weekly rig count check

The total Baker Hughes rig count was down 90 for the week, the steepest decline yet seen.  The biggest news was that offshore rig count declined by 5 to 49 active rigs, a 10% weekly drop.  This number can be very lumpy.  The Permian basin lost 25 rigs 454, and I think was the biggest decliner in percentage terms among the major plays.  The Barnett gas field lost 25% of its rigs and is now down to 19.

Inventory levels and contango

From the EIA report this Wednesday, crude inventories are the highest since they started keeping reliable statistics in the early 1980s.  There was an editorial (which I can’t find now) saying that US inventories are the highest since 1931.  In the early 1930s, the East Texas Field was developed and a glut of oil came on to the market that nearly put the entire oil industry out of business.  Texas asked the federal government to come in and enforce a production rationing program to keep prices up and everyone from going out of business.  There is a good account of it in the book "The Prize" by Daniel Yergin.

 I’m starting to hear commentators say they think we have found a bottom here in the $40 range.  I don’t see any support for this, except that US producers and the majors are cutting capex and cutting the rig-count.  These measures will have long term consequences, but the short term spot price may still decline significantly.  Capex cuts will certainly support the price over the longer term though.

As I mentioned before the crude market is in contango now, meaning that futures are trading higher than the spot price.  Last summer it was in backwardation, meaning that the futures were below spot.  Contango rewards you for storing oil.  There is, and probably will continue to be, increasing demand for floating storage, as cheap storage fills up.  Incidentally if you would like some excitement, you can trade oil tanker stocks like TNK, DHT, NAT, TNP.  But be aware that these are highly leveraged companies in an incredibly volatile business that has a reputation for destroying capital that rivals the airline industry.

EIA also has estimates for OECD inventories (above), but the data quality here is probably worse than their domestic US data.  It does show an alarming build however.  And now we can also look at production numbers for the USA:

These production numbers are not as important as whole-world numbers.  But the USA is a high cost producer, and one of the countries that the Saudis say must cut production.  So far there is little discernible impact of the higher prices on US production.  Surely the rig count drop and the fast decline rate of shale wells will cause US production declines at some point, but we are not seeing it yet.  This brings me to the conclusion that this talk that we are now hearing that crude may have found a floor, really doesn't seem to have any short term basis.  Inventories continue to build, and there has been no peak in production.  Companies are not selling oil into the spot market because they can store it and sell it forward at a guaranteed profit.  Traders are doing arbitrage trades where they buy oil, sell it forward and store it on a tanker.  But there are only so many tankers, and only so much storage.

I would like to call attention to something that happened in the mid-continent ethane market in 2012.  The production was spiking from all the “wet gas” people were drilling and ethane storage capacity was limited.  Mont Belvieu is the main ethane hub on the gulf coast, and prices there dropped by 2/3 in 2 months.  In Conway Kansas, the other listed spot market for ethane, it traded down to about $.01 per gallon.  There was simply no place to put it.  Because it is only a component of natural gas production, you cannot turn off the production independently.

https://rbnenergy.com/lets-get-crackin-part5-natural-gasoline

Now I don’t believe that anything this dramatic can happen to oil prices, production would be shut in well before that.  But it does highlight that since there is a fixed amount of storage for oil, and as inventories build and production does not decline, there could be a further severe sell off in the spot market.  The recent ISIS scares in the Kirkuk region of Iraq could be an opportunity for a short-term bump for people stuck in a position.   Although if you think ISIS can capture the big fields in Shite dominate Basra region, you might be less bearish than I am.  That would solve this supply glut in an instant! 

Rig count and weekly inventory numbers

http://www.eia.gov/petroleum/supply/weekly/pdf/wpsrall.pdf

No signs of an end to the glut from the weekly EIA data for the USA.  Gasoline stocks are also on the high side.   Distillates (diesel, heating oil, and jet fuel) are on the low end of the 5 year range, but we have been exporting very large quantities.   I don’t feel competent to infer any major conclusions from this, but certainly we have not seen anything that suggests we are approaching the end of the glut.

Rig Count is dropping like its 2009:

Data from Baker Hughes http://www.bakerhughes.com/rig-count

We dropped 12 rigs in the Bakken, down to 153.  Permian only lost 6, down to 430, and this represents a deceleration in the rate of decline in that basin vs the past two weeks.  Eagleford lost 4, down to 181, that is also a deceleration in the rate of decline there.  The gas basins held up.

