Why this is Not the Time to Chase Oil Stocks.
By Dan Dicker, Oil & Energy Insider:
We’ve entered the twilight zone in oil, where rumors and financial moves in outer markets are affecting oil and the stocks we’ve accumulated, making trading these markets not only difficult, but dangerous. We’ve got to stay disciplined and focused in this tough market and stay away from some tempting, but ultimately destructive ‘opportunities’.
Oil has put together a strong four day rally, pushing Brent prices above $50 a barrel again. But we must realize where this strong response from oil has come from before we foolishly attempt to leverage that move into good opportunities in oil stocks.
First, another meeting from OPEC and non-OPEC members has been tentatively scheduled for September, to discuss another production cut. Both the Russian oil minister and Saudi sources have floated some positive outcomes might come from these discussions. Khalid Al-Falih has said the Saudis would “take any action to help the market rebalance”, and yet the Saudis have also pushed their production in August to the highest level ever – 10.9m barrels a day.
This is the kind of aggressive move ahead of meetings that signals that an agreement is very unlikely, and the Saudis (as well as the Iranians) are continuing their fight for market share, instead of ready to compromise on production limits.
Don’t get me wrong – a reconstitution of OPEC as the global supply gatekeeper is very much in the cards eventually – and is the Saudi endplay to their so-far two year assault on U.S. and other non-OPEC producers. But when that cooperation and production agreement comes, it will be when the U.S. and other producers are driven completely into the dust without hope of arising again from the ashes. The bottom line is: we’re not nearly at that point yet.
Look at Chesapeake Energy (CHK), a company I put early on my list of the ‘walking dead’. It was by far the most likely large-cap name in U.S. production that I noted was likely to go bankrupt, with its debt to equity ratio of over 4000(!). I still need to see that bankruptcy in companies like Chesapeake to believe that the destruction of U.S. production is nearing its apex and oil is truly on the road to complete rebalancing.
And yet today, the company announced a new $1b funding operation with Goldman Sachs and Citigroup. That, along with the recent oil rally has sent shares upwards more than 25% in the last month. The hope, of course, is that new funding will give Chesapeake a chance to live to see $80 oil again. This is the exact outcome of competitive production that the Saudis have been strategically trying to prevent, and will prevent by not signing any production limitation – yet.
Second, the dollar index has finally shown some longer-term weakness, indicating perhaps that the highs in the dollar have been seen, and with them, the lows in oil. This has again sent the hedge funds and other speculative accounts into trimming shorts and increasing longs in the oil market, sending prices higher.
All of this is not fundamentally based – for now, stockpiles remain hugely oversupplied, and even bankrupted oil companies continue to pump oil to satisfy bondholders. A huge amount of investor and private equity money continues to hopefully chase “5-bagger” opportunities in oil like Chesapeake.
All of this to remind my readers that I do not think that this is the time to chase oil stocks. I have instead been using this rally to take profits on oil winners that we have accumulated earlier in the year. For example, I have sold more than half of my holdings in EOG Resources (EOG) after their mega positive report that send shares above $91 (from my basis price around $72). I have equally shaved my holdings of Cimarex (XEC) and Hess (HES). All of these have been huge winners that we accumulated in the spring.
Until the destruction in U.S. production is complete – a process that has admittedly gone on longer than I thought it would – there will be better opportunities to buy quality oil stocks at value prices. For right now, I won’t be tempted by financial rallies or OPEC rumors to get in at these prices. I’d rather be getting out. By Dan Dicker, Oil & Energy Insider
Energy companies are not the only ones. This leading Indicator of big trouble is now fermenting in the banks. Read… Business Loan Delinquencies Rock Past Lehman Moment Level
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The Saudis can’t slow down. They have to pump now like their lives depended on it. To slow down now is a death blow. There are over 15,000 foreign workers stranded out in the desert that haven’t received paychecks in months and they are paying government contractors in IOUs and other debt instruments. The Saudis are truly in a financial mess, just like Chesapeake Energy. It’s a tread mill of which neither party can afford to get off of even for a second, until the other blinks. The Saudis aren’t going to slow production anytime soon.
