Tag Archives: Permian Basin

US Oil Rig Count Decline Quickened This Week

Idle rigs in Helmerich & Payne International Drilling Co.'s yard in Ector County, Texas. North Dakota has also been hit hard, forcing gains in technology.

Source: Rigzone

The fall in U.S. rigs drilling for oil quickened a bit this week, data showed on Friday, suggesting a recent slowdown in the decline in drilling was temporary, after slumping oil prices caused energy companies to idle half the country’s rigs since October.

Drillers idled 31 oil rigs this week, leaving 703 rigs active, after taking 26 and 42 rigs out of service in the previous two weeks, oil services firm Baker Hughes Inc said in its closely watched report.

With the oil rig decline this week, the number of active rigs has fallen for a record 20 weeks in a row to the lowest since 2010, according to Baker Hughes data going back to 1987.
Since the number of oil rigs peaked at 1,609 in October, energy producers have responded quickly to the steep 60 percent drop in oil prices since last summer by cutting spending, eliminating jobs and idling rigs.

After its precipitous drop since October, the U.S. oil rig count is nearing a pivotal level that experts say could dent production, bolster prices and even coax oil companies back to the well pad in the coming months.

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Pioneer Natural Resources Co, a top oil producer in the Permian Basin of West Texas, said this week it will start adding rigs in June as long as market conditions are favorable. U.S. crude futures this week climbed to over $58 a barrel, the highest level this year, as a Saudi-led coalition continued bombings in Yemen.

That was up 38 percent from a six-year low near $42 set in mid March on oversupply concerns and lackluster demand, in part on expectations the lower rig count will start reducing U.S. oil output.

After rising mostly steadily since 2009, U.S. oil production has stalled near 9.4 million barrels a day since early March, the highest level since the early 1970s, according to government data.

The Permian Basin in West Texas and eastern New Mexico, the nation’s biggest and fastest-growing shale oil basin, lost the most oil rigs, down 13 to 242, the lowest on record, according to data going back to 2011.

Texas was the state with the biggest rig decline, down 19 to 392, the least since 2009.
In Canada, active oil rigs fell by four to 16, the lowest since 2009. U.S. natural gas rigs, meanwhile, climbed by eight to 225, the same as two weeks ago.

Here’s What Could Point To More Upside For Oil

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Crude oil has already bounced back by 30 percent over the past month. But according to Richard Ross of Evercore ISI, currency market moves are predicting more upside for the battered commodity.

Over the past week, oil-exposed currencies such as the Canadian dollar, the Norwegian krone and the Australian dollar have surged in value against the U.S. dollar. And since these currencies tend to be correlated with crude, Ross extrapolates that oil has more upside.

Crude-exposed currencies “are really firming here, and they have been firming over the past month or so along with crude oil itself, and I think that holds bullish implications,” Ross said.

Looking at the Canadian currency in particular, Ross predicts that “the Canadian dollar continues to firm against the U.S. dollar, and this should be supportive of crude.”

Even the crumbling Russian ruble has had a great run over the past month, Ross points out.

“Earlier this year, the ruble was staring into the abyss,” he said in a Thursday “Trading Nation” segment. “Strength in the Russian ruble, once again, has a positive read-through for crude oil.”

However, not everyone buys the thesis.

Referring to the commodity currencies, Boris Schlossberg of BK Asset Management said that “they’re kind of reactive. It’s hard to make that case completely.”

In other words, crude is driving currencies like the Canadian dollar, and not the other way around.

One Third Of U.S. Companies’ Q1 Job Cuts Due To Oil Prices

https://i0.wp.com/www.jobcutnews.com/wp-content/uploads/2011/10/pink-slips.jpgby Olivia Pulsinelli

Oil prices caused one-third of the job cuts that U.S.-based companies announced in the first quarter, according to a new report. March was the fourth month in a row to record a year-over-year increase in job cuts, Chicago-based outplacement consultancy Challenger, Gray & Christmas Inc. reports. And 47,610 of the 140,214 job cuts announced between January and March were directly attributed to falling oil prices. Not surprisingly, the energy sector accounted for 37,811 of the job cuts — up a staggering 3,900 percent from the same quarter a year earlier, when 940 energy jobs were cut. However, U.S. energy firms only announced 1,279 job cuts in March, down about 92 percent from the 16,339 announced in February and down nearly 94 percent from the 20,193 announced in January. The trend held true in Houston, where several energy employers announced job cuts in January and February, while fewer cuts were announced in March. Overall job-cut announcements are declining, as well. U.S. employers announced 36,594 job cuts in March, down 27.6 percent from the 50,579 announced in February and down 31 percent from the 53,041 announced in January. In December, 32,640 job cuts were announced. “Without these oil related cuts, we could have been looking one of lowest quarters for job-cutting since the mid-90s when three-month tallies totaled fewer than 100,000. However, the drop in the price of oil has taken a significant toll on oil field services, energy providers, pipelines, and related manufacturing this year,” John Challenger, CEO of Challenger, Gray & Christmas, said in a statement.

The U.S. Oil Boom Is Moving To A Level Not Seen In 45 Years

by Myra P. Saefong

Peak U.S. oil production is a ‘moving target’

SAN FRANCISCO (MarketWatch) — U.S. oil production is on track to reach an annual all-time high by September of this year, according to Rystad Energy. If production does indeed top out, then supply levels may soon hit a peak as well. That, in turn, could lead to shrinking supplies. The oil-and-gas consulting-services firm estimates an average 2015 output of 9.65 million barrels a day will be reached in five months — topping the previous peak annual reading of 9.64 million barrels a day in 1970. Coincidentally, the nation’s crude inventories stand at a record 471.4 million barrels, based on data from U.S. Energy Information Administration, also going back to the 1970s. The staggering pace of production from shale drilling and hydraulic fracturing have been blamed for the 46% drop in crude prices CLK5, -1.08% last year. But reaching so-called peak production may translate into a return to higher oil prices as supplies begin to thin.

Rystad Energy’s estimate includes crude oil and lease condensate (liquid hydrocarbons that enter the crude-oil stream after production), and assumes an average price of $55 for West Texas Intermediate crude oil. May WTI crude settled at $49.14 a barrel on Friday. The forecast peak production level in September is also dependent on horizontal oil rig counts for Bakken, Eagle Ford and Permian shale plays stabilizing at 400 rigs, notes Per Magnus Nysveen, senior partner and head of analysis at Rystad. Of course, in this case, hitting peak production isn’t assured. “Some will be debating whether the U.S. has reached its peak production for the current boom, without addressing the question of what level will U.S. production climb to in any future booms,” said Charles Perry, head of energy consultant Perry Management. “So one might also say U.S. peak production is a moving target.” James Williams, an energy economist at WTRG Economics, said that by his calculations, peak production may have already happened or may occur this month, since the market has seen a decline in North Dakota production, with Texas expected to follow.

Permian Basin Idles Five Rigs This Week

by Trevor Hawes

Drilling rig

The number of rigs exploring for oil and natural gas in the Permian Basin decreased five this week to 285, according to the weekly rotary rig count released Thursday by Houston-based oilfield services company Baker Hughes.

The North American rig count was released a day early this week because of the Good Friday holiday, according to the Baker Hughes website.

District 8 — which includes Midland and Ector counties — shed four rigs, bringing the total to 180. The district’s rig count is down 42.68 percent on the year. The Permian Basin is down 46.23 percent.

At this time last year, the Permian Basin had 524 rigs.

TEXAS

Texas’ count fell six this week, leaving 456 rigs statewide.

In other major Texas basins, there were 137 rigs in the Eagle Ford, unchanged; 29 in the Haynesville, down three; 23 in the Granite Wash, down one; and six in the Barnett, unchanged.

Texas had 877 rigs a year ago this week.

UNITED STATES

The number of rigs in the U.S. decreased 20 this week, bringing the nationwide total to 1,028.

There were 802 oil rigs, down 11; 222 natural gas rigs, down 11; and four rigs listed as miscellaneous, up two.

By trajectory, there were 136 vertical rigs, down eight; 799 horizontal rigs, down 13; and 93 directional rigs, up one. The last time the horizontal rig count fell below 800 was the week ending June 4, 2010, when Baker Hughes reported 798 rigs.

There were 993 rigs on land, down 17; four in inland waters, unchanged; and 31 offshore, down three. There were 29 rigs in the Gulf of Mexico, down four.

The U.S. had 1,818 rigs at this time last year.

TOP 5s

The top five states by rig count this week were Texas; Oklahoma with 129, down four; North Dakota with 90, down six; Louisiana with 67, down five; and New Mexico with 51, unchanged.

The top five rig counts by basin were the Permian; the Eagle Ford; the Williston with 91, down six; the Marcellus with 70, unchanged; and the Cana Woodford and Mississippian with 40 each. The Mississippian idled three rigs, while the Cana Woodford was unchanged. The Cana Woodford shale play is located in central Oklahoma.

CANADA AND NORTH AMERICA

The number of rigs operating in Canada fell 20 this week to 100. There were 20 oil rigs, up two; 80 natural gas rigs, down 22; and zero rigs listed as miscellaneous, unchanged.

The last time Canada’s rig count dipped below 100 was the week ending May 29, 2009, when 90 rigs were reported.

Canada had 235 rigs at this time last year.

The total number of rigs in the North America region fell 40 this week to 1,128. North America had 2,083 rigs a year ago this week.

Cheaper Foreign Oil Caps US Drilling Outlook

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By Chris Tomlinson | Houston Chronicle | MRT.com

The shale oil revolutionaries are retreating in disarray, and cheap foreign oil may banish them to the margins of the market.

As oil and natural gas move into a period of low prices, new data shows that North American drillers may not have the wherewithal to keep producing shale wells, which make up 90 percent of new drilling. In fact, if prices remain low for years to come, which is a real possibility, then investors may never see a return on the money spent to drill shale wells in the first place.

The full cost of producing oil and natural gas at a representative sample of U.S. companies, including capital spent to build the company and buy assets, is about $80 per barrel of oil equivalent, according to a study from the Bureau of Economic Geology’s Center for Energy Economics at the University of Texas.

The analysis of 2014 corporate financial data from 15 of the top publicly traded producers, which I got an exclusive look at before it’s published this week, determined that companies will have a hard time recovering the capital spent that year and maintaining production unless prices rise above $80 a barrel.

The price for West Texas Intermediate has spent most of the year below $50 a barrel.

Low prices, though, won’t mean that producers will shut in existing wells. Many of these same companies can keep pumping to keep cash coming into the company, and they can still collect a 10 percent return above the well’s operating costs at $50 a barrel of oil. They just won’t make enough money to invest in new wells or recover the capital already spent.

This harsh reality of what it will take to keep the shale revolution going shows how vulnerable it is to competition from cheap overseas oil.

“Everyone walks around thinking that they know how much this stuff costs because they see published information on what people spend to just drill wells,” explained Michelle Foss, who leads the Houston-based research center. “That is not what it takes for a company to build these businesses, to recover your capital and to make money.” The bureau was founded in 1909 and functions as the state geological agency.

Low oil prices will also exacerbate the economic impact of low natural gas prices. For years natural gas has kept flowing despite prices below $4 for a million British thermal units because about 50 percent of wells produced both gas and liquids, such as crude oil and condensate.

True natural gas costs

High oil prices have helped companies subsidize natural gas wells, but lower oil prices mean natural gas wells that don’t produce liquids will need to stand on their own economics.

The center’s analysis found that among the sample companies focused primarily on gas, prices will need to top $6 a million BTUs just to cover full costs and rise above $12 a million BTUs to recover the capital expended to develop the wells.

“We have important resources, but people have to be realistic about the challenges of developing them,” Foss told me. “There will have to be higher prices.”

Everyone predicts prices will rise again. The only questions are how quickly and to what price. Some experts predict WTI prices will reach $70 a barrel by the end of 2015, while others see $60. The soonest most expect to see $80 a barrel oil is in 2017. Saudi Arabian officials have said they believe the price has stabilized and don’t see oil returning to $100 a barrel for the next five years.

High prices and shale

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The Saudi opinion is particularly important because that nation can produce oil cheaper than any other country and can produce more oil than any other country. As the informal leader of the Organization of the Petroleum Exporting Countries, Saudi Arabia kept the price of oil inside a band between $80 and $100 a barrel for years. Now, the Saudis appear ready to keep the price low.

That’s because high prices inspired the shale revolution, where American companies figured out how to economically drill horizontally into tight rocks and then hydraulically fracture them to release oil and natural gas. Since OPEC countries rely on high oil prices to finance their governments, everyone assumed OPEC would cut production and keep revenues high.

Arab leaders, though, were more concerned about holding on to market share and allowed prices to fall below levels that make most shale wells economic. Foss, who recently returned from meetings in the United Arab Emirates, said OPEC is unlikely to change course because developing countries are seeking alternatives to oil and reducing demand.

“The Saudis and their partners see pressures on oil use everywhere they look, and what they want is their production, in particular their share of the global supply pie, to be as competitive as it can be to ensure they’ve got revenue coming into the kingdom for future generations,” she said.

OPEC is afraid rich countries like the U.S. are losing their addiction to oil, and by lowering prices hope to keep us hooked. And OPEC has plenty of product.

“There’s 9 million barrels a day in current and potential production capacity in Iraq and Iran that is tied up by political conflicts, and if you sort that out enough, that’s a flood of cheap oil onto the market,” Foss said.

On the losing end

If prices remain low, the big losers will be the bond holders and shareholders of indebted, small and medium-size companies that drill primarily in North America. Since these companies are not getting high enough prices to pay off capital expenditures through higher share prices or interest payments , they are in serious trouble.

The inability of Denver-based Whiting Petroleum to sell itself is an example. The board of the North Dakota-focused company was forced to issue new shares, reducing the company’s value by 20 percent, and take on more expensive debt. Quicksilver Resources, based in Fort Worth, filed for Chapter 11 bankruptcy on March 17 because it couldn’t make the interest payments on its debt and no one was willing to invest more capital.

Until one of these companies is bought, we won’t know the true value of the shale producers at the current oil and natural gas prices.

But as more data reaches the market, there is a real danger that these companies are worth even less than investors fear, even though they may have high-quality assets.

Junk-Rated Oil & Gas Companies in a “Liquidity Death Spiral”

by Wolf Richter

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On the face of it, the oil price appears to be stabilizing. What a precarious balance it is, however.

Behind the facade of stability, the re-balancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations.

So said the International Energy Agency in its Oil Market Report on Friday. West Texas Intermediate plunged over 4% to $45 a barrel.

The boom in US oil production will continue “to defy expectations” and wreak havoc on the price of oil until the power behind the boom dries up: money borrowed from yield-chasing investors driven to near insanity by the Fed’s interest rate repression. But that money isn’t drying up yet – except at the margins.

Companies have raked in 14% more money from high-grade bond sales so far this year than over the same period in 2014, according to LCD. And in 2014 at this time, they were 27% ahead of the same period in 2013. You get the idea.

Even energy companies got to top off their money reservoirs. Among high-grade issuers over just the last few days were BP Capital, Valero Energy, Sempra Energy, Noble, and Helmerich & Payne. They’re all furiously bringing in liquidity before it gets more expensive.

In the junk-bond market, bond-fund managers are chasing yield with gusto. Last week alone, pro-forma junk bond issuance “ballooned to $16.48 billion, the largest weekly tally in two years,” the LCD HY Weekly reported. Year-to-date, $79.2 billion in junk bonds have been sold, 36% more than in the same period last year.

But despite this drunken investor enthusiasm, the bottom of the energy sector – junk-rated smaller companies – is falling out.

Standard & Poor’s rates 170 bond issuers that are engaged in oil and gas exploration & production, oil field services, and contract drilling. Of them, 81% are junk rated – many of them deep junk. The oil bust is now picking off the smaller junk-rated companies, one after the other, three of them so far in March.

On March 3, offshore oil-and-gas contractor CalDive that in 2013 still had 1,550 employees filed for bankruptcy. It’s focused on maintaining offshore production platforms. But some projects were suspended last year, and lenders shut off the spigot.

On March 8, Dune Energy filed for bankruptcy in Austin, TX, after its merger with Eos Petro collapsed. It listed $144 million in debt. Dune said that it received $10 million Debtor in Possession financing, on the condition that the company puts itself up for auction.

On March 9, BPZ Resources traipsed to the courthouse in Houston to file for bankruptcy, four days after I’d written about its travails; it had skipped a $60 million payment to its bondholders [read… “Default Monday”: Oil & Gas Companies Face Their Creditors].

And more companies are “in the pipeline to be restructured,” LCD reported. They all face the same issues: low oil and gas prices, newly skittish bond investors, and banks that have their eyes riveted on the revolving lines of credit with which these companies fund their capital expenditures. Being forever cash-flow negative, these companies periodically issue bonds and use the proceeds to pay down their revolver when it approaches the limit. In many cases, the bank uses the value of the company’s oil and gas reserves to determine that limit.

If the prices of oil and gas are high, those reserves have a high value. It those prices plunge, the borrowing base for their revolving lines of credit plunges. S&P Capital IQ explained it this way in its report, “Waiting for the Spring… Will it Recoil”:

Typically, banks do their credit facility redeterminations in April and November with one random redetermination if needed. With oil prices plummeting, we expect banks to lower their price decks, which will then lead to lower reserves and thus, reduced borrowing-base availability.

April is coming up soon. These companies would then have to issue bonds to pay down their credit lines. But with bond fund managers losing their appetite for junk-rated oil & gas bonds, and with shares nearly worthless, these companies are blocked from the capital markets and can neither pay back the banks nor fund their cash-flow negative operations. For many companies, according to S&P Capital IQ, these redeterminations of their credit facilities could lead to a “liquidity death spiral.”

Alan Holtz, Managing Director in AlixPartners’ Turnaround and Restructuring group told LCD in an interview:

We are already starting to see companies that on the one hand are trying to work out their operational problems and are looking for financing or a way out through the capital markets, while on the other hand are preparing for the events of contingency planning or bankruptcy.

Look at BPZ Resources. It wasn’t able to raise more money and ended up filing for bankruptcy. “I think that is going to be a pattern for many other companies out there as well,” Holtz said.

When it trickled out on Tuesday that Hercules Offshore, which I last wrote about on March 3, had retained Lazard to explore options for its capital structure, its bonds plunged as low as 28 cents on the dollar. By Friday, its stock closed at $0.41 a share.

When Midstates Petroleum announced that it had hired an interim CEO and put a restructuring specialist on its board of directors, its bonds got knocked down, and its shares plummeted 33% during the week, closing at $0.77 a share on Friday.

When news emerged that Walter Energy hired legal counsel Paul Weiss to explore restructuring options, its first-lien notes – whose investors thought they’d see a reasonable recovery in case of bankruptcy – dropped to 64.5 cents on the dollar by Thursday. Its stock plunged 63% during the week to close at $0.33 a share on Friday.

Numerous other oil and gas companies are heading down that path as the oil bust is working its way from smaller more vulnerable companies to larger ones. In the process, stockholders get wiped out. Bondholders get to fight with other creditors over the scraps. But restructuring firms are licking their chops, after a Fed-induced dry spell that had lasted for years.

Investors Crushed as US Natural Gas Drillers Blow Up

by Wolf Richter

The Fed speaks, the dollar crashes. The dollar was ripe. The entire world had been bullish on it. Down nearly 3% against the euro, before recovering some. The biggest drop since March 2009. Everything else jumped. Stocks, Treasuries, gold, even oil.

West Texas Intermediate had been experiencing its biggest weekly plunge since January, trading at just above $42 a barrel, a new low in the current oil bust. When the Fed released its magic words, WTI soared to $45.34 a barrel before re-sagging some. Even natural gas rose 1.8%. Energy related bonds had been drowning in red ink; they too rose when oil roared higher. It was one heck of a party.

But it was too late for some players mired in the oil and gas bust where the series of Chapter 11 bankruptcy filings continues. Next in line was Quicksilver Resources.

It had focused on producing natural gas. Natural gas was where the fracking boom got started. Fracking has a special characteristic. After a well is fracked, it produces a terrific surge of hydrocarbons during first few months, and particularly on the first day. Many drillers used the first-day production numbers, which some of them enhanced in various ways, in their investor materials. Investors drooled and threw more money at these companies that then drilled this money into the ground.

But the impressive initial production soon declines sharply. Two years later, only a fraction is coming out of the ground. So these companies had to drill more just to cover up the decline rates, and in order to drill more, they needed to borrow more money, and it triggered a junk-rated energy boom on Wall Street.

At the time, the price of natural gas was soaring. It hit $13 per million Btu at the Henry Hub in June 2008. About 1,600 rigs were drilling for gas. It was the game in town. And Wall Street firms were greasing it with other people’s money. Production soared. And the US became the largest gas producer in the world.

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But then the price began to plunge. It recovered a little after the Financial Crisis but re-plunged during the gas “glut.” By April 2012, natural gas had crashed 85% from June 2008, to $1.92/mmBtu. With the exception of a few short periods, it has remained below $4/mmBtu – trading at $2.91/mmBtu today.

Throughout, gas drillers had to go back to Wall Street to borrow more money to feed the fracking orgy. They were cash-flow negative. They lost money on wells that produced mostly dry gas. Yet they kept up the charade. They aced investor presentations with fancy charts. They raved about new technologies that were performing miracles and bringing down costs. The theme was that they would make their investors rich at these gas prices.

The saving grace was that oil and natural-gas liquids, which were selling for much higher prices, also occur in many shale plays along with dry gas. So drillers began to emphasize that they were drilling for liquids, not dry gas, and they tried to switch production to liquids-rich plays. In that vein, Quicksilver ventured into the oil-rich Permian Basin in Texas. But it was too little, too late for the amount of borrowed money it had already burned through over the years by fracking for gas below cost.

During the terrible years of 2011 and 2012, drillers began reclassifying gas rigs as rigs drilling for oil. It was a judgement call, since most wells produce both. The gas rig count plummeted further, and the oil rig count skyrocketed by about the same amount. But gas production has continued to rise since, even as the gas rig count has continued to drop. On Friday, the rig count was down to 257 gas rigs, the lowest since March 1993, down 84% from its peak in 2008.

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Quicksilver’s bankruptcy is a consequence of this fracking environment. It listed $2.35 billion in debts. That’s what is left from its borrowing binge that covered its negative cash flows. It listed only $1.21 billion in assets. The rest has gone up in smoke.

Its shares are worthless. Stockholders got wiped out. Creditors get to fight over the scraps.

Its leveraged loan was holding up better: the $625 million covenant-lite second-lien term loan traded at 56 cents on the dollar this morning, according to S&P Capital IQ LCD. But its junk bonds have gotten eviscerated over time. Its 9.125% senior notes due 2019 traded at 17.6 cents on the dollar; its 7.125% subordinated notes due 2016 traded at around 2 cents on the dollar.

Among its creditors, according to the Star Telegram: the Wilmington Trust National Association ($361.6 million), Delaware Trust Co. ($332.6 million), US Bank National Association ($312.7 million), and several pipeline companies, including Oasis Pipeline and Energy Transfer Fuel.

Last year, it hired restructuring advisers. On February 17, it announced that it would not make a $13.6 million interest payment on its senior notes and invoked the possibility of filing for Chapter 11. It said it would use its 30-day grace period to haggle with its creditors over the “company’s options.”

Now, those 30 days are up. But there were no other “viable options,” the company said in the statement. Its Canadian subsidiary was not included in the bankruptcy filing; it reached a forbearance agreement with its first lien secured lenders and has some breathing room until June 16.

Quicksilver isn’t alone in its travails. Samson Resources and other natural gas drillers are stuck neck-deep in the same frack mud.

A group of private equity firms, led by KKR, had acquired Samson in 2011 for $7.2 billion. Since then, Samson has lost $3 billion. It too hired restructuring advisers to deal with its $3.75 billion in debt. On March 2, Moody’s downgraded Samson to Caa3, pointing at “chronically low natural gas prices,” “suddenly weaker crude oil prices,” the “stressed liquidity position,” and delays in asset sales. It invoked the possibility of “a debt restructuring” and “a high risk of default.”

But maybe not just yet. The New York Post reported today that, according to sources, a JPMorgan-led group, which holds a $1 billion revolving line of credit, is granting Samson a waiver for an expected covenant breach. This would avert default for the moment. Under the deal, the group will reduce the size of the revolver. Last year, the same JPMorgan-led group already reduced the credit line from $1.8 billion to $1 billion and waived a covenant breach.

By curtailing access to funding, they’re driving Samson deeper into what S&P Capital IQ called the “liquidity death spiral.” According to the New York Post’s sources, in August the company has to make an interest payment to its more junior creditors, “and may run out of money later this year.”

Industry soothsayers claimed vociferously over the years that natural gas drillers can make money at these prices due to new technologies and efficiencies. They said this to attract more money. But Quicksilver along with Samson Resources and others are proof that these drillers had been drilling below the cost of production for years. And they’d been bleeding every step along the way. A business model that lasts only as long as new investors are willing to bail out old investors.

But it was the crash in the price of “liquids” that made investors finally squeamish, and they began to look beyond the hype. In doing so, they’re triggering the very bloodletting amongst each other that ever more new money had delayed for years. Only now, it’s a lot more expensive for them than it would have been three years ago. While the companies will get through it in restructured form, investors get crushed.


Oil Production Falling In Three Big Shale Plays, EIA Says

HOUSTON – It’s official: The shale oil boom is starting to waver.

And, in a way, it may have souped-up rigs and more efficient drilling technologies to thank for that.

Crude production at three major U.S. shale oil fields is projected to fall this month for the first time in six years, the U.S. Energy Information Administration said Tuesday.

It’s one of the first signs that idling hundreds of drilling rigs and billions of dollars in corporate cutbacks are starting to crimp the nation’s surging oil patch.

But it also shows that drilling technology and techniques have advanced to the point that productivity gains may be negligible in some shale plays where horizontal drilling and hydraulic fracturing have been used together for the past several years.

Because some plays are already full of souped-up horizontal rigs, oil companies don’t have as many options to become more efficient and stem production losses, as they did in the 2008-2009 downturn, the EIA said.

The EIA’s monthly drilling productivity report indicates that rapid production declines from older wells in three shale plays are starting to overtake new output, as oil companies drill fewer wells.

In the recession six years ago, the falling rig count didn’t lead to declining production because new technologies boosted how fast rigs could drill wells.

But now that oil firms have figured out how to drill much more efficiently, “it is not clear that productivity gains will offset rig count declines to the same degree as in 2008-09,” the EIA said.

Energy Information Agency

Overall, U.S. oil production is set to increase slightly from March to April to 5.6 million barrels a day in six major fields, according to the EIA.

But output is falling in the Eagle Ford Shale in South Texas, North Dakota’s Bakken Shale and the Niobrara Shale in Colorado, Wyoming, Nebraska and Kansas.

In those three fields, net production is expected to drop by a combined 24,000 barrels a day.

The losses were masked by production gains in the Permian Basin in West Texas and other regions.

Efficiency improvements are still emerging in the Permian, faster than in other oil fields because the region was largely a vertical-drilling zone as recently as December 2013, the EIA said.

Net crude output in the Bakken is expected to decline by 8,000 barrels a day from March to April. In the Eagle Ford, it’s slated to fall by 10,000 barrels a day. And in the Niobrara, production will dip by roughly 5,000 barrels a day.

But daily crude output jumped by 21,000 barrels in the Permian and by 3,000 barrels in the Utica Shale in Ohio and Pennsylvania.

Read more at MRT.com

Tenants Benefit When Rent Payment Data Are Factored Into Credit Scores

by Kenneth R. Harney | LA Times

It’s the great credit divide in American housing: If you buy a home and pay your mortgage on time regularly, your credit score typically benefits. If you rent an apartment and pay the landlord on time every month, you get no boost to your score. Since most landlords aren’t set up or approved to report rent payments to the national credit bureaus, their tenants’ credit scores often suffer as a direct result.

All this has huge implications for renters who hope one day to buy a house. To qualify for a mortgage, they’ll need good credit scores. Young, first-time buyers are especially vulnerable — they often have “thin” credit files with few accounts and would greatly benefit by having their rent histories included in credit reports and factored into their scores. Without a major positive such as rent payments in their files, a missed payment on a credit card or auto loan could have significant negative effects on their credit scores.

You probably know folks like these — sons, daughters, neighbors, friends. Or you may be one of the casualties of the system yourself, a renter with a perfect payment history that creditors will never see when they pull your credit. Think of it this way and the great divide gets intensely personal.

But here’s some good news: Growing numbers of landlords are now reporting rent payments to the bureaus with the help of high-tech intermediaries who set up electronic rent-collection systems for tenants.

