shortages and steep price increases.

But the market adjusted and production improved. A recent report by the USDA said world wheat and soybean production are at record highs. The huge harvests are helping push down prices.

And it’s not just grains. In Florida, the mild hurricane season helped send orange juice futures down to about $1.35 a pound, compared with their 2012 high of more than $2.

Looking ahead to this year’s growing season, harvests may again be huge. That’s because cheap energy is making it easier to plant more. Farmers who are paying a dollar-a-gallon less since a year ago for diesel fuel can run their tractors longer.

If the weather is good this summer, corn silos will be bulging by fall. That means ranchers and farmers will have cheaper corn to feed livestock, helping restrain meat and poultry prices.

At the same time, the global economy is running at a sluggish pace, so demand for food is not growing the way it had been a decade ago.

Also, the value of the dollar is now at a 10-year high. That means Americans will be able to purchase foreign foods, like cheeses and fruit, for less. Also, foreign customers won’t be able to buy as much from U.S. farmers, allowing more U.S.-grown food to remain at home with U.S. consumers.

So put all of these factors together: the potential for huge harvests; cheaper food imports; and reduced foreign competition for food and cheaper energy costs for farmers. That sounds like a great formula for bargains at the grocery store later this year.

And a price downdraft may hit manufactured goods too. That’s because raw materials — tin, nickel, lead and so on — keep getting cheaper too. U.S. coal prices have tumbled back nearly to the lows set in early 2009 during the worst of the Great Recession.

Economists say these across-the-board price drops in industrial commodities largely reflect the dramatic economic slowdown in China, Europe and other regions. When they are growing more slowly, then they don’t need as many raw materials.

“The risk of deflationary pressure is much higher than the inflationary pressure or stable price scenarios for the global economy in the near term,” Wells Fargo Securities’ economic team wrote in a special report on deflation.

But any American who has been out shopping lately may be thinking: huh? What price breaks? New cars cost more. Meat prices have remained stubbornly high. Eggs are expensive. When exactly will these lower commodity prices translate into relief for U.S. consumers?

“It depends,” Snaith said. “If these factors persist through 2015, we would expect to see these price declines make their way to consumers. But it’s a waiting game.” [Copyright 2015 NPR]

Copper Caps Worst Year Since 2011 as China’s Economy Cools

Copper Caps Worst Year Since 2011 as China’s Economy Cools
By Agnieszka de Sousa and Joe Deaux – Dec 31, 2014, 1:34:50 PM

Copper capped the biggest annual loss in three years in London amid signs of an economic slowdown in China, the world’s largest metals consumer.

The final reading this month for the manufacturing Purchasing Managers’ Index for China from HSBC Holdings Plc and Markit Economics came in at 49.6, the lowest in seven months. A figure below 50 signifies contraction. China is on course for the slowest year of economic growth since 1990, according to a Bloomberg survey. Copper dropped 14 percent this year amid prospects for fading demand from the Asian nation.

“The biggest stumbling block is you have China certainly slowing down,” Tai Wong, the director of commodity products trading at BMO Capital Markets Corp. in New York, said in a telephone interview. “If people have trades that they want to put on for the start of 2015, buying copper doesn’t seem to be one of them.”

Copper for delivery in three months on the London Metal Exchange fell 0.4 percent to settle at $6,300 a metric ton ($2.86 a pound) at 2:50 p.m. The drop this year was the biggest drop since a 21 percent loss in 2011.

The global copper market is poised to swing to a surplus of 139,000 tons next year from an estimated 128,000-ton deficit this year on more output from mines, according to RBC Capital Markets. Slowing demand in China could push the market into a bigger surplus in 2015, RBC analyst Fraser Phillips said in a report last week.

Copper stockpiles tracked by the LME rose 2.8 percent to 177,025 tons, the highest since May, data showed today. Inventories are down 52 percent this year, the biggest decline in a decade.