As for the price of oil bpd, I wouldn’t be surprised to learn that the FED has its fingers in the pie, manipulating the price.
Well the price action seems to be in response to the upcoming beef. Just in the last two days are the biggest two stories of the year, with a third to boot…Everyones just frontrunning the “hot” part of the action.
1. Turkish foreign minister says it is ok for the Russians to use incirlik base to “fight terror” if they so choose.
2.Today Yemen says its OK for Russia to use Yemen to “fight terror.”
3.Duerte in Phillipines (indirectly but timing is spot on) says I don’t give a “shit” about the UN…
The writing has been on the wall, is on the wall.
Heck yeah SA is trying to get as much money as they can, their days are numbered, do you think its an accident the USA pulled out their aerial asstets on Friday????
It’s the US pushing the Saudis to keep pumping.
The US needs the petrodollars to support the US economy.
The Russians and Iranians are happy to accept other stable currencies, if the Saudis cut back on production, it will be the US economy that suffers.
US banks make $1 billion a day, changing money for countries to trade, it’s a massive tax on the global economy, and no country likes paying it.
And that is only the small change, 10 million barrels a day at $40 is $146 billion a year that flows into American banks and the Treasury.
(If you are Sinbad, the comic….we know each other)
KSA is doomed…
Council on Foreign Relations: Saudi Arabia’s Break-Even on Oil is Approaching $120 per barrel
http://www.cfr.org/oil/fiscal-breakeven-oil-prices-uses-abuses-opportunities-improvement/p37275?cid=ex-cgs-oil_breakeven_discussion-levi_use-113015
http://i.cfr.org/content/Breakeven_figure_Saudi_Arabia.jpg
The Saudi’s are continuing to pump oil and will continue to do so until they are ruined financially. They are hemorrhaging reserves in the process. The inconvenient reality is that the global economy has been in the dumps since 2008 and there is no prospect of it picking up steam any time soon. Oil demand is down and supplies are way up. In fact, we are already headed towards another recession if we are not in fact already in one. Global debt is too high and economic activity, such as it is, is being spurred on by ever more debt. Are they are selling oil in the amounts that they are in an attempt to hold on to market share and drive out new entrants to the market or are they just attempting to maintain cash flow? Either way, the House of Saud may be entering its twilight years.
Here are the break-even oil prices for 13 of the world’s biggest producers
http://www.businessinsider.com.au/break-even-oil-prices-for-all-the-major-producers-in-the-world-2015-7?r=US&IR=T
Those figures are fairly rubbery, they are mostly based on how much of the revenue from oil sales ends up in Government hands.
I looked up production costs of various countries at the EIA website a few years back, and they stated that Saudi oil cost $12 a barrel.
Russian oil was a bit more than Gulf oil, but under $20.
US oil production, which is never quoted in any of these propaganda stories was $60 for offshore oil. I can’t remember the onshore cost of production, and that data doesn’t seem to be available at the EIA website anymore.
The story says that Russian production has a break even price of $105, but the Russian Government, puts excess revenue from oil when prices are high, into sovereign wealth funds, high oil prices have little impact on Government budget revenue.
So the break even prices are based on discretionary spending of taxes on oil sales, not actual production costs. In fact Russian oil companies are making huge profits, whilst US oil companies are losing money.
I would dearly love to know what effect oil prices have on the worlds biggest oil producer, the US, but that never seems to get mentioned.
When virtually your entire revenue comes from oil – or even a substantial part of it…
Very little of the expenditures are ‘discretionary’
That would be like saying the US government could easily slash spending by say 75% — without collapsing the country.
Have a look at the economy of Alberta (and they are not totally dependent on oil…) — or better still look at Venezuela — they are going to pieces because their revenues from oil have dried up completely.
The reality is — you cannot cut back much — without causing mayhem in your economy.