One of these, RentTrack, says it already has coverage in thousands of rental buildings nationwide, with a total of 100,000-plus apartment units, and expects to be reporting rent payments for more than 1 million tenants within the year. Two others, ClearNow Inc. and PayYourRent, also report to one of the national bureaus, Experian, which includes the data in consumer credit files. RentTrack reports to Experian and TransUnion.

Why does this matter? Two new studies illustrate what can happen when on-time rent payments are factored into consumers’ credit reports and scores. RentTrack examined a sample of the tenants in its database and found that 100% of renters who previously were rated as “unscoreable” — there wasn’t enough information in their credit files to evaluate — became scoreable once they had two months to six months of rental payments reported to the credit bureaus.

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Tenants who had scores below 650 at the start of the sampling gained an average of 29 points with the inclusion of positive monthly payment data. Overall, residents in all score brackets saw an average gain of 9 points. The scores were computed using the VantageScore model, which competes with FICO scores and uses a similar 300 to 850 scoring scale, with high scores indicating low risk of nonpayment.

Experian, the first major credit bureau to begin integrating rental payment records into credit files, also completed a major study recently. Using a sample of 20,000 tenants who live in government-subsidized apartment buildings, Experian found that 100% of unscoreable tenants became scoreable, and that 97% of them had scores in the “prime” (average 688) and “non-prime” (average 649) categories. Among tenants who had scores before the start of the research, fully 75% saw increases after the addition of positive rental information, typically 11 points or higher.

Think about what these two studies are really saying: Tenants often would score higher — sometimes significantly higher — if rent payments were reported to the national credit bureaus. Many deserve higher credit scores but don’t get them.

Matt Briggs, chief executive and founder of RentTrack, says for many tenants, their steady rent payments “may be the only major positive thing in their credit report,” so including them can be crucial when lenders pull their scores.

Justin Yung, vice president of ClearNow, told me that “for most [tenants] the rent is the largest payment they make per month and yet it doesn’t appear on their credit report” unless their landlord has signed up with one of the electronic payment firms.

Is this something difficult or complicated? Not really. You, your landlord or property manager can go to one of the three companies’ websites (RentTrack.com, ClearNow.com and PayYourRent.com), check out the procedures and request coverage. Costs to tenants are either minimal or zero, and the benefits to the landlord of having tenants pay rents electronically appear to be attractive.

Everybody benefits. So why not?

kenharney@earthlink.net Distributed by Washington Post Writers Group. Copyright © 2015, Los Angeles Times

This Chart Shows the True Collapse of Fracking in the US

by Wolf Richter
https://feww.files.wordpress.com/2009/08/rex-wtillerson-exxon.jpg

Rex Tillerson, Exxon Mobile CEO

“People need to kinda settle in for a while.” That’s what Exxon Mobil CEO Rex Tillerson said about the low price of oil at the company’s investor conference. “I see a lot of supply out there.”

So Exxon is going to do its darnedest to add to this supply: 16 new production projects will start pumping oil and gas through 2017. Production will rise from 4 million barrels per day to 4.3 million. But it will spend less money to get there, largely because suppliers have had to cut their prices.

That’s the global oil story. In the US, a similar scenario is playing out. Drillers are laying some people off, not massive numbers yet. Like Exxon, they’re shoving big price cuts down the throats of their suppliers. They’re cutting back on drilling by idling the least efficient rigs in the least productive plays – and they’re not kidding about that.

In the latest week, they idled a 64 rigs drilling for oil, according to Baker Hughes, which publishes the data every Friday. Only 922 rigs were still active, down 42.7% from October, when they’d peaked. Within 21 weeks, they’ve taken out 687 rigs, the most terrific, vertigo-inducing oil-rig nose dive in the data series, and possibly in history:

US-rig-count_1988_2015-03-06=oilAs Exxon and other drillers are overeager to explain: just because we’re cutting capex, and just because the rig count plunges, doesn’t mean our production is going down. And it may not for a long time. Drillers, loaded up with debt, must have the cash flow from production to survive.

But with demand languishing, US crude oil inventories are building up further. Excluding the Strategic Petroleum Reserve, crude oil stocks rose by another 10.3 million barrels to 444.4 million barrels as of March 4, the highest level in the data series going back to 1982, according to the Energy Information Administration. Crude oil stocks were 22% (80.6 million barrels) higher than at the same time last year.

“When you have that much storage out there, it takes a long time to work that off,” said BP CEO Bob Dudley, possibly with one eye on this chart:

US-crude-oil-stocks-2015-03-04So now there is a lot of discussion when exactly storage facilities will be full, or nearly full, or full in some regions. In theory, once overproduction hits used-up storage capacity, the price of oil will plummet to whatever level short sellers envision in their wildest dreams. Because: what are you going to do with all this oil coming out of the ground with no place to go?

A couple of days ago, the EIA estimated that crude oil stock levels nationwide on February 20 (when they were a lot lower than today) used up 60% of the “working storage capacity,” up from 48% last year at that time. It varied by region:

Capacity is about 67% full in Cushing, Oklahoma (the delivery point for West Texas Intermediate futures contracts), compared with 50% at this point last year. Working capacity in Cushing alone is about 71 million barrels, or … about 14% of the national total.

As of September 2014, storage capacity in the US was 521 million barrels. So if weekly increases amount to an average of 6 million barrels, it would take about 13 weeks to fill the 77 million barrels of remaining capacity. Then all kinds of operational issues would arise. Along with a dizzying plunge in price.

In early 2012, when natural gas hit a decade low of $1.92 per million Btu, they predicted the same: storage would be full, and excess production would have to be flared, that is burned, because there would be no takers, and what else are you going to do with it? So its price would drop to zero.

They actually proffered that, and the media picked it up, and regular folks began shorting natural gas like crazy and got burned themselves, because it didn’t take long for the price to jump 50% and then 100%.

Oil is a different animal. The driving season will start soon. American SUVs and pickups are designed to burn fuel in prodigious quantities. People will be eager to drive them a little more, now that gas is cheaper, and they’ll get busy shortly and fix that inventory problem, at least for this year. But if production continues to rise at this rate, all bets are off for next year.

Natural gas, though it refused to go to zero, nevertheless got re-crushed, and the price remains below the cost of production at most wells. Drilling activity has dwindled. Drillers idled 12 gas rigs in the latest week. Now only 268 rigs are drilling for gas, the lowest since April 1993, and down 83.4% from its peak in 2008! This is what the natural gas fracking boom-and-bust cycle looks like:

US-rig-count_1988_2015-03-06=gasYet production has continued to rise. Over the last 12 months, it soared about 9%, which is why the price got re-crushed.

Producing gas at a loss year after year has consequences. For the longest time, drillers were able to paper over their losses on natural gas wells with a variety of means and go back to the big trough and feed on more money that investors were throwing at them, because money is what fracking drills into the ground.

But that trough is no longer being refilled for some companies. And they’re running out. “Restructuring” and “bankruptcy” are suddenly the operative terms.


“Default Monday”: Oil & Gas Face Their Creditors

by Wolf Richter

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Debt funded the fracking boom. Now oil and gas prices have collapsed, and so has the ability to service that debt. The oil bust of the 1980s took down 700 banks, including 9 of the 10 largest in Texas. But this time, it’s different. This time, bondholders are on the hook.

And these bonds – they’re called “junk bonds” for a reason – are already cracking. Busts start with small companies and proceed to larger ones. “Bankruptcy” and “restructuring” are the terms that wipe out stockholders and leave bondholders and other creditors to tussle over the scraps.

https://martinhladyniuk.files.wordpress.com/2015/03/27560-bankruptcy.jpg

Early January, WBH Energy, a fracking outfit in Texas, kicked off the series by filing for bankruptcy protection. It listed assets and liabilities of $10 million to $50 million. Small fry.

A week later, GASFRAC filed for bankruptcy in Alberta, where it’s based, and in Texas – under Chapter 15 for cross-border bankruptcies. Not long ago, it was a highly touted IPO, whose “waterless fracking” technology would change a parched world. Instead of water, the system pumps liquid propane gel (similar to Napalm) into the ground; much of it can be recaptured, in theory.

Ironically, it went bankrupt for other reasons: operating losses, “reduced industry activity,” the inability to find a buyer that would have paid enough to bail out its creditors, and “limited access to capital markets.” The endless source of money without which fracking doesn’t work had dried up.

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On February 17, Quicksilver Resources announced that it would not make a $13.6 million interest payment on its senior notes due in 2019. It invoked the possibility of filing for Chapter 11 bankruptcy to “restructure its capital structure.” Stockholders don’t have much to lose; the stock is already worthless. The question is what the creditors will get.

It has hired Houlihan Lokey Capital, Deloitte Transactions and Business Analytics, “and other advisors.” During its 30-day grace period before this turns into an outright default, it will haggle with its creditors over the “company’s options.”

On February 27, Hercules Offshore had its share-price target slashed to zero, from $4 a share, at Deutsche Bank, which finally downgraded the stock to “sell.” If you wait till Deutsche Bank tells you to sell, you’re ruined!

When I wrote about Hercules on October 15, HERO was trading at $1.47 a share, down 81% since July. Those who followed the hype to “buy the most hated stocks” that day lost another 44% by the time I wrote about it on January 16, when HERO was at $0.82 a share. Wednesday, shares closed at $0.60.

Deutsche Bank was right, if late. HERO is headed for zero (what a trip to have a stock symbol that rhymes with zero). It’s going to restructure its junk debt. Stockholders will end up holding the bag.

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On Monday, due to “chronically low natural gas prices exacerbated by suddenly weaker crude oil prices,” Moody’s downgraded gas-driller Samson Resources, to Caa3, invoking “a high risk of default.”

It was the second time in three months that Moody’s downgraded the company. The tempo is picking up. Moody’s:

The company’s stressed liquidity position, delays in reaching agreements on potential asset sales and its retention of restructuring advisors increases the possibility that the company may pursue a debt restructuring that Moody’s would view as a default.

Moody’s was late to the party. On February 26, it was leaked that Samson had hired restructuring advisers Kirkland & Ellis and Blackstone’s restructuring group to figure out how to deal with its $3.75 billion in debt. A group of private equity firms, led by KKR, had acquired Samson in 2011 for $7.2 billion. Since then, Samson has lost $3 billion. KKR has written down its equity investment to 5 cents on the dollar.

This is no longer small fry.

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Also on Monday, oil-and-gas exploration and production company BPZ Resources announced that it would not pay $62 million in principal and interest on convertible notes that were due on March 1. It will use its grace period of 10 days on the principal and of 30 days on the interest to figure out how to approach the rest of its existence. It invoked Chapter 11 bankruptcy as one of the options.

If it fails to make the payments within the grace period, it would also automatically be in default of its 2017 convertible bonds, which would push the default to $229 million.

BPZ tried to refinance the 2015 convertible notes in October and get some extra cash. Fracking devours prodigious amounts of cash. But there’d been no takers for the $150 million offering. Even bond fund managers, driven to sheer madness by the Fed’s policies, had lost their appetite. And its stock is worthless.

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Also on Monday – it was “default Monday” or something – American Eagle Energy announced that it would not make a $9.8 million interest payment on $175 million in bonds due that day. It will use its 30-day grace period to hash out its future with its creditors. And it hired two additional advisory firms.

One thing we know already: after years in the desert, restructuring advisers are licking their chops.

The company has $13.6 million in negative working capital, only $25.9 million in cash, and its $60 million revolving credit line has been maxed out.

But here is the thing: the company sold these bonds last August! And this was supposed to be its first interest payment.

That’s what a real credit bubble looks like. In the Fed’s environment of near-zero yield on reasonable investments, bond fund managers are roving the land chasing whatever yield they can discern. And they’re holding their nose while they pick up this stuff to jam it into bond funds that other folks have in their retirement portfolio.

Not even a single interest payment!

Borrowed money fueled the fracking boom. The old money has been drilled into the ground. The new money is starting to dry up. Fracked wells, due to their horrendous decline rates, produce most of their oil and gas over the first two years. And if prices are low during that time, producers will never recuperate their investment in those wells, even if prices shoot up afterwards. And they’ll never be able to pay off the debt from the cash flow of those wells. A chilling scenario that creditors were blind to before, but are now increasingly forced to contemplate.

Another Dubious Jobs Report

Source: Prison Planet

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According to the payroll jobs report today (March 6) the economy created 295,000 new jobs in February, dropping the rate of unemployment to 5.5%. However, the BLS also reported that the labor force participation rate fell and the number of people not in the labor force rose by 354,000.

In other words, the unemployment rate dropped because the labor force shrunk.

If the economy was in recovery, the labor force would be growing and the labor force participation rate would be rising.

The 295,000 claimed new jobs are highly suspect. For example, the report claims 32,000 new retail jobs, but the Census Bureau reports that retail sales declined in December and January. Why would retailers experiencing declining sales hire more employees?

Construction spending declined 1.1% in January, but the payroll jobs report says 29,000 construction jobs were added in February.

Zero Hedge reports that the decline in the oil price has resulted in almost 40,000 laid off workers during January and February, but the payroll jobs report only finds 2,900 lost jobs in oil for the two months.http://www.zerohedge.com/news/2015-03-06/did-bls-once-again-forget-count-tens-thousands-energy-job-losses

There is no sign in the payroll jobs report of the large lay-offs by IBM and Hewlett Packard.

These and other inconsistencies do not inspire confidence.

By ignoring the inconsistencies the financial press does not inspire confidence.

Let’s now look at where the BLS says the payroll jobs are.

 photo JobBulletinBoard.jpg

All of the goods producing jobs are accounted for by the 29,000 claimed construction jobs. The remaining 259,000 new jobs–90%–of the total–are service sector jobs. Three categories account for 70% of these jobs. Wholesale and retail trade, transportation and utilities account. for 62,000 of the jobs. Education and health services account for 54,000 of which ambulatory health care services accounts for 19,900. Leisure and hospitality account for 66,000 jobs of which waitresses and bartenders account for 58,700 jobs.

These are the domestic service jobs of a turd world country.

John Williams (shadowstats.com) reports: “As of February, the level of full-time employment still was 1.0 million shy of its pre-recession peak.”

Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following. His latest book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is now available.

 

Chart Of The Day: Recession Dead Ahead?

By Tyler Durden

The chart below showing the annual increase, or rather, decrease in US factory orders which have now declined for 6 months in a row (so no one can’t blame either the west coast port strike or the weather) pretty much speaks for itself, and also which way the US “recovery” (whose GDP is about to crash to the 1.2% where the Atlanta Fed is modeling it, or even lower is headed.

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As the St Louis Fed so kindly reminds us, the two previous times US manufacturing orders declined at this rate on an unadjusted (or adjusted) basis, the US economy was already in a recession.

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/03/fed%20recession%20NSA.jpg

And now, time for consensus to be shocked once again when the Fed yanks the rug from under the feet of the rite-hike-istas.

Texas Home Buyers Are Better Off Than National Average

by Rye Durzin

Texas homebuyers

The March 2015 Texas Home buyers and Sellers Report from the Texas Association of Realtors shows that between July 2013 and June 2014 median household income for Texas home buyers increased 5.9 percent year-over-year compared with a national increase of only 1.4 percent.

Home buyers in Texas are older, more likely to be married and make more money than the national averages, according to the March 2015 Texas Home buyers and Sellers Report from the Texas Association of Realtors.

The study shows that between July 2013 and June 2014 median household income for Texas home buyers increased 5.9 percent year-over-year compared with a national increase of only 1.4 percent. However, the percentage of first-time home buyers in Texas fell 4 points to 29 percent, compared to a 5 percent decline nationally to 33 percent.

Home buyers in Texas are also two years older compared to the previous period, edging up to 45 years of age, and 72 percent of home buyers are married, compared to 65 percent nationally.

Texans are also buying larger and newer homes than other buyers across the U.S. In Texas, the typical three-bedroom, two-bathroom home had 2,100 square feet and was built in 2002, compared to the typical national home built in 1993 with 1,870 square feet.

Forty-seven percent of first-time home buyers in Texas said that finding the right property was the most difficult step in buying a home, as did 48 percent of repeat home buyers.

For Texans selling homes, 21 percent said that the reason for selling was because of job relocation, followed by 16 percent who said that their home was too small. The median household income for a Texas home seller was $120,800, compared with a national media income of $96,700 among home sellers.

Texas home buyers (overall): July 2013 – June 2014

  • Median household income: +5.9% to $97,500
  • Percent of homes bought that were new: 28% (-1% from July 2012 – June
  • 2013)
  • Percentage of first-time home buyers: 29% (-4% from July 2012 – June
  • 2013)
  • Age of typical home buyer: 45 years old (+2 years from July 2012 – June 2013)
  • Average age of first-time home buyer: 32 years old (+1 year from July
  • 2012 – June 2013)
  • Average age of repeat home buyer: 50 years old (unchanged from July 2012 – June 2013)
  • Median household income for first-time home buyers: +5.8% to $72,000 (compared to July 2012 – June 2013)
  • Median household income for repeat home buyers: -8.9% to $97,500 (compared to July 2012 – June 2013)
  • Percent of married home buyers: 72% (+1% from July 2012 – June 2013)
  • New homes purchased: 28% (-2% from July 2012 – June 2013)
  • Median household income for home sellers: $120,800
  • Age of average home seller: 49 years

National home buyers (overall): June 2013 – July 2014

  • Median household income: +1.4% to $84,500
  • Percent of homes bought that were new: 16% (constant from July 2012 – June 2013)
  • Percentage of first-time home buyers: 33% (-5% from July 2012 – June 2013)
  • Age of typical home buyer: 44 years old (+2 years from July 2012 – June
  • 2013)
  • Average age of first-time home buyer: 31 years old (unchanged from July
  • 2012 – June 2013)
  • Average age of repeat home buyer: 53 years old (+1 year from July 2012 – June 2013)
  • Median household income for first-time home buyers: +2.3% to $68,300 (compared to July 2012 – June 2013)
  • Median household income for repeat home buyers: -1% to $95,000 (compared to July 2012 – June 2013)
  • Percent of married home buyers: 65% (-1% from July 2012 – June 2013)
  • New homes purchased: 16% (unchanged from July 2012 – June 2013)
  • Median household income for home sellers: $96,700
  • Age of average home seller: 54 years

Gundlach: If The Fed Raises Rates By Mid-Year “The Sinister Side Of Low Oil may Raise Its Head

jeffrey gundlach

Photo by Reuters | Eduardo Munoz.  Article by by Robert Huebscher in Advisor Perspective

The Fed should reject its inclination to raise rates, according to Jeffrey Gundlach. It’s rare that he agrees with Larry Summers, but in this case the two believe that the fundamentals in the U.S. economy do not justify higher interest rates.

Gundlach, the founder and chief investment officer of Los Angeles-based Doubleline Capital, spoke to investors in a conference call on February 17. The call was focused on the release of the new DoubleLine Long Duration Fund, but Gundlach also discussed a number of developments in the economy and the bond market.

Signals of an impending rate increase have come from comments by Fed governors that the word “patient” should be dropped from the Fed meeting notes, according to Gundlach. That word has taken on special significance, he explained, since Janet Yellen attached a two-month time horizon to it.

“If they drop that word,” Gundlach said, “it would be a strong signal that rates would rise in the following two months.”

The Fed seems “philosophically” inclined to raise rates, Gundlach said, even though the fundamentals do not justify such a move. Strong disinflationary pressure coming from the collapse in oil prices should caution the Fed against raising rates, he said.

Gundlach was asked about comments by Gary Shilling that oil prices might go as low at $10/barrel. “We better all hope we don’t get $10,” he said, “because something very deflationary would be happening in this world.” If that is the case, Gundlach said investors should flock to long-term Treasury bonds.

“I’d like to think that the world is not in that kind of deflationary precipice,” he said.

Oil will break below its previous $44 low, Gundlach said. But he did not put a price target on oil.

Gundlach warned that by mid-year, if the Fed does raise rates, “the sinister side of low oil may raise its head.” At that time, lack of hiring or layoffs in the fracking industry could cripple the economy, according to Gundlach.

In the short term, Gundlach said that the recent rise in interest rates is a signal that the “huge deflationary scare” –which was partly because of Greece – has dissipated. Investors should monitor Spanish and Italian yields, he said. If they remain low, it is a signal that Greece is not leaving the Eurozone or that, if it does, “it is not a big deal.”

http://www.advisorperspectives.com/newsletters15/Gundlach_to_the_Fed.php

A Raw Deal for Real-Estate Agents

Real estate can be risky for agents themselves. Fickle buyers, unforeseen structural issues, setbacks in financing can all scuttle a deal.

THE COMMITMENT-PHOBE Known for repeatedly pulling out of the purchase right before the contract is signed. Illustration: Laszlito Kovacs

By Nancy Keates | Wall Street Journal, Feb. 19, 2015

She saw a ghost. That was the excuse, anyway, for one buyer’s decision to back out at the last minute from closing on a $1.4 million house in San Francisco, losing a roughly $21,000 deposit in the process.

Her real-estate agent, Amanda Jones of Sotheby’s International Realty, estimates she spent about 250 hours over six months showing the prospective buyer about 130 houses in the Bay Area. In the end, she believes the woman just changed her mind. “It was horrible,” the agent says.

Few professions demand as much upfront time and legwork with the risk of zero return on the effort as real-estate sales. Fickle buyers, unforeseen structural issues, setbacks in financing can all scuttle a sale. Now, there’s another common deal breaker: an overheated housing market in which frenzied bidding wars lead to rash decisions—followed by buyers’ remorse.

“It’s such a fast-paced market right now. Buyers are expected to make offers after seeing a place once at a packed house, so they don’t have time to think things through,” says Kaitlin Adams, an agent with New York-based Compass.

THE NERVOUS NELLIE Spends countless hours to find the perfect home, but backs out at the last minute, saying it just doesn’t ‘feel right.

Nationally, median home prices in 2014 rose to their highest level since 2007, while housing inventory continued to drop—falling 0.5% lower than a year ago, according to the National Association of Realtors. The percentage of buyers backing out of contracts has gone up by about 8%—to 19.1% in the third quarter of 2014 from 17.76% in the third quarter of 2012, according to Evercore ISI, an investment-banking advisory firm.

The war stories come mostly at the high end in select markets, where affluent buyers are less affected by the prospect of losing thousands in earnest money or down payments. Cormac O’Herlihy of Sotheby’s International Realty in Los Angeles recently had buyers he calls “nervous nellies” back out on a $6 million house. “They enjoy an overabundance of financial ability,” Mr. O’Herlihy says.

Julie Zelman, a New York-based agent with Engel & Völkers, spent the past year searching for an apartment for a recently divorced client in his 40s who said he wanted to move from Manhattan’s Upper East Side to a building downtown—preferably one populated by celebrities. Twice the client was about to close when he changed his mind: The first time was at a building called Soho Mews—he’d read it was the home of an Oscar-nominated actress and a Grammy-winning musician. The man offered $2.8 million for a two-bedroom unit but then backed out. Another time, he walked away after offering $3.1 million on a two-bedroom unit in 1 Morton Square, where a popular TV actress once lived.

“He was wasting everyone’s time. It was humiliating for me,” says Ms. Zelman, who thinks the client wasn’t mentally ready for such a big change. The client ended up renting an apartment on the Upper East Side.

THE FAULT FINDER Cites microscopic flaws to quash the deal—and get the earnest money back.

When buyers change their minds before signing a contract, they don’t lose any money. Nataly Rothschild, a New York-based broker, says she thought she had finally closed a deal after a couple’s yearlong house hunt. Because there were five other offers pending, her clients offered $200,000 over the almost $2 million asking price on the three-bedroom, three-bathroom listed for $1.8 million on Manhattan’s Upper East Side. Then Ms. Rothschild, an agent at Engel & Völkers, got a call from the couple’s attorney saying the buyer, who was nine months pregnant, had broken down in tears, saying she just couldn’t sign because it didn’t feel right. “I felt miserable for her,” says Ms. Rothschild. “But we were all shocked.”

Buyers who change their minds after signing a contract typically lose their earnest money, a deposit that shows the offer was made in good faith. That money is often held by the title company or in an escrow account and later applied to down payment and closing costs. If the deal falls through, whoever holds the deposit determines who gets the earnest money. In standard contracts, the earnest money goes to the seller. If, however, a contingency spelled out in the contract emerges—the buyer’s financing falls through, for example—the buyer usually gets the earnest money back.

Vivian Ducat, an agent with Halstead Property in New York, had a client lose $55,000 in earnest money after a change of heart on a $550,000 co-op. The woman, who was living in California, had wanted to buy a place in New York because one of her children was living there. At the last minute she balked, emailing that she “couldn’t handle the New York lifestyle.” She’d signed the contract and even filled out all the paperwork for the co-op board.

THE OVER BIDDER. Gets caught up in the frenzy of the bidding war, then realizes he didn’t mean to spend so much.

In rare instances, buyers can get their earnest money back through arbitration if they can prove a valid cause. Ms. Adams, the Compass agent, represented the sellers of a one-bedroom apartment in Brooklyn Heights that was listed for just under $600,000. When a bidding war with five offers ensued, the unit went for $70,000 above asking price to a couple from the West Coast who wanted to use it as a part-time residence. After the contract was signed, the building’s co-op board enacted a new rule that owners had to live in the building full time. As a result, the West Coast couple got their earnest money back, and the unit sold to another buyer at about $80,000 above the asking price.

Even if the real reason is simply buyer’s remorse, real-estate agents say buyers can get back earnest money as long as they can find some valid-sounding reason for dissatisfaction. Ms. Jones in San Francisco had clients withdraw an offer on a $1.1 million house. They’d been looking for two years and when the house came up the wife was traveling abroad; the husband said he was sure she would love it. Turns out the wife didn’t like it at all. The couple used the excuse of a leak found in the inspection process and got their $33,000 deposit back.

And about that ghost. A buyer who put down $43,000 in earnest money pulled out after a neighbor told them the previous owner had died in the home, among other things. The matter went into arbitration, and the potential buyer got the entire deposit back.

Ever since then, Ms. Jones says she has sellers disclose in their contracts the possibility that there might be a ghost. “You have to prepare for anything,” she says.

We Live In An Era Of Dangerous Imbalances

by Tyler Durden

The intervention by the world’s central banks has resulted in today’s bizarro financial markets, where “bad news is good” because it may lead to more (sorry, moar) thin-air stimulus to goose asset prices even higher.

The result is a world addicted to debt and the phony stimulus now essential to sustaining it. In the process, a tremendous wealth gap has been created, one still expanding at an exponential rate.

History is very clear what happens with dangerous imbalances like this. They correct painfully. Through class warfare. Through currency crises. Through wealth destruction.

Is that really the path we want? Because we’re for sure headed for it.

Increasing Rent Costs Present a Challenge to Aspiring Homeowners

https://i0.wp.com/dsnews.com/wp-content/uploads/sites/25/2013/12/rising-arrows-two.jpgby Tory Barringer

Fast-rising rents have made it difficult for many Americans to save up a down payment for a home purchase—and experts say that problem is unlikely to go away any time soon.

Late last year, real estate firm Zillow reported that renters living in the United States paid a cumulative $441 billion in rents throughout 2014, a nearly 5 percent annual increase spurred by rising numbers of renters and climbing prices. Last month, the company said that its own Rent Index increased 3.3 percent year-over-year, accelerating from 2013 even as home price growth slows down.

Results from a more recent survey conducted by Zillow and Pulsenomics suggest that rent prices will continue to be a problem for the aspiring homeowner for years to come.

Out of more than 100 real estate experts surveyed, 51 percent said they expect rental affordability won’t improve for at least another two years, Zillow reported Friday. Another 33 percent were a little more optimistic, calling for a deceleration in rental price increases sometime in the next one to two years.

Only five percent said they expect affordability conditions to improve for renters within the next year.

Despite the challenge that rising rents presents to home ownership throughout the country, more than half—52 percent of respondents—said the market should be allowed to correct the problem on its own, without government intervention.

“Solving the rental affordability crisis in this country will require a lot of innovative thinking and hard work, and that has to start at the local level, not the federal level,” said Zillow’s chief economist, Stan Humphries. “Housing markets in general and rental dynamics in particular are uniquely local and demand local, market-driven policies. Uncle Sam can certainly do a lot, but I worry we’ve become too accustomed to automatically seeking federal assistance for housing issues big and small, instead of trusting markets to correct themselves and without waiting to see the impact of decisions made at a broader local level.”

On the topic of government involvement in housing matters: The survey also asked respondents about last month’s reduction in annual mortgage insurance premiums for loans backed by the Federal Housing Administration (FHA). The Obama administration has projected that the cuts will help as many as 250,000 new homeowners make their first purchase.

The panelists were lukewarm on the change: While two-thirds of those with an opinion said they think the changes could be “somewhat effective in making homeownership more accessible and affordable,” just less than half said the new initiatives are unwise and potentially risky to taxpayers.

