THE fulmar is a seabird that dates back to an extinct species from the Miocene age and are long-lived for birds with a 20-year life span. Having spent some time sailing in the waters around northern Europe, they are a more refined version and much prettier than the common seagull as they look for food off fishing boats.
But as was pointed out to me in my readings recently, the name comes from the Old Norse words meaning “foul” and “gull,” a reference to the fulmar’s “gut oil puke” of the chicks.
A defense mechanism, the stomach oil that the chicks expel in projectile vomiting not only smells like rotten fish but is almost impossible to wash or even scrape from human skin. And if you are a bird looking for a free and easy meal, the stomach oil also has the consistency of super-glue, gluing a bird’s feathers together making flight impossible. If the bird tries to wash the stomach oil off by going into the water, its feathers lose their natural buoyancy and waterproofing and the bird drowns.
The fulmar looks harmless and yet it is an accomplished murderer by nature and inclination. I have written several times that crude-oil prices are going to fall, and while some financial experts doubt that forecast, more evidence says that by June, what we think of as low prices today may seem high by comparison in the future.
Last week the American Petroleum Institute reported that the buildup of crude-oil inventories in the US was the largest on record since 2001. The estimate was for an increase of about 3.1 million barrels at the Cushing, Oklahoma, storage facility—the biggest in the world—but, in fact, came in at 10.5 million.
At the average current pace of unsold inventory, Cushing will be at full capacity by May 15, 2014. At that point there will simply not be any more land-based storage available for crude oil. While some will turn to the expensive storage method of using ocean-going tankers, some producers will be forced to dump this excess oil on the market regardless of price as storage costs will be more expensive than accepting a lower welling price.
Shale-oil production in the US fell about 3 percent last month from December’s historic high. We know that many shale-oil producers have stop production on less productive and expensive wells and are now confining their efforts to better wells in order to keep cash flow coming in. The financial experts—not the oil experts—are predicting that there will be less oil production by the third quarter and prices will begin to increase. But as I have said before, real life in the oil fields is much different than real life in the financial markets.
One critical ground zero for shale-oil production is in the US state of North Dakota in the Bakken fields. The director of the state’s Department of Mineral Resources tells us to expect a surge higher in production during June. “Bakken production could suddenly skyrocket, by nearly 10 percent in June, potentially rising to a historic high level.”
There are two reasons for this to occur. About 125 uncompleted wells must come online by the end of June to comply with a state law to “use it or lose” land lease contract. Further, a major state oil tax incentive starts in June on any production after that date further increasing the cash flow on any new oil produced.
Oil-drilling companies may take advantage of the tax break to shut down production somewhere else but that is only an outside possibility.
While low oil prices are good for the Philippine economy, at some price point—and no one knows what that is—the financial experts may see even lower prices in the future as the oil experts do and we could really have a free fall occur. That would cause some negative contagion to wash up even on our shores.
One last concern that I have in considering that the coming months may be like the fulmar bird—pretty to look at but very bad to hold—is that, for the first time this year, the two weeks saw a large amount of foreign money start flowing out of the Philippine stock market. While foreign money is often, if not usually, wrong about local stocks, this time it looks different and the picture is not pretty.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
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