One other observation that I would make is that we have reached something of a milestone in that ¾ of the drilling rigs on land in the USA are now horizontal rigs.   Vertical and directional rigs have been dropped more rapidly, increasing the percentage of horizontal rigs in the total.  “Directional rigs” are basically like vertical rigs but drilled at an angle.  They are also called “Slant Drilling” rigs.  Horizontal rigs drill strait down then make a right turn and drill along a formation for a mile or so, and are a more modern technology than the other two types.

If we continue to drop at the current rate it will take 3-4 months to get to the 2009 lows.

Davos commentary

There was some interesting commentary from Davos from the CEOs of the European integrated oil companies Eni and Total.

"A lot of our projects are long term to have production in five or six years. And that is a problem. If you are cutting capex (capital expenditure) drastically now - we can have a lack of production in four or five years creating a new increased oil price at $200 maybe," Descalzi said (Eni CEO).

Of course everyone who produces and sells oil would like OPEC to cut production to prop up prices.  Oil majors have been increasing capex and their production has been falling for years now, but the independents and state companies have more than made up for those declines.

From a game theory perspective, the goal of OPEC of providing price stability, may be in conflict with the goal of receiving the highest possible price over the long term.  In other industries, the low cost producers never cut back supply, but keep producing through downturns for maximum operational efficiency.  The global mining firm BHP long said that their philosophy was to produce from low cost, long life assets, and maintain production and investment through the entire commodity cycle.  (Incidentally they seemingly diverted from this philosophy when they invested in US shale gas at the top of the cycle).   New producers with higher cost supply will think twice about making an investment if the price can crash from $100 down to $30 at any moment and bankrupt them.  Price volatility can actually be a benefit to the low cost producer because it keeps down supply, and so props up margins, over the longer term.

The only problem with volatility in most OPEC countries is that they use their oil revenue to fund massive social spending programs, which cannot be easily cut back without devastating consequences to their economy.  If, like Norway, they instead put oil revenues into an investment fund, and used the fund to finance their domestic agenda, they could insulate themselves from the volatility of prices.  This may be what the Saudis are doing now.  The only problem, of course, is that there is a long list of OPEC countries that don’t have a fund like this, and have little ability to withstand the short term price impacts.  Iran, Venezuela, and non-OPEC Russia fall into this category.  Iraq has no savings, but they have been able to increase production to partially offset the price declines.

http://www.reuters.com/article/2015/01/21/oil-eni-davos-idUSL6N0V02Z420150121

The coming improvements in the cost structure of unconventional drilling

The rig count will plummet but production will be resilient

I have mentioned this many times, but I think it is an important point that is not being widely emphasized.  The cost structure of the major onshore unconventional plays (Bakken, Eagleford, Permian plus all the less significant areas), will drop dramatically over the course of this year.  The so called "breakeven" price for all these basins will decrease very substantially if the oil price stays low.  Rig productivity has already been improving every month in every basin for the past several years, but this has mainly been due to improvements in technology and the experience level of operators.  There will be several new reasons for efficiency improvements.

Operators will focus on their most economic prospects, rather than drilling for exploration, acreage retention or other more speculative activities.  Chesapeake Energy, which had become financially overextended due to the aggressive acreage acquisition strategies of then-CEO Aubrey McClendon, pulled back on capex several years ago after a leadership change.  They have shown remarkable improvements in efficiency as they cut capex levels, and I think these changes are illustrative of what is likely to happen industry-wide this year.  The reasons for the improvements are various but they all are related to making capital spending choices that emphasize making an economic return on a well instead of prioritizing acreage retention, exploration etc.  This leads to increases of multi-well pad-drilling in the core areas of a play, rather than testing out the perifery and drilling single-well pads to hold acreage.

From Cheseapeake Energy Investor Presentation:

After a dramatic cut to the capex budget well costs fell substantially in all regions.

The substantial increases in efficiency that Chesapeake made when they reduced capex will likely be seen industry wide in 2015.  But the industry as a whole will have a second advantage in reducing costs that Chesapeake didn't have on its own.

Services costs will decrease due to overcapacity:  Schlumberger said on their conference call that they would prefer to "stack equipment" than to give up too much on margins.  Maybe, but then they should be prepared to give up market share, and that might disadvantage them for when the market comes back.  Service costs are highly elastic, and they should fall dramatically.  I don't know enough to be able to make any projections about the extent of this effect, but I would expect it to have a substantial impact on the overall economics of tight oil in the USA.

