'Fracklog' means no oil bottom anytime soon

Oil fracking
David McNew | Getty Images

The rich vocabulary of the oil market includes such terms as contango, backwardation and the crack spread. These expressions, at first glance, would seem to be more suited to describing competitive techniques on "Dancing with the Stars," but the first two are shorthand descriptors of the futures markets curve structure. The crack spread is the profit margin refiners make on cracking crude oil into its component parts of such things as gasoline and diesel fuel.

Recently, a new term has been added to the lexicon and it translates into bad news for longer-term oil market bulls.

The word is "fracklog" and it refers to the growing number of oil wells in the United States shale plays that remain drilled but unfinished. This backlog of fracking wells represents a "fracklog."

Oil wells that are drilled using hydraulic fracturing technology are completed in a two-step process: there is an initial drill boring that takes place, usually horizontally, under a rock formation in which pockets of oil and/or natural gas are trapped. The second step involves introducing a high-pressure concoction of water, sand and a mix of chemicals that literally fractures the rock formation, allowing the trapped pockets of oil gas to be liberated and recovered.

Due to the oil price crash, many energy companies in the shale industry are hunkering down and seeking to conserve their increasingly precious cash reserves. Harold Hamm, CEO of Continental Resources, confirmed this on CNBC's "Squawk Box" on Thursday morning.

The second step in the process is referred to as the "well completion" process, and it consumes 60 percent of a well's cost, according to Hamm.

By laying the groundwork or infrastructure for a well's completion, companies are able to have production on standby, as they wait and hope for prices to recover.

Currently, there are upward of 3,000 fracklogged wells. Typically, they can be expected to produce approximately 1,000 barrels of oil per day, which puts a potential flood of 3 million barrels of new crude ready to be tapped, in short order or in about two months' time. It is an amount of oil that is equal Iraq's daily production.

The hopes for an oil price recovery are being pinned on signs of increased demand, in reaction to the lower pump prices for gasoline and diesel fuel, and reduced production.

The demand response is occurring. The weekly reports from the Energy Department are consistently showing solid demand growth for gasoline, and near double-digit demand increases for the diesel fuel category, which includes heating oil.

Supply, however, remains stubbornly at multiyear highs and showing no signs of slowing, despite a plunge in the U.S. rig count over the past several months. In fact, U.S. oil production will likely end up being 7.8 percent higher in 2015 than last year at more than 9.3 million barrels per day, according to the Energy Department.

The oil futures curve is in a steep contango right now, meaning that near-term futures contract prices are lower than longer-dated futures contract prices. This is encouraging market players to lease tanks and ships to store oil now, and deliver those barrels against the higher-priced contracts in the future.

The fracklog is another version of the storage play. Hamm has been quoted as saying that 80 percent of new drilling is stopping short of the completion step, creating more and more standby oil sources.

This is a relatively new, significant development that will likely dash the hopes of those rooting or hoping for a price recovery of some magnitude in the near future. Given the strained financial position of a lot of fracking-centric drillers, many of those fracklogged wells may be fired up as soon as WTI oil hits $60 or $65 per barrel.

Exxon Mobil's Rex Tillerson was recently on CNBC expressing his pessimism over a rapid or significant oil price recovery. The fracklog supports his view.

John P. Kilduff is partner at Again Capital. He's also a CNBC contributor.