Finally, the survey polled panelists on their predictions for U.S. home values this year. As a whole, the group predicted values will rise 4.4 percent in 2015 to a median value of $187,040, with projections ranging from a low of 3.1 percent to a high of 5.5 percent.

“During the past year, expectations for annual home value appreciation over the long run have remained flat, despite lower mortgage rates,” said Terry Loebs, founder of Pulsenomics. “Regarding the near-term outlook, there is a clear consensus among the experts that the positive momentum in U.S. home prices will continue to slow this year.”

On average, panelists said they expect median home values will pass their precession peak ($196,400) by May 2017.

OPEC Can’t Kill American Shale

https://i0.wp.com/static3.businessinsider.com/image/542c5b786da8118e288b4570/morgan-stanley-here-are-the-16-best-stocks-for-playing-the-american-shale-boom.jpgby Shareholdersunite

Summary

  • OPEC is supposedly out to beat, or at least curtail the growth of American shale oil production.
  • For a host of reasons, especially the much shorter capex cycle for shale, they will not succeed unless they are willing to accept permanent low oil prices.
  • But, permanent low oil prices will do too much damage to OPEC economies for this to be a credible threat.

We’re sure by now you are familiar with the main narrative behind the oil price crash. First, while oil production outside of North America is basically stagnant since 2005.

The shale revolution has dramatically increased supply in America.

(click to enlarge)

The resulting oversupply has threatened OPEC and the de-facto leader Saudi Arabia has chosen a confrontational strategy not to make way for the new kid on the block, but instead trying to crush, or at least contain it. Can they achieve this aim, provided it indeed is their aim?

Breakeven price
At first, one is inclined to say yes, for the simple reason that Saudi (and most OPEC) oil is significantly cheaper to get out of the ground.

(click to enlarge)

This suggests that all OPEC has to do is to keep output high and sooner or later the oversupply will work itself off the market, and expensive oil is more likely to see cutbacks than cheaper oil, although this critically depends on incentives facing individual producers.

Capex decline
It is therefore no wonder that we’ve seen significant declines in rig counts and numerous companies have announced considerable capex declines. While this needs time to work out into supply cutbacks, these will eventually come.

For instance BP (NYSE:BP) cutting capex from $22.9B in 2014 to $20B in 2015, or Conoco (NYSE:COP) reducing expenditures by more than 30% to $11.5B this year on drilling projects from Colorado to Indonesia. There are even companies, like SandRidge (NYSE:SD), that are shutting 75% of their rigs.

Leverage
It is often argued that the significant leverage of many American shale companies could accelerate the decline, although it doesn’t necessarily have to be like that.

While many leveraged companies will make sharp cutbacks in spending, which has a relatively rapid effect on production (see below), others have strong incentives to generate as much income as possible, so they might keep producing.

Even the companies that go belly up under a weight of leverage will be forced to relinquish their licenses or sell them off at pennies to the dollar, significantly lowering the fixed cost for new producers to take their place.

Hedging
Many shale companies have actually hedged much of their production, so they are shielded from much of the downside (at a cost) at least for some time. And they keep doing this:

Rather than wait for their price insurance to run out, many companies are racing to revamp their policies, cashing in well-placed hedges to increase the number of future barrels hedged, according to industry consultants, bankers and analysts familiar with the deals. [Reuters]

Economics
Being expensive is not necessarily a sufficient reason for being first in line for production cuts. For instance, we know that oil from the Canadian tar sands is at the high end of cost, but simple economics can explain why production cuts are unlikely for quite some time to come.

The tar sands involve a much higher fraction as fixed cost:

Oil-sands projects are multibillion-dollar investments made upfront to allow many years of output, unlike competing U.S. shale wells that require constant injections of capital. It’s future expansion that’s at risk. “Once you start a project it’s like a freight train: you can’t stop it,” said Laura Lau, a Toronto-based portfolio manager at Brompton Funds. Current oil prices will have producers considering “whether they want to sanction a new one.” [Worldoil]

So, once these up-front costs are made, these are basically sunk, and production will only decline if price falls below marginal cost. As long as the oil price stays above that, companies can still recoup part of their fixed (sunk) cost and they have no incentive to cut back production.

But, of course, you have tar sand companies that have not yet invested all required up-front capital and new capex expenditures will be discouraged with low oil prices. So, there is still the usual economic upward sloping supply curve operative here.

Swing producer
The funny thing is American shale oil is at the opposite end of this fixed (and sunk) cost universe, apart from acquiring the licenses. As wells have steep decline curves, production needs constant injection of capital for developing new wells.

Production can therefore be wound down pretty quickly should the economics require, and it can also be wound back up relatively quickly, which we think is enough reason why American shale is becoming the new (passive) swing producer. This has very important implications:

  • The relevant oil price to look at isn’t necessarily the spot price, but the 12-24 months future price, the time frame between capex and production.
  • OPEC will not only need to produce a low oil price today, that price needs to be low for a prolonged period of time in order to see cutbacks in production of American shale oil. Basically, OPEC needs the present oil price to continue indefinitely, as soon as it allows the price to rise again, shale oil capex will rebound and production will increase fairly soon afterwards.

So basically, shale is the proverbial toy duck which OPEC needs to submerge in the bathtub, but as soon as it releases the pressure, the duck will emerge again.

Declining cost curves
The shale revolution caught many by surprise, especially the speed of the increase in production. While technology and learning curves are still improving, witness how production cost curves have been pushed out in the last years:

There is little reason this advancement will come to a sudden halt, even if capex is winding down. In fact, some observers are arguing that producers shift production from marginal fields to fields with better production economics, and the relatively steep production decline curves allow them to make this shift pretty rapidly.

Others point out that even the rapid decline in rig count will not have an immediate impact on production, as the proportion of horizontal wells and platforms where multiple wells are drilled from the same location are increasing, all of which is increasing output per rig.

Another shift that is going on is to re-frack existing wells, instead of new wells. The first is significantly cheaper:

Beset by falling prices, the oil industry is looking at about 50,000 existing wells in the U.S. that may be candidates for a second wave of fracking, using techniques that didn’t exist when they were first drilled. New wells can cost as much as $8 million, while re-fracking costs about $2 million, significant savings when the price of crude is hovering close to $50 a barrel, according to Halliburton Co., the world’s biggest provider of hydraulic fracturing services. [Bloomberg]

Production cuts will take time
The hedging and shift to fields with better economics is only a few of the reasons why so far there has been little in the way of actual production cuts in American shale production, the overall oil market still remains close to record oversupply. The International Energy Agency (IEA) argues:

It is not unusual in a market correction for such a gap to emerge between market expectations and current trends. Such is the cyclical nature of the oil market that the full physical impact of demand and supply responses can take months, if not years, to be felt [CNBC].

In fact, the IEA also has explicit expectations for American shale oil itself:

The United States will remain the world’s top source of oil supply growth up to 2020, even after the recent collapse in prices, the International Energy Agency said, defying expectations of a more dramatic slowdown in shale growth [Yahoo].

OPEC vulnerable itself
Basically, the picture we’re painting above is that American shale will be remarkably resilient. Yes, individual companies will struggle, sharp cutbacks in capex are already underway, and some companies will go under, but the basic fact is that as quick as capex and production can fall, they can rise as quickly again when the oil price recovers.

How much of OPEC can the storm of the oil price crash, very much remains to be seen. There is pain all around, which isn’t surprising as one considers that most OPEC countries have budgeted for much higher oil prices for their public finances.

(click to enlarge)
You’ll notice that these prices are all significantly, sometimes dramatically, higher than what’s needed to balance their budgets. Now, many of these countries also have very generous energy subsidies on domestic oil use, supposedly to share the benefits of their resource wealth (and/or provide industry with a cost advantage).

So, there is a buffer as these subsidies can be wound down relatively painless. Some of these countries also have other buffers, like sovereign wealth funds or foreign currency reserves. And there is often no immediate reason for public budgets to be balanced.

But to suggest, as this article is doing, that OPEC is winning the war is short-sighted.

Conclusion
While doing damage to individual American shale oil producers and limiting its expansion, the simple reality is that for a host of reasons discussed above, OPEC can’t beat American shale oil production unless it is willing to accept $40 oil indefinitely. While some OPEC countries might still produce profitably at these levels, the damage to all OPEC economies will be immense, so, we can’t really see this as a realistic scenario in any way.

Oil Glut Gets Worse – Production, Inventories Soar to Record

https://i1.wp.com/bloximages.newyork1.vip.townnews.com/oaoa.com/content/tncms/assets/v3/editorial/9/14/914424e8-aaf0-11e4-ac1c-b74346c3e35b/54cf9855658eb.image.jpgby Wolf Richter

February 4th, 2015: Crude oil had rallied 20% in three days, with West Texas Intermediate jumping $9 a barrel since Friday morning, from $44.51 a barrel to $53.56 at its peak on Tuesday. “Bull market” was what we read Tuesday night. The trigger had been the Baker Hughes report of active rigs drilling for oil in the US, which had plummeted by the most ever during the latest week. It caused a bout of short covering that accelerated the gains. It was a truly phenomenal rally!

But the weekly rig count hasn’t dropped nearly enough to make a dent into production. It’s down 24% from its peak in October. During the last oil bust, it had dropped 60%. It’s way too soon to tell what impact it will have because for now, production of oil is still rising.

And that phenomenal three-day 20% rally imploded today when it came in contact with another reality: rising production, slack demand, and soaring crude oil inventories in the US.

The Energy Information Administration reported that these inventories (excluding the Strategic Petroleum Reserve) rose by another 6.3 million barrels last week to 413.1 million barrels – the highest level in the weekly data going back to 1982. Note the increasingly scary upward trajectory that is making a mockery of the 5-year range and seasonal fluctuations:

US-crude-oil-stocks-2015-02-04
And there is still no respite in sight.

Oil production in the US is still increasing and now runs at a multi-decade high of 9.2 million barrels a day. But demand for petroleum products, such as gasoline, dropped last week, according to the EIA, and so gasoline inventories jumped by 2.3 million barrels. Disappointed analysts, who’d hoped for a drop of 300,000 barrels, blamed the winter weather in the East that had kept people from driving (though in California, the weather has been gorgeous). And inventories of distillate, such as heating oil and diesel, rose by 1.8 million barrels. Analysts had hoped for a drop of 2.2 million barrels.

In response to this ugly data, WTI plunged $4.50 per barrel, or 8.5%, to $48.54 as I’m writing this. It gave up half of the phenomenal three-day rally in a single day.

Macquarie Research explained it this way:

In our experience, oil markets rarely exhibit V-shaped recoveries and we would be surprised if an oversupply situation as severe as the current one was resolved this soon. In fact, our balances indicate the absolute oversupply is set to become more severe heading into 2Q15.

Those hoping for a quick end to the oil glut in the US, and elsewhere in the world, may be disappointed because there is another principle at work – and that principle has already kicked in.

As the price has crashed, oil companies aren’t going to just exit the industry. Producing oil is what they do, and they’re not going to switch to selling diapers online. They’re going to continue to produce oil, and in order to survive in this brutal pricing environment, they have to adjust in a myriad ways.

“Efficiency and innovation, when price falls, it accelerates, because necessity is the mother of invention,” Michael Masters, CEO of Masters Capital Management, explained to FT Alphaville on Monday, in the middle of the three-day rally. “Even if the investment only spits out quarters, or even nickels, you don’t turn it off.”

Crude has been overvalued for over five years, he said. “Whenever the return on capital is in the high double digits, that’s not sustainable in nature.” And the industry has gotten fat during those years.

Now, the fat is getting trimmed off. To survive, companies are cutting operating costs and capital expenditures, and they’re shifting the remaining funds to the most productive plays, and they’re pushing 20% or even 30% price concessions on their suppliers, and the damage spreads in all directions, but they’ll keep producing oil, maybe more of it than before, but more efficiently.

This is where American firms excel: using ingenuity to survive. The exploration and production sector has been through this before. And those whose debts overwhelm them – and there will be a slew of them – will default and restructure, wiping out stockholders and perhaps junior debt holders, and those who hold the senior debt will own the company, minus much of the debt. The groundwork is already being done, as private equity firms and hedge funds offer credit to teetering oil companies at exorbitant rates, with an eye on the assets in case of default.

And these restructured companies will continue to produce oil, even if the price drops further.

So Masters said that, “in our view, production will not decrease but increase,” and that increased production “will be around a lot longer than people are forecasting right now.”

After the industry goes through its adjustment process, focused on running highly efficient operations, it can still scrape by with oil at $45 a barrel, he estimated, which would keep production flowing and the glut intact. And the market has to appreciate that possibility.


Rigs Down By 21% Since Start Of 2015
Permian Basin loses 37 rigs first week in February

by Trevor Hawes

The number of rigs exploring for oil and natural gas in the Permian Basin fell 37 this week to 417, according to the weekly rotary rig count released Friday by Houston-based oilfield service company Baker Hughes.

This week’s count marked the ninth-consecutive decrease for the Permian Basin. The last time Baker Hughes reported a positive rig-count change was Dec. 5, when 568 rigs were reported. Since then, the Permian Basin has shed 151 rigs, a decrease of 26.58 percent.

For the year, the Permian Basin has shed 113 rigs, or 21.32 percent.

In District 8, which includes Midland and Ector counties, the rig count fell 19 this week to 256. District 8 has shed 58 rigs, 18.47 percent, this year.

Texas lost 41 rigs this week for a statewide total of 654. The Lone Star State has 186 fewer rigs since the beginning of the year, a decrease of 22.14 percent.

In other major Texas basins, there were 168 rigs in the Eagle Ford, down 10; 43 in the Haynesville, unchanged; 39 in the Granite Wash, down one; and 19 in the Barnett, unchanged.

The Haynesville shale is the only major play in Texas to have added rigs this year. The East Texas play started 2015 with 40 rigs.

At this time last year, there were 483 rigs in the Permian Basin and 845 in Texas.

In the U.S., there were 1,456 rigs this week, a decrease of 87. There were 1,140 oil rigs, down 83; 314 natural gas rigs, down five; and two rigs listed as miscellaneous, up one.

By trajectory, there were 233 vertical drilling rigs, down two; 1,088 horizontal drilling rigs, down 80; and 135 directional drilling rigs, down five.

The top five states by rig count this week were Texas; Oklahoma with 176, down seven; North Dakota with 132, down 11; Louisiana with 107, down one; and New Mexico with 78, down nine.

The top five basins were the Permian; the Eagle Ford; the Williston with 137, down 11; the Marcellus with 71, down four; and the Mississippian with 53, down one.

In the U.S., there were 1,397 rigs on land, down 85; nine in inland waters, down three; and 50 offshore, up one. There were 48 rigs in the Gulf of Mexico, up one.

Canada’s rig count fell 13 this week to 381. There were 184 oil rigs, down 16; 197 natural gas rigs, up three; and zero rigs listed as miscellaneous, unchanged. Canada had 621 rigs a year ago this week, a difference of 240 rigs compared to this week’s count.

The number of rigs exploring for oil and natural gas in the North America region, which includes the U.S. and Canada, fell 100 this week to 1,837. There were 2,392 rigs in North America last year.

Rigs worldwide

On Friday, Baker Hughes released its monthly international rig count for January. The worldwide total was 3,309 rigs. The U.S. ended January with 1,683 rigs, just more than half of all rigs worldwide.

The following are January’s rig counts by region, with the top three nations in each region in parentheses:

Africa: 132 (Algeria: 97; Nigeria: 19; Angola: 14)

Asia-Pacific: 232 (India: 108; Indonesia: 36; China offshore: 33)

Europe: 128 (Turkey: 37; United Kingdom offshore: 15; Norway: 13)

Latin America: 351 (Argentina: 106; Mexico: 69; Venezuela: 64)

Middle East: 415 (Saudi Arabia: 119; Oman: 61; Iraq: 60)

Odessa migrant worker 1937

Migrant oil worker and wife near Odessa, Texas 1937

Photographer: Dorothea Lange Created: May 1937 Location: OdessaTexas

Call Number: LC-USF34-016932 Source: MRT.com

Millions of Boomerang Buyers Poised to Re-Enter Housing Market

Millions of Boomerang Buyers Poised to Re-Enter Housing Marketby WPJ

According to RealtyTrac, the first wave of 7.3 million homeowners who lost their home to foreclosure or short sale during the foreclosure crisis are now past the seven-year window they conservatively need to repair their credit and qualify to buy a home as we begin 2015.

In addition, more waves of these potential boomerang buyers will be moving past that seven-year window over the next eight years corresponding to the eight years of above-normal foreclosure activity from 2007 to 2014.

Potential-Boomerang-Buyers-Nationwide-1.png

“The housing crisis certainly hit home the fact that home ownership is not for everyone, but those burned during the crisis should not immediately throw the baby out with the bathwater when it comes to their second chance at home ownership,” said Chris Pollinger, senior vice president of sales at First Team Real Estate, covering the Southern California market which has more than 260,000 potential boomerang buyers. “Home ownership done responsibly is still one of the best disciplined wealth-building strategies, and there is much more data available for home buyers than there was five years ago to help them make an informed decision about a home purchase.”

  • Nearly 7.3 million potential boomerang buyers nationwide will be in a position to buy again from a credit repair perspective over the next eight years.
  • Markets with the most potential boomerang buyers over the next eight years among metropolitan statistical areas with a population of at least 250,000.
  • Markets with the highest rate of potential boomerang buyers as a percentage of total housing units over the next eight years among metro areas with at least 250,000 people.
  • Markets most likely to see the boomerang buyers materialize are those where there are a high percentage of housing units lost to foreclosure but where current home prices are still affordable for median income earners and where the population of Gen Xers and Baby Boomers — the two generations most likely to be boomerang buyers — have held steady or increased during the Great Recession.
  • There were 22 metros among those with at least 250,000 people where this trifecta of market conditions is in place, making these metros the most likely nationwide to see a large number of boomerang buyers materialize in 2015 and beyond.

Potential-Boomerang-Buyers-Nationwide-2.png

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Potential-Boomerang-Buyers-Nationwide-4.png

 

Why The Energy Selloff Is So Dangerous To The US Economy

https://i1.wp.com/www.topnews.in/files/job_losses.jpg
By Pam and Russ Martens:

Summary:

  • The global economy is producing far to much supply of most things, chasing to-little-demand from cash strapped consumers.
  • Prices of other industrial commodities are in steep decline.
  • Billions of dollars in investment capital are “risk off”.
  • An untold number of jobs spread across America are at risk.

Television pundits and business writers who are relentlessly pounding the table on how cheaper home heating oil and gas at the pump is going to provide a consumer windfall and ramp up economic activity have a simplistic view of how things work.

Oil-related companies in the U.S. now account for between 35 to 40 percent of all capital spending. Announcements of sharp cutbacks in capital spending and job reductions by these companies create big ripples, forcing related companies to trim their own budgets, revenue assumptions, and payrolls accordingly.

The announcements coming out of the oil patch are picking up steam and it’s not a pretty picture. Last week Schlumberger said it would eliminate 9,000 jobs, approximately 7 percent of its workforce, and trim capital spending by about $1 billion. Yesterday, Baker Hughes, the oilfield services company, announced 7,000 in job cuts, roughly 11 percent of its workforce, and expects the cuts to all come in the first quarter. Baker Hughes also announced a 20 percent reduction in capital spending. This morning, the BBC is reporting that BHP Billiton will cut 40 percent of its U.S. shale operations, reducing its number of rigs from 26 to 16 by the end of June.

When Big Oil cuts capital spending, we’re not talking about millions of dollars or even hundreds of millions of dollars; we’re talking billions. Last month, ConocoPhillips announced it had set its capital budget for 2015 at $13.5 billion, a reduction of 20 percent. Smaller players are also announcing serious cutbacks. Yesterday Bonanza Creek Energy said it would cut its capital spending by 36 to 38 percent.

Other big industrial companies in the U.S. are also impacted by the sharp slump in oil, which has shaved almost 60 percent off the price of crude in just six months. As the oil majors scale back, it reduces the need for steel pipes. U.S. Steel has announced that it will lay off approximately 750 workers at two of its pipe plants.

On January 15, the Federal Reserve Bank of Kansas City released a dire survey of what’s ahead in its “Fourth Quarter Energy Survey.” The survey found: “The future capital spending index fell sharply, from 40 to -59, as contacts expected oil prices to keep falling. Access to credit also weakened compared to the third quarter and a year ago.  Credit availability was expected to tighten further in the first half of 2015.” About half of the survey respondents said they were planning to cut spending by more than 20 percent while about one quarter of respondents expect cuts of 10 to 20 percent.

The impact of all of this retrenchment is not going unnoticed by sophisticated stock investors, as reflected in the major U.S. stock indices. On days when there is a notable plunge in the price of crude, the markets are following in lockstep during intraday trading. Yes, the broader stock averages continued to set new highs during the early months of the crude oil price decline in 2014 but that was likely due to the happy talk coming out of the Fed. It is also useful to recall that the Dow Jones Industrial Average traveled from 12,000 to 13,000 between March and May 2008 before entering a plunge that would take it into the 6500 range by March 2009.

Both the Federal Open Market Committee (FOMC) and Fed Chair Janet Yellen have assessed the plunge in oil prices as not of long duration. The December 17, 2014 statement from the FOMC and Yellen in her press conference the same day, characterized the collapse in energy prices as “transitory.” The FOMC statement said: “The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”

If oil were the only industrial commodity collapsing in price, the Fed’s view might be more credible. Iron ore slumped 47 percent in 2014; copper has slumped to prices last seen during the height of the financial crisis in 2009. Other industrial commodities are also in decline.

A slowdown in both U.S. and global economic activity is also consistent with global interest rates on sovereign debt hitting historic lows as deflation takes root in a growing number of our trading partners. Despite the persistent chatter from the Fed that it plans to hike rates at some point this year, the yield on the U.S. 10-year Treasury note, a closely watched indicator of future economic activity, has been falling instead of rising. The 10-year Treasury has moved from a yield of 3 percent in January of last year to a yield of 1.79 percent this morning.

All of these indicators point to a global economy with far too much supply and too little demand from cash-strapped consumers. These are conditions completely consistent with a report out this week from Oxfam, which found the following:

“In 2014, the richest 1% of people in the world owned 48% of global wealth, leaving just 52% to be shared between the other 99% of adults on the planet. Almost all of that 52% is owned by those included in the richest 20%, leaving just 5.5% for the remaining 80% of people in the world. If this trend continues of an increasing wealth share to the richest, the top 1% will have more wealth than the remaining 99% of people in just two years.”

Crude Oil (WTI) Trading Versus the Dow Jones Industrial Average, December 1, 2014 Through January 12, 2015

Midland Texas, Hunkering Down For The Oil Bust

 Oilfield worker on a rigOilfield worker on a rig
Active pumping rig located on Highway 385 south of Odessa, photographed Tuesday, Sept. 24, 2014. James Durbin/Reporter-Telegram.  Source: MRT.com 

MIDLAND — With oil prices plummeting by more than 50 percent since June, the gleeful mood of recent years has turned glum here in West Texas as the frenzy of shale oil drilling has come to a screeching halt.

Every day, oil companies are decommissioning rigs and announcing layoffs. Small firms that lease equipment have fallen behind in their payments.

In response, businesses and workers are getting ready for the worst. A Mexican restaurant has started a Sunday brunch to expand its revenues beyond dinner. A Mercedes dealer, anticipating reduced demand, is prepared to emphasize repairs and sales of used cars. And people are cutting back at home, rethinking their vacation plans and cutting the hours of their housemaids and gardeners.

Dexter Allred, the general manager of a local oil field service company, began farming alfalfa hay on the side some years ago in the event that oil prices declined and work dried up. He was taking a cue from his grandfather, Homer Alf Swinson, an oil field mechanic, who opened a coin-operated carwash in 1968 — just in case.

“We all have backup plans,” Allfred said with a laugh. “You can be sure oil will go up and down, the only question is when.”

Indeed, to residents here in the heart of the oil patch, booms and busts go with the territory.

“This is Midland and it’s just a way of life,” said David Cristiani, owner of a downtown jewelry store, who keeps a graph charting oil prices since the late 1990s on his desk to remind him that the good times do not last forever. “We are always prepared for slowdowns. We just hunker down. They wrote off the Permian Basin in 1984, but the oil will always be here.”

It is at times like these that Midland residents recall the wild swings of the 1980s, a decade that began with parties where people drank Dom Pérignon out of their cowboy boots. Rolls-Royce opened a dealership, and the local airport had trouble finding space to park all the private jets.

By the end of the decade, the Rolls-Royce dealership was shut and replaced by a tortilla factory, and three banks had failed.

There has been nothing like that kind of excess over the past five years, despite the frenzy of drilling across the Permian Basin, the granddaddy of U.S. oil fields. Set in a forsaken desert where tumbleweed drifts through long-forgotten towns, the region has undergone a renaissance in the last four years, with horizontal drilling and fracking reaching through multiple layers of shale stacked one over the other like a birthday cake.

But since the Permian Basin rig count peaked at around 570 last September, it has fallen to below 490, and local oil executives say the count will probably go down to as low as 300 by April unless prices rebound.

The last time the rig count declined as rapidly was in late 2008 and early 2009, when the price of oil fell from more than $140 to under $40 a barrel because of the financial crisis.

Unlike traditional oil wells, which cannot be turned on and off so easily, shale production can be cut back quickly, and so the field’s output should slow considerably by the end of the year.

The Dallas Federal Reserve recently estimated that the falling oil prices and other factors will reduce job growth in Texas overall from 3.6 percent in 2014 to as low as 2 percent this year, or a reduction of about 149,000 jobs created.

Midland’s recent good fortune is plain to see. The city has grown in population from 108,000 in 2010 to 140,000 today, and there has been an explosion of hotel and apartment construction. Companies like Chevron and Occidental are building new local headquarters. Real estate values have roughly doubled during the past five years, according to Mayor Jerry Morales.

The city has built a new fire station and recruited new police officers with the infusion of new tax receipts, which increased by 19 percent from 2013 to 2014 alone. A new $14 million court building is scheduled to break ground next month.

But the city has also put away $39 million in a rainy-day fund for the inevitable oil bust.

“This is just a cooling-off period,” Morales said. “We will prevail again.”

Expensive restaurants are still full and traffic around the city can be brutal. Still, everyone seems to sense that the pain is coming, and they are preparing for it.

“We are responding to survive, so that we may once again thrive when we come out the other side,” said Steven H. Pruett, president and chief executive of Elevation Resources, a Midland-based oil exploration and production company. “Six months ago there was a swagger in Midland and now that swagger is gone.”

Pruett’s company had six rigs running in early December but now has only three. It will go down to one by the end of the month, even though he must continue to pay a service company for two of the rigs because of a long-term contract.

The other day Pruett drove to a rig outside of Odessa he feels compelled to park to save cash, and he expressed concern that as many as 50 service workers could eventually lose their jobs.

But the workers themselves seemed stoic about their fortunes, if not upbeat.

“It’s always in the back of your mind — being laid off and not having the security of a regular job,” said Randy Perry, a tool-pusher who makes $115,000 a year, plus bonuses, managing the rig crews. But Perry said he always has a backup plan because layoffs are so common — even inevitable.

Since graduating from high school a decade ago, he has bought several houses in East Texas and fixed them up, doing the plumbing and electrical work himself. At age 29 with a wife and three children, he currently has three houses, and if he is let go, he says he could sell one for a profit he estimates at $50,000 to $100,000.

Just a few weeks ago, he and other employees received a note from Trent Latshaw, the head of his company, Latshaw Drilling, saying that layoffs may be necessary this year.

“The people of the older generation tell the young guys to save and invest the money you make and have cash flow just in case,” Perry said during a work break. “I feel like everything is going to be OK. This is not going to last forever.”

The most nervous people in Midland seem to be the oil executives who say busts may be inevitable, but how long they last is anybody’s guess.

Over a lavish buffet lunch recently at the Petroleum Club of Midland, the talk was woeful and full of conspiracy theories about how the Saudis were refusing to cut supplies to vanquish the surging U.S. oil industry.

“At $45 a barrel, it shuts down nearly every project,” Steve J. McCoy, Latshaw Drilling’s director of business development, told Pruett and his guests. “The Saudis understand and they are killing us.”

Pruett nodded in agreement, adding, “They are trash-talking the price of oil down.”

“Everyone has been saying ‘Happy New Year,’” Pruett continued. “Yeah, some happy new year.”

GUNDLACH: Don’t Be Bottom-Fishing In Oil Stocks And Bonds

ducks bottom feedingSource: Business Insider

NEW YORK (Reuters) – DoubleLine Capital’s Jeffrey Gundlach said on Tuesday there is a possibility of a “true collapse” in U.S. capital expenditures and hiring if the price of oil stays at its current level.