Aluminum, lead and zinc were also lower in London, while nickel and tin advanced. The LMEX index of six metals fell 7.8 percent this year.

In New York, copper futures for March delivery declined 1 percent to $2.8255 a pound on the Comex, closing down 17 percent for 2014. Trading was 54 percent below the average of the past 100 days for this time, according to data compiled by Bloomberg.

To contact the reporters on this story: Agnieszka de Sousa in London at atroszkiewic@bloomberg.net; Joe Deaux in New York at jdeaux@bloomberg.net

To contact the editors responsible for this story: Millie Munshi at mmunshi@bloomberg.net Joe Richter

More articles on london

Will Wildcatter’s ‘Naked’ Gamble on Oil Prices Pay Off? Continental Resources CEO Hamm Sells Hedges, Betting on Quick Rebound in Crude

By ERIN AILWORTH, GREGORY ZUCKERMAN and DANIEL GILBERT WSJ
Dec. 9, 2014 12:35 p.m. ET

Harold Hamm ’s willingness to make risky bets helped him build Continental Resources Inc. into the one of the biggest oil producers in North Dakota’s Bakken Shale and a symbol of the U.S. energy boom. But his latest gamble—a quick rebound in crude prices—is rubbing some investors and analysts the wrong way.

Mr. Hamm, who founded Continental and owns 68% of its shares, announced in early November that the company had cashed in almost all of its financial hedges that guaranteed it could sell millions of barrels of oil for about $100 apiece. The company said it had realized $433 million in cash from selling the hedges, some of which ran through 2016.

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“We feel like we’re at the bottom rung here on prices and we’ll see them recover pretty drastically, pretty quick,” Mr. Hamm said on a Nov. 5 call with analysts. He said the Organization of the Petroleum Exporting Countries was pushing down oil prices to slow America’s expanding energy output.

Now, removing the hedges, known in the industry as “going naked,” looks misguided even to some of the company’s fans, after the recent tumble for oil prices. The benchmark price for U.S. oil has continued to slide, falling from $81 in late October to $63.82 on Tuesday.

If Continental had kept the contracts that insured it against lower crude prices, it could have reaped $52 million more for its oil in November, according to a Wall Street Journal review of company disclosures. And it might have received $75 million more this month, assuming current conditions continue.

The Journal’s calculation of about $127 million in forgone revenue is similar to projections by several Wall Street analysts, and those projections would continue to rise in the coming months if oil prices remain below $96 a barrel.

ENLARGE
The company said it disagreed with the Journal’s figures but wouldn’t provide its own, except to say that after figuring in revenue it received for selling its hedges, it expects the “net negative effect” to be $25 million to $30 million in November and December. It sold nearly $1.2 billion of oil and gas in the third quarter and reported net income of $533 million.

“It was a bad move with terrible timing,” said Gregg Jacobson, a portfolio manager at Caymus Capital Partners LP, a $200 million Houston hedge fund manager that had about 4.5% of its portfolio in Continental shares as of the end of the third quarter. Though he thinks the hedging sale will prompt some investors to view the company as unusually risky, Mr. Jacobson said he remains a supporter because of its executives’ skill in finding and drilling for oil.

“In the long run, the stock will respond to how they perform in the field,” he said.

While shares of many U.S. energy producers have had double-digit percentage declines since oil prices began falling in late June, Continental’s stock has been hammered. Its shares, which closed up 7.2% at $36.18 on Tuesday, have fallen by more than half since the end of August, and more than 25% since Mr. Hamm disclosed on Nov. 5 that the company had sold the hedges.

Mr. Hamm said in an interview that he still believes his bet could pay off but that it might take as many as two years to tell. “You can’t condemn that as a bad decision,” he said. “You haven’t seen it play out.”

Companies like Continental can react quickly to market changes, he said, which gives them an advantage over OPEC’s members. The cartel is discounting “the resiliency of U.S. producers,” he said, adding that investors “need to look at Continental long-term.”

