OT: May have been covered, but...
Clubber
Florida
Tuesday, January 6, 2015 4:44 AM
This is directed at farmerart, our resident oil/energy expert. We all are seeing plummeting gas prices. This must impact your industry. Two points...
1) What has caused this downward spiral, and why is it just happening now, and where does it go from here?
2) How has it impacted you, directly?
Of course others will comment, but I think fa is the only one on TUSCL I would consider near the "expert" TITle.
1) What has caused this downward spiral, and why is it just happening now, and where does it go from here?
2) How has it impacted you, directly?
Of course others will comment, but I think fa is the only one on TUSCL I would consider near the "expert" TITle.
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19 comments
They say the lower gasoline prices have led to a big increase in auto sales. Large SUV's and pick up trucks - expensive vehicles over $35k are in sales 35%.
The auto industry is such a driver of the U.S. economy, this seems like a positive.
I think it was primarily that oil continues to drop, although Greece was also in the news.
I've discussed this a bit before and in PMs but prolonged low oil prices could trigger general deflation since oil is an input to so many things. This is what the mysterious low bond yields might have been signaling all along.
There is also the risk of defaults from those with high production costs. There could also be layoffs and geopolitical ramifications. It's probably won't be a big deal if it happened so slowly, but so fast catches some off guard.
So that's the bad news. Now the good news is that there have been countless booms and busts in the price of oil, so the more experienced players know how to ride it out.
Large funds and insiders appear to be buying which is good long term. The bad news short term is that hedge funds are also buying some names but going short others. The market loves to beat up hedge funds due to relative small amounts of money to big players and the fact that they don't hold for long and are often over leveraged. So it will probably swing around wildly to get them in both directions.
I personally love XOM between 85-90. If it could drop under $85 that would be a dream buy. XOM is one of the experience players I mentioned. They are very conservative in the cost of production of projects they fund, and will benefit as higher cost producers go bust.
Actually that's the supply side of supply and deman.
Another conspiracy theory is that Saudi Arabia is trying to knock out U.S. shale producers.
OPEC is certainly talking tough in terms of rhetoric.
Through 2012, Russia was the largest oil producer. If they used a hell of a lot, then maybe you have a point.
X - an unknown.
SPURT - a drip under pressure.
Question #1. Why? Simple answer..........too much crude oil is chasing too few buyers. Boom and bust is the history of the oil business.
I consider this current plunge in prices to be nothing more than just another normal downdraft in my cyclical industry. During my career of almost 50 years in this business I have lived through six of these cycles. This one is #7. These downdrafts end when blood and red ink start to flow. The blood has already started to flow here in Canada. Just today the largest tar sands operator, Suncor, laid off 1,000 workers. A week before Christmas the second largest tar sands operator, Syncrude, laid off 800 workers. The explorers are pulling in their horns.....the count of active rigs in the western Canadian sedimentary basin is down a huge percentage from the same time last year; and this is prime drilling season in Canada. The same thing must be happening in USA, the North Sea, and all other high cost areas anywhere in the world.
This will only stop when the Arabs start to hurt from the low prices. Last cycle ended with prices in the mid $30s/bbl. The 1998 crash ended when WTI fell to $10/bbl. Saudi Light was selling for $7/bbl in that crash. I could hear the screams of pain from those sheiks all the way over here in North America as they sold their oil at that give-away price.
My impression is that the fall in price of a barrel of crude is near its end. I don't think the price will go lower than the price during the last crash. Generally, a good rule to follow for oil traders is.............never expect oil to fall lower than the lowest price in the previous downdraft.
To put a number on it.......I would say that nothing much lower than $38-$40/bbl will be seen this go-round.
Question #2. Effect on me? Well, I sold the oil part of my company in the spring of 2014. All of my production at that time was hedged forward to the end of 2017 at prices of $92/bbl to $103/bbl. I have no idea what price the new guy is getting for any increased production on the oil leases that went with the sale of the company.
I sold my first company very near the top of the previous price cycle, not at the absolute top of the cycle but near enough to the top of the cycle that the idiot who bought me out went bankrupt as prices plunged.
Currently I am continuing my nat gas exploration play in the North West Territories. I have been able to squeeze my drilling contractor, but not too severely. Another drilling season will see at least a 50% cut in rig day rates, I am sure.