After the 2008 gas crash we saw rig count come down ~75% and production continue to increase.  I don't necessarily think this will happen for oil.  If the oil rig count falls by 75% I would expect production to plateau or decline modestly.  One of the reasons that gas production was able to grow was that the most efficient gas play, the Marcellus, was just coming on at that time.  As rigs left the Barnett, Fayetteville, and Haynesville shale drilling was accelerating in the Marcellus.  Each rig there produced more gas than in the earlier plays.  Secondly, shale gas drilling is much more efficient from a $/BTU standpoint than tight oil drilling.  The best shale gas areas are highly profitable if they can sell their gas at $3/mmbtu, the energy equivalent to selling oil at about $18/bbl.  The best tight oil areas are currently marginal at about $40/bbl or a bit under, though this number is likely to decrease.

Where is the consensus and how are my views different?  I think the price of oil is likely to decline further from here before recovering.  We may be in for a long period of serious volatility, in contrast to the relative stability in the market in the several year period leading up to this summer.  It is not possible to make long term projections on price with any accuracy, but I think there is a conventional wisdom that a much higher price is necessary to ensure adequate supply.  The "correct" long term price, for instance the 5 year average after supply and demand come back to equilibrium, might be only $60-70/bbl in 2015 dollars.  $100 was too high- it created too much new production.  It is true that much of today's high-cost oil has a higher break-even than that, but we are in the early innings of tight oil though.  There are also big low-cost supplies that could come on the market from Iraq and Iran at some point.  Either of these countries have the geological resources to increase production by 4 million b/d if the politics go the right way.  Though even in an ideal political climate this would likely take half a decade at the least.  While it is fun to guess, I must acknowledge that there is a wide range of possible outcomes, and in the end even a much more informed observer than I can only make an educated guess about how prices will behave over the course of this year.

screening for value

I'm starting to compare valuations and get some names ready in case I want to start buying any time soon here.  As a reminder, the only E&P stock I own is Whiting at the moment, having sold CHK (July), APA (September), EOG (bought in Sep at 101.50, sold in December 96.50).  Other non-E&P energy related stocks which I have owned are CVX and FCX (also sold in September).  I also previously mentioned that I own American Airlines, which I bought quite well in September and sold half in December, and I also own CF Industries, a play on durable low-cost North American natural gas.

A year ago I had done a screen comparing the growth rate of production and the enterprise value/EBITDA.  EV/EBITDA is the enterprise value, net debt plus market capitalization, divided by the earnings before interest taxes depreciation and amortization.  This ratio is a simplification, but it is greatly superior to using the PE ratio for E&P companies, especially for companies where debt is a large part of the valuation.

Today I did another screen but instead of using growth rate I used leverage, as defined by net debt/ebitda.   In a contraction like this one it is important to examine the debt situation of the company.

First a few comments on this screen.

1) The gas companies (COG, RRC, EQT, SWN, UPL, AR) appear to be a bit more richly valued than they actually are relative to the oil companies.  This is because gas was already low last year, so they can reasonably expect their ebitda to hold up better in 2015.  Companies with a lot of "wet gas" such as RRC and AR, will still get hit by lower natural gas liquids prices, which are somewhat connected to oil.

2) This chart might suggest that some of the very highly levered companies are good shorts, such as GDP, SFY, SD.  Unfortunately I have missed the boat on these companies.  Although their EV/EBITDA may not look particularly low, their equity value has gone down by 80% or more from their 52 week high.  Even if I knew for a fact that these companies would go bankrupt a year from now if prices didn't improve, it still wouldn't be a good short.  Any rally in oil prices could triple these almost overnight.  In fact, anyone who is bullish on oil  prices in the near term could buy these if they want some serious leverage.

3) Bakken producers appear over leveraged in general.  None of these 4 appear particularly comfortable at about 2-3x net debt/2014 ebitda.  Their leverage ratio could increase dramatically next year if we see no improvement in oil prices.  On the other hand, some of these companies are trading at under $10 per barrel of proved reserves.  Recent offshore projects, like the Hes one approved several months ago, have $20 capex per bbl of "recoverable resource).  These companies may be prime candidates for the majors or large-cap E&Ps if things stay ugly.