A wildcatter—he has called himself an “explorationist”—Mr. Hamm started the company that would become Continental in 1967 and first struck oil in 1971 in Oklahoma. More than two decades ago, he began focusing on exploring the then-little-known Williston Basin, which stretches from South Dakota to the Canadian province of Saskatchewan. Over time, his company became a leader in the Bakken formation in North Dakota, which has become one of the biggest oil fields in the U.S.

Continental produced nearly 35 million barrels of oil last year, almost four times what it was producing five years earlier. That growth has helped push U.S. oil output to more than 9 million barrels of crude a day, up from 5 million in 2008.

Though Continental has become a leader of the U.S. energy boom, it is unusual. Institutional and activist investors have curbed some of the risk-taking of wildcatters at other energy outfits, and few companies of Continental’s size remain controlled by their founders.

Continental said it had 5.2 million barrels insured in November and December at an average price of about $100.

When oil prices are falling, hedges—contracts that many energy companies buy to protect against declining prices by guaranteeing a minimum price for the oil and gas they produce—become much more valuable. Continental notes that several of its competitors aren’t hedged, including Apache Corp. , which has no hedges on the books in 2015. Apache said it does have some production insured through the end of this year.

Mr. Hamm isn’t the first energy executive to abandon hedges. Under the leadership of former CEO Aubrey McClendon , Chesapeake Energy Corp. dropped its natural-gas hedges in 2011, leaving it exposed to a dismal gas market and dealing with a cash crunch the following year.

‘It was a bad move with terrible timing… In the long run, the stock will respond to how they perform in the field’
—Gregg Jacobson, a portfolio manager at Caymus Capital Partners
Continental isn’t likely to face a liquidity crisis—its debt is smaller than many of its competitors at about 1.7 times its cash flow, according to S&P Capital IQ. And the company has $1.75 billion in unused credit, recent financial filings show.

“They’ve built such a good balance sheet, they have the luxury of making this gamble,” said Jason Wangler, an analyst for Wunderlich Securities, who called the move a speculative bet. “They left money on the table in the short term.”

Mr. Hamm, he said, is “the guy you’re investing in, as much as the company.”

Since selling Continental’s hedges, Mr. Hamm has lost about $4.4 billion of his personal fortune as Continental’s shares have fallen—a loss that could be compounded by Mr. Hamm’s divorce. A judge recently awarded the former Mrs. Hamm, Sue Ann Arnall, a nearly $1 billion settlement; she appealed that decision on Friday. Mr. Hamm now owns about $9.2 billion of company stock.

Some investors say Continental’s primary acreage in the Bakken and elsewhere renders the hedging decision less important in the long-term.

“Cash flow next year will be lower and more volatile, assuming prices stay under pressure,” said Joe Chin, an analyst at Obermeyer Wood Investment Counsel LLLP, an Aspen, Colo., firm that owned 340,000 Continental shares at the end of the third quarter. “But we remain confident about management’s ability to deploy capital.”

Write to Erin Ailworth at Erin.Ailworth@wsj.com, Gregory Zuckerman at gregory.zuckerman@wsj.com and Daniel Gilbert at daniel.gilbert@wsj.com

Andy Hall & OPEC out of business. Time for a new way to Trade Oil.

How Oil Trading ‘God’ Hall Made Money as Crude Fell
By Bradley Olson – Dec 10, 2014, 6:18:09 AM

Andrew J. Hall, revered for anticipating major swings in the market, posted a 1 percent gain in his commodity hedge fund in November, according to people familiar with the matter. Photographer: Andrey Rudakov/Bloomberg
How does a renowned oil trader who bets on rising prices make money when crude plunges 18 percent in a month? By betting on the U.S. dollar at the same time.