Here are the actual Saudi numbers:
Council on Foreign Relations: Saudi Arabia’s Break-Even on Oil is Approaching $120 per barrel
http://www.cfr.org/oil/fiscal-breakeven-oil-prices-uses-abuses-opportunities-improvement/p37275?cid=ex-cgs-oil_breakeven_discussion-levi_use-113015
http://i.cfr.org/content/Breakeven_figure_Saudi_Arabia.jpg
Sure the Saudi’s can cut back — and they are doing so in a big way right now…. but when the difference between what oil sells for and what the KSA needs to balance the books — there is no way you can cut back enough without crashing your country….
As for the impact on the US of low oil prices — the US is nothing like the KSA — the revenues (taxes) from oil production are insignificant in terms of the overall tax base.
You could pretty much remove those revenues and there would be little impact on the US budget.
Again – when almost all your revenue is derived from oil — obviously $50 oil is a massive problem.
Oh and btw the US is not the biggest producer of oil.
Russia… KSA… USA…..
http://money.cnn.com/interactive/news/economy/worlds-biggest-oil-producers/
The US is the largest ‘combined’ energy producer. Slight nuance.
Here’s another wrinkle… Russia also needs oil at well over $100, but it’s burning through what remains of their cash reserves at a much higher pace, and their cash reserves are half of Saudi.
The reality is that no energy producers – including the Big 5 and the biggest state-owned oil companies – are making money at $50.
What I find most alarming is that even when oil dropped to $30 — and stayed there for some months -we saw no snap-back in growth.
I suspect that is because the economy was badly damaged when oil prices were over $100 as stimulus was piled on to deal with that….
Debt was encouraged across the board … so now the world is drowning it — and a drop in the price of oil has no impact.
The USA ,has started exporting Crude.Saudis ,will not allow US Domination, in Crude Market.Low prices to continue,for a long time.
Hmmmm,, USA exports crude, at the same time imports 25%-30% of total daily crude consumption.
It is a global market with various grades going to appropriate refineries, yet the US is a long way from being energy self-sufficient. Those days ended almost 50 years ago, despite media and political misinformation.
Remember the last presidential bid of Michelle Bachman when she guaranteed $2.00 gas and that such a price would solve all problems? Well, it’s close to that now and oil companies are going broke in droves.
Current oil consumption rates are 10X the rate of new discoveries. Excellent graphic included for this statement.
http://planetforlife.com/oilcrisis/oilsituation.html
This is a very good time to personally adjust for lower energy use as we go forward. God knows not too many people these days have extra cash to spew out the tailpipe.
That website is nothing more than a conspiracy theory.
Is this one better?
“That means that drillers in those plays must replace 38 to 42 percent of their current production EACH YEAR before they can increase production. It’s a ferociously high decline rate, some 10 times the rate worldwide. And, this is the oil that the optimists tell us is going to raise global production!”
http://oilprice.com/Energy/Crude-Oil/Why-New-Oil-Discoveries-wont-Make-a-Difference-to-our-Energy-Future.html
Nick what the heck is a CONSPIRACY THEORY!? By that you must mean that you don’t believe that anything that happens can be motivated by ulterior motives….Because that is what you’re doing when you say something is a “conspiracy theory” You are saying that nothing can possibly have an ulterior motive.
i.e.
After 9/11, Verizon instituted a 1.50 “terrorism fee.” A common “conspiracy theory” that arose from this “fee” was that it was being charged not at all to keep Americans safe from terrorism, or even to recoup loses from 9/11, but is was just a pure profit move, later validated when the FCC made them stop the fee…
So in other words the fee being charged is for “profit,” and not to recoup loses or prevent future terrorism..Since the motives in the “conspiracy theory” do not match the motives stated by the common narrative (by the sellers), then what your basically saying in front of thousands of virtual people is that your brain cannot accept anything that contradicts itself in that manner….
The product must be what the seller says it is and if you think maybe the seller has an ulterior motive (profit) then I am going to call you a conspiracy theorist because my brain can’t the fact that sometimes people on Earth lie…..