4) Permian valuations still seem high to me, but I've been saying this for a while and the gap has not closed.

5) The valuation gap between the smaller and larger companies has closed (smaller companies used to be valued more highly), but the large caps still seem to be a better bet to me.  Although they were growing more slowly, this may turn into an advantage, since the smaller companies will see much bigger declines if they stop drilling- more on this later.

5) Some of the lower leverage, low valuation midcap companies like QEP and SM might deserve a look on the long side.  They have seen huge declines but don't have much debt.

1/16/14 rig count commentary

The Baker Hughes weekly rig count came out on Friday, and we are seeing the decrease in drilling activity continuing to accelerate.   74 rigs dropped, or 4.4% of all US active land rigs.  This is a slight acceleration in the rate of decline since last week, and at the current pace, we could drop 25% of active rigs in the next month.  44 of the 74 were in Texas, including 15 in the Permian (487 rigs) and 12 in Eagleford (185 rigs).  The major oil basins are all about 12-17% off their early October peaks.  The Granite Wash (43 rigs) is 33% off the early october number, and has been the biggest decliner.  The Utica (49 rigs) and Barnett (25 rigs) are the only significant plays that haven't seen a decline yet.

I'm going to keep watching this since for the next weeks.  I didn't used to comment on it because there was too little change from one week to the next to be particularly interesting.

In search of the marginal producer...

Based on the massive capex cuts we are seeing and the tight oil ("shale") decline rates, it is likely to be the US onshore production that peaks and starts to decline later this year.  There are big cuts to offshore producer's capex budgets as well, but because of the long timeframe for offshore, this won't effect short-term supply.   Tullow, an E&P speciallizing in Africa and offshore drilling, recently cut their capex from $1b in 2014 to $200mm for 2015.  The capex budgets from the majors should be interesting.  So far the large-cap E&Ps haven't anounced huge cuts.  Conoco cut only 20% vs last year when they announced in mid december.  Smaller companies have had much bigger cuts, for example Oasis (Bakken) cut 50% when they announced in December.  Denbury (CO2 flooding projects) cut 50% in November.  Continental (Bakken and mid-continent) cut 40% in December.  As I have said before though, I wouldn't be surprised to see production flattish even after huge capex cuts, since the least efficient operators and regions will bear the brunt, just as we saw with shale gas in 2008-2009.

I had always heard that oil sands needed $30 + oil to survive.  I can’t say precisely where I heard that, but it was the number in my mind when I went to look a few months ago at.  But the oil sands producers have held up remarkably well, and this Bloomberg article says they can keep going at as low as $10/bbl in some cases!  I had thought they had relatively modest capex cost per bbl (partly due to their very long production life) but then higher OPEX, which would make them prime candidates for shut ins.  This does not seem to be happening so far.  Very low natural gas prices might be helping too, since processing oil sands takes  plenty of energy.  The other thing is that the huge discount to WTI that the benchmark Western Canada Select (WCS) grade sees has closed from as much as $40 in 2013 down to close to $10 currently.  I don’t have access to great data here so I’ll have to apologize for the approximations.

One thing to think about: Consider that widespread use of horizontal drilling and hydraulic fracturing to extract tight oil has only commenced at-scale about 5 years ago.  Deepwater and ultradeepwater drilling has been around since the 1970s.  Efficiency in both is improving, but unconventional-onshore oil production is just in its infancy.  Recovery rates are still incredibly low, in the neighborhood of 5%, vs 50% or so for conventional oil projects (depending on a number of considerations).   As I’ve said many times before, I think it is very unreliable to make long term projections about so called break-even economics of unconventional oil.  People were saying $5.50 was a breakeven for shale gas back in ’08, yet here we are after 6 years of gas prices below $5 and production has consistently grown.  We have even heard of 100% irrs in the Marcellus with $3 gas (check out company presentations from Cabot or Range).