Andrew J. Hall, revered for anticipating major swings in the market, posted a 1 percent gain in his commodity hedge fund in November, according to people familiar with the matter. Hall, who is leaving his longtime post as chief executive officer of Phibro LLC, the century-old commodities trading house now owned by Occidental Petroleum Corp. (OXY ▼ -3.29% 74.90), sees oil falling further as he focuses on his private fund.

“It’s a new era,” said Carl Larry, a former trader who is now a Houston-based director of oil and natural gas at Frost & Sullivan. “So many things have changed. This will be a chance for him to step back, assess the market, and maybe plot a comeback.”

The surprise rise at 64-year-old Hall’s Astenbeck Capital Management was driven by his bets on the greenback and a move to sell out of crude contracts before the worst of the rapid decline in prices, according to the people and his letters to investors in the $3 billion fund. A prolific art collector and Oxford University graduate, Hall is revered as a “god” by rival traders, according to “Oil,” a 2010 book by Tom Bower.

Known for his conviction that oil prices will rise in the long term and that U.S. shale drilling is overhyped, Hall still sees reasons for an oil rally — eventually. First he sees crude prices falling further to as low as $50 a barrel before recovering in the first half of next year, according to his Dec. 1 letter to investors.

Astenbeck, which posted losses in 2011 and 2013, is poised to finish the year up by as much as 7 percent, according to the people who asked not to be identified because the information isn’t public.

Phibro’s Fate

Andrew J. Hall, founder of Astenbeck Capital Management, right, and his daughter Emma Hall, stand for a photograph during the 21st annual Take Home a Nude gala and fundraiser for the New York Academy of Art at Sotheby’s in New York, U.S.. Photographer: Katya Kazakina/Bloomberg
The fate of Occidental’s Phibro has yet to be determined, with Hall’s departure making the future more uncertain. The oil company had already told employees this year that it planned to sell or close its energy trading unit by the end of 2014.

Phibro’s U.S. employees haven’t been active in trading for months and the overseas operations may be sold, the people said. Occidental announced plans in February 2014 to reduce exposure to proprietary trading, Melissa Schoeb, a company spokeswoman, said yesterday.

As CEO, Hall gained notoriety during the 2009 financial crisis for a nine-digit pay package while Phibro was owned by Citigroup Inc., igniting controversy over compensation at banks that had been kept afloat with federal funds.

‘Fool’s Errand’

The former trader for BP Plc anticipated oil’s rise to a record in 2008, and its subsequent fall, helping him land compensation near $100 million for three straight years. Before Phibro was bought by Occidental, it had been profitable every fiscal year since 1997 and in 80 percent of the quarters during that period. The trading house’s gains for those years amounted to $4.4 billion, according to data compiled by Bloomberg.

Saudi Arabia was correct not to cut production after last month’s meeting of the Organization of Petroleum Exporting Countries, Hall wrote to his investors on Dec. 1. The market is oversupplied, making any effort to sustain prices at $90 a barrel “a fool’s errand,” he said.

Too much has been invested in boosting output in recent years, particularly in U.S. shale formations where producers have drilled wells with cheap, borrowed money, he said. Hall has frequently said the oil boom is over-hyped and won’t last as long as the industry thinks. Low prices will run weaker shale operators out of business and lead to reduced spending on more costly developments such as those in Canada’s oil sands, deep-water drilling and Arctic projects, Hall said.

‘Reasonable Bet’

“As the oil industry and, more to the point, its investors and its lenders slam on the brakes and as low prices stimulate demand growth, the current glut will in time disappear — if not turn into a future shortage,” he wrote in his letter. “That at least is what the Saudis are counting on, and to us it appears a reasonable bet.”

Hall’s strategy in the past has often been to buy so-called long-dated oil contracts for delivery years into the future. He likes to invest when those futures are cheaper than current prices, because he believes oil will rise. Earlier this year, the futures contracts were selling for less than oil prices at the time.