Price solves everything. And when supplies get tight, if ever we do start ‘running out of oil’ (something that has been predicted for 100 years), then price will rationalize alternative energy sources. The thing is, as always, too soon is the same as being wrong, and subsidizing unviable sources of energy delays their more efficient production at a later time.
Personally adjusting for lower energy use is something that happens due to the price mechanism, not from any sort of self-discipline. Proof of this is provided by the hordes of environmental advocates and bureaucrats that run around the world in private jets at 10x the energy footprint because they can afford it, or because someone else is paying, preaching to ordinary citizens to reduce their energy consumption, when those “ordinary citizens'” demand is quite reasonable – I mean they have to get to work, cook their food, and light their houses to survive, and they pay for what they use. In times of high prices, they buy smaller cars, (the most direct use and cost of high energy prices), and use less. Right now the monster SUVs and huge pickup trucks (which seem to be driven to the supermarket by suburbanites) seem to be the vehicles of choice. There have been times when you could hardly give these away, but today apparently people do have enough money to spew out the tailpipe. Otherwise they wouldn’t be buying.
The supposed paradox of the US importing oil while at the same time exporting is answered again by price: it’s a function of locale, and the cost to transport. Something that is also not considered, and which would be considered absurd by most people is that imported oil has actually reduced US energy costs, by keeping a lid on prices due to abundant supply: imagine what the price of oil would be, now or in the past, if imports were barred.
And Michelle Bachman or anybody else cannot guarantee a price for anything unless it’s above the market. Otherwise you end up with lineups like you did when the Department of Energy got involved with distribution in the ’70s.
You comment about the world “running out of oil” for the last 100 years is true. In fact, you can go all the way back to around 1870 when J. D. Rockefeller went “all in” on the oil business.
There was talk that the oil field in Titusville was all there was. Wells were being pumped like mad and the “experts” all said it was going to end soon…bye bye…nice knowing you…..So, Rockefeller, a devout Baptist, prayed to God for a sign that oil production was not going to end…..and his prayers were answered in the discovery of the Bradford Field…bigger and better than Titusville.
That was when he went “all in” and started buying and combining his Cleveland refinery with the other 27 small refineries in Cleveland. All but 2 joined with him. Along with the genius of Henry Flagler, and his wife’s accurate business advice, he ramped up any and all debt to buy all the refineries he could.
This is why , in his later years, he said “God gave me my money”.
How much petroleum does the United States import and export?
In 2015, the United States imported approximately 9.4 million barrels per day (MMb/d) of petroleum from about 82 countries.
Petroleum includes crude oil, natural gas plant liquids, liquefied refinery gases, refined petroleum products such as gasoline and diesel fuel, and biofuels including ethanol and biodiesel. About 78% of gross petroleum imports were crude oil.
In 2015, the United States exported about 4.8 MMb/d of petroleum to 136 countries. Most of the exports were petroleum products. The resulting net imports (imports minus exports) of petroleum were about 4.6 MMb/d.
The top five source countries of U.S. petroleum imports in 2015 were Canada, Saudi Arabia, Venezuela, Mexico, and Colombia.
http://www.eia.gov/tools/faqs/faq.cfm?id=727&t=6
The four day rally in oil may have a lot to do with the flooding in Louisiana, a big oil state. For those of you who don’t know, the rains lasted for four days.
The areas flooded are home to all kinds of oil and chemical related businesses. While these sites regroup there may be a shortage of all kinds of petrol-chemical products.
Thank God it hasn’t affected the upcoming Shrimp & Petroleum Festival (No, I am not kidding!) starting September 2nd. Come on down!
Shrimp and Petroleum! Like Garden and Gun Magazine, this incongruity speaks to something basic in the unreconstructed Southern soul.
Gotta have a gun to protect your garden and shrimp boat no go without gas. As congruent as file and gumbo. :)
“There will be plenty of opportunities to buy oil stocks in the future” Dan Dicker… what he means is…” There will be plenty of opportunities to invest in the destruction of our ecosystem and Climate in the future”!
Gerald, you night well look at England’ ecological quality during the industrial revolution, in the age of coal and steam.