Could unconventional onshore improvements make ultra-deepwater offshore drilling obsolete?  This is not a prediction, but rather a question.  I don’t think it is inconceivable that further improvements in unconventional onshore, and its application to resource basins in other countries, permanently constrains the price of oil over the long term.  Deepwater started in developed countries in areas like the Gulf of Mexico (North Sea is mostly shallow), but has since moved to developing regions like Brazil and West Africa.  After many years, deepwater, and especially "ultra deepwater" is still at the high end of the cost curve.  Consider that 5 years after the first deepwater discovery, around 1975, deepwater was still in its infancy.  5 years after EOG first discovered the Bakken in 2006, tight-oil was in the midst of a massive industry-changing boom, attracting over $100b of capex annually in the USA alone (including lease acquisition, exploration, development etc).  Even this past year, we would occasionally see claims by E&P companies that they had improved recoveries by as much as 60% by changing their completion design.  These improvements would be due to changes like cementing their liners, increasing the amount of propant, increasing the number of frac stages, using plug and perf or coiled tubing fracs instead of sliding sleeve frac designs etc.   No one knows how cheap it will get, but like the oil sands or shale gas drilling, what starts on the very high end of the cost curve, is likely to become more economical over time.  Also, deepwater may always have BP-Horizon incident looming over it.  No one has ever gone out to drill an on-shore well only to end up with $50b in liabilities.

Baker Hughs rig count update, and the latest EIA drilling productivity report

Huge drops are coming in the US rig count over the next several months, which will dwarf the drops we have seen so far.  The Baker Hughes monthly report came out on 1/9 and showed a drop of 60 land rigs bringing us down to 1750 total in the USA.  All these rigs were oil rigs, bringing the oil count down to 1421.  The gas rig count stayed about unchanged at 329.  Notably 28 of 60 dropped rigs were in the Permian, and 8 in the Bakken.

The declines we have seen so far are not particularly substantial since we are only a bit off the highs of the fall, but rig count declines are starting to accelerate.  Rig efficiency, as tracked by EIA, is increasing at the same steady pace it has been, but I would expect rig efficiency to accelerate noticeably as less efficient rigs operators are the first to drop rigs in the major basins.

The EIA monthly drilling productivity report came out yesterday.  We have not yet seen production increases start to slow.  USA added over 1 million b/d crude production last year, and the rate of increase has not yet slowed.  It will indeed slow later this year, but it may substantially lag the rig-count decline, since there is a backlog of uncompleted wells in most of these plays, and infrastructure constraints that will be alleviated as the pace growth starts to slow.  Then if the price stays low and the rig count stays low (for instance half the current level) we will eventually see absolute month over month declines in US production, but it might not happen until late this year or even next year if prices were to more or less settle at this level or decline further.

From EIA.gov... the reason oil prices are low in a nut-shell.  The three major plays added another 90 thousand barrels per day, which is an annualized rate of increase of 1.08 million barrels per day, and this does not include other areas like the Anadarko basin and Niobrara, which are also increasing production.  Low prices have not yet taken their toll on US supply growth.  It may take many more months of low prices to curtail the supply growth.  

I threw in the Marcellus gas chart just because gas isn't getting much attention these days.  90 rigs are now growing production in a basin that produces nearly 3 million barrel of oil equivalent per day.  This is one of the most efficient major sources of hydrocarbon in the Western Hemisphere and far more cost efficient than any of the tight-oil plays.  The Marcellus is also the reason we are unlikely to see high natural gas prices any time in the foreseeable future.

inventory check in

There are two main sources for inventory data available free on the internet.  The first is from IEA, the International Energy Agency.  Members of this organization include most of the so called developed countries of the world.  Most of the countries of Central and Western Europe, as well as USA, Canada, Japan, Australia, New Zealand, and Turkey are member states.  The organization was created in the wake of the first oil crisis in the early 1970s to make policy recommendations to promote energy security for the developed world.

Their latest month reports are available only to subscribers, but the prior months are available free.  The reports are much less detailed than the data available for the USA from the US Energy Information Agency (EIA), another good online source of inventory data, but the great advantage of the IEA is that they are global, and oil is a global market.   The data quality also may be somewhat worse because of limited reporting from many countries, but it is presented well, and their reports convey what is going on in the world market very effectively.    There are a couple charts from the December report I would highlight.

Supply has been exceeding demand for 6 consecutive quarters, and the excess supply is now close to 2 million barrels per day.

Over the past two years OPEC supply has been in decline, and non-OPEC supply has been rapidly increasing.   Supply changes in Iran, Iraq, and Libya have been responsible for most of the volatility in OPEC production.  For non-OPEC, the vast majority of the supply growth has been from USA tight oil.

The Saudis have not increased production, they have simply refused to drop their production and balance the market, as they have historically done in recent decades.

OECD total stocks are at record levels and continue to trend upward.  We are currently in a true excess supply situation.  This is totally different from the 2009 price crash, which was associated with a general financial panic, and not a fundamental supply-demand imbalance.  