Gundlach, who correctly predicted government bond yields would plunge in 2014, said on his annual outlook webcast that 35 percent of Standard & Poor’s capital expenditures comes from the energy sector and if oil remains around the $45-plus level or drops further, growth in capital expenditures could likely “fall to zero.”

Gundlach, the co-founder of Los Angeles-based DoubleLine, which oversees $64 billion in assets, noted that “all of the job growth in the (economic) recovery can be attributed to the shale renaissance.” He added that if low oil prices remain, the U.S. could see a wave of bankruptcies from some leveraged energy companies.

Brent crude approached a near six-year low on Tuesday as the United Arab Emirates defended OPEC’s decision not to cut output and traders wondered when a six-month price rout might end.

Brent has fallen as low as just above $45 a barrel, near a six-year low, having averaged $110 between 2011 and 2013.

Gundlach said oil prices have to stop going down so “don’t be bottom-fishing in oil” stocks and bonds. “There is no hurry here.”

Energy bonds, for example, have been beaten up and appear attractive on a risk-reward basis, but investors need to hedge them by purchasing “a lot, lot of long-term Treasuries. I’m in no hurry to do it.”

High-yield junk bonds have also been under severe selling pressure. Gundlach said his firm bought some junk in November but warned that investors need to “go slow” and pointed out “we are still underweight.”

Gundlach said U.S. stocks could outperform other countries’ equities as the economic recovery looks stronger than its counterparts, though double-digit gains cannot be repeated.

He also reiterated that it’s possible yields on the benchmark 10-year Treasury note could drop to 1 percent in 2015. The 10-year yield traded around 1.91 percent on Tuesday, little changed from late on Monday after hitting 20-month low of 1.8640 percent.

“The 10-year Treasury could join the Europeans and go to 1 percent. Why not?” Gundlach told Reuters last month. “If oil goes to $40, then the 10-year could be going to 1 percent.”

The yield on 10-year German Bunds stood at 0.47 percent on Tuesday.


Meanwhile…

Jeff Gundlach Unveils His Outlook For 2015

Screen Shot 2015 01 13 at 4.13.56 PM

by: Myles Unland

“V”

This is the title of the latest webcast from DoubleLine Capital’s Jeffrey Gundlach, who just wrapped up a webcast giving his outlook for 2015.

We last heard from Gundlach in December when he held a presentation called “This Time It’s Different,” in which he talked about the oil markets, the dollar, and how the 10-year Treasury bond could get to 1%.

Among the things Gundlach believes 2015 has in store for the market is more volatility, lower Treasury yields, and a Federal Reserve rate hike, “just to see if they can do it.”

Gundlach spent a good chunk of his open talking about the effects that the decline in oil will have on jobs growth and capital investment in the US, noting that 35% of capital investment from the S&P 500 is related to the energy sector.

The bull case for the US in 2015, Gundlach said, is predicated primarily on the strength of the US labor market. Meanwhile the chart of the year so far is the US 10-year yield against other major economies, with the US clearly having space to converge towards the super-low yields seen on 10-year bonds in Japan, Germany, and Switzerland.

We’ve broken out a number of Gundlach’s slides below and added commentary taken as he spoke live on Tuesday.

  • 4:22 PM

  • Gundlach’s leading slide.

Screen Shot 2015 01 13 at 4.21.40 PM

  • 4:22 PM

  • Gundlach says of the title that it stands for the fifth year that he’s being these webcasts, but also has a market theme. “Most risk markets have gone into a V since about June.”

Says that the “touchdown” part of the drop in oil is that consumers get more money in their pocket. “I think that’s one of the reasons, rightly, that people view the oil decline as somewhat positive.”

Gundlach says that there is a sinister side to the oil decline, which is potential impacts on employment in the US, particularly in the energy space.

Gundlach says “all of the job growth” from the recession until today can be attributed to the shale oil boom.

  • 4:25 PM

  • Gundlach says that if oil stays anywhere near where it is today, we’re going to see leveraged energy companies go bankrupt.

“And maybe some other things related to that.”

  • 4:27 PM

  • Gundlach said that in 2014 he thought bonds would return 6%. The Barclays Aggregate Bond Index returned 6%.

Screen Shot 2015 01 13 at 4.26.43 PM

  • 4:28 PM

  • Gundlach says, as he did in December, “TIPS are for losers, that’s for sure.”

  • 4:30 PM

  • Every yield curve flattened in 2014.

Screen Shot 2015 01 13 at 4.29.59 PM

  • 4:31 PM

  • “It wasn’t the US of A in 2014, but the US of Only.”

US stocks were the only really strong equity markets among major developed economies. Chinese and Indian stocks were big winners among emerging markets.

Screen Shot 2015 01 13 at 4.30.40 PM

  • 4:34 PM

  • Gundlach says he’s been positive on the US dollar since 2011. This was a huge consensus trade in 2014, and Gundlach says sometimes the consensus is right.

“It looks to me like the dollar is headed higher.”

Gundlach says he knows long dollar is a crowded trade, but the fundamentals bolstering a strong dollar remain in tact.

Additionally, Gundlach thinks the Fed will raise rates with a few more months of strong payrolls gains, which will only make the dollar stronger.
Screen Shot 2015 01 13 at 4.32.01 PM

  • 4:35 PM

  • Gundlach says his investments are still dollar-denominated.

  • 4:36 PM

  • What a year for the ruble.

Screen Shot 2015 01 13 at 4.35.43 PM

  • 4:37 PM

  • Mutual fund flows in 2014 looked a lot like 2007.

Screen Shot 2015 01 13 at 4.37.07 PM

  • 4:38 PM

  • The Long Bond had one of the best years ever in 2014.

Screen Shot 2015 01 13 at 4.38.03 PM

  • 4:39 PM

  • Gundlach said that in 2012, when bonds hit their low he had a 90% conviction that that would THE low for bonds. His conviction is less than that now.

  • 4:40 PM

  • 2014 was a disaster for commodities.

The best commodity in 2014 was gold.

Screen Shot 2015 01 13 at 4.39.46 PM

  • 4:42 PM

  • The white line is the commodity index, the yellow line is the commodity index you can actually invest in.

Investable commodities have been losers for years.

Gundlach says you lost 800 basis points per annum over the last 10 years investing in commodities.

Screen Shot 2015 01 13 at 4.40.56 PM

  • 4:42 PM

  • Gold gained ground in basically every currency except the US dollar in 2014.

Screen Shot 2015 01 13 at 4.42.11 PM

  • 4:43 PM

  • “Gold is on a stealthy rally and I suspect gold is going to be headed higher not lower.”

  • 4:43 PM

  • Gold gained 89% in ruble terms last year.

Screen Shot 2015 01 13 at 4.43.19 PM

  • 4:45 PM

  • “Bitcoin is on its way to being relegated to the ash heap of digital currencies.”

  • 4:47 PM

  • “One of the great vintages of Chateau Mouton.”

Screen Shot 2015 01 13 at 4.46.31 PM

  • 4:49 PM

  • Gundlach says the labor market is the backbone of the US bull case in 2015.

The number of companies worrying about poor sales is dropping, while there is a modest increase concerns about the quality of labor.

Gundlach says he is “from Missouri” on this one. He will wait to see wage growth show up before making the case for a lift off in wages.

  • 4:50 PM

  • The job scenario is stronger as fewer people apply for disability.

Screen Shot 2015 01 13 at 4.49.14 PM

  • 4:50 PM

  • Food stamp usage has been flat over the last few years.

Screen Shot 2015 01 13 at 4.50.01 PM

  • 4:52 PM

  • This is the most bullish chart of 2015.

Oil prices have been correlated with GDP growth 18 months forward.

And so this chart implies 3+% global growth going forward.

“On balance this should be viewed as an encouraging indicator.”

Gundlach doesn’t think, however that global growth is going to be upgraded in 2015, and like the last several years will be downgraded as the year goes along.

Screen Shot 2015 01 13 at 4.51.07 PM

  • 4:53 PM

  • The S&P 500 has been strong against the rest of the world since 2010, but this trend really accelerated in June of 2015.

Screen Shot 2015 01 13 at 4.52.34 PM

  • 4:54 PM

  • Gundlach says US outperformance “isn’t really a great sign.” But says US is probably the preferred place to invest against the rest of the world, however.

“It’s almost impossible for the gains from June 2014 to now to be repeated this year.”

  • 4:55 PM

  • Bear case is three big slides, Gundlach says.

  • 4:55 PM

  • The stock market has never been up seven years in a row.

Screen Shot 2015 01 13 at 4.55.26 PM

  • 4:56 PM

  • Gundlach adds that its rare for the bond market to go up three years in a row, and that happened in 2010, 2011, and 2012.

“Lo and behold, they didn’t go up in 2013.”

  • 4:57 PM

  • Margin debt has peaked, and with Fed raising rates, Gundlach says it seems likely that margin debt would likely shrink.

Screen Shot 2015 01 13 at 4.56.47 PM

“Let’s just say the S&P 500 has not gone up.”

“This seems to have been a predictable headwind, and it’s staring at us again.”

Screen Shot 2015 01 13 at 4.57.27 PM

  • 4:59 PM

  • Gunlach says stocks diverging from junk bonds is the most worrying signal coming out of markets right now.

  • 5:02 PM

  • Gundlach thinks we could go into an “overshoot” of low yields with yields rising in the second part of this year.

The path of least resistance to Gundlach seems to be for lower bond yields.

  • 5:04 PM

  • “I’ll bet you dollars to donuts the red line goes down.”

Gundlach says that oil just can’t stop going down. Last year, Treasury yields couldn’t stop going down, and this year oil can’t seem to stop going down.

Adds that contrarianism is dagnerous in commodities and stocks, says that contrarian investing is tempting, but oil is just a dangerous trade right now.

Screen Shot 2015 01 13 at 5.03.19 PM

  • 5:06 PM

  • Gundlach says that once oil broke $70, it would create acceptance that oil isn’t going back to $95, causing producers to increase production because they need the revenue, not cut production to boost prices.

And so here we are.

  • 5:08 PM

  • “When one sector gets weak, don’t make the rookie mistake of thinking that everything around it is fine.”

“It’s too early to be going all-in on the concept that we’re at the bottom of the oil or junk bond cycle.”

“Go slow.”

Gundlach says DoubleLine is still underweight junk bonds.

Gundlach says CPI is down over the last six months, and it is going to be negative.

Screen Shot 2015 01 13 at 5.08.32 PM

  • 5:10 PM

  • “So the Fed is kind of in a dilemma.”

The employment situation looks like it might be time to raise rates, but the inflation data is saying the opposite.

  • 5:10 PM

  • Non-government inflation data is also cratering.

Screen Shot 2015 01 13 at 5.10.03 PM

  • 5:11 PM

  • “The bloodless verdict of the bond market says that inflation will be negative for two years.”

Screen Shot 2015 01 13 at 5.10.39 PM

  • 5:14 PM

  • The chart of the year for bonds so far.

Screen Shot 2015 01 13 at 5.14.14 PM

  • 5:15 PM

  • Gundlach says the bond chart of the year is part of the argument about why oil at $40, weighing on inflation, could bring the 10-year below its 2012 lows.

  • 5:16 PM

  • “Watch this closely.”

Gundlach says something happened when investors got scared of Spanish and Italian bonds.

Screen Shot 2015 01 13 at 5.15.43 PM

  • 5:17 PM

  • “A harbinger of doom for the eurozone.”

Screen Shot 2015 01 13 at 5.16.17 PM

  • 5:19 PM

  • “This is what I think is going to happen in the US.”

Since the financial crisis, every interest rate hike has been accompanied by a reversal, and Gundlach thinks this will happen again.

Gundlach says, as he did in December, that he thinks the Fed is going to raise rates “just to do it.”

Screen Shot 2015 01 13 at 5.18.12 PM

  • 5:19 PM

  • Gundlach says that not a single OPEC member can balance their budget at current oil prices.

  • 5:20 PM

  • “I am quite sure that one of the things ‘V’ can represent in 2015 is volatility.”

“I expect this year to have substantially higher volatility than past years.”

Screen Shot 2015 01 13 at 5.19.54 PM

  • 5:21 PM

  • This chart corroborates the idea that maybe $50 is normal and that $100 oil was the outlier.

Screen Shot 2015 01 13 at 5.20.57 PM

  • 5:22 PM

  • 35% of CapEx in the S&P 500 is in the energy space, Gundlach says.

“That could cause some trouble.”

  • 5:24 PM

  • There are essentially no cities in China with rising home prices.

Screen Shot 2015 01 13 at 5.24.10 PM

  • 5:25 PM

  • “No wonder China is talking about a $10 trillion stimulus program.”

  • 5:25 PM

  • “You wonder how many lives this cat can have.”

Gundlach on the real estate market in China.

  • 5:26 PM

  • The good news? We won’t see high-yield debt defaults for a few years because everyone has refinanced their debt.

“There are lots of reasons to think rates should rise in five years, but not much in five days or five months.”
Screen Shot 2015 01 13 at 5.25.39 PM

  • 5:28 PM

  • Let’s talk about something you should not own …

Mall REITS.

Gundlach says that with online sales at 9% of retail sales coming online, it seems low. But consider that you can’t buy gasoline online, you don’t really buy groceries online.

“People don’t want the median banana.”

  • 5:29 PM

  • The Mall REIT index is up 35% or so in the last 12 months.

This seems like a horrible idea, Gundlach says.

“If you hate corporate bonds yielding 3%, if you hate mortgages yielding 3%, then how could you want to own a Mall REIT yielding 3%?”

Screen Shot 2015 01 13 at 5.28.43 PM

  • 5:31 PM

  • Gundlach says Russia doesn’t become a good speculative bet until oil stops dropping.

“You’ve got to see oil put in a low, a consolidation. Until then, Russia is dagnerous.”

  • 5:33 PM

  • Thoughts on Tesla, given oil …

“I think of all the car companies, Tesla is less of a car company than any other.”

“I’m surprised that anyone would change their car buying habits based on the six-month price of oil. Tesla isn’t so much a play on cars being sold, but on batteries being transformative in many phases of life.”

Gundlach again talking about potential for Tesla’s batteries to get homes entirely off the grid.

“Tesla has as good a chance as anybody to develop a battery that can change the world.”

Says that the stock is hugely overvalued if you just look at the auto sales.

20 Stunning Facts About Energy Jobs In The US

https://i2.wp.com/www.paradinerecruiting.com/wp-content/uploads/2014/07/oil-jobs.jpgby Tyler Durden

For all those who think the upcoming carnage to the shale industry will be “contained” we refer to the following research report from the Manhattan Institute for Policy Research:

  • The United States is now the world’s largest and fastest-growing producer of hydrocarbons. It has surpassed Saudi Arabia in combined oil and natural gas liquids output and has now surpassed Russia, formerly the top producer, in natural gas. [ZH: that’s about to change]
  • The increased production of domestic hydrocarbons not only employs people directly but also radically reduces the drag on growth and job formation associated with America’s trade deficit.
  • As the White House Council of Economic Advisers noted this past summer: “Every barrel of oil or cubic foot of gas that we produce at home instead of importing abroad means more jobs, faster growth, and a lower trade deficit.” [the focus now is not on the oil produced at home, which is set to plunge, but the consumer “tax cut” from plunging oil prices]
  • Since 2003, more than 400,000 jobs have been created in the direct production of oil & gas and some 2 million more in indirect employment in industries such as transportation, construction, and information services associated with finding, transporting, and storing fuels from the new shale bounty.
  • All told, about 10 million Americans are employed directly and indirectly in a broad range of businesses associated with hydrocarbons.
  • There are 16 states with more than 150,000 people employed in hydrocarbon-related activities. Even New York, which continues to ban the production of shale oil & gas, is seeing job benefits in a range of support and service industries associated with shale development in adjacent Pennsylvania.

  • Direct employment in the oil & gas industry had been declining for 30 years but has recently reversed course, with the availability of new technologies to develop shale fields. Nearly 300,000 direct oil & gas jobs have been created following the 2003 nadir in that sector’s direct employment.
  • The five super-major oil companies—Exxon, BP, Chevron, Shell, Conoco—that operate in the U.S. account for only 10 percent of Americans working directly in the oil & gas business.
  • Meanwhile, more than 20,000 other firms are directly involved in the oil & gas industry, and they produce over 75 percent of America’s oil & gas output. The median independent oil & gas firm has fewer than 15 employees. (Note that these data exclude gasoline stations, which employ nearly 1 million people and are overwhelmingly owned by individuals or small businesses.)
  • As in the oil & gas industry, most Americans are employed by firms with fewer than 500 employees. Small businesses not only employ half of all American workers but also generate nearly half the nation’s economic output. Young firms tend to be small firms; and young firms tend to emerge disproportionately in areas of rapid growth or new opportunities—such as in and around America’s shale fields.

  • A broad array of small and midsize oil & gas companies are propelling record economic and jobs gains—not just in the oil fields but across the economy. The enormous expansion in employment, exports, and tax revenues from the domestic oil & gas revolution is largely attributable to a core and defining feature of America: small businesses.
  • The oil & gas sector boom creates “induced” and energy-related jobs. For every direct job, there are, on average, three jobs created in industries such as housing, retail, education, health care, food services, manufacturing, and construction.
  • In the 10 states at the epicenter of oil & gas growth, overall statewide employment gains have greatly outpaced the national average. There we see the ripple-out effect on overall (not just oil & gas) employment. The shale boom’s broad jobs benefits are most visible in North Dakota and Texas, of course, where overall state employment growth in all sectors has vastly outpaced U.S. job recovery. Similarly, in the other states that have experienced recent growth in hydrocarbon production—notably, Pennsylvania, Colorado, Louisiana, Oklahoma, Wyoming—statewide overall (again, not just oil & gas) employment growth has also outpaced the U.S. recovery.
  • In addition to the direct and induced jobs, America is beginning to see the economic and jobs impact of a renaissance in energy-intensive parts of the manufacturing sector, from plastics and chemicals to fertilizers. Examples include an Egyptian firm planning a $1 billion fertilizer plant in Iowa and a South Korean tire company with an $800 million plan for a Tennessee plant. Germany’s BASF recently announced expansion of its American investments, including production and research. BASF calculated that its German operations’ energy bill would be $700 million a year lower if it could pay American prices for energy
  • The Marcellus shale fields in Pennsylvania were responsible for enabling statewide double-digit job growth in 2010 and 2011 and now account for more than one-fifth of that state’s manufacturing jobs. For every $1 that the Marcellus industry spends in the state, $1.90 of total economic output is generated.
  • The typical wage effect of the oil & gas revolution is most clearly visible in Texas. In the 23 counties atop the Eagle Ford shale, average wages for all citizens have grown by 14.6 percent annually since 2005, compared with the 6.8 and 6.3 percent average for Texas and the U.S., respectively, over the same period. The top five counties in the Eagle Ford shale have experienced an average 63 percent annual rate of wage growth. These are the kinds of wage effects sought in every state and by every worker.

  • Given the persistent, slow job recovery from the Great Recession, there could not be a more important time in modern history to find ways to foster more small businesses of all kinds, given that they are not only the core engine for growth but also frequently grow rapidly.

Punchline #1:

  • The $300–$400 billion overall annual economic gain from the oil & gas boom has been greater than the average annual GDP growth of $200–$300 billion in recent years—in other words, the economy would have continued in recession if it were not for the unplanned expansion of the oil & gas sector.

Punchline #2:

  • Hydrocarbon jobs have provided a greater single boost to the U.S. economy than any other sector, without requiring any special taxpayer subsidies—instead generating tax receipts from individual incomes and business growth.

And the final punchline:

  • The National Association of Manufacturers estimated that the shale revolution will lead to 1 million manufacturing jobs over the coming decade. Manufacturing jobs pay nearly 30 percent more than the industrial average and generate $1.48 of economic activity for every $1 spent, making manufacturing the highest economic multiplier of all industrial sectors.

Sorry, not anymore.

Now, thanks to John Kerry’s “secret pact“, and America’s close “ally” in the middle-east, Saudi Arabia whose “mission” it no longer to bankrupt Russia but to crush America’s shale industry, the only question surround the only bright spot for America’s economy over the past 6 years is how long before most of the marginal producers file Chapter 11, or 7.

Texas: Recession In 2015?

https://i2.wp.com/i.imwx.com/web/news/2012/january/snow-txdrillrig-iwit-mlallison-440x297-010911.jpgby Josh Young

Summary

  • Texas is by far the largest producer of oil in the US.
  • Oil production represents a disproportionate portion of Texas’s economy.
  • With oil prices down 45%, oil’s share of Texas GDP may fall 50% or more.
  • Unlike Russia and other countries, Texas cannot depreciate its own currency, magnifying the economic effect.

Texas is the largest oil producer in the US. And oil prices are down almost 50% in the past 4 months. Yet nowhere in the news do we hear about the risk of Texas entering a recession. The facts and figures below should concern investors in securities with economic exposure to the Texas economy. The risk is real.

As seen in the below chart by the EIA, Texas is the largest oil producing state in the US, producing 3x as much oil as the next largest producing state.

In September, Texas produced 3.23 million barrels of oil per day. This compares to 1.1 million barrels of oil per day produced in the second largest oil producing state, North Dakota, and much smaller quantities by other traditional oil producing states such as Alaska, California, and Oklahoma. And by comparison, Russia produces 10.9 million barrels per day.

Quantifying the value of this production, at $100 oil, that would be $323 million worth of oil produced per day, or $118 billion of oil produced per year. With the current price of oil hovering around $55 per barrel, that same oil production is only worth $178 million per day, or $65 billion. This is a loss of $53 billion of oil sales revenue just in the state of Texas.

This $53 billion in lost revenues compares to Texas’s GDP of $1.4 trillion in 2013 – it would be 3.8% of the State’s GDP, which is now “missing” due to oil prices having fallen. This is only the direct loss to the state – the indirect loss is likely several times as much. Direct oilfield activity is slowing down dramatically, as oil producing companies cut their capital expenditure budgets for 2015. Oilfield services stocks (NYSEARCA:OIH) are already down 37% from their peak earlier this year in anticipation of an activity slowdown. And for every job lost on a rig or in an oil company’s office, there are several additional jobs that may be lost, from the gas station manager to the sales clerk at a store to the front desk worker at a hotel.

The oil industry is unusual in that both the upstream independent producers and the service companies tend to outspend their cash flow, typically on local (to Texas) goods and services, on everything from drill pipe to rig manufacturing to catering. This means that for every dollar of lost oil sales from the lower oil price, there may be several dollars less spent across the Texas economy. This could be devastating for the Texas economy, and has not yet been widely discussed in the financial media.

To see an extreme example of the impact of lower oil prices on an economy tied to oil production, we can look at Russia (NYSEARCA:RSX). The Russian economy is more oil dependent than Texas’s. Russia’s GDP was $2.1 trillion in 2013. This compares to Texas’s GDP of $1.4 trillion. So Russia produces 3.3x as much oil as Texas, but only has 1.5x the GDP. So on a direct basis, assuming “ceteris paribus” conditions, a $1 decline in the price of oil would have 2.2x the impact to the economy of Russia as to the economy of Texas.

So what is happening in Russia? Already, the ruble has dropped in value by 50% in the past year. And numerous sources are calling for a severe recession in 2015. This would be expected, considering the high portion of the GDP that is attributable to oil production.

However, Russia has an advantage that Texas does not have. It has its own currency. While a 50% drop in a currency may not sound great if you’re looking to spend that currency elsewhere, it is crucial if you are an exporter and your primary export just dropped in price by 45%. The ruble denominated impact of the drop in the price of oil is a mere 10%. Unfortunately, for Texas, the dollar denominated drop in oil is 45%. So despite the lower economic exposure to oil, Texas does not have the benefit of a falling currency to buffer the blow of lower oil prices.

It may get even worse. With less drilling activity, oil production growth in Texas may slow, and eventually may decline. Depending on the speed of this slowdown, Texas could even see production decline by the end of 2015. This is because most of the new production has been coming from fracking unconventional wells, which can decline in production by as much as 80% in the first year. Production growth has required an increasing number of wells drilled, and has been funded with 100% of oil company cash flow along with hundreds of billions of dollars of equity and debt over the past few years. With the recent crash in oil stock prices (NYSEARCA: XOP) and in oil company bonds (NYSEARCA: JNK), oil drillers may be forced to spend within cash flow, and that cash flow will be down at least 45% in 2015 if the oil price stays on the path projected in the futures market.

All of this means that in 2015, Texas oil wells could be producing less than the 3.23 million barrels of oil per day it was producing in September 2014, and their owners could be receiving 45% less revenue per barrel produced. Again applying an economic multiplier, the results could be devastating. And without the cushion of a weak currency that benefits countries like Russia, it is hard to see how Texas could avoid a recession in 2015 if the price of oil stays near its current low levels.

“Houston, You Have A Problem” – Texas Is Headed For A Recession Due To Oil Crash, JPM Warns

https://i1.wp.com/i.qkme.me/3rq0zl.jpg
by
Tyler Durden

It was back in August 2013, when there was nothing but clear skies ahead of the US shale industry that we asked “How Much Is Oil Supporting U.S. Employment Gains?” The answer we gave:

The American Petroleum Institute said last week the U.S. oil and natural gas sector was an engine driving job growth. Eight percent of the U.S. economy is supported by the energy sector, the industry’s lobbying group said, up from the 7.7 percent recorded the last time the API examined the issue. The employment assessment came as the Energy Department said oil and gas production continued to make gains across the board. With the right energy policies in place, API said the economy could grow even more. But with oil and gas production already at record levels, the narrative over the jobs prospects may be failing on its own accord…. The API’s report said each of the direct jobs in the oil and natural gas industry translated to 2.8 jobs in other sectors of the U.S. economy. That in turn translates to a total impact on U.S. gross domestic product of $1.2 trillion, the study found.

Two weeks ago we followed up with an article looking at “Jobs: Shale States vs Non-Shale States” in which we showed the following chart:

And added the following:

According to a new study, investments in oil and gas exploration and production generate substantial economic gains, as well as other benefits such as increased energy independence.  The Perryman Group estimates that the industry as a whole generates an economic stimulus of almost $1.2 trillion in gross product each year, as well as more than 9.3 million permanent jobs across the nation. 

The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

 

Another way of visualizing the impact of the shale industry on the US economy comes courtesy of this chart from the Manhattan Institute which really needs no commentary:

The Institute had this commentary to add:

The jobs recovery since the 2008 recession has been the slowest of any post recession recovery in the U.S. since World War II. The number of people employed has yet to return to the 2007 level. The country has suffered a deeper and longer-lasting period of job loss than has followed any of the ten other recessions since 1945.

There has, however, been one employment bright spot: jobs in America’s oil & gas sector and related industries. Since 2003, more than 400,000 jobs have been created in the direct production of oil & gas and some 2 million more in indirect employment in industries such as transportation, construction, and information services associated with finding, transporting, and storing fuels from the new shale bounty.

In addition, America is seeing revitalized growth and jobs in previously stagnant sectors of the economy, from chemicals production and manufacturing to steel and even textiles because of access to lower cost and reliable energy.

The surge in American oil & gas production has become reasonably well-known; far less appreciated are two key features, which are the focus of this paper: the widespread geographic dispersion of the jobs created; and the fact that the majority of the jobs have been created not in the ranks of the Big Oil companies but in small businesses, even more widely dispersed.

Fast forward to today when we are about to learn that Newton’s third law of Keynesian economics states that every boom, has an equal and opposite bust.

Which brings us to Texas, the one state that more than any other, has benefited over the past 5 years from the Shale miracle. And now with crude sinking by the day, it is time to unwind all those gains, and give back all those jobs. Did we mention: highly compensated, very well-paying jobs, not the restaurant, clerical, waiter, retail, part-time minimum-wage jobs the “recovery” has been flooded with.

Here is JPM’s Michael Feroli explaining why Houston suddenly has a very big problem.

  • In less than five years Texas’ share of US oil production has gone from around 25% to over 40%
  • By some measures, the oil intensity of the Texas economy looks similar to what it was in the mid-1980s
  • The 1986 collapse in oil prices led to a painful regional recession in Texas
  • While the rest of the country looks to benefit from cheap oil, Texas could be headed for recession

The collapse in oil prices will create winners and losers, both globally and here in the US. While we expect the country, overall, will be a net beneficiary from falling oil prices, two states look like they will bear the brunt of the pain: North Dakota and Texas. Given its much larger size, the prospect of a recession in Texas could have some broader reverberations. 