Then extrapolate to what should have been the state of England’s ecology today.
If you are not too much the Cassandra, you will recognize quite a large disconnect.
Oil is required to operate our economy — if we reduce the burning of oil – we collapse.
It would appear we have no choice but to continue burning oil — since there are no substitutes
If in three years, oil hits $200 a barrel, sales of gasoline powered passenger vehicle will plunge. They’ll buy electric because it will be a lot cheaper to operate even WITHOUT government incentives.
Oil is a transportation fuel in the US (in addition to feed stock for the chemical industry). With demand from gasoline-powered passenger vehicles sagging, a big part of demand for oil in the US will be sagging. This process will take a few years (replacement of the fleet takes time), but it will be irreversible.
Trucks and planes will still be powered by oil products, but not passenger vehicles, urban delivery vehicles, urban buses, etc.
You assume that the economy cannot react and adjust. This is the basis of all your oil & collapse comments. This is patently wrong. $200 oil will create a BOOM in electric vehicles and infrastructure to charge them … self-driving cars (electric) will add to the sea change. Power generation will boom – plants and transmission lines – to supply the juice for transportation. Mass transit will become a better option, and more money will be spent to build out commuter rail lines in big urban centers…..
All these changes will boost the economy
Whether you like it or not, an increasing part of this additional power needed for transportation will be generated by renewables. So a boom in renewables…
Other industries will suffer (gas stations that don’t switch to electric charging stations, the oil industry, automakers that miss the switch to electric cars, etc.)
An economy adjusts! Always does, always has, always will!
There won’t be any kind of collapse at $200 oil. There might be a recession as the economy adjusts. And after it, we’ll be better off. It will be the beginning of the end of oil as the dominant transportation fuel.
The oil industry and oil producing countries know this – and they won’t let oil get this high for as long as possible. So I don’t think we’ll get $200 oil anytime soon … and if we do, the collapse in demand will soon push prices lower … but by then, demand in the US won’t return to today’s level. By that time, the switch to electric vehicles will be permanent.
There will always be demand for oil, but it will at a fraction of today’s demand.
One further comment — the economy can tolerate very expensive oil for some time… without blowing to pieces
As long as the Fed offsets the hammer blow to growth with massive stimulus.
Of course as we are seeing … massive stimulus had toxic side-effects…. that will end up blowing the global economy to pieces…
There is increasing evidence that massive economic stimulus — monetary, courtesy of the Federal Reserve, and fiscal, thanks to the president and supply-side minded lawmakers — is taking hold. The magnitude of the policy turnaround, which caps a constructive, multi-year reflation process, should overwhelm the economic negatives — including the drag from expensive oil and poor finances at the state- and local-government levels.
Expensive oil and its impact on other energy costs remains a concern.
Read more at: http://www.nationalreview.com/article/207227/reversal-fortune-david-malpass
And now back to the Fed. The current level of U.S. monetary stimulus is massive. Real interest rates have fallen 5.2 percent from December 2000 to March 2003, reaching -1.2 percent.
Read more at: http://www.nationalreview.com/article/207227/reversal-fortune-david-malpass
What was happening in 2003 that provoked this massive stimulus response — a response that has only increased as the cost of oil increased…
As we can see — oil lifted off lows of 12 bucks in 1998… and it continued to climb…. in 2003 the Fed acted…
The policies we are looking at today began in 2003… in effect we got onto the treadmill to hell at that time… because the Fed recognized that growth was ending…
https://economatters.files.wordpress.com/2009/05/crude-oil-prices-by-the-what-matters-weblog-1998-2009-monthly-averages-data-by-the-eia-updated-may-162009.jpg
I trust you can understand that $200 oil would result in more than just a recession…..
Here in Australia the Government taxes fuel at a very high rate, low grade petrol is about US $3.75 a gallon. All taxis either use LPG, or are electric. Most commercial vehicles are either diesel or LPG.
So yes the market adjusts to price, it always does, but electric vehicles are limited by batteries, when fuel cells arrive, the internal combustion engine will go the way of the steam train very rapidly.