In February, a futures contract for a barrel of December 2019 West Texas Intermediate benchmark crude was selling for $76 a barrel while current prices averaged $100. By July, those 2019 contracts were selling for $88. That represents a 16 percent gain. Astenbeck, which also invests in numerous other commodities, including precious metals, was up 19 percent through June, according to his investor letters.

Holding Off

In August and September, Hall told investors he’d cut risk and sold a number of oil contracts at the higher price, and planned to wait for the market to once again turn his way. Now, such futures contracts are selling above today’s WTI price of $62.53, an environment in which Hall in the past has held off investing, according to people familiar with his positions.

When prices fell, Hall invested in the dollar. Astenbeck’s 1 percent gain in November came as U.S. oil prices fell to the lowest level in five years. In that same period, the Bloomberg Dollar Spot Index, a gauge of the dollar’s strength against 10 major trading partners, rose 15 percent.

Hall’s departure from Phibro, where traders have cut their teeth for more than 40 years, and the potential for the unit’s closure rippled through trading circles yesterday, said Eric Rosenfeldt, a vice president at Virginia Beach, Virgina-based energy supply firm PAPCO Inc.

Phibro History

Among the most storied trading houses in history, Phibro helped create modern oil-trading markets, with more than 2,000 employees around the world at one time. In 1981, the firm was large enough to buy the investment bank Salomon Brothers. Founded in 1901 as Philipp Brothers trading metals and chemicals, Phibro dove into oil in 1973 when the Arab oil embargo caused prices to soar and left U.S. refineries searching for supplies.

Phibro’s original crude traders included Marc Rich, who would later gain infamy for breaking sanctions against Iran and fleeing the country to avoid federal indictments. Rich won a controversial pardon from President Bill Clinton. Thomas O’Malley, now the chairman of PBF Energy Inc., hired Hall for Phibro at a salary of $135,000, he told reporters last month.

“You expect to see some trading shops come and go in energy trading, but there are some staple firms like Phibro that have been around such a long time, and created so many good professionals throughout the industry,” Rosenfeldt said by phone. If its doors eventually close, “it would certainly be the end of a very long era.”

Brent Plunge To $60 If OPEC Fails To Cut, Junk Bond Rout, Default Cycle, “Profit Recession” To Follow

Brent Plunge To $60 If OPEC Fails To Cut, Junk Bond Rout, Default Cycle, “Profit Recession” To Follow

NOVEMBER 24, 2014 AT 8:01 AM
Zero Hedge / Tyler Durden

While OPEC has been mostly irrelevant in the past 5 years as a result of Saudi Arabia’s recurring cartel-busting moves, which have seen the oil exporter frequently align with the US instead of with its OPEC “peers”, and thanks to central banks flooding the market with liquidity helping crude prices remain high regardless of where actual global spot or future demand was, this Thanksgiving traders will be periodically resurfacing from a Tryptophan coma and refreshing their favorite headline news service for updates from Vienna, where a failure by OPEC to implement a significant output cut could send oil prices could plunging to $60 a barrel according to Reuters citing “market players” say.

By way of background, the key reason OPEC is struggling to remain relevant is because, as the FT reported over the weekend, “US imports of crude oil from Opec nations are at their lowest level in almost 30 years, underlining the impact of the shale revolution on global trade flows. The lower dependence on imports from the cartel, which pumps a third of the world’s crude, comes amid advances in hydraulic fracturing that has propelled domestic US production to about 9m barrels a day – the highest level since the mid-1980s.”

The US “shale miracle” is best seen on the following chart showing the total output of the US compared to perennial crude powerhouse, Saudi Arabia:

It is this shale threat that has become the dominant concern for OPEC, far beyond whatever current US national interest are vis-a-vis Ukraine, and Russia’s sovereign oil revenues, and as reported previously, Brent has to drop below to $75 or lower for US shale player to one by one start going offline.

Unfortunately, it may bee too little too late for the splintered cartel. As Bloomberg reports, “the days when OPEC members could all but guarantee consensus when deciding production levels for oil are long gone, according to a veteran of almost two decades of the group’s meetings.”