By now, most people are familiar with the growth of the fossil fuel industry in places like Pennsylvania and Ohio. However, that has primarily been a natural gas story. The renaissance of US crude oil production has been much more concentrated: over 90% of the growth in the past five years has been in North Dakota and Texas; with Texas alone accounting for 67% of the increase in the nation’s crude output over that period.

In the first half of 1986, crude oil prices fell just over 50%. At the end of 1985, the unemployment rate in Texas was equal to that in the nation as a whole; at the end of 1986 it was 2.6%- points higher than the national rate. There are some reasons to think that it may not be as bad this time around, but there are even better reasons not to be complacent about the risk of a regional recession in Texas.

Geography of a boom

The well-known energy renaissance in the US has occurred in both the oil and natural gas sectors. Some states that are huge natural gas producers have limited oil production: Pennsylvania is the second largest gas producing state but 19th largest oil producer. The converse is also true: North Dakota is the second largest crude producer but 14th largest gas producer. However, most of the economic data as it relates to the energy sector, employment, GDP, etc, often lump together the oil and gas extraction industries. Yet oil prices have collapsed while natural gas prices have held fairly steady. To understand who is vulnerable to the decline in oil prices  specifically we turn to the EIA’s state-level crude oil production data.

The first point, mentioned at the outset, is that Texas, already a giant, has become a behemoth crude producer in the past few years, and now accounts for over 40% of US production. However, there are a few states for which oil is a relatively larger sector (as measured by crude production relative to Gross State Product): North Dakota, Alaska, Wyoming, and New Mexico. For two other states, Oklahoma and Montana, crude production is important, though somewhat less so than for Texas. Note, however, that these are all pretty small states: the four states where oil is more important to the local economy than Texas have a combined GSP that is only 16% of the Texas GSP. Finally, there is one large oil producer, California, which is dwarfed by such a huge economy that its oil intensity is actually below the national average, and we would expect it, like the country as a whole, to benefit from lower oil prices.

Texas-sized challenges

As discussed above, Texas is unique in the country as a huge economy and a huge oil producer. When thinking about the challenges facing the Texas economy in 2015 it may be useful, as a starting point, to begin with the oil price collapse of 1986. Then, like now, crude oil prices collapsed around 50% in the space of a few short months. As noted in the introduction, the labor market response was severe and swift, with the Texas unemployment rate rising 2.0%-points in the first three months of 1986 alone. Following the hit to the labor market, the real estate market suffered a longer, slower, burn, and by the end of 1988 Texas house prices were down over 14% from their peak in early 1986 (over the same period national house prices were up just over 14%). The last act of this tragedy was a banking crisis, as several hundred Texas banks failed, with peak failures occurring in 1988 and 1989.

How appropriate is it to compare the challenges Texas faces today to the ones they faced in 1986? The natural place to begin is by getting a sense of the relative energy industry intensity of Texas today versus 1986. Unfortunately, the GSP-by-industry data have a definitional break in 1997, but splicing the data would suggest a similar share of the oil and gas sector in Texas GSP now and in 1985: around 11%. Employment in the mining and logging sector (which, in Texas, is overwhelmingly dominated by the oil and gas sector) was around 3.7% in 1985 and is 2.7% now. This is consistent with a point we have been making in the national context: the oil and gas sector is very capital-intensive, and increasingly so. Even so, as the 1986 episode demonstrated, there do seem to be sizable multiplier effects on non-energy employment. Finally, there does not exist capital spending by state data, but at the national level we can see the flip side of the increasing capital intensive nature of energy: oil and gas related cap-ex was 0.58% of GDP in 4Q85, and is 0.98% of GDP now.

Given this, what is the case for arguing that this time is different, and the impact will be smaller than in 1986? One is that now, unlike in 1986, natural gas prices haven’t moved down in sympathy with crude oil prices, and the Texas recession in 1986 may have owed in part also to the decline in gas prices. Another is that, as noted above, the employment share is somewhat lower, and thus the income hit will be felt more by capital-holders – i.e. investors around the country and the world. Finally, unlike 1986, the energy industry is experiencing rapid technological gains, pushing down the energy extraction cost curve.

While these are all valid, they are not so strong as to signal smooth sailing for the Texas economy. Financially, oil is a fair bit more important than gas for Texas, both now and in 1986, with a dollar value two to three times as large. Moreover, while energy employment may be somewhat smaller now, we are not talking about night and day. The current share is about 3/4ths what it was in 1986. (Given the higher capital intensity, there are some reasons to think employment may be greater now in sectors outside the traditional oil and gas sectors, such as pipeline and heavy engineering construction).

As we weigh the evidence, we think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession. Such an outcome could bring with it the usual collateral damage that occurs in a slowdown. Housing markets have been hot in Texas. Although affordability in Texas looks good compared to the national average, it always does; compared to its own history, housing in some major Texas metro areas looks quite dear, suggesting a risk of a pull-back in the real estate market.

The national economy performed quite well in 1986, in spite of the Texas recession. We expect the US economy will perform well next year too , though some  regions – most notably Texas – could significantly under perform the national average.

* * *
So perhaps it is finally time to add that footnote to the “unambiguously good” qualified when pundits describe the oil crash: it may be good for everyone… except Texas which is about to enter a recession. And then Pennsylvania. And then North Dakota. And then Colorado. And then West Virginia. And then Alaska. And then Wyoming. And then Oklahoma. And then Montana, and so on, until finally we find just where the new equilibrium is following the exodus of hundreds of thousands of the best-paying jobs created during the “recovery” offset by minimum-wage waiters, bartenders, retail workers and temps.

BofA Analyst Credits Falling Oil Prices for Lower Mortgage Rates

https://i2.wp.com/www.syntheticoilchangeprice.com/wp-content/gallery/cheap-oil-change/cheap_oil_change_hero.jpgby Phil Hall

The precipitous drop in global oil prices has created a domino effect that led to a new decline in lower mortgage rates, according to a report by Chris Flanagan, a mortgage rate specialist at Bank of America Merrill Lynch.

“The oil collapse of 2014 appears to have been a key driver [in declining mortgage rates],” stated Flanagan in his report, which was obtained by CBS Moneywatch. “Further oil price declines could lead the way to sub-3.5 percent mortgage rates.”

Flanagan applauded this development, noting that the reversal of mortgage rates might propel housing to a stronger recovery.

“We have maintained the view that 4 percent mortgage rates are too high to allow for sustainable recovery in housing,” he wrote. Flanagan also theorized that if rates fell into 3.25 percent to 3.5 percent range, it would boost “supply from both refinancing and purchase mortgage channels.”

Flanagan’s report echoes the sentiments expressed by Frank Nothaft, Freddie Mac’s chief economist, who earlier this week identified the link between oil prices and housing.

“The recent drop in oil prices has been an unexpected boon for consumers’ pocketbooks and most businesses,” Nothaft stated. “Economic growth has picked up over the final nine months of 2014 and lower energy costs are expected to support growth of about 3 percent for the U.S. in 2015. Therefore we expect the housing market to continue to strengthen with home sales rising to their best sales pace in eight years, national house price indexes up, and rental markets continuing to display low vacancy rates and the highest level of new apartment completions in 25 years.”

But not everyone is expected to benefit from this development. A report issued last week by the Houston Association of Realtors forecast a 10 percent to 12 percent drop in home sales over the next year, owing to a potential slowdown in job growth for the Houston market’s energy industry if oil prices continue to plummet.

Why Cheap Oil May Be Here To Stay

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By
Kyle Spencer

Summary

  • Many investors are still skeptical that Saudi Arabia will hold firm on oil production.
  • Increased global consumption due to falling prices is unlikely to offset North American production.
  • US consumption is in a secular, structural decline due to increased efficiency and demographic changes. That’s unlikely to change any time soon.
  • The floor may not be where the Saudis think it is.

Investors are slowly waking up to the fact that Saudi Arabia is willing to take OPEC hostage to defend its market share, with Oil Minister Ali Al-Naimi declaring that –

In a situation like this, it is difficult, if not impossible, that the kingdom or OPEC would carry out any action that may result in a reduction of its share in market and an increase of others’ shares.

Alas, rather than embrace the cheap petroleum paradigm that has dominated most of the 20th century, many investors continue to cling to old shibboleths. Case in point: Brian Hicks, a portfolio manager at US Global Investors, recently noted that

The theme going into 2015 is mean reversion. Oil prices are below where they should be (emphasis mine), and hopefully they will start gravitating back to the equilibrium price of between $US80 and $US85 a barrel.

I emphasize the words “below where they should be” because the notion that oil (NYSEARCA:USO) prices belong somewhere – and it’s always higher, somehow – is the linchpin of the bullish thesis. But the question of why a high price regime should prevail over a low price regime is never satisfactorily explained.

Higher extraction costs? A sizable chunk of those costs are sunk costs that can simply be ignored in production decisions and lowering the effective breakeven price. A tighter focus on already drilled wells in areas with mature infrastructure could lower costs even further. Moreover, service sector costs fall as rigs are idled. Depleted reserves? Most resource-producing basins are experiencing an increasing yield over time despite the rapid depletion of individual wells. A lot of that is due to extraction efficiency, which is increasing at a phenomenal rate; in fact, one rig today brings on four times the amount of gas in the Barnett Shale than it did in 2006. Drill times in the Bakken are also falling, while new well production per rig is steadily rising since 2011.

Drill Times (Spud to Rig) 2004-2013

(SOURCE: ITG Research)

Technically oversold? Good luck catching that knife. Traders have been pounding the table on “oversold conditions” since $80. Proponents of the Oversold Hypothesis who like to point historical examples of oil’s extreme short-term volatility for validation are conveniently ignoring the vast number of counter-examples like this TIME Magazine headline from June, 1981, which almost reads as if it could have been written yesterday:

(Source: TIME Archives)

1981 is an intriguing date for another reason: It marked the first time in over a decade that Non-OPEC nations countries outproduced OPEC. Despite repeated cuts by OPEC, it took five years for capitulation to set in. Nor are lower prices guaranteed to lead to cuts. Indeed, when oil prices plummeted from $4/bbl to 35 cents in 1862, the Cleveland wildcatters didn’t idle their pumps; they pumped faster to pay the interest on their debt.

Don’t Iran and Venezuela require higher oil prices in order to balance their budgets and head off domestic upheaval? Please. The Saudis don’t care about Iran’s budget problems. Venezuela is a non-entity despite it’s immense reserves. In fact, Venezuela’s hell-in-a-handbasket status was one of the major reasons for Cuba’s recent defection to the US.

Asian stimulus? The only reason that Japanese consumers know that oil prices are lower is from Western news headlines. The share of a day’s wages to buy a single gallon of gas in Japan is 5.59% vs. 2.45% in the US. Nevertheless, the Japanese are riding high compared to the BRICS: In Brazil, it’s 17.62%; in Russia, 7.95%; in India it’s 114.92%; in China it’s 23.54%. Not the most fertile ground for a demand-side revolution; especially since oil is priced in dollars rather than yen, reals, rubles, or rupees.

What about the US? Won’t lower prices lead to higher consumption? Despite what you read about our “insatiable thirst” for oil, Americans don’t actually drink the stuff. Our machines do, and those machines are becoming more and more efficient due to CAFE standards and new transportation technologies, especially NGVs. Demographic changes are also leading a secular decline in consumption. Fig. 2 below highlights the steady march down for miles traveled per capita as the Baby Boomers retire to slower paced lives.

(Source: Citigroup, Census, CIRA)

The reality is that there’s little that an uptick in demand can do to offset oil’s continuing price collapse if the Saudis aren’t prepared to cut to the bone. The wildcatters certainly aren’t going to; on the contrary, they have every incentive (and no real alternative at this point) to pump like crazy to pay down debt and break OPEC’s back. Most doom and gloom prognostications for North American shale use full-cycle breakeven estimates like the ones presented in Figure 2.

Full-Cycle Breakeven Costs by Resource (Assuming Zero Efficiency Gains)

Unfortunately for the bulls, all-in sustaining cost (full-cycle capex) is a totally irrelevant metric for establishing a floor on commodity prices. Commodities prices are based on the marginal cost of production of the most prolific producers, not the full-cycle costs of marginal, high cost producers lopped in with the market leaders. As Seth Kleinman’s group at Citi has pointed out

…what counts at this stage is half-cycle costs, which are in the significantly lower band of $37 to $45 a barrel. This means that the floor is falling and may not be nearly as firm as the Saudi view assume(s).

Oil Bust Contagion Hits Wall Street, Banks Sit on Losses

https://i1.wp.com/www.bloomberg.com/image/iptmX9f9f1vc.jpgby Wolf Richter

Oil swooned again on Wednesday, with the benchmark West Texas Intermediate closing at $60.94. And on Thursday, WTI dropped below $60, currently trading at $59.18. It’s down 43% since June.

Yesterday, OPEC forecast that demand for its oil would further decline to 28.9 million barrels a day next year, after having decided over Thanksgiving to stick to its 30 million barrel a day production ceiling, rather than cutting it. It thus forecast that there would be on OPEC’s side alone 1.1 million barrels a day in excess supply.

Hours later, the US Energy Information Administration reported that oil inventories in the US had risen by 1.5 million barrels in the latest week, while analysts had expected a decline of about 3 million barrels.

So the bloodletting continues: the Energy Select Sector ETF (XLE) is down 26% since June; S&P International Energy Sector ETF (IPW) is down 34% since July; and the Oil & Gas Equipment & Services ETF (XES) is down 46% since July.

Goodrich Petroleum, in its desperation, announced it is exploring strategic options for its Eagle Ford Shale assets in the first half next year. It would also slash capital expenditures to less than $200 million for 2015, from $375 million for 2014. Liquidity for Goodrich is drying up. Its stock is down 88% since June.

They all got hit. And in the junk-bond market, investors are grappling with the real meaning of “junk.”

Sabine Oil & Gas’ $350 million in junk bonds still traded above par in September before going into an epic collapse starting on November 25 that culminated on Wednesday, when they lost nearly a third of their remaining value to land at 49 cents on the dollar.

In early May, when the price of oil could still only rise, Sabine agreed to acquire troubled Forest Oil Corporation, now a penny stock. The deal is expected to close in December. But just before Thanksgiving, when no one in the US was supposed to pay attention, Sabine’s bonds began to collapse as it seeped out that Wells Fargo and Barclays could lose a big chunk of money on a $850-million “bridge loan” they’d issued to Sabine to help fund the merger.

A bridge loan to nowhere: investors interested in buying it have evaporated. The banks are either stuck with this thing, or they’ll have to take a huge loss selling it. Bankers have told the Financial Times that the loan might sell for 60 cents on the dollar. But that was back in November before the bottom fell out entirely.

As so many times in these deals, there is a private equity angle to the story: PE firm First Reserve owns nearly all of Sabine and leveraged it up to the hilt.

The same week, a $220-million bridge loan, put together by UBS and Goldman Sachs for PE firm Apollo Group’s acquisition of oilfield-services provider Express Energy, was supposed to be sold. But investors balked. As of December 2, the loan was still being marketed, “according to two people with knowledge of the deal,” Bloomberg reported. If it can be sold at all, it appears UBS and Goldman will end up with a loss.

And so energy-related leveraged loans are tanking. These ugly sisters of junk bonds are issued by junk-rated corporations, and they have everyone worried [Treasury Warns Congress (and Investors): This Financial Creature Could Sink the System]. Their yields have shot up from 5.1% in August to 7.4% in the latest week, and to nearly 8% for those of offshore drillers [“Yes, it Was a Brutal Week for the Oil & Gas Loan Sector”].

Six years of the Fed’s easy money policies purposefully forced even conservative investors to either lose money to inflation or venture way out on the risk curve. So they ventured out, many of them without knowing it because it happened out of view inside their bond funds. And they funded the fracking boom and the offshore drilling boom, and the entire oil revolution in America, no questions asked.

Energy junk bonds now account for a phenomenal 15.7% of the $1.3 trillion junk-bond market. Alas, last week, JPMorgan warned that up to 40% of them could default over the next few years if oil stays below $65 a barrel. Bond expert Marty Fridson, CIO at LLF Advisors, figured that of the 180 “distressed” bonds in the BofA Merrill Lynch high-yield index, 52 were issued by energy companies. And Bloomberg reported that the yield spread between energy junk bonds and Treasuries has more than doubled since September to 942 basis points (9.42 percentage points).

The toxicity of energy junk bonds is spreading to the broader junk-bond market. The iShares iBoxx High Yield Corporate Bond ETF fell 1.2% to $88.43 on Thursday, the lowest since June 2012. And at the riskiest end of the junk-bond market, it’s getting ugly: the effective yield index for bonds rated CCC or lower jumped from 7.9% in late June to 11.4% on Wednesday.

After not finding any visible yield in the classic spots, thanks to the Fed’s policies, institutional investors – the folks that run your mutual fund or pension fund – took big risks just to get a tiny bit of extra yield. And to grab a yield of 5% in June, they bought energy junk debt so risky that it now has lost a painfully large part of its value, and some of it might default.

Oil and gas are inseparable from Wall Street. Over the years, as companies took advantage of the Fed’s policies and issued this enormous amount of risky debt at a super-low cost, and as they raised money by spinning off subsidiaries into over-priced IPOs that flew off the shelf in one of the most inflated markets in history, and as they spun off other assets into white-hot MLPs, and as banks put now iffy bridge loans together, and as mergers and acquisitions were funded, at each step along the way, Wall Street extracted its fees.

Now the boom is turning into a bust, and the contagion is spreading from the oil patch to Wall Street. Energy companies are cutting back. BP, Chevron, Goodrich…. They’re not cutting back production by turning a valve. They’ll keep the oil and gas flowing to generate cash to stay alive, and it will contribute to the glut.

Instead, they’re cutting back on exploration and drilling projects. It will hit local economies in the oil patch and ripple beyond them. As energy companies slash their capex and their stock buybacks, they’ll borrow less, those that can still borrow at all, and there won’t be many energy IPOs, and there may not be a lot of spinoffs into MLPs or any of the other financial maneuvers that Wall Street got so fat on during the fracking and offshore drilling boom. The fees will dry up. And some of the losses will come home to roost on bank balance sheets.

The contagion is already visible on Wall Street. Susquehanna Financial Group downgraded Goldman Sachs to neutral on Wednesday, citing the mayhem in the oil markets and the impact it has on junk bonds and leveraged loans and the other financial mechanism by which Goldman’s investment and lending divisions sucked fees out of the oil patch and its investors. And this is just the beginning.

Bank of America Sees $50 Oil As OPEC Dies

“Our biggest worry is the end of the liquidity cycle. The Fed is done. The reach for yield that we have seen since 2009 is going into reverse”, said Bank of America.

https://i1.wp.com/media0.faz.net/ppmedia/aktuell/wirtschaft/759001933/1.2727518/article_multimedia_overview/umweltpolitisch-hoch-umstritten-hilft-fracking-hier-in-colorado-amerika-dabei-unabhaengiger-von-den-opec-mitgliedern-zu-werden.jpgBy Ambrose Evans-Pritchard

The OPEC oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over the coming months as market forces shake out the weakest producers, Bank of America has warned.

Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a much cheaper source of gas for Europe.

Francisco Blanch, the bank’s commodity chief, said OPEC is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,“ he said.

The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.

The bank said in its year-end report that at least 15pc of US shale producers are losing money at current prices, and more than half will be under water if US crude falls below $55. The high-cost producers in the Permian basin will be the first to “feel the pain” and may soon have to cut back on production.

The claims pit Bank of America against its arch-rival Citigroup, which insists that the US shale industry is far more resilient than widely supposed, with marginal costs for existing rigs nearer $40, and much of its output hedged on the futures markets.

Bank of America said the current slump will choke off shale projects in Argentina and Mexico, and will force retrenchment in Canadian oil sands and some of Russia’s remote fields. The major oil companies will have to cut back on projects with a break-even cost below $80 for Brent crude.

It will take six months or so to whittle away the 1m barrels a day of excess oil on the market – with US crude falling to $50 – given that supply and demand are both “inelastic” in the short-run. That will create the beginnings of the next shortage. “We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year,” said Sabine Schels, the bank’s energy expert.

Mrs Schels said the global market for (LNG) will “change drastically” in 2015, going into a “bear market” lasting years as a surge of supply from Australia compounds the global effects of the US gas saga.

If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs. It has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LGN itself has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas at all within a couple of years.

Bank of America said the oil price crash is worth $1 trillion of stimulus for the global economy, equal to a $730bn “tax cut” in 2015. Yet the effects are complex, with winners and losers. The benefits diminish the further it falls. Academic studies suggest that oil crashes can ultimately turn negative if they trigger systemic financial crises in commodity states.

Barnaby Martin, the bank’s European credit chief, said world asset markets may face a stress test as the US Federal Reserve starts to tighten afters year of largesse. “Our biggest worry is the end of the liquidity cycle. The Fed is done and it is preparing to raise rates. The reach for yield that we have seen since 2009 is going into reverse”, he said.

Mr Martin flagged warnings by William Dudley, the head of the New York Fed, that the US authorities had tightened too gently in 2004 and might do better to adopt the strategy of 1994 when they raised rates fast and hard, sending tremors through global bond markets.

Bank of America said quantitative easing in Europe and Japan will cover just 35pc of the global stimulus lost as the Fed pulls back, creating a treacherous hiatus for markets. It warned that the full effect of Fed tapering had yet to be felt. From now on the markets cannot expect to be rescued every time there is a squall. “The threshold for the Fed to return to QE will be high. This is why we believe we are entering a phase in which bad news will be bad news and volatility will likely rise,” it said.

What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.

These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries to break out of the stimulus trap, including Fed officials themselves.

Oil Markets: Sentiment And Lame Thinking Are Currently In The Driver’s Seat

Summary

  • The oil markets have hit multi-year lows on unsubstantiated theories about a supply glut and fears of cooling demand.
  • Meanwhile, the geopolitical risks around the world have oddly disappeared in H2 2015.
  • Nevertheless, the facts prove that the real thing is way too far from evaporating geopolitical risks or a material deterioration of the global supply-demand fundamentals that can justify a slump.
  • The unprecedented downward pressure on oil prices is a headline-driven and sentiment-driven event.
  • The oil price will definitely rise significantly in 2015.

Introduction

The stock market will always give the investors a chance to make a blunder, especially for those who allow emotions to overrule facts and factual thinking. The emotional blunders are part of the game in the stock market. And if you run your portfolio based on lame-thinking and emotion, you will most likely follow the herd mentality and sell at the wrong time, because lame-thinking and emotion will always cloud your judgment.

Things get worse for your portfolio when you allow the analysts and the opinion makers who show up daily on CNBC and Bloomberg, to tell you what is really going on with a sector. To me, many of these guys are not just incompetent. To me, they are dangerous because their advice can ruin your wealth in a record time. It is easy to throw out statements without backing them up with any math, and it is easy to make overly simplistic interpretations of the global supply/demand dynamics. “So easy even a caveman can do it,” as GEICO’s commercial states.

And as clearly illustrated by the following charts, insanity and panic are currently hovering over the oil markets, due to the fact that many incompetent oil prognosticators have flooded the media with their lame opinions over the last months. For instance, the charts for the bullish ETFs (NYSEARCA:USO), (NYSEARCA:DBO) and (NYSEARCA:OIL) that track WTI are below:

(click to enlarge)

and below:

(click to enlarge)

and below:

(click to enlarge)

This is the chart for the bullish ETF (NYSEARCA:BNO) that tracks Brent:

(click to enlarge)

And the charts for the leveraged bullish ETFs (NYSEARCA:UCO) and (NYSEARCA:UWTI) are below:

(click to enlarge)

and below:

(click to enlarge)

All these bullish ETFs have returned back to their 2010 levels amid irrational fears for oversupply. But, these fears are completely unsubstantiated and they do not justify at all the sentiment-driven slump in the oil price over the last 4 months.

Andre Kostolany and The Oil Price

Obviously, all these sellers ignore Andre Kostolany who has said that:

“Imagine a man walking, one step at a time, on a country lane for a mile or so. He is accompanied by his dog, which follows the man like a dog follows his master: one step forward, one step backward. While the man is walking slowly, his dog is jumping around back and forth. There will be times when the man is ahead; he will wait for the dog and then there will be times when the dog is ahead and the dog will wait. In this example, the man represents the economy, and the dog the stock market.”

And for those who do not know Andre Kostolany, Kostolany is a stock market legend. Kostolany’s great quote describes what is going on with the oil price these days. The dog (oil price) currently is behind the man (oil supply/demand dynamics) and will catch him sooner rather than later.

In other words, I am a strong believer that Brent is not going to stay below $75/barrel for long, and the dubious Thomas are welcome to read the facts that will propel Brent higher than its current levels by early 2015.

What They Were Telling You In 2013 And H1 2014

Back in 2013 and H1 2014, when Brent was trading around $110/bbl, the analysts and several other opinion makers were calling for oil to hit $150 per barrel. Let’s see some more details and the reasons behind these calls:

1) In H1 2013, the U.S. Department of Energy reported that China overtook the U.S. as the world’s largest net oil importer. That was the time when a report from the Paris-based OECD (Organization for Economic Co-Operation and Development) came out and noted:

“Based on plausible demand and supply equations, there is a risk that prices could go up to anywhere between $150 and $270 per barrel in real terms by 2020, depending on the responsiveness of oil demand and supply and on the size of the temporary risk premium embedded in current prices due to fears about future supply shortages.”

OECD also noted in that report:

“There is a strong price increase needed despite this new oil production coming on stream.”

2) In H1 2013, Energy Aspects, an energy research consultancy, noted as linked above “All estimates point to Asian demand propelling growth.” It also said that the implications of the U.S. shale-oil boom could be overstated for the rest of the world if demand from Asia keeps up.

3) In H1 2013, some analysts from Goldman Sachs wrote that Brent crude oil prices could rise to $150 per barrel in H2 2013 because:

“Despite the boom in U.S. shale gas, the oil price remains high, which he attributed primarily to sanction-related supply disruptions in Iran. Trying to compensate for this, Saudi Arabia has already increased its oil production to a 30-year high this year.”

Mr. Currie added that:

“While global oil demand has increased at a slower pace, it is still higher than the production increases in non-OPEC countries. Upside risks for oil prices include low inventory levels, limited OPEC spare capacity, and geopolitical risks which are likely near an all-time high with production in a very large number of countries at risk, including Egypt, Iran, Iraq, Libya, Nigeria, Sudan, Syria and Venezuela. Europe still faces economic and policy headwinds, China just experienced a significant food inflation surprise (and the livestock impacts from last year’s agriculture price spike will only be felt this year) and the US still faces risks from the debt ceiling debate, the automatic spending cuts (or “sequestration”) and impending tax increases.”

4) In H2 2013, when Brent was still around $115/bbl, the French bank Societe Generale said:

“Brent crude is likely to rise towards $125 a barrel if the West launches airstrikes against Syria, and could go even higher if the conflict spills over into the rest of the Middle East.”

5) As linked above, another report from JBC Energy in Vienna said in H2 2013:

“Current developments such as low spare capacity in Saudi Arabia, stockpiles falling in the U.S., disappointing supply developments around the world and signs of an improving global economy are pointing to tighter markets.”

6) In late 2013, the analysts at the National Bank of Abu Dhabi in UAE noted:

“Average oil price was $112 per barrel in 2012. The average price of crude oil is forecast at $105 per barrel in 2013, $101 per barrel in 2014 and $100 per barrel in 2015. The base case is for oil prices to soften mildly, but remain close to $100 per barrel through 2018. Thereafter, prices rise by a few dollars each year in this scenario.”

7) Even a few months ago in June 2014, the analysts were telling you:

A) This is from Nordea Bank (OTCPK:NRBAY):

“If Iraq, accounting for 3.7% of the world’s total oil production, suffers a serious disruption to its oil supplies, we will see a sharp upswing in oil prices as the OPEC effective spare capacity buffer is low, making the global oil market highly sensitive to further supply disturbances. If Iraqi oil production would fall back to the low levels seen during the invasion of Iraq in 2003, oil prices could easily rise by up to $30 a barrel as this would push the global spare capacity back to the lows when oil prices reached $150 a barrel in July 2008. High oil prices would put the world economic recovery at risk.”

B) This is from PVM Oil Associates:

“The deteriorating situation in Iraq could be the source of an oil price and therefore a financial shock should be sending economic-growth forecasters back to the drawing board. There can be no doubt that if Iraq’s southern oil operations are impacted Brent could reach $125 a barrel and beyond. Saudi Arabia may have 2 million barrels a day of capacity it can turn on reasonably quickly but that leaves no spare capacity margin.”