[QUOTE]If in three years, oil hits $200 a barrel, sales of gasoline powered passenger vehicle will plunge. [/QUOTE]
At $200 a barrel, we’re talking gas a what, $5 a gallon? Maybe $6? That’s not enough to force most people into electric cars which currently carry at least a $10K premium over a gas only car. Hell, with the miles I drive, it’s not even enough for me to trade in my paid for 18 MPG SUV.
Currently electric cars are simply toys for the rich. Most people can’t even charge one on a daily basis because their apartments or condo’s don’t have charging ports in the parking lots.
The Chevy Volt and the upcoming Bolt both seem to be decent electric cars but, they’re not enough better than a gas car to justify the price difference. $10K buys a bunch of gas. Electric cars currently have terrible depreciation too. Hybrids as well. A $40K 2012-13 volt can be bought today for $12,000.
The biggest problem with electric cars is that it takes many hours to charge one. Instead of a 15 minute gas and soda stop, you’re looking at an hour on a faster charger to 8-10 hours on house current.
So I’m a bit skeptical about this electric future at least in the short term.
I don’t know where gas prices will be at $200 oil. We had $150, and gas hit $5 in some parts of the country. But gas is lagging oil in its price movements and oil only touched $150 briefly, not long enough to influence behavior in a serious way, other than driving less. So we don’t know what people would do if oil stayed at $150 long enough, and if gas at that price of oil, stayed at $5-$6 for a long time.
Now imagine $200. One way to look at this is to multiply today’s price of gas by 4. That would be the upper end of the range, which in many part of the country would be above $12. So something in the middle might be $8 in Texas and $10 in California. If that becomes something that people think is permanent, they will change their behavior (purchasing decisions). A $100-a-month gas bill suddenly jumps to something like $300.
You’re right. Electric cars still have a lot of limitations and price issues. But these issues are getting smaller every year. Every major automaker is working on mass-produced electric cars that will be out soon. None of the models on the road today are really mass-produced in the automotive sense, of say 300,000 cars of a particular model per year. Volume is still too low.
The battery is key. Battery performance is moving in quantum leaps. So three years is a long time in that respect. And three years from now would just be the beginning of it in my scenario.
Well said.
I, for one, and my entire family will NOT use any “self driving” vehicle. But the Personal Injury Attorneys are salivating.
I for one, and my entire family, will NOT, and never have used “public” transportation (and I won’t tell you why).
The proper use of Nuclear Energy, and our nation’s 500 year supply of coal, can be used to produce gasoline. If the Nazi Germans did it, and ran a 5 year war effort on “synthetic oil” from primitive Coal-to-Gasoline technology (Supplied by Standard oil’s patents, source: Antony Sutton’s books), then we can do it.
The technology to convert water (H2O) and Coal (C) to hydro-carbon chains or Benzene rings (CHx + O2) has been known for 100 years. I learned that 50 years ago in college Chemistry class (my second degree). Nuclear power is sufficient to do so.
When gas hit $4+ here in South Florida, we did NOT change our driving habits nor trade in/sell our 3 cars. Rather, we stopped going out to eat as much, didn’t take one of the “regular” trips to Disney World, decided NO MORE movies (we will wait till it is Red Boxed). etc. We can even cut back more, when gasoline hits $10/gallon (by then, everything else will be so cheap due to over-supply and inventory glut, that we may come out ahead).
Price dictates behaviour. (Sorry, I spell the English way since I learned English over-seas)
Autonomous zero emission vehicles will be the game changer in large urban cities. Perhaps not in your dinky American town with several tens of thousands of people, but any city with over a million will see them adopted on a huge level.
I live in Cairo, Egypt, a mega-city of over 20 million people; there are presently over 30,000 Uber drivers here (more joining every day). I only have to wait a maximum of 5 minutes to hire a car. All GPS linked, quality controlled ect… Uber cuts down on traffic, reduces idling and congestion. Autonomous vehicles are the next logical progression – and they are well on the way.