The global glut of crude, which has contributed to a 30 percent decline in prices since June 19, has left the Organization of Petroleum Exporting Countries disunited and dependent on non-members to shore up the market, said former Qatari Oil Minister Abdullah Bin Hamad Al Attiyah. The 12-member group is set to meet in Vienna on Nov. 27.

“OPEC can’t balance the market alone,” Al Attiyah, who participated in the group’s policy meetings from 1992 to 2011, said in a Nov. 19 phone interview. “This time, Russia, Norway and Mexico must all come to the table. OPEC can make a cut, but what will happen is that non-OPEC supply will continue to grow. Then what will the market do?”

“OPEC had been enjoying easy meetings, and decisions were taken without a sweat,” Al Attiyah said. “Now the situation is different.”

Oil markets are oversupplied by about 2 million barrels a day, and global economic growth is below expectations, he said. “The U.S., which was a major market for OPEC, is no longer welcoming imports. It’s now striving to become an oil exporter. It’s already exporting condensates.”

So if OPEC is unable to reach an agreement, what is the worst case? Back to Reuters, which says that “The market would question the credibility of OPEC and its influence on global oil markets if there was no cut,” said Daniel Bathe, of Lupus alpha Commodity Invest Fund.

That could send Brent down to around $60, Bathe said.

“Herding behavior and a shift to net negative speculative positions should accelerate the price plunge,” he added.

Fund managers are divided over whether OPEC will reach an agreement on cutting output. Bathe put the likelihood at no more than 50 percent.

The oil price has been falling since the summer due to abundant supply — partly from U.S. shale oil — and low demand growth, particularly in Europe and Asia.

As a result, some investors believe a small cut — of around 500,000 bpd — would not be enough to calm the markets.

If OPEC fails to agree a cut, prices will drop “further and quite quickly”, with U.S. crude possibly sliding to $60, he said. U.S. crude closed at $76.51 on Friday, with Brent just above $80.

It’s not all downside: there is a chance that OPEC will agree on a 1 million barrel or more cut, which would actually send prices higher:

“The market really wants to see that OPEC is still functioning … if there is a small cut, with an accompanying statement of coherence from OPEC that presents a united front, and talks about seeing demand recovery, and some moderation of supply growth, then Brent could move up to $80-$90.” “Prices below $80 are putting significant strain on the cartel’s weakest members such as Venezuela,” said Nicolas Robin, a commodities fund manager at Threadneedle. He said a bigger cut — of 1 million bpd or more — was an “outlier scenario”, but such a move would rapidly push prices above $85.

Then again, even thay may be insufficient if the market prices in an ongoing deterioration in global end-demand: “Doug King, chief investment officer of RCMA Capital, sees Brent falling to $70, even with a cut of 1 million bpd.”

So in a worst case scenario, where Brent does indeed tumble to $60, what happens? We already know the answer, as it was presented in “If WTI Drops To $60, It Will “Trigger A Broader HY Market Default Cycle”, Says Deutsche”:

… it is not just the shale companies that are starting to look impaired. According to a Deutsche Bank analysis looking at what the “tipping point” for highly levered companies is in “oil price terms”, things start to get really ugly should crude drop another $15 or so per barrell. Its conclusion: “we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate…. A shock of that magnitude could be sufficient to trigger a broader HY market default cycle, if materialized. ”

This explains why the HY space has been far less exuberant in recent weeks, and the correlation between HY and the S&P 500 has completely broken down.

Finally it is not just the junk bond sector that is poised for a rout should there be no meaningful supply cuts later this week: recall that in another note over the weekend, DB said that should crude prices take another leg lower, then the most likely next outcome is a Profit recession, which while left unsaid, will almost certainly assure a full-blown, economic one as well.

So keep an eye on Vienna this Thanksgiving: the black swan may just be coated with an layer of crude oil this year.