C) This is from Commerzbank (OTCPK:CRZBY):

“It is hard to imagine that the oil production in northern Iraq will return to the market in the foreseeable future. So far, oil production in the south of Iraq, which accounts for 90% of Iraq’s oil exports, has been unaffected by the fighting in the north and center of the country. However, the sharp price rise in the last two days shows that this oil supply is no longer viewed as secure, either. Without the oil production from the south of Iraq, the market would be stripped of an estimated 2.5 million barrels per day.”

D) This is from the research consultancy Energy Aspects:

“Look at any forecast, they are calling for Iraqi production to be around 7-8 million barrels a day by 2018/2020 for oil prices to not rise substantially. And I think that’s the key, because that’s not going to happen. If this is contained within Iraq that’s one thing, but there’s a very different implication if it becomes a bigger regional conflict. That’s the biggest problem. Iraq’s at the heart of this big oil-producing region.”

What They Are Telling You In H2 2014

Let’s see now what the analysts and several other oil experts have been telling you lately:

1) In October 2014, Goldman Sachs slashed its 2015 oil price forecast. Goldman sees Q1 2015 WTI crude at $75/bbl versus $90/bbl previously and Q1 2015 Brent at $85/bbl versus $100/bbl previously. The U.S. investment bank said rising production will outstrip demand, joining other oil analysts who predict consumption will be dented by slower global economic growth and lead to a supply glut.

2) Other analysts who joined the bearish party lately, predict that the bear market in crude will continue with prices falling as low as $50 a barrel, in part because the global economy is slowing, pushing supply levels higher.

3) In late October 2014, fellow newsletter editor Dennis Gartman showed up and implied that oil could go to $40-$50 per barrel because among others, Lockheed Martin (NYSE:LMT) was working on a compact fusion reactor that could be ready within 10 years. He said:

“Fusion is going to be the great nuclear power of the next 150 years. And finally, we are driving less and less. We are using so much less gasoline than we ever have, in global terms, in national terms, in per capital terms. All of those things, I think, are going to be weighing heavily on crude oil. And where could it go? A lot lower, a lot lower.”

So within ten years from now, we will fit a nuclear fusion reactor on the back of our cars dumping our gas tanks. Let Star Trek come to life! Obviously, Gartman’s thesis also implies that Star Trek’s high-tech, innovative and game-changing tools will be on clearance, so all the people from China and India to Africa and America will not afford to overlook this irrationally cheap nuclear fusion reactor. I don’t even understand why an investor can take Gartman’s approach on oil seriously.

4) The technical traders also showed up a few weeks ago calling for $40/bbl, based on the following chart:

(click to enlarge)

2013/H1 2014 vs. H2 2014: No Major Fundamental Change While Geopolitical Risks Deteriorate

According to Forbes, these are the world’s biggest oil consumers today:

1) United States.

2) China.

3) Japan.

4) India.

5) Euro area.

As also shown in the previous paragraph, the calls in 2013 and H1 2014 for $150/bbl were based on the geopolitical tensions in the Middle East and the expectations about global growth with a focus on demand from the growing Asian markets, which are high in the list with the world’s biggest oil consumers.

And the facts below prove that nothing has changed over the last six months to justify a drop of 35% in the oil price that has occurred lately. In contrast, the geopolitical risks in the Middle East have deteriorated, and the security situation both in Iraq and in Libya has worsened recently. Even International Monetary Fund [IMF] admits that the geopolitical risks have worsened since H1 2014, according to its latest report.

Also, the world’s biggest oil consumers are growing at rates that either are in line with 2013 rates or exceed expectations. There is nothing to indicate that global supply and demand imbalance has fundamentally changed in the past six months. There is just too much speculation, emotion, panic and short-term lame thinking that have been used to determine the value of the oil price lately, and this slump in oil prices is clearly a result of sentiment and emotion.

Let’s proceed now with the facts:

1) Geopolitical risks deteriorate primarily due to ISIS, Iran and Libya: The extremist Islamic State of Iraq and Syria (ISIS) is still there, and the U.S. military and its allies hit ISIS forces with 15 air strikes in Iraq and Syria during a three-day period, The U.S. Central Command revealed a couple of days ago. Thirteen attacks were carried out in Iraq since last Wednesday and two more targeted Islamic State in Syria.

Meanwhile, ISIS keeps advancing in Iraq and Syria, after seizing Iraq’s second largest city Mosul on June 10th. The attacks have been escalating since 2013 and H1 2014, while American, British and Syrian soldiers were beheaded in October 2014 and November 2014, which is confirmed by Obama Administration. Apparently, there is no improvement compared to the situation in 2013 or H1 2014.

Furthermore, world powers failed to reach a nuclear agreement with Iran last week and extended talks for seven months. This means that the Western economic sanctions are not going to be lifted anytime soon, freezing the ability of Iranian banks to conduct international transactions while Iran’s daily oil export restrictions will remain too. This also means that Iran will continue working on its nuclear program by the summer of 2015, impacting negatively the destabilization risk in the region. And there is obviously no improvement compared to the situation in 2013 or H1 2014.

Also, there is no risk improvement in Libya compared to the situation in 2013 or H1 2014. In late August 2014, Libya’s ambassador to the United Nations warned of “full-blown civil war,” if the chaos and division in the North African country continue.

Libya currently has two competing parliaments and governments. The first government and elected House of Representatives relocated to Tobruk a few months ago after an armed group from the western city of Misrata seized the capital Tripoli and most government institutions, as well as the eastern city of Benghazi. The rival previous parliament remains in Tripoli and is backed by militias.

And just a couple of weeks ago, Libya’s political strife intensified as the rival government that has seized the capital took control of Libya’s largest oilfield (El Sharara), according to Reuters. Libya’s oil production rose above 900,000 bopd in September 2014, sharply above lows of 100,000 bopd in June 2014, but it has already fallen to around 500,000 bopd at most, as a recovery in Libya has faltered so far, according to Reuters. This translates into a material drop of approximately 400,000 bopd from Libya only.

2) GDP Growth Rates: Let’s take a look now at the GDP growth rates of the world’s biggest oil consumers:

A) United States: According to the latest news of September 2014, the U.S. economy grew 4.6% in Q2 2014, exceeding earlier estimates. And according to the latest news of November 2014, the U.S. economy grew 3.9% in Q3 2014, exceeding once again the consensus estimate of 3.3%, as illustrated below:

(click to enlarge)

B) China: China grew 7.6% in 2013 and grows 7.4% (on average) to date, as shown below:

(click to enlarge)

Also, China’s GDP per capita continues growing in 2014 at the same pace it has been growing over the last couple of years, as illustrated below:

(click to enlarge)

On top of that, the Chinese central bank initiated an easing cycle just a few weeks ago. How can a serious investor ignore this initiative that will have material effects on China’s future growth and China’s oil consumption of course?

C) Japan: The Japanese economy grew in Q1 2014 and contracted in Q2 and Q3 2014, as illustrated below:

(click to enlarge)

But on average, Japan grew 1.52% in 2013 and grew 0.89% in 2014 too, based on the three quarterly GDP figures to date.

Additionally, Japan’s GDP per capita continues growing in 2014 compared to 2013, as illustrated below:

(click to enlarge)

D) India: As shown below, the Indian economy grew 4.5% in 2013:

(click to enlarge)

That was the time when the analysts were saying that these GDP numbers were below their expectations. Please see some analysts’ and officials’ statements about India’s GDP growth from late 2013:

i) “There is no light at the end of the tunnel visible in India’s GDP release.”

ii) “It was slightly below expectations but I feel the overall growth rate of 4.9% would be achieved this year (2014)” said C. Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council.

iii) “These numbers clearly show that attaining a growth rate of 4.9% in 2014 is not possible.”

That was also the time when Brent was around $110/bbl and all the oil prognosticators were projecting $150/bbl, as shown in the previous paragraph.

However, the Indian economy picked up steam and rebounded to a 5.7% rate in Q2 2014 from 4.6% in Q1 2014, led by a sharp recovery in industrial growth and gradual improvement in services.

And under the Modi government and thanks to a series of fundamental economic reforms, the Indian economy continued its growth and grew 5.3% in Q3 2014, as illustrated below:

(click to enlarge)

Needless to mention that these GDP rates in Q2 2014 and Q3 2014 were well above the analysts’ expectations.

Additionally, India’s GDP per capita continues rising in 2014 compared to 2013, as illustrated below:

(click to enlarge)

And according to yesterday’s news from Reuters, Indian factory activity expanded at its fastest pace in nearly two years in November 2014. The HSBC Manufacturing Purchasing Managers’ Index (PMI) rose to 53.3 in November 2014 from 51.6 in October 2014, its highest since February 2013, and the thirteenth consecutive month of expansion in activity. The analysts had expected manufacturing activity to lose some steam and predicted the index would fall to 51.2.

On top of that, India overtook Japan as the world’s third-biggest crude oil importer in 2013 and the U.S. Energy Information Administration [EIA] projects that India will become the world’s largest oil importer by 2020.

E) Europe: Europe continues growing in 2014 albeit in a slow rate, as illustrated below:

(click to enlarge)

But the current slow growth in Europe was there in 2013 too. In fact, Europe has been limping forward for years and this is nothing new, as clearly illustrated at the previous chart.

The Half-Truths And The Peak Oil

Given the fact that neither the geopolitical risks have declined since H1 2014 nor the average GDP growth rates in the world’s biggest oil consumers have dropped compared to 2013, the oil bears had to discover something else to strengthen their lame approach to oil and the supposedly supply glut.

Therefore, it does not surprise me the fact that I have seen the chart below more than 20 times in numerous online articles over the last weeks, given also that there are always willing authors who behave like parrots repeating what they hear:

The thing is that this chart itself tells you half-truths for the following three reasons that you will not find all together in any of the recent bearish articles about oil:

1) This chart above compares apple to oranges. It compares Saudi’s conventional production with U.S. oil production which is primarily a result of drilling unconventional shale wells that peter out quickly. The gap between the extraction cost in Saudi Arabia and the U.S. is approximately $60/bbl. Extracting oil from shale costs $60 to $100 a barrel, compared with $25 a barrel on average for conventional supplies from the Middle East, according to the International Energy Agency [IEA].

In other words, new oil is not cheap and the rising oil production in the U.S. over the last couple of years has been conditional upon the high oil price. Most of the wave of the U.S. production is currently unprofitable and the current low oil price discourages new drilling.

2) The U.S. shale players are on a steep rate treadmill because of the high decline rates of the unconventional wells, and an investor must be in denial to not see it.

3) The sweet spots and the spots with high productivity in the main oil basins in the U.S. (Williston, EF, Permian) cover a finite amount of land and eventually the number of the wells at the sweet spots is not infinite. The shale producers say that they have reserves [RLI] for approximately 10 years but this does not mean that their drilling locations are sweet spots.

The shale producers have already drilled in many of the best areas, or sweet spots. Once those areas have been drilled out completely, operators will have to move to more-marginal locations and well productivity will fall precipitously. Meanwhile, the advances in technology cannot make wonders to boost the recovery rates overnight.

As such, it is imperative to keep in mind that the peak oil in the U.S. is not a myth. At the current oil price, the supply of the unconventional oil production in the U.S. will quickly prove self-correcting. Both the oil production and the crude inventories in the U.S. will stall soon and will go into a permanent decline effective H1 2015 as a result of the ongoing reduction in drilling activity, the high depletion rates of the unconventional wells and the finite number of the sweet spots.

In fact, the rapid decline has already started. First, the Energy Information Administration said yesterday U.S. crude-oil supplies declined 3.7 million barrels on the week ended Nov. 28. Analysts surveyed by Platts had expected crude inventories to increase by 380,000 barrels on the week.

According also to today’s news from Seeking Alpha, new permits, which outline what drilling rigs will be doing 60-90 days in the future, showed heavy declines for the first time this year across the top three U.S. onshore fields: the Permian Basin, Eagle Ford and Bakken shale. Specifically, there is an almost 40% decline in new well permits issued across the U.S. in November 2014, with only 4,520 new well permits approved last month, down from 7,227 in October 2014.

These numbers indicate a sizable dent in U.S. production in the not too distant future. Most of that dent will come from the highly leverage players holding lower quality land.

The Oil Sector In 2015 And The Real Estate Analog

The ETFs (NYSEARCA:IYR) and (NYSEARCA:VNQ) measure the performance of the real estate sector of the U.S. equity market and include large-, mid- or small-capitalization companies known as real estate investment trusts (“REITs”). Their charts over the last couple of years are illustrated below:

(click to enlarge)

and below:

(click to enlarge)

All the investors know the fundamental problems behind the slump of the real estate sector in the U.S. a few years ago. Given that no fundamental improvement can take place overnight, it took the real estate sector in the U.S. a few years to recover from its lows in 2009.

I am sure now that many readers wonder why I talk about the real estate sector in an oil-related article. What is the relation between the real estate sector and the oil markets?

I mention this example because I strongly believe that the oil price will recover like the real estate sector has recovered from its bottom over the last three years. But, there is also a big difference here. The recovery of the oil price will be much quicker than the recovery of the real estate sector, given that this slump of the oil price has been driven by lame thinking, arbitrary speculation and sentiment, while having nothing to do with evaporating geopolitical risks around the world or a material deterioration of the global supply-demand fundamentals.

On top of that, there are some additional geopolitical clouds on the horizon that can make oil jump by H1 2015. For instance, the current low oil price has brought many OPEC members to their knees, while the holders of those countries’ sovereign debt are toast as long as oil stays at the current levels. Iran, Iraq, Libya, Algeria and Venezuela are not prepared to withstand low oil prices for long and they are now in serious danger of political upheaval at current prices. According to yesterday’s news from CNBC, the first signs of an escalating social unrest in Venezuela are already there, and things will definitely get worse over the next weeks.

Furthermore, Russia and Saudi Arabia will be anxiously watching the rapid depletion of their sovereign wealth funds, which will make the political situation in these two countries dicey over the next months.

In other words, I obviously agree with Andrew John Hall, who is known as the God of Crude Oil Trading. Although many investors and readers do not know this oil legend, Hall is secure in his view that the price of oil is destined to rise sooner rather than later, mocking those who are convinced that a U.S. shale boom will mean long-term cheap, abundant energy.

My Takeaway

Fellow investors, please educate yourselves for your own benefit. Everyone talks about buying low and selling high, but he often does the opposite. The typical investor often buys high because he feels good. And he sells low because of panic and lame thinking.

Therefore, this is the essence of my investment thesis. This oil price fall is a sentiment-driven slump. This is short term and sentiment-driven noise in the big picture story. Right now, oil has come to the point where it is unloved, which is exactly when you have to expose yourself to the sector. This oil downturn cannot last long and oil will bounce back by early 2015.

On the supply side, there are not any “elephant” conventional discoveries over the last years, and this is why the conventional oil production from the U.S., the North Sea, Mexico, North Africa and the Middle East has been falling over the last years. Cheap and easy oil is gone forever, and the global marginal barrel currently is in the $80 to $90 range.

Due to the current low oil price, oil supplies will become critically tight by early 2015, largely because production leader Saudi Arabia is not able to pump as much extra oil as many people believe. In fact, Saudi oil production has peaked at approximately 10 million bopd over the last years, as illustrated below:

On the demand side, the investors must not ignore that world population keep growing at a satisfactory rate in an energy intensive world, as witnessed by the GDP growth rates and the GDP per capita for the world’s biggest oil consumers mentioned above. As a result, global oil demand continues growing unabated at average of 1 million barrels per year.

Meanwhile, the geopolitical tensions are escalating and the crude oil price is best proxy for geopolitical risk.

After all, how can the investors weather this temporary storm and benefit from this oil price shock? Well, big fortunes will be made to those with the patience and foresight to pick right and hold tight. Just pick quality oil stocks with low key metrics (i.e. EV/EBITDA, EV/Production, EV/Reserves), sit tight, and you are going to do very well given that the strong players will remain and the weak ones will vanish.

For instance, stay far from the heavily indebted companies with a high Net Debt to EBITDA ratio, because many highly leveraged U.S. shale producers will go broke over the next couple of years. The rising tide will not lift all boats. Even if WTI jumps at $85/bbl tomorrow, several U.S. shale oil producers will not avoid bankruptcy while others will be sold for pennies on the dollar. Beggars cannot be choosers.

And now you know why I sent out last Thursday a Market Update to the subscribers of “Nathan’s Bulletin,” urging them to load specific quality picks. And when Brent crests that $90 mark again, they will be glad they did.

https://i2.wp.com/static.seekingalpha.com/uploads/2009/11/11/saupload_world_20in_20oil_lr_shutterstock_4174132.jpg
Comments (149)
 
 
 
  • mike904

    Comments (741) | Send Message

     

    I would be obvious to a garden gnome that any rise in the price of Brendt crude above $115 causes a recession. This has been true ever since 2007. The US cannot afford $4 gasoline.

     

    The reason oil stayed as high as it did was the fact that India and China subsidized it. The fact that China passed the US in imports misses the point. China uses 36mm boe in coal every year. They manufacture 700 million tons of steel versus 40 in the US. This is due largely to $5 trillion in QE. In the process of this absurd borrowing, they have wiped out most of their neighbors.

     

    Earnest and Young estimates that there is 300 million tons of excess steel capacity in the world and China is STILL building new capacity. That 300 million tons is assuming China continues to use 640 million tons internally. Once countries start to protect their steel producers, China is going to collapse. Steel requires 11 BOE of energy per ton. 300 million tons is the equivalent of 10 million BOE of energy per day. If there’s a recession, you could see total energy use drop by 15-20 million BOE per day.

     

    Demand isn’t what people want, demand is what they can pay for. Once the wold starts defaulting on this junk corporate debt, petroleum demand is going to collapse. The last time we went through a shock like this was 1982 and 6 million BPD of demand came of the market. This one is going to be far far worse. You could easily see oil go to $50 and stay there for a decade. According to Evans-Ambrose Prichard, Jim Chanos and Kyle Bass, China is going to collapse.

    4 Dec, 07:50 AMReplyLike7
     
  • Global Investor

    Comments (309) | Send Message

     

    Excellent write up, as usual! Your excerpt below says it all:

     

    ” The recovery of the oil price will be much quicker than the recovery of the real estate sector, given that this slump of the oil price has been driven by lame thinking, arbitrary speculation and sentiment, while having nothing to do with evaporating geopolitical risks around the world or a material deterioration of the global supply-demand fundamentals”.

     

    and this one:

     

    ” In fact, the rapid decline has already started. First, the Energy Information Administration said yesterday U.S. crude-oil supplies declined 3.7 million barrels on the week ended Nov. 28. Analysts surveyed by Platts had expected crude inventories to increase by 380,000 barrels on the week.

     

    According also to today’s news from Seeking Alpha, new permits, which outline what drilling rigs will be doing 60-90 days in the future, showed heavy declines for the first time this year across the top three U.S. onshore fields: the Permian Basin, Eagle Ford and Bakken shale. Specifically, there is an almost 40% decline in new well permits issued across the U.S. in November 2014, with only 4,520 new well permits approved last month, down from 7,227 in October 2014. “

     

    I did not actually expect such big declines so soon. Both declines really surprised me. How long can an investor remain in denial?

    4 Dec, 10:54 AMReplyLike9
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    mike

     

    “China is going to collapse.”

     

    People have been saying that for around, well, forever.

    4 Dec, 11:27 AMReplyLike17
     
  • IncomeYield

    Comments (1847) | Send Message

     

    The opposite could happen.

     

    How many people world-wide have been sitting on the proverbial sidelines at $100+ oil? Waiting to start or expand a biz. Waiting to buy a car?

     

    All of a sudden, poof, 40% off on the COGS!
    Possibly a big demand shock coming.

    4 Dec, 12:34 PMReplyLike5
     
  • bettheranch

    Comments (19) | Send Message

     

    “How many people world-wide have been sitting on the proverbial sidelines at $100+ oil? Waiting to start or expand a biz. Waiting to buy a car?”

     

    Answer: None.

    4 Dec, 12:42 PMReplyLike5
     
  • IncomeYield

    Comments (1847) | Send Message

     

    Exactly, “None”, or did you mean “Zero”?

    4 Dec, 12:55 PMReplyLike0
     
  • Josh Young

    , contributor
    Comments (704) | Send Message

     

    Great article. I like that you incorporated the drilling permit drop, seen here: http://seekingalpha.co…

    4 Dec, 02:41 PMReplyLike1
     
  • bettheranch

    Comments (19) | Send Message

     

    Zero. Zip. Nada.

     

    Most people (Americans) can’t even tell you who Ben Franklin was, much less tell you the price of oil.

     

    They can’t even remember how much their last tattoo cost them, or their boyfriend.

    4 Dec, 06:08 PMReplyLike12
     
  • trader57

    Comments (253) | Send Message

     

    GI, if those numbers for well permits are not seasonally adjusted, then it’s possible that a big part of that drop is caused by seasonal factors related to weather. It could be that many drillers do not start new wells after November in places like the Bakken play and the DJ Basin, and thus the latest month that they get permits could be October. So those permit number have to be seasonally adjusted to be meaningful.

     

    Nonetheless, I don’t buy some of the talk I’m reading on the internet that “the US shale drillers will keep right on going with oil at $65”. That idea is just totally ridiculous. The operating cash flow generated by US shale producers will decline dramatically if oil stays below $80 and they won’t be able to raise nearly as much capital because of lower stock prices and substantially higher yields required to sell bonds. So US shale drillers will be forced to cut back on drilling activity because of a simple lack of capital and cash flow to pay for horizontal drilling, which is expensive. This big drop in drilling activity, which will happen for sure if oil stays below $80, should cause US oil production growth to drop sharply in the first half of next year and that drop will probably cause the oil market to correct back up into the 80s by the second half of next year.

     

    I’ve been surprised that the Saudis have been willing to let oil prices fall all the way below $70. I’m starting to wonder if anyone really knows what oil price they need to balance their national budget. Same thing with the Russians–it’s difficult to get good credible information from the Middle East, South America, and Russia about national budgets and other subjects like what kind of oil production technology they’re using today and what their marginal cost of production is today. Do Wall Street analysts and those sleepy international agencies in Europe really know what’s going on in the Middle East and Russia? I’m starting to wonder.

    4 Dec, 08:41 PMReplyLike5
     
  • jj1937

    Comments (1455) | Send Message

     

    Dow 18,000 by XMAS. It’ll probably happen by Monday.

    4 Dec, 10:59 PMReplyLike0
     
  • Skaterdude

    Comments (698) | Send Message

     

    Oil and coal are not fungible and they are not used primarily for the same purposes. BOE is nice if you’re assessing overall energy consumption, but it’s not a good way to think about consumption across all energy sources. If steel production drops, how will that affect the people driving vehicles in Beijing or other metropolitan areas? If coal producers in the US close mines, how will that affect oil prices and consumption? Not as much as you might propose just by looking at BOE. People don’t fuel cars with coal, and power companies are building NG fueled power plants because NG is cheaper and cleaner. So if coal production drops in the US, it’s not going to directly cause gasoline prices to rise. My point in these examples is not to argue whether oil or NG prices will rise or fall, but simply to illustrate the lack of connection between markets and demand.

    4 Dec, 11:44 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3663) | Send Message

     

    Author’s reply » Global Investor,

     

    Thank you for your compliments. The huge divergence between the reality and the market perception is more than apparent in the oil markets now.

     

    The geopolitical risks have worsened compared to 2013 and H1 2014, the GDP growth rates in 2014 are at or above expectations in the world’s largest oil consumers compared to 2013, while the crude inventories and the new permits have already started to drop rapidly. We talk for a 40% decline here.

     

    To me, this is the definition of: THEATER OF THE ABSURD.

     

    Let’s see how long this THEATER OF THE ABSURD will go on.

     

    Regards,
    VD

    5 Dec, 06:08 AMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3663) | Send Message

     

    Author’s reply » Josh,

     

    Thank you for your compliments. As mentioned above, what is going on now in the oil markets is the definition of the: THEATER OF THE ABSURD.

     

    Let’s see how long the oil bears will keep behaving in this irrational manner trying to make money at the bottom although the facts are not there.

     

    Regards,
    VD

    5 Dec, 06:12 AMReplyLike3
     
  • TraderFool

    Comments (504) | Send Message

     

    Hello trader57,

     

    Re: “I don’t buy some of the talk I’m reading on the internet that “the US shale drillers will keep right on going with oil at $65″. That idea is just totally ridiculous. The operating cash flow generated by US shale producers will decline dramatically if oil stays below $80 and they won’t be able to raise nearly as much capital because of lower stock prices and substantially higher yields required to sell bonds”

     

    If oil price keeps going down, and I’m a shale driller with sunk cost already, wouldn’t I want to try to keep pumping MUCH, MUCH more first to try to keep my fixed costs even lower, to try my best to survive, before the inevitable happens? In other words, I think we might just be seeing the beginning of the price fall … sure, 6-12 months down the road, we’ll see some real bust happening (not all producers have enough liquidity to last 6-12 months), but the time from today to the next 3-6 months could be really painful for longs … before they cut production, I think, they’ll try to produce a heck of a lot more to try to survive, before the financial constraints starts to work – remember, financials have many avenues, some will still pump more, borrow from banks to suvive, etc. i.e. we could be looking at 6-12 months pain before recovery, before the banks finally say enough is enough, before capital markets starts to rate the bonds as junk, etc. These process could last a long time, and until then, we might be seeing continued increased weekly production which will keep depressing crude oil prices …

     

    Originally, I plan to go long on crude oil stocks, but I’m now thinking of holding back my longs until I see a real bottom in prices. I like to see US production slows down for 2 to 3 weeks in a row, and right now, we are just not seeing this happening at all – US producers keep producing more oil every week, and with Saudis not cutting down, the supply of oil on a weekly basis keeps going up, and prices inevitably must come down … I have a feeling, $65 will not be the immediate bottom yet … but let’s see …

    5 Dec, 08:44 AMReplyLike6
     
  • trader57

    Comments (253) | Send Message

     

    It will take a few months for drilling activity to decline. The OPEC meeting was only a week ago. Oil producers are not going to stop drilling any wells that they’ve already started, and I would think they have some contracts for a few months that can only be canceled in extreme dire situations. By March 2015 we should start seeing a substantial decline in oil rig counts. Production growth will then start declining quickly and US production could even start dropping by mid-summer.

    5 Dec, 11:32 AMReplyLike4
     
  • Holthusen

    Comments (638) | Send Message

     

    Very funny! Yet sadly correct, and getting worse. We are raising a generation of Electronic Gamers. They live in another world instead of the real world.

    5 Dec, 11:36 AMReplyLike4
     
  • blondguysc2001

    Comments (55) | Send Message

     

    Interesting article…lots of good data points, particularly how well you call out the “analysts” and hold them accountable for their calls. These people truly are nothing but weathervanes….at least the vast majority of them.

     

    I do think there is a temporary glut of supply that triggered the decline, coupled with the obligatory unwinding of long positions…crude prices may capitulate further, but they won’t stay down for long. The tricky part is staying patient and waiting for a tradeable bottom, and separating the long term winners from the ones with excess leverage and poor fundamentals. We know the hedge funds are herd animals so expect more piling on of short positions to drive crude lower.

    4 Dec, 07:54 AMReplyLike17
     
  • Value Digger

    , contributor
    Comments (3663) | Send Message

     

    Author’s reply » blondguysc2001,

     

    I am getting sick when I see how quickly all these highly paid “gurus” change their mind depending on which way the wind blows, while ignoring the facts. And they behave like parrots repeating the words and imitating the actions of another.

     

    This is why, I felt the need to write this factual article that clearly demonstrates what these “gurus” were telling us in 2013 and H1 2014, and what could drive prices at $150/bbl.

     

    Also, separating the wheat from the chaff is something that ALL the investors must do now. They must NOT make the mistake to load the heavily indebted energy companies because it will be a “dead cat bounce”, if these companies ever bounce back.

     

    Regards,
    VD

    5 Dec, 06:23 AMReplyLike5
     
  • Duago

    Comments (70) | Send Message

     

    Value Digger,
    I greatly value your research, time and effort put into you articles.
    However, timing is everything. This piece feels desperate. I have read a lot of details on the subject of late and there were many signs of this slump in prices coming that were not accounted for by those who only see oil prices as going up.
    Prices go up and they go down. I don’t see the compelling evidence that it will suddenly go up soon.