Also, don’t forget about drones, companies like Amazon are heavily investing in that exploding sector.
“But when that cooperation and production agreement comes, it will be when the U.S. and other producers are driven completely into the dust without hope of arising again from the ashes. The bottom line is: we’re not nearly at that point yet.”
Nonsense!
Rigs ARE NOT being cut up for scrap; The same phenomenon which saw the rapid building of the fracking industry in the first place will guarantee its reconstitution even more rapidly.
It just depends on the price of energy at the wellhead.
http://www.bloomberg.com/news/articles/2016-08-19/shale-drillers-party-like-it-s-2014-as-oil-enters-bull-market
Already happening. Too much doom and gloom. ;)
what is nonsense is the game the Saudi’s are playing. They do not have exports or oil production audited, so they continue to pretend to be exporting more producing more etc. etc., but their fields are in their twilight years but they won’t even acknowledge ANY depletion.
Its part of the game being waged against Russia, pretence of oil glut that isn’t. Its why ‘climate change’ was suddenly adopted by the U.S. after years of suggesting it didn’t exist, but where first it was named Global Warming.
We all know or should know how none of Al Gore’s prediction came to pass, but he did rather rich.
Now though the U.S. has seized on ‘climate change’ because it aids the pretence of oil glut, when the US own military reports showed how concerned they are at oil running out.
Shale was a last ditch futile attempt to throw money to produce oil way below cost to try to give the impression of how much of it there is….and the bankruptcies show how successful that is, and where even the major oil companies are ALL making a loss on shale.
Shale is also short lived, by virtue of hydraulic fraccing, and an irony that the system that made shale possible is also the system that ensures it can never be viable as it depletes resources so very quick, with up to a 70% drop in production the first year, and the Red Queen Syndrome kicking in, meaning before long it is impossible to drill enough wells to even make up for the losses in the legacy wells.
Saudi oil is in very mature fields, most are subject to Enhanced Oil recovery a sure sign of a very mature field where production drops like a stone. Water flooding in the desert is not the cheapest way of producing oil either.
So the best answer was pretend you support the busted theory of global warming, climate change or whatever name they want to call it now, but where climate change is safer because the climate of the earth has always changed, with the same geographical areas ranging from frozen to tropical at various times.
So pretend to the masses that there is oil glut, all the time though your home production is dropping and your imports are going up….as they are now, but each time you can suggest new panacea’s new clean energy new subsidies to pretend they are cheaper than hydrocarbons, but really the name of the game is to pretend to everyone else to leave more oil for you.
Even the ridiculous critics who said that we cannot afford to take more than 50% of the oil in the ground, without realising an oil company usually recovers far less than that anyway, often in the region of just 10%.
The same games that keep gold and silver down, because basically if you control the paper, its currently the paper that controls the market, whether its oil, gas, gold or silver.
Most producers are so highly leveraged that they must pump to service debt. The world is awash in corporate and sovereign debt and even at these historically low interest rates, which helped create the rampant borrowing, the debt must be serviced.
It’s like 2008 all over again, but this time major entities have the debt load and the consumer is still deleveraging.
Yep. And that is why they keep pumping like mad….
If I borrow $1 Million and have a 20 year payment schedule, I have to pay you back $4,166 per month for 240 months, right? Even if you charge me 1%, 3%, or 5%, the BIG amount is this $4,166. In a very profound way, the % on the debt is insignificance. Let’s say the monthly bill is $4,400 with interests. If I can’t pay you the lower $4,166, then I sure as hell can’t pay you anything else.
We are both in trouble.
It is not a function of the % rate since that is such a small portion of your monthly bill.
The payment of $4,166 a month in your example implies 0% interest.
In your example, at 1% interest, your payment would rise to $4,599 a month.
At 5% interest, your payment would jump to $6,599 a month. That payment is 58% higher than the zero-interest payment. Interest makes a HUGE difference.
In a 30-year mortgage at 5%, the vast majority of your first payments just cover interest, and only a tiny amount covers principal. As you pay down the outstanding balance, the amount of interest falls, while the amount of the principal payment rises. In the end, almost the entire payment is principal.