There are a couple of different ways that this glut could end:  

1) Shut ins- The first and most jarring way for the market to balance would be for prices to get so low that they are below the cash-cost of the most expensive producers.  There was a recent article in Rigzone.com that described a report form Wood McKenzie estimating cash-costs for various producers.  Note that this is different from the so called break-even point, which also includes depreciation expenses for the capital invested in the project.  If the oil price goes below cash-cost for a producer that means he is actually losing more money for every additional barrel produced.  The logical thing to do would be to shut in your production when the price goes below the cash cost.  The article suggests that only .2% of world production is cash flow negative at $50 oil, and 1.6% is cash flow negative at $40.  Those producers tend to be US "stripper wells" (old and very low production wells), Canadian oil-sands, and North Sea deepwater.  Short dips below $50 might not cause this oil to be shut in because restart costs may be high, and a shut in can impair the productivity of a well.  In the case of offshore, several fields might use the same infrastructure, so it would be the economics of the entire area that might dictate when to shut in.  So if oil were to get below $40, that might be the magic number for production to shut in, and the imbalance to be resolved in the short term.  I would imagine that oil sands mining operations would be among the most likely to be shut in first, but I don't know enough to say for sure.

2) Natural declines and capex reductions-  Oil production from an existing well declines gradually.  From some new tight-oil wells it may decline as much as 60% or more in the first year.  The oil producing regions of the world that are un-economic at $50 oil is a long one: large portions of US unconventional, some Canadian oil sands, Gulf of Mexico deepwater, North Sea, Brazil pre-salt fields, various West African off-shore projects, some of the central-Asian conventional projects, some of the Arctic projects in Russia, etc.  If we see capex cuts, we should see natural production declines in the more expensive areas that will not be offset by new production.  This will eventually balance the market.  This is more relevant to the longer-term supply-demand balance, and is unlikely to arrest the decline in the very short term.

3) Demand increases spurred by low prices or economic growth- Americans are buying pick-up trucks at an incredible rate, and demand increases may help close the imbalance.  Unfortunately, demand tends to be quite inelastic in the short term because oil is generally not substitutable for any other type of energy.  Oil at one time was used in power plants (it still is in a few places), and electricity production is generally substitutable with gas or coal.  This ability to substitute provides a check on the volatility of the prices of gas and coal, but there is no similar check on oil price volatility.

4) Voluntary cutbacks in supply-  If OPEC, perhaps in concert with other significant non-OPEC producers were suddenly announce that they would balance the market with supply cuts this could resolve the imbalance overnight.  The Saudi's would presumably have to participate in this though, and so far they are showing no intention of doing this.  They are even talking down the price further every chance they get by saying they wouldn't cut supply even if it hit $20.  In a recent interview the Saudi Oil minister Ali Naimi said they wouldn't cut output no mater what.

The solution won't necessarily be just one of these things, but will likely be a combination of factors.  These are interesting times in the world of energy, and it is hard to say what the future will bring.  I hesitate to make any specific predictions, except to say that I don't expect sharp rebound in the oil price in the short term, and another leg down in the spot price is certainly not out of the question or even unlikely.

A brutal day for E&P sector, are we finally starting to see signs of real capitulation?

I turned on CNBC at lunch just and saw the anchor saying "some traders are saying we might see oil in the 30s".  Today we saw most E&Ps off 6-10%.  I'm even tempted to dip a toe in here for a short term speculation (but have resisted that temptation).    It doesn't take a technician to tell you that this chart or WTI doesn't look good:

Right after that they had someone on saying that they were projecting a $70 oil price for the first quarter average!  He was saying that the small Permian Basin companies he covered wouldn't have any financial trouble because they had hedges in place.  There are still lots of people living in a fantasy land I think.  Supply and demand are fundamentally mismatched at the moment and the Saudis are saying they won't cut.  I want to see producers say they are dramatically cutting capex budgets before their hedges start to run out.  I also want to see the stocks of oil majors pull back more.  Exxon is still trading at $90, or 15x analysts' (stale) earnings estimates for 2015.

At some point in the future I think we will see an agreement to cut production that may incorporate the Russians and other non-opec producers such as Norway, Brazil, and Mexico, but there is likely more pain to come first.  I want to see total capitulation.  I'm buying some broad index funds today but not oil equities yet.