    4 Dec, 08:11 AMReplyLike9
     
  • TraderFool

    Comments (504) | Send Message

     

    Duago,
    Just pull up the price charts of crude oil over the past 20 years.
    You’ll see this current price drop is the 2nd longest drop over that period.
    The only time when crude had a bigger drop was back in 2008, from a peak of $147, down to a low of $33, near the 200 month MA. Today, we are near the 200 month MA as well which is currently around $60-$65 … we can’t time it precisely, but over the next few months, I feel we are close to the current bottom, and it makes sense to pick good quality issues relating to crude oil, and slowly work your way inside. Never go on margin, this is really Value Investing at its finest, and if you are not scared, you are not doing Value Investing properly – I won’t bat an eyelid if the purchases made this week drops by 50% more at the bottom, because history has shown that they will rise much, much more. I’m looking at +100% gains over the next 1-3 years at the least …

    4 Dec, 04:13 PMReplyLike13
     
 
  • Dan Teodor

    , contributor
    Comments (110) | Send Message

     

    Duago,

     

    Demand for oil in the six segments that simply cannot stop are impervious to economic slowdown (plastics, oceangoing freight, train freight, fertilizer, aviation, modern armies). Regardless of consumer slowdowns, these six segments represent 80% of oil and net gas consumed around the world. When economies slow down, the food, freight, aviation and military segments do not, they continue on. A recession in Europe or China would only slow the rise in demand, not reverse it. Look at the demand trend of the past year and understand that even if demand only rises at one half the slope is has followed from 2004 until now, it will still outstrip current expected global production for Q1 2015. Oil price strip is highly elastic to tiny percentage changes in the supply-demand balance. Current situation is creating the coiled spring and that coiled spring WILL unwind before the end of 2015.

     

    We just hope it is a measured controlled unwind throughout the year, otherwise we will have the $140 spike we saw in 2008 for a month or two before settling down to something in the $90 – $100 brent range.

     

    Set your DCF and NAV models for $90 brent / $85 WTI. This is going to get ugly before the weather gets cold again in 2015. I’m willing to go out on a limb and say you can quote me on this one.

     

    Here is the reality when Brent is $70/bbl for more than one or two months…

     

    1. Venezuela is cash flow negative and cannot make coupon payments on its foreign debt. Venezuela WILL default on its debt before end of 2015 in this price regime.

     

    2. Iran cannot feed its army at this price. The mullahs depend on the support of their army to maintain power. Kicking this leg out from under the government stool makes their continued existence precarious. Martial law kind of precarious.

     

    3. The government in Tripoli cannot feed their guard at these prices. If the government in Tripoli cannot do this, they cannot protect the pipes that carry crude to their northern port. When that happens the other government in the west breaks through and shuts the pipe down to prevent revenue from reaching the Tripoli government and thereby trying to strangle it. 800,000 bbl/day go off stream.

     

    4. Saudi Arabia is burning $2b/month from their sovereign wealth fund. At that burn rate, the ENTIRE sovereign wealth fund runs dry in 60 months. They need to turn the boat around long before that happens because if they burn through more than about 25% of it, angry men with beards and automatic rifles start to hang around the palace gates. Not a stable internal situation. Riyadh has made major financial promises to its citizens in return for peace and their support. And in Saudi Arabia, the citizens do not have peaceful protest marches when they are aggrieved.

     

    5. Russia is burning $2.5b/month form their sovereign wealth fund. At that burn rate, the ENTIRE sovereign wealth fund runs dry in 48 months. They will tighten their belts, suffer, freeze, grit their teeth and tough it out. BUT! (and this is a big one) understand that at the back of the mind of every strategist in the Kremlin is the nagging thought that all they have to do to cause a global geopolitical crisis and force the price of energy to whipsaw back up to $100/bbl in the course of a week is to kick the hornets nest: Roll the tanks into Donetsk and Lukhansk. Overnight crisis and EU buckles because it is now winter and Germany will freeze without the Ukrainian transit gas (Nordstream can only supply about one third of what Europe needs to stay warm).

     

    6. I can’t even begin to fathom what the dynamics going on in Syria / Iraq are right now, but it can’t be good. I’m sure Baghdad had to guarantee Kurdistan a minimum cut in the negotiation to let them export. Well, either Baghdad or Kurdistan is not going to get that minimum cut agreed in that negotiation. How do you think things are panning out in their relations now?

     

    This situation has the makings of a new Arab Spring / Cold War settling in… and it cannot remain in equilibrium for a whole 12 months.

    4 Dec, 07:12 PMReplyLike23
     
  • rjj1960

    Comments (1370) | Send Message

     

    Value Digger,one of 3 people on SA with brains. Good job , appreciate the effort.

    4 Dec, 08:29 PMReplyLike10
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Duago,

     

    Thank you for your comment. But, my article is full of facts as always. If you disagree with the facts, it is your choice.

     

    Regards,
    VD

    5 Dec, 06:26 AMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » rjj1960,

     

    Thank you for your compliments. Good luck with your investments.

     

    Regards,
    VD

    5 Dec, 06:29 AMReplyLike1
     
  • ainjibi

    Comments (13) | Send Message

     

    Who are the other 2 with brain on SA ? Would appreciate the info. !

    5 Dec, 02:57 PMReplyLike2
     
  • rjj1960

    Comments (1370) | Send Message

     

    Filloon and Fitzsimmons.

    5 Dec, 05:50 PMReplyLike2
     
  • ainjibi

    Comments (13) | Send Message

     

    Thanks !

    5 Dec, 06:01 PMReplyLike0
     
  • ggig2000

    Comments (10) | Send Message

     

    who are the other two? ; )

    6 Dec, 10:36 AMReplyLike0
     
  • mikenh

    Comments (223) | Send Message

     

    The change in commodity prices, oil included, was triggered by a change in financing attitudes of some buyers. Changing Fed policy added uncertainty to a sure bet. Same thing happened on a smaller scale when Bernancke hinted that bond buying might stop someday.

    4 Dec, 08:26 AMReplyLike2
     
  • themacguy521

    Comments (26) | Send Message

     

    VD. Thanks and could not agree more.

     

    Oil Bears and Analysts are driving the oil price down with their unrealistic attitude towards:

     

    a) Negative growth;
    b) India’s energy appetite; and
    c) The fallacy of Nirvana in the Middle East.

     

    Not to mention that Pick-Ups and large SUVs are back in vogue in North America…

     

    I also believe that Putin will rattle his sabre and agitate conflict somewhere, to raise uncertainty and thus prices – if the drought in Oil prices remains lower much longer. After all, the fall in the price of crude in the mid 80’s (and Reagan) brought the USSR to its knees. He will not repeat that. Guaranteed.

     

    Waiting for a firm bottom – then backing up the truck for more PTA.

    4 Dec, 08:34 AMReplyLike9
     
  • Old Rick

    Comments (512) | Send Message

     

    Please let us all know when there is a firm bottom so we can all benefit from your insight.

    4 Dec, 03:34 PMReplyLike7
     
  • TraderFool

    Comments (504) | Send Message

     

    Old Rick,

     

    No one will know the absolute bottom, at the “Hard Right Edge” of the charts. Bottoms are only know once some time are passed, and by then, you won’t be able to buy at the bottom price. That’s the reality of prices. The key is Money Management – always make sure to have enough cash to buy at lower prices when bargains avails themselves. For highly cyclical stocks, a rough yardstick is 75% fall in prices from the peak for decent names. E.g. SDRL is one that I think could be interesting – peak price was $48 in 2013, and is now trading near $12, or 75% fall. I would allocate around 4% of my portfolio to this, to be split into 4 bullets, and have actually deployed first bullet at $13.50. I’ll be looking for a final buy price of around $7 (approximately 50% fall from my first entry), and these types of buys are just put into the drawer and forget. When the drawer is opened in 1-3 year’s time, you will most likely earn anywhere from 50% to 100% gains or more.

     

    Meanwhile, have the stomach to see the value of what you bought dropped by 50% from what you purchased. Don’t ever think about selling then, because the Reward to Risk of holding is much, much better.

     

    And diversify into 3 issues at the very least, so that total exposure to crude oil is no more than say 12% trading capital. I am just very cautious, but of course, at the very bottom, for the 4th buy, you could double or triple the buy size and raise the 12% up to say 15%-20% capital … but these type of substantial increase must show capitulation, i.e. big price drops with big volumes …. (SDRL has shown the first capitulation last week and this week, and usually, there’s more than 1 capitulation). And if you are a nimble trader, you would also consider adding on the way up, e.g. when Weekly RSI(14) crossed above 20 and Daily RSI(14) dropped back down to around 30-40 or so ie. dipping on the way up, if you are worried that you only have 3% capital in this during the bottom.

     

    PS. SDRL falls into my screen, because at $13.50, it is trading at NAV, and well below Replacement Cost. So, if it falls to $7, that would be trading at 50% NAV approximately, and is good enough for me.

    4 Dec, 04:21 PMReplyLike9
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » themacguy521,

     

    Thank you for your compliments. Also, good luck with PTA (Petroamerica Oil) which is debt free with a pristine balance sheet, as shown in my previous articles.

     

    Regards,
    VD

    5 Dec, 06:29 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Old Rick,

     

    Warren Buffett has said more than once that he has NEVER managed to buy at the bottom and sell at the top. Nevertheless, he is a billionaire.

     

    Regards,
    VD

    5 Dec, 06:31 AMReplyLike5
     
  • les2005

    Comments (15) | Send Message

     

    excellent article. While I’m hesitant to predict WHEN oil prices will go back up, it’s obvious that they will. Outside the middle east, most resources cannot be economically accessed at a price below $70, so while the market price may go below, the pendulum invariably will swing back because
    – more and more suppliers will go out of business or reduce supply
    – consumption and hence demand will rise if oil is that cheap.
    There are a lot of factors at play as you well demonstrated – geopolitical, GDP growth, but also competing energy sources (and I’m not talking nuclear fission, but renewables). But the overriding factors appear to be speculation and herd behaviour. And we all know they can only go for so long into one direction.

    4 Dec, 08:37 AMReplyLike8
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » les2005,

     

    Thank you for your compliments.

     

    Regards,
    VD

    5 Dec, 06:32 AMReplyLike0
     
  • Mark_Stphens

    Comments (13) | Send Message

     

    I’ve been keeping an eye on all of the airlines. Since gas prices are so low right now, almost ALL of them have had large gains the past month.

    4 Dec, 08:45 AMReplyLike2
     
  • Family Investor

    Comments (558) | Send Message

     

    Great article, appreciate you sharing your research.

    4 Dec, 09:01 AMReplyLike5
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Family Investor, Thank you for your compliments. Regards, VD

    5 Dec, 06:32 AMReplyLike0
     
  • Old Mule

    Comments (25) | Send Message

     

    The article makes some very sound points. I must disagree with the view that the shale plays are going to “play out” in the near future. If anything, we have continually underestimated what innovation and knowledge are achieving in exploring and producing from tight formations. Lower prices will slow the growth in shale exploration and production, but the quantity of resource present in shale plays is enormous and not fully understood.

    4 Dec, 09:04 AMReplyLike5
     
 
  • bettheranch

    Comments (19) | Send Message

     

    Old Mule, you are correct. We have, indeed, continually underestimated what innovation and knowledge are achieving.

     

    Also, not all shale formations are so thin as to horizontally support only single laterals. Some, like the Wolfcamp, are very thick, and the first wells drilled are really only the first of many stacked laterals.

     

    Back to innovation and knowledge, that is not limited to shale plays, either. Not all of the new oil production is shale production. At least some if not much of it is from new horizontal development of non-shale assets. For example, look at the Spraberry in W TX.

     

    Also, the shale wells that are drilled and produced typically hold under the leases of unsophisticated lessors other zones that have not yet been tapped.

     

    There is more to be squeezed out of these formations than most people realize, and with advances in cost savings along the way, there still remains quite a bit of money to be made.

    4 Dec, 11:07 AMReplyLike2
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    Old

     

    If it is “not fully understood” then you cannot say anything about future shale production. Currently, the author is correct. Until production is realized, such as current retrievable shale oil, for investment purposes, it doesn’t exist.

    4 Dec, 11:30 AMReplyLike3
     
  • bettheranch

    Comments (19) | Send Message

     

    To the contrary, even though it is not fully understood, we know for sure that we are not getting all out of it, and there has to be a way to get more out of it as technology and knowledge improve and as economic opportunities arise.

     

    What it is going to take to send men to Mars is not fully understood, either. But that does not mean that we cannot say anything about sending men to Mars at some point in the future.

    4 Dec, 11:46 AMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Old Mule,

     

    Thank you for your kind words.

     

    In terms of the shale oil and the technology, I believe that the technology cannot make wonders overnight. And more importantly, the current technology cannot get a lot better overnight, given that it took us (George Mitchell) many years to improve this shale process and bring it to the point where we are now.

     

    If the oil price remains at the current levels for long, the peak oil event will occur in 2015, in my view.

     

    Regards,
    VD

    5 Dec, 06:39 AMReplyLike1
     
  • Dr. Z.

    Comments (93) | Send Message

     

    Breaking News: Publisher of oil newsletter bullish on oil.

    4 Dec, 09:11 AMReplyLike11
     
  • Jion

    Comments (528) | Send Message

     

    An oil newsletter that contains short ideas too.

    4 Dec, 09:38 AMReplyLike9
     
  • samberpax

    Comments (115) | Send Message

     

    Dr. Z.:Breaking News: Publisher of oil newsletter bullish on oil.

     

    ———————-…

     

    Please let me know when the majority of oil newsletter writers turn bearish, that is when I’ll be a buyer.

     

    best,
    -samberpax

    4 Dec, 09:47 PMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Dr. Z.,

     

    You are NOT a subscriber of my newsletter that was out just 3 months ago, in September 2014, when the oil price was already falling.

     

    If you were a subscriber, you could check my picks and the recommended entry prices.

     

    And please let me know and I will gladly send you the returns from my picks in H1 2015, based on the recommended entry prices.

     

    Regards,
    VD

    5 Dec, 06:48 AMReplyLike1
     
  • Emmanuel Daugeras

    , contributor
    Comments (44) | Send Message

     

    Good article. I like the attitude to keep one’s head cool and act on facts, not emotions.
    I buy the long case for Oil, long term. But the question is that of how long it will take to come back.
    The political unrest in the middle east ist not necessarily a cause for less supplies: the ISIS for instance uses Oil to finance their war. The anarchy actually can dislocate the production discipline and lead to lower prices. But agreed with you, anarchy is not sustainable and Oil prices will eventually move up again.

    4 Dec, 09:20 AMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Emmanuel, Thank you for the kind words. The political unrest in the Middle East often leads to production disruptions, statistically speaking. And things in the Middle East are not better now than in H1 2014. In contrast, things now are much worse.

     

    Rgeards,
    VD

    5 Dec, 06:53 AMReplyLike1
     
  • Timothy Coates

    Comments (9) | Send Message

     

    Wow!! Talk about talking up your book! There are so many things wrong with this article it makes it hard to even take it seriously. I’m wondering if this is Dan Dicker writing under a different name with his whole “Barrels at risk” theory that artificially buoyed prices for the 5 years between 2009 and now.

     

    The author seeks to discount the additional 3.5 million barrels the US produces that were not available 5 years ago by saying the wells dry up fast and the production cost are too high. That is the true “lame thinking” here. I heard estimates that some production cost in the Bakken are as low as $29 dollars and that $70 is actually on the high end. His cost estimates are from years ago. Good ole American ingenuity drives down the cost of recovering this oil daily.

     

    The author doesn’t deal with the death spiral that OPEC currently finds itself in. The more profligate members need a high oil price in order to maintain their spending. If I can’t make my revenue with a high oil price what is my alternative? That’s right pump more. Their state goal at this last meeting was to keep the production quotas in place. What was unsaid and the real reason oil took another dive is cheating on production quotas will reach an all time high over the coming months as these governments seek to shore up their finances.

     

    Finally, the author displays several charts but proceeds to ignore what the charts say. We have firmly broken all uptrends and any recovery will be very difficult. I would further break his argument down but that would just give more credence to yesterday’s theory about the state of energy supplies in the world.

    4 Dec, 09:28 AMReplyLike13
     
  • Short&Stocky

    Comments (40) | Send Message

     

    Comments like this are what give me confidence that oil bulls will make money

    4 Dec, 11:33 AMReplyLike13
     
  • thkalinke

    Comments (134) | Send Message

     

    The OPEC death-spiral, with poorer members exceeding quotas, has been going on for at least a couple of decades, nothing new there. As far as a Bakken play that can produce for $29 and keep it there – if you find one, please share.

    4 Dec, 11:37 AMReplyLike8
     
  • Timothy Coates

    Comments (9) | Send Message

     

    I picked up the $29 number from a Market Watch article written by Tim Mullaney entitled “Opec is wrong to think it can outlast U.S. on oil prices”. If that number is incorrect it’s not because I made it up. I agree that cheating has been going on since OPEC’s inception but never before have the weaker members of OPEC been in such tenuous positions with their populace which I believe will spur further more pronounced cheating.

    4 Dec, 01:30 PMReplyLike2
     
  • Class VI

    Comments (3) | Send Message

     

    The author argues that saudi has already reached or near’d max capacity pumping…

     

    So whats the max production capacity for the rest of OPEC for them to keep ‘pumping more’ to make budgets meet?

    4 Dec, 01:52 PMReplyLike2
     
  • quantcoyote

    Comments (66) | Send Message

     

    TC: I don’t necessarily disagree with your scepticism, but apart from Saudi Arabia there is very little spare capacity in OPEC (Libya’s may be higher than the rest, but even that’s not so high and Libya is likely to have real problems for a while). So the capacity to cheat is limited, even if the will to do so may not be. I’m beginning to wonder if SA gives a toss about OPEC at all. They can’t get the other members to cut (because they will cheat), and they need not be concerned about them increasing output.

    4 Dec, 02:33 PMReplyLike1
     
  • Timothy Coates

    Comments (9) | Send Message

     

    quant: you could be very well right about their lack of capacity. I have read though in the last couple days about another 300k barrels coming online from a Kurdish/Iraqi government agreement as well. My point was simply that US shale drilling cost are only dropping so that isn’t supportive of higher prices and OPEC isn’t cutting or even holding to the quotas they agree on.

    4 Dec, 03:17 PMReplyLike2
     
  • Noah Research Partners

    Comments (6) | Send Message

     

    While you are not wrong, I have a hard time understanding why this wasn’t presented or “paraded” 6 and 12 months ago.. Surely this has not been an overnight occurrence.

     

    Secondly, just like in October when everybody “woke up!!” and sent the market down 10%, because NOW the world is going into recession, good call btw. I highly doubt you bears are any more correct on your reactionary projections after crude fell from $90, you must be rich predicting this stuff.

     

    As an aside Gartman has been one of the best contrarian indicators of the past 2 years.

     

    And just to put my money where it counts, not that seeking alpha isn’t awesome.I recently sold multiple strike puts on EOG, NOV, PXD, XOM, CLR. Implied volatility is ridiculously high, and if history is any indicator its a very high probability trade.

    4 Dec, 06:07 PMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Excellent said, Short&Stocky.

    5 Dec, 08:01 AMReplyLike1
     
  • Jion

    Comments (528) | Send Message

     

    It’s the “follow the trend” guys. Until its end….but usually they realize the end too late.

    6 Dec, 07:10 AMReplyLike0
     
 
  • Edmund Shing

    , contributor
    Comments (31) | Send Message

     

    Good, detailed piece, even if I am running the risk of confirmation bias (I am long oil stocks). But one thing. Nuclear fusion reactor on the back of a car – that is Back to the Future, rather than Star Trek!
    Edmund

    4 Dec, 09:29 AMReplyLike8
     
  • MAYHAWK

    Comments (528) | Send Message

     

    Edmund,

     

    Yes, that would be Dennis “Marty McFly” Gartman. To be honest, I would rather have the sports almanac than my oil stocks right now.

    4 Dec, 03:21 PMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Edmund,

     

    Thank you for the compliments. And when it comes to the nuclear fusion reactor, I do not disagree with you. We can definitely see it both ways.

     

    Regards,
    VD

    5 Dec, 06:56 AMReplyLike1
     
  • contrarianadvisor

    Comments (997) | Send Message

     

    A few months ago with oil above $100, I was a lonely bear calling for sub $50 oil. Now that oil has fallen $35, I have lots of company in the bear camp. Still there are lots of analysts and investors trying to call a bottom in oil prices here so i would say that sentiment is somewhat equally divided between bulls and bears here. I think we have a ways to go before oil bottoms. First, we just had a major trend break and those don’t turn around quickly. Second, most of the recent decline was in reaction to OPEc deciding not to cut output. In other words, the focus has been on supply while I think what drives oil below $40 in 2015 will be much weaker demand than is currently being assumed, fueled by a global contraction.

     

    Both oil and oil stocks have a lot further to fall in upcoming months. There will be a far better entry point for both later in 2015. Investors would be wise to exercise some patience here and let things play out for a while. Buying the first sharp break is rarely a good idea, particularly not when there are so many signals indicating that the global economy is losing momentum.

    4 Dec, 09:33 AMReplyLike8
     
  • blittrell

    Comments (8) | Send Message

     

    Ironic that an analyst writes an article encouraging investors to ignore the analysts.

     

    Oil prices will ultimately come back, until then focus on the myriad of economic sectors that benefit from cheaper energy. It should also present a great buying opportunity for a whole host of energy stocks.

     

    This piece has too much emotion embedded in it for my liking.

    4 Dec, 09:40 AMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » blittrell,

     

    I am not a professional analyst who is living from this analysis.
    I am an investor instead.

     

    Regards,
    VD

    5 Dec, 06:58 AMReplyLike4
     
  • 745

    Comments (211) | Send Message

     

    Good article Digger. Whether people agree with your points or not, I don’t see how any investor could disagree with the first two paragraphs of the article. You nailed it spot on. One question though, would you care to share any specific names of shale producers that You feel will be extinct within a few years?

    4 Dec, 09:48 AMReplyLike8
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » 745,

     

    Thank you for your compliments.

     

    Please see my previous articles and comments to find my bearish calls on several energy stocks over the last months i.e. Halcon Resources (HK), Goodrich Petroleum (GDP), Cobalt International (CIE), GMX Resources (GMXRQ), ATP Oil and Gas (ATPGQ), CAMAC Energy (CAK), Pinecrest Energy (PRY.V), Midstates Petroleum (MPO) etc.

     

    Regards,
    VD

    5 Dec, 07:05 AMReplyLike1
     
  • Trade In Mexico

    , contributor
    Comments (598) | Send Message

     

    Absolutely brilliant title and analysis!!!!

     

    The title really sums up how stupid investors are being now. The current daily correlation between a 50 cent or $1 move in oil taking down oil stocks by a few percent is ridiculous. Dennis Gartman has no credibility, I don’t understand why CNBC has him on regularly.

     

    Thanks again for the article!

    4 Dec, 10:09 AMReplyLike6
     
  • contrarianadvisor

    Comments (997) | Send Message

     

    “Dennis Gartman has no credibility, I don’t understand why CNBC has him on regularly.”

     

    They have Jim Cramer on, so why not Dennis Gartman? They both change their minds on a daily basis and do it with conviction.

    4 Dec, 10:39 AMReplyLike7
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    Cramer needs to take my friends 100 level college logic class. The first thing my friend tells his students, on the first day is, “Getting louder doesn’t make your argument better.”

    4 Dec, 11:34 AMReplyLike5
     
  • Trade In Mexico

    , contributor
    Comments (598) | Send Message

     

    Contrarian, That is true about Cramer but the difference is that CNBC could eject Gartman with ease, while getting rid of Cramer would mean getting new anchors and having to replace his show.

     

    Right now, small cap oil stocks should be bought for a year end rally, stocks like MDR, WG, etc could see huge gains from current levels.

    4 Dec, 07:00 PMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Trade In Mexico,

     

    Thank you for your compliments.

     

    Regards,
    VD

    5 Dec, 07:06 AMReplyLike0
     
  • CSilver

    Comments (16) | Send Message

     

    Oil prices are bound to rise again… Just wait. Everoyne is getting excited over low gas prices but we all know it’s a cycle. If we’re at the bottom, you know the peak is on the way

    4 Dec, 10:14 AMReplyLike3
     
  • moatfrog

    Comments (749) | Send Message

     

    Everyone seems to have an opinion on oil pricing and what will happen to stocks. Up – down talk gets to be nauseating. Some articles are short winded while others (this one) are long winded. One equals the other. Forgetting all of that, I thoroughly know is that I filled up my car yesterday smiling at my lower fuel bill. I also realize, OPEC be damned, oil prices present a buying opportunity both at the pump and with the cheaper share prices of the big producers. Observing more cars on our roads and those in China and elsewhere just adds frosting to the cake. What are you doing? Are you immersing yourselves in the noise presented by this article and others of its ilk, or are you adding some oil shares to your portfolio?

    4 Dec, 10:40 AMReplyLike1
     
  • Noah Research Partners

    Comments (6) | Send Message

     

    Couldn’t agree more, everyone in the world is now an oil analyst. Specifically, since oil has dropped considerably, they project more declines..what are the odds?!!

     

    I think investors need to pull the trigger on stocks they wanted lower instead of watching tv for a buying signal.

    4 Dec, 06:07 PMReplyLike3
     
  • Realtoi

    Comments (318) | Send Message

     

    Buy quality that has paid uninterrupted dividends for decades, despite what happened with oil prices. That way you’ve got whatever situation we’re in now covered. You get paid for waiting..

    4 Dec, 07:32 PMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Noah Research Partners,

     

    What you describe is the definition of “HERD MENTALITY” that has brought the oil price at the current ridiculously low levels.

     

    But Einstein has said: “Two things are infinite: the Universe and human stupidity. And I am not sure about the Universe.”

     

    Regards,
    VD

    5 Dec, 07:10 AMReplyLike1
     
  • irishmaninbelgium

    Comments (49) | Send Message

     

    I agree that the ‘glut’ in supply is a bit of a nonsense and I’ve read a few articles recently lending weight to this argument.

     

    However, the claim that $80-$100 is the breakeven for shale seems unfounded – I think it was the IEA that said that only 4% of production uneconomic under $70?

     

    I also read a very interesting article today, I think on CNBC (apologies for the lack of sources), that discussed how transportation costs have plummeted in the past years.
    It mentioned that in 2011, companies were paying up to $28 a barrel in transport costs. It is now $1-$3 because of pipeline construction.
    If that is indeed the case, it is clear that a lot of shale is economic way below $70.

     

    Gartman and his nuclear fusion. What a tool. I made the exact same point elsewhere that unless engines are replaced with fusion reactors and someone discovers how to make plastic from ‘fusion’ we will be using oil for some time to come…

     

    I think the plummeting oil prices are the result of speculation more than any other factor but, as always, the market can remain irrational for longer than most of us can remain solvent.

     

    GL

    4 Dec, 10:56 AMReplyLike4
     
  • Vincent1966

    Comments (329) | Send Message

     

    I hope he’s right…that we’re not going to see a “new normal” in oil prices, but it’s too early to tell. Don’t underestimate the impact of overhead supply in oil stocks. A whole lot of damage has been done here and if we don’t see a rapid reversal, it’s going to be a long and painful thing to watch as holders bail out on any rally attempt.

    4 Dec, 11:00 AMReplyLike3
     
 
  • meridian6

    Comments (339) | Send Message

     

    It’s simple. Saudi Arabia is the only low cost producer in the world, but the rest of OPEC has costs similar to the US.

     

    Saudi only produces 10M bbl out of 30M bbl. I predict NOCs can only withstand the pain for 6 months. after that, they can elect to exit OPEC, and form a non-Saudi cartel to sell at $80-$90 band. Saudi can sell their 10M bbl cheap if they elect to, but that’s not enough to meet global demand, so buyers will have to pay non-Saudi price.

     

    4 Dec, 11:01 AMReplyLike5
     
  • bettheranch

    Comments (19) | Send Message

     

    Value Digger I do not think that Seeking Alpha is including your articles in their daily email of “Today’s articles on Energy Investing.” Or at least I have not been seeing them there.

    4 Dec, 11:10 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » bettheranch, I do not have any idea about it. Thank you for the heads-up.
    Regards, VD

    5 Dec, 07:11 AMReplyLike0
     
  • irishmaninbelgium

    Comments (49) | Send Message

     

    Also: Andrew John Hall has been dead wrong for the past few years.

     

    He is betting that the price of oil will increase. He is correct in this assertion. Everyone knows the price of oil is going to go up, eventually.

     

    ““When you believe something, facts become inconvenient obstacles,” Hall wrote in April, taking issue with an analyst who predicted a shale renaissance could result in $75-a-barrel oil over the next five years.”

     

    He should listen to his own advice, it seems.

    4 Dec, 11:11 AMReplyLike2
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    Fusion Reactors, indeed. Right around the corner.

     

    Here is one article where the “5 year” buzz line comes from:
    http://bit.ly/1viOe43

     

    “The team acknowledges that the project is in its earliest stages, and many key challenges remain before a viable prototype can be built. However, McGuire expects swift progress. The Skunk Works mind-set and “the pace that people work at here is ridiculously fast,” he says. “We would like to get to a prototype in five generations. If we can meet our plan of doing a design-build-test generation every year, that will put us at about five years, and we’ve already shown we can do that in the lab” . . . . An initial production version could follow five years after that.”