I think you got the concept reversed.
The oil service companies like Halliburton indicate longer term trends much better than exploration and drilling ledgers and trading market jockeys like Dan. Those companies recently threw a lot of workers overboard and are now rowing very slowly with no plans to speed up. Happened in the 80’s. It took over a decade to see prices swing higher then. Things are crazier now, but short of ship stopping war (say that 3x quickly), oil prices will stay down.
We don’t know what the Fed thinks, knows or how far ahead they look into the future. What if the QE’s where meant to finance the rising oil costs and not the rising production costs and as soon as the oil price collapsed they ended the QE and started to raise the rate which strengthened the dollar and push the oil price even further down.
Meanwhile the Fed has been buying toxic assets from the Wall Street banks who now have $2.3 trillion parked at the Fed… just about the sum that Saudi Arabia wants for Aramco. The low oil price is slowly killing Saudi Arabia who is now burning through its reserves and have now decided to sell a piece of Aramco to finance their budget deficit.
Pride before the crash! (don’t fall in)
People also to add in the demand destruction for petroleum based products from Japan.
This is a result of two factors:
1. Slowly, the electric utilities are restarting their nuclear generating plants. This will cause a huge fall in NG, oil, and coal imports used to replace lost production.
2. A fall in population will result in demand destruction.
(As an aside the fall in POO and restart of the facilities is one reason for the rebound in Japan’s trade balances.)
My apologies if someone else has already mentioned this…but would be interested in comments on this story which provides another perspective:
http://www.telegraph.co.uk/business/2016/07/31/texas-shale-oil-has-fought-saudi-arabia-to-a-standstill/
The craziness of the debt-laden fracking biz makes sense to me as a trainwreck in the making…but the above article provides a counter
This is hogwash.
First off the KSA dances to the Fed’s tune (the Fed being the ultimate power in the US)
The Fed obviously wanted the shale revolution to happen — look at how the MSM got behind what was never a profitable industry – that was always going to be short-lived.
The reason the Fed pushed shale is because conventional oil peaked in 2005 http://www.scientificamerican.com/article/has-peak-oil-already-happened/
I have a friend who was a partner in a global engineering firm – they did loads of work in the oil patch in Texas…. he was overseeing that…
We were discussing the above situation and he remarked that around 2002 and 2003 there was a urgent push from clients to complete all projects asap. They had never been so busy.
Connect the dots with shale…
Are we to believe that some whore-banging whack jobs in Saudi Arabia would allowed to destroy the shale revolution????
Not a chance.
What is happening is that the cost of producing oil has skyrocketed
http://ftalphaville.ft.com/2012/05/02/983171/marginal-oil-production-costs-are-heading-towards-100barrel/
All producers are losing money at current prices….
They are pumping like there is no tomorrow (there is no tomorrow…) in order to get as much cash flow as possible — so they can service debts… and stay in business hoping for a rise in the price of oil so they return to profitability.
The Big 5 are slashing to the bone … yet most are still losing money…
Sad to say – oil prices cannot return to levels that allow for producer solvency… the economic will not have it
According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.
http://www.iea.org/textbase/npsum/high_oil04sum.pdf
Yes thank-you, it’s madness to think the oil shale / tar sands revolution in Canada/US would somehow be allowed to die.
The problem is that most people form their beliefs from what they read in the MSM.
We are taught not to think for ourselves…. we are told that the MSM has gravitas… for some it is a favoured left source – for others its a right wing source …. the high priests dish out a flavour for everyone….
It is quite difficult to unshackle oneself from the lies we are fed by the MSM…. their opinions end up being regurgitated ‘truths’ from the Ministry of Truth….
Is the Oil Industry Dying?
The peak oil controversy stages a comeback as the industry confronts a future of higher costs — and low prices.
https://psmag.com/is-the-oil-industry-dying-49841d0f6641#.d8zubiz5w
Now is the time to buy coal stocks. Too many reasons to list here. But after you finish laughing, check into this segment.