     

    And then ramping up commercialization of fusion power, another decade? we’re looking at 15-20 years best case scenario before fusion has any affect on fossil fuel prices. This just goes to support the author’s conclusion that oil prices are low due to “lame thinking.”

    4 Dec, 11:49 AMReplyLike2
     
  • Vijoda

    Comments (69) | Send Message

     

    Growing up, my neighbor Roy had the coolest mom. She let him put up a poster in his room of an eagle swooping down on a little mouse that had a single finger extended in the air. That visual flashed in my mind as I read this.

     

    No chart of the relationship between the strength of the dollar and the price of oil. Is it relevant?

     

    Good luck with your picks.

    4 Dec, 11:57 AMReplyLike3
     
  • ant21b

    Comments (539) | Send Message

     

    Oil will stay low for at least a few years the world economy is contracting not expanding and the U.S will enter a recession in about 2.5 years or so tops as part of the business cycle. Look at how oil stayed low in the 80s and 90s after being high in the 70s it was not a short term phenomena.

    4 Dec, 12:02 PMReplyLike0
     
  • billcharlesdixon

    Comments (1705) | Send Message

     

    I agree with you; oil should rise in 2015 if not this month. I don’t see much if any downside: we all knew that opec would probably not cut production; yet when they ratified that fact, oil prices went down another 10%. The whole thing is overdone, and what went down (in this case) must go up again.

    4 Dec, 12:03 PMReplyLike1
     
  • Flash Crash Gordon

    Comments (403) | Send Message

     

    Lot of knives likely left to be caught in this paradigm shifting move…not saying don’t dollar average, but be wary more pain likely lies ahead.

    4 Dec, 12:29 PMReplyLike3
     
  • Ruben12345

    Comments (418) | Send Message

     

    It would have been helpful to foresee this decline in oil was coming but no one did. .. To now claim we know what happens next seems not credible (again)

    4 Dec, 12:39 PMReplyLike4
     
  • IncomeYield

    Comments (1847) | Send Message

     

    Seems that some did. Some fairly large oil related positions and assets were sold over the past year or so.

    4 Dec, 01:01 PMReplyLike0
     
  • john001

    Comments (671) | Send Message

     

    Value Digger….another informative article. Thanks

     

    To all those investors who believe operators in the unconventional reservoirs can keep producing while oil prices are dropping, check out their H1 budget forecasts for negative changes in CAPEX. That will remove much of the guess work and hand waving on how profitable they expect their operations to be. They know better than the analysts and economists on when to turn the taps off.

    4 Dec, 01:03 PMReplyLike3
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » john001, Thank you for the compliments. Regards, VD

    5 Dec, 07:14 AMReplyLike0
     
  • juscallmej

    Comments (38) | Send Message

     

    good article.. totally agree.
    gartman is the worst of the worst in my opinion. he really is clueless. I dont know why they keep having him on every other day on fast money and the like.
    Its funny how media affect sentiment changes on a dime that makes everyone forget the bigger picture as you referenced above.
    remember ebola and the airline stocks in october? ignore the noise.

    4 Dec, 01:47 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » juscallmej, Thank you for the compliments. Truth is that some people had better not speak publicly so often because they shoot themselves in the foot.
    Regards,
    VD

    5 Dec, 07:16 AMReplyLike1
     
  • Freddyfred

    Comments (4) | Send Message

     

    That was NOT a LAME article ! Great Job! You covered a lot of material.

     

    I think at some point sooner than the media and herd thinks that oil will bounce hard upward. OPEC made a good move to instigate a needed correction and put the industry in check. Now I think (in the short term) we will see a scary drop lower fueled by more moves by OPEC such as todays move to cut prices from SA to Asia/India and USA. SA sees India as growing and needs to subdue the fact that demand is growing. I would not be surprised if massive amounts of capital is also used to force the commodity down further to keep the herd moving ion that direction. OPEC knows that they can turn it around very quickly (just tell the world they are cutting production and the herd reverses quickly) when they need to so they are in the drivers seat for sure.

    4 Dec, 02:00 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Freddyfred,

     

    Thank you for the compliments.

     

    A LOT of people and greedy oil speculators will be burned by shorting at the current levels. They have to pay for their mistakes and their greed, as always.

     

    Regards,
    VD

    5 Dec, 07:18 AMReplyLike0
     
  • nino91007

    Comments (226) | Send Message

     

    Oil fluctuates….down, then up. The question is how much MORE down it will go before it goes up…..yes $100+ is real but when? 2015 or 2018.

    4 Dec, 02:20 PMReplyLike1
     
  • goldenretiree

    Comments (932) | Send Message

     

    Lot of chutzpah here. You denigrate those with opposite viewpoints, then present everything you say as “facts.” When the fact of the matter is, nobody has a perfect crystal ball. Yes, oil will go back up. Question right now is “when.” The other question, how far does it fall from here? When you can definitively answer those questions, you can invest with confidence. Let us know when that occurs. Lot of good research here if you tone down the ego.

    4 Dec, 02:34 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » goldentree,

     

    There is nothing about ego here. You misunderstood it. I have a clear opinion that I support it with facts and links. If you have a different opinion, you are welcome to present it coupled with facts in another article. If you present speculation only, it will not help, I think.

     

    Regards,
    VD

    5 Dec, 07:21 AMReplyLike3
     
 
  • charles hinton

    Comments (2798) | Send Message

     

    value ,i agree with golden…there is too much ego.

     

    when you started quoting your” gods ” and casting scorn on any who disagree i lost interest.

     

    ps mr market is always right no matter how much fundamentalist cry.

    5 Dec, 11:11 AMReplyLike2
     
  • Dirk43

    Comments (17) | Send Message

     

    Gartman is surely way to optimistic with his fusion forecast but a better and more immediate alternative is already here, Hydrogen powered cars. With new technical breakthroughs coming rapidly such as graphene membranes, Hydrogen will replace electric cars this decade and will start to make a serious dent in gasoline as well.
    Another paradigm changing event already mentioned is China. The enormous real estate debt bubble and steel production bubble also fueled by debt has to come to a head soon. Yes, the collapse of China has been forecasted “forever” but so was the 2007 US recession which also was belittled for years right up to the edge. So was the collapse of the Soviet Union. The Chinese Govmnt has been able to keep the ball in the air because they control most of the economy but the Piper stands at the door. A Chinese economic collapse which WILL come will also collapse the oil price. Maybe it will recover some first but no energy investor can afford to ignore this.
    Caveat Emptor!

    4 Dec, 02:52 PMReplyLike0
     
  • firstinsnow

    Comments (509) | Send Message

     

    I don’t know, I’m not sure of any of this, and I’m standing by my
    position, firmly. [until I change it]
    What I am sure of, is that this situation will change, and that change
    is inevitable.
    NO, I am not an analyst.

    4 Dec, 03:30 PMReplyLike3
     
  • D. Rockefeller

    Comments (135) | Send Message

     

    I don’t know what the price of oil will be, just look at the charts and they are still going down. China is buying up a lot of excess oil and sticking it in tankers etc.
    What I want to know is a chart from the EIA on Zero Hedge showing retail gasoline sales in the USA have declined almost 75%!!!! since 2004. Then Bloomberg showed a photo of the first gas station in America selling gas for below $ 2.00. Weird that below the gas price it showed Diesel selling for $3.39 plus! The EIA does not explain that stuff well why diesel is much more expensive than gasoline.(a six cents higher tax from the Feds. low suphur costs and “demand” globally????) Then the EIA shows gasoline production in the USA has risen!!! OK that tells me big oil is exporting refined petroleum products to other countries to make tons of money off us. Killing diesel over environmental EPA type stuff for political reasons because gasoline costs more to make than Diesel even with the other factors and six cent tax, and Exxon is back in Green River developing their shale oil in situ electro-fracking method for the largest oil play on earth-TRILLIONS of BARRELS in AMERICA. All comes down to costs, the big boys games, and ignorance of the average US citizen willing to be played and fleeced.
    Yes overall your article was good but there’s a lot more going on the secret weird world of big oil than any of us will understand like how in the 70’s the US “government” supposedly allowed Saudi Arabia to shut down our nation in the WINTER and I froze waiting in gas lines? The USA??? Biggest army on earth plus Standard Oil of California developed the Saudi oil???? Or that their lawyer, John J. McCloy told at least seven US “presidents” what to do and say through Reagan and HW Bush? Heck he even ran the Warren Commission with Dulles and World War 11. Harold Hamm says he can drill existing wells in the “Scoop” at 99 cents a barrel and tried to sue OPEC. He is not going to shut down next year and plans on ramping up oil production big no matter what the price is. He wants to ream OPEC and make them blink unlike the 1986 oil bust when we went broke.
    All highly interesting and I am watching and going to buy back when I think oil has hit the low-could be next year though?

    4 Dec, 04:43 PMReplyLike1
     
  • justforfun777

    Comments (16) | Send Message

     

    too much time spent making fun of the analysts.

     

    why are you looking at GDP growth rates when talking about oil demand when oil demand figures for those same countries are available?

     

    I dislike articles that spend their time making fun of other oracles and then turn around and make their own guesses of what the future holds. It’s an emotional argument.

    4 Dec, 05:15 PMReplyLike1
     
  • TraderFool

    Comments (504) | Send Message

     

    Re: “too much time spent making fun of the analysts.”

     

    Actually, I like that part – in my nearly 2 decade experience, I’ve seen far too many investors put too much faith on analysts and it’s important to show actual real life examples where analysts are fallible also.

     

    For example, take a look at SDRL. When SDRL was above $40, there were not many analysts telling investors to sell, the prevailing tone was “crude oil is going up, up, up, and buy, buy, buy”.. But when SDRL cuts dividends to zero at $15-$20, they are now downgrading SDRL. Buy at $40, sell at $20? I think you can go to the poorhouse very fast following these “anal-ysts”.

     

    SDRL is not an isolated example. Today, after massive price falls, I see Zacks now telling investors to sell their energy mutual funds after these funds have massive falls …

     

    As for the future, no one knows what is going to happen, you have to follow your own investing/trading thesis. For me, I think SDRL has fallen 75% from peak, cut dividends to zero, so, I am slowly starting to accumulate SDRL, looking to spend up to 4% capital when it finally gets down to say $7. Yes, no guarantee it will fall down that far when today is only $12, but I like the fact that it has fallen from a peak of $48 down to $12 … that’s my unsubstantiated opinion also, and probably emotional as well 🙂 And yes, I’m starting to think of accumulating when analysts consensus is to sell … it worked very well for me over the past decade ….

    4 Dec, 05:36 PMReplyLike3
     
  • samberpax

    Comments (115) | Send Message

     

    justforfun777: I dislike articles that spend their time making fun of other oracles and then turn around and make their own guesses of what the future holds.

     

    ———————-…

     

    Exactly so! I am elevating my standard by lowering theirs. Sad, very sad indeed.

     

    Best,
    -samberpax

    4 Dec, 10:26 PMReplyLike0
     
  • stockdunn

    Comments (245) | Send Message

     

    XOM is my largest holding; also have PBA, SE, and LNCO (oops). However, this Bloomberg article has some “paradigm shift” ideas that should be entered into the conversation. Oil is no longer the only game in town, and that has to be considered. Also, just because our politicians refuse to take climate change seriously, doesn’t mean the rest of the world isn’t taking notice and preparing to do something about it:

     

    http://bloom.bg/12CBfjp

     

    Here is the link to Lockheed-Martin’s compact fusion announcement. These researchers/engineers are the best of the best, I would think, so if they’re making an announcement, they must have something legitimate up their sleeve, I would think:

     

    http://lmt.co/1yJEu5x

    4 Dec, 05:41 PMReplyLike2
     
  • TraderFool

    Comments (504) | Send Message

     

    Hello stockdunn,

     

    Interesting article on Fusion, nice read.
    However, the recent crude oil price fall down to $66 is most likely unrelated to Lockheed-Martin’s fusion piece, as that piece seems more about promoting Lockheed-Martin in research and what they think they could achieve in 5 years time, and still not yet confirmed …. but good to cast a quick glance from time to time on these sort of things ….

     

    If Lockheed-Martin managed to bring this to commercial production at small enough sizes at reasonable prices (that’s a BIG IF), then, I think we first see Lockheed-Martin’s stock price zooms up first a lot more than what we’ve seen so far, before we see global crude oil prices comes down significantly … that’s just my gut feel …

    4 Dec, 05:54 PMReplyLike2
     
  • TraderFool

    Comments (504) | Send Message

     

    PS. Regarding “paradigm shifts”, I would treat that with a huge grain of salt. In 2008, crude oil fell from $147 down to $33, and a lot of articles came out with “paradigm shifts”. If you had invested in crude oil counters then, you would be laughing with +100%-+400% gains when crude makes its way back up to $110 in just 2-3 years …

     

    There is no guarantee we’ve seen bottom in crude yet, but I feel we are now entering a period where Value Investors should start to feel excited on some of the high quality issues that are beaten up hugely, to trade below NAV and trade well below Replacement Costs …

     

    Cheers,
    TF

    4 Dec, 07:17 PMReplyLike1
     
  • stockdunn

    Comments (245) | Send Message

     

    TF: Thanks for your response. I agree, the LMT fusion concept probably has nothing to do with the drop we’ve seen, and any shift would be sometime down the road. Yet, these things sometimes land on your lap before you realized they would.

     

    I haven’t sold any of my oil stocks, but I haven’t added yet, either. Would love to buy some LNCO to bring down my cost basis, but I’m concerned they’ll have to cut, or pull a Seadrill and eliminate, their dividend.

    4 Dec, 11:13 PMReplyLike1
     
  • CheeseLover

    Comments (2) | Send Message

     

    After I read your article http://bit.ly/1thepsy, I was quite impressed with your reasoning and knowledge.
    I have been waiting for a follow-up and this seems to be the one.
    Again I am impressed by your knowledge and your reasoning but I’m a bit disappointed too. Especially by not addressing points 3 and 4 of these 8 major reasons.

    4 Dec, 06:04 PMReplyLike1
     
  • samberpax

    Comments (115) | Send Message

     

    CheeseLover: Again I am impressed by your knowledge and your reasoning but I’m a bit disappointed too. Especially by not addressing points 3 and 4 of these 8 major reasons.

     

    ———————-

     

    Just to refresh, points 3 and 4 of these 8 major reasons:

     

    3) The weakening of the U.S. dollar.
    4) OPEC’s decision to cut supply in November 2014.

     

    Best,
    -samberpax

    4 Dec, 10:41 PMReplyLike0
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Cheeselover, this is the follow up article as you guessed correctly. And you need to give it some time, as I also note.

     

    Please bear in mind that the HERD MENTALITY is like the TITANIC cruise ship. The big ships need a couple of miles to turn….

     

    Regards,
    VD

    5 Dec, 07:28 AMReplyLike1
     
  • TraderFool

    Comments (504) | Send Message

     

    VD,

     

    Agree this is very much a TITANIC cruise ship that will take a few miles to turn … apparently, the weekly US Oil production figure need to show 2 to 3 consecutive week of decline at the very least first. Until then, odds are crude oil will keep falling (short term momentum). I now feel we may be close to bottom, but we are not confirmed there yet, and I won’t be surprised if crude makes $30 very briefly, before a strong and fast recovery once a few of these marginal producers are out of the picture …

     

    Just as Saudis and US are stubborn right now to curtail production, in a year’s time when a few of the US producers goes bust, the Saudis will have achieved their objective and cut production, and just as quick, I see crude oil could rise back to $100 very fast … the US production numbers are always a surprise to markets, I expect the Saudi’s response to also be a surprise to the market when they cut back production in 6-12 months time – those looking for signs will not find it, I believe it will be a surprise to the market when it happen anytime within the next 12 months …

    5 Dec, 09:11 AMReplyLike0
     
  • Go Lakers

    Comments (1377) | Send Message

     

    “Also, the world’s biggest oil consumers are growing at rates that either are in line with 2013 rates or exceed expectations. There is nothing to indicate that global supply and demand imbalance has fundamentally changed in the past six months.”

     

    Whilst I agree with your base thesis and believe that the price of oil is going back up to what are more “normal” levels, some of the biggest consumers of oil on the planet are likely going to use less-and-less of it as time goes on. For example, there are pretty strict rules in place for future vehicle mileage requirements in the US, the EU has been clamping down hard on emissions for a pretty long time and lots of companies are now involved in the business of making energy efficient equipment and machinery. The list is long – GE, Siemens, Caterpillar, Deere, Hitachi, Volvo, Komatsu…..and so on.

     

    The historical environment for oil consumption is becoming more-and-more dated when compared to what the oil consumption environment will look like going forward. It’s hard if not impossible to use the past as an accurate guide to the future.

     

    The future oil consumption environment in two words – different and lower.

    4 Dec, 06:16 PMReplyLike1
     
  • rajprasad

    Comments (450) | Send Message

     

    every article on oil price that I read these days are bullish on oil price. May be one should take opposite view and stay short

    4 Dec, 06:56 PMReplyLike1
     
  • TraderFool

    Comments (504) | Send Message

     

    raj,
    If you are short on crude oil, I don’t see a reason why you need to close your shorts now as crude keeps falling. You should only close it when you see a confirmed uptrend, at least, that’s my view.

     

    Value Investors though are a different breed – they ease their way in specific value stocks, and now, many oil related stocks are trading at below NAV and well below Replacement Costs with strong cashflows during the last oil crisis … these stocks could still fall by another 25%-50% or close to bottom, no one really knows and so, they start to accumulate a little bit at a time … history has shown that crude oil will eventually recover, and they could be looking at +100% returns in 1-3 years time … the Value approach does not require market timing, and crude oil being highly cyclical in nature means we will definitely see $80-$100 crude oil again eventually over the next 1-3 years, we just don’t know exactly when. If it goes back to $100, you can be sure many of these crude related counters will go back up to their former levels, potentially 100%-300% gains …

     

    Mr Market has presented a compelling opportunity, the key is Money Management, accumulate a few high quality counters, and once bought, lock them up in a drawer and don’t worry about the daily price volatilities. In 1-3 years time, the gains of +100%-300% can be had … know the strategies in advance, never allocate more than 15%-20% portfolio to oil related counters at the bottom, and certainly, never go on margins. I have been staying cash majority of my portfolio, I just recently allocate 2% capital on oil counters, and plan to slowly work my way to 15%-20% assuming these stocks could fall up to 50% from current levels … This is a no-brainer approach, I just don’t care about the daily price volatilities.

     

    Cheers,
    TF.

    4 Dec, 07:12 PMReplyLike1
     
  • rajprasad

    Comments (450) | Send Message

     

    TF

     

    i am heavily long on oil and hurting badly but i keep buying as price drops. i am in your camp

    4 Dec, 07:29 PMReplyLike0
     
  • TraderFool

    Comments (504) | Send Message

     

    raj,

     

    Oil futures, stocks or options? I hope it is not leveraged instruments? The trend is still down …

    4 Dec, 07:45 PMReplyLike0
     
 
  • rajprasad

    Comments (450) | Send Message

     

    stocks with covered calls, naked puts no leverage – i can sustain the loss for a long time

    4 Dec, 07:52 PMReplyLike1
     
  • stockdunn

    Comments (245) | Send Message

     

    TF: Care to share what you’re buying?

    4 Dec, 11:17 PMReplyLike0
     
  • rajprasad

    Comments (450) | Send Message

     

    i bought ect voc per eroc and several others

    5 Dec, 12:22 AMReplyLike0
     
  • TraderFool

    Comments (504) | Send Message

     

    stockdunn,

     

    I’m eyeing SDRL – originally, I plan to go in with 4 bullets, at $13.50 (already done), $11, $9 and $7 very roughly speaking, but now, I will most likely try to take advantage of the short term down momentum (I am a trader) to cut loss some and take wait to pick it up at lower prices, and wait for a better technical signal. Allocating just 4% capital for SDRL.

     

    The other 2 counters are HP (this is a Dividend Aristocrat that keeps paying higher dividends every year for over 25 years) and NE (this is a nice Value play), but I haven’t triggered any buys in either yet as Crude keeps falling and the counters keep falling … Again, 4 bullets each, total 12% capital when I’m done all the 3 buys at the bottom.

     

    Originally, I plan to make a “simple” buy approach of just buying at set levels, but the more I study the crude markets fundamentally, the more I realize that I can fine-tune my entry better, so, let’s see if this is successful or not …

     

    How about you? What counters are you looking at?

    5 Dec, 09:23 AMReplyLike0
     
  • TraderFool

    Comments (504) | Send Message

     

    Hello raj,

     

    Glad you didn’t go for futures / options with time expiries – I just don’t know how long these crude oil price can fall – it can keep falling and falling, and the bottom and recovery I believe will be a huge surprise to me.

     

    Personally, I prefer safer, large caps, very liquid stocks that institutional buys with average daily volume greater than 500k to 1000k shares, and try to buy using a combination of writing puts and directly, and sell covered calls also.

     

    Whilst my current list is SDRL, HP and NE, if I find something else better, I’ll most likely drop one for that …

     

    Good luck.

     

    Cheers,
    TF

    5 Dec, 09:29 AMReplyLike0
     
  • rajprasad

    Comments (450) | Send Message

     

    TF

     

    Oil company stock valuation is based on EV/B/D; EV/EBITDA and EV/Reserve; It does not matter whether large cap or debt; In case of low rev they can always curtail drilling and be very liquid to pay down debt. Worse come worse they will sell their reserves for better price than current valuation. We just bid on various leases offered by Chevron and we did not get it as there are numerous buyers willing to pay higher price.

     

    raj

    5 Dec, 06:41 PMReplyLike0
     
  • Carlos San

    Comments (22) | Send Message

     

    This is an awful lot of cut and paste combined with high handed comments intimating the writer is a genius who knows more than everyone else. It is not original analysis. The fact that so many comments suggest this ois “excellent analysis” goes a long way toward explaining the somewhat sad state of oil and gas investment. I’m not hating, but re-read this article. It is just not analysis. Period.

    4 Dec, 07:24 PMReplyLike1
     
  • seanthome

    Comments (49) | Send Message

     

    But how much cheaper will oil go to before it starts to bounce back up?

    4 Dec, 08:07 PMReplyLike2
     
  • noobie107

    Comments (117) | Send Message

     

    That’s impossible to call.
    One could make educated guesses based on the geopolitical actions/goals of the major oil producing countries, changes in demand, etc.
    I’d rather see oil stay around these levels for a while as I accumulate.

    4 Dec, 08:11 PMReplyLike1
     
  • blahblahblahblahblar

    Comments (34) | Send Message

     

    What’s interested me is the issue of sovereign debt and reliance on oil revenues for certain countries.

     

    Looking at Venezuela and Iran for example – the oil price before the crash, at it’s peak…was nowhere near the quoted figures given for these countries to approach break even; so who goes broke first…small shale producers in the USA or the countries that need $150 oil to just break even, or do they just continue to go broke forever?

     

    I don’t think the OPEC decision is targeted solely at US shale plays…there’s others that are in far more pain over this, the rest of the global economy benefits while oil producers suffer a small but probably needed shakeout: I’ve got investments in oil but it’s ok to lose paper money on one part of the portfolio if another part benefits… I think sovereign default would be a lot worse for everyone involved. Oil will go back up in price eventually, and the median price will rise over time as the asset depletes. When is actually not that important unless you need your money tomorrow.

    4 Dec, 08:32 PMReplyLike3
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » blahblahblah,

     

    Please see the excerpt below:

     

    ” On top of that, there are some additional geopolitical clouds on the horizon that can make oil jump by H1 2015. For instance, the current low oil price has brought many OPEC members to their knees, while the holders of those countries’ sovereign debt are toast as long as oil stays at the current levels. Iran, Iraq, Libya, Algeria and Venezuela are not prepared to withstand low oil prices for long and they are now in serious danger of political upheaval at current prices.

     

    According to yesterday’s news from CNBC, the first signs of an escalating social unrest in Venezuela are already there, and things will definitely get worse over the next weeks.

     

    Furthermore, Russia and Saudi Arabia will be anxiously watching the rapid depletion of their sovereign wealth funds, which will make the political situation in these two countries dicey over the next months. “

     

    Regards,
    VD

    5 Dec, 08:05 AMReplyLike1
     
  • rrb1981

    Comments (11) | Send Message

     

    What will be quite interesting to see is if all of the pundits are correct regarding shale production being a “Ponzi scheme” etc.

     

    The sharp increase in production in the US over the past 5 years is simply amazing, however, it would be interesting to see what the overall average decline rate is for the US over the same time period.

     

    I’m inclined to believe that the decline rate is substantially higher in part due to the tremendous number of unconventional wells that have been drilled in the past few years and the fact that they are in the steep part of the decline curve. So, while production has been climbing, it seems that the Saudi’s are hoping to curb drilling and therefore let the decline curve catch up with the industry. With a sustained drop in prices, eventually borrowing base redeterminations will result in at least a moderate decrease in drilling, perhaps even drilling within cash flow!

     

    Also, while my opinions mean very little, I think it is important to point out somewhat misleading comments about certain plays being profitable at $40 or whatever they want to insert. Yes, if lease operating expenses and field level costs, transportation, ad valorem etc are $25-$40 per barrel, then those wells will be cash flow positive as long as pricing remains above that price.

     

    However $25-$40 oil will not provide a decent IRR for new wells. Remember most of these shale wells exhibit very high initial production and have sharp hyperbolic type declines. Producers need to get full payout in the first 12-24 months. Wells might decline 60-70% within the first 24 months. Look at the NPV of many of the Bakken wells at $60/bbl. Not nearly as attractive as when they were $100.

     

    I don’t know what oil pricing will do in the next few months, nor do I know what OPEC and the Saudi’s will do in 6 months. I do however believe that US oil producers will eventually have to reign in drilling budgets as cash flow wanes. I don’t know if that will mean production growth will taper, if production will hold steady with new production offsetting natural decline or if total US production will slowly decrease. I do know that it will be interesting to see it unfold.

     

    And while my opinion isn’t worth much, I believe that we will eventually find some happy medium where US producers can achieve decent IRRs and production can grow modestly. My guess is $75-$80 bbl.

    4 Dec, 08:49 PMReplyLike4
     
  • samiam911

    Comments (13) | Send Message

     

    I thoroughly enjoy VD’s articles, despite the fact that now all 4 of my positions initiated based on his recommendations are down from 30-60%. I still value them because their fundamental analysis, as outlined by VD, shows that they are still good investments; I will hold onto them for the long term.

     

    While VD is great at pointing out value, guessing what will happen to the price of oil will always be speculation. I like the argument given here, but the truth is that no one really knows.

     

    Investors in oil-producing companies should do so because they believe that their fundamentals will allow them to be successful and profitable in any environment of oil pricing.

    4 Dec, 10:45 PMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Samiam, thank you for your comments but I believe you have to keep in mind two things:

     

    – The recommended entry price for my picks, given that timing matters when it comes to investing. Buying a good company is not enough.

     

    – The investment horizon, given that I am not a day trader.

     

    Regards,
    VD

    5 Dec, 07:32 AMReplyLike1
     
  • samiam911

    Comments (13) | Send Message

     

    VD,

     

    Thanks for your reply. One of the things I appreciate about your articles is always standing by your track record. Given that, here are some of your picks from this year:

     

    CAZFF Recommended 5/15/14 – market price $0.30, currently at $0.14.

     

    PTAXF Recommended 8/26/14 – Market price $0.38, currently at $0.14

     

    LNREF Recommended 6/7/14 – Market price $0.35, currently at $0.19

     

    They have all experienced significant losses (on average 52%). However, I agree that I am not a day trader so if I liked these companies enough to buy them, I would still hold on as long as the fundamentals have not changed. As Buffet said, if you aren’t willing to lose half of your investment in the market, you shouldn’t be there.

     

    I remain long, but the simple fact is that there have been some significant losses in the short term.

    6 Dec, 08:58 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » samiam,

     

    I was wondering why you did not mention:

     

    AEI.T recommended at C$4.95, now at C$6.85, up 40% despite the slump of the energy stocks.

     

    CKE.T recommended at C$0.82, now at C$1.25, up 50% despite the slump of the energy stocks.

     

    CAZ.T was recommended at C$0.24 in May 2014.

     

    LNR was recommended at $0.32 in June 2014.

     

    PTA.V was recommended at C$0.39 AND C$0.25 in October 2014:

     

    http://seekingalpha.co…

     

    and for reference, Oasis (OAS) has dropped from $55 to $14,

     

    Sandridge (SD) from $7 to $2.4

     

    Magnum (MHR) from $8.6 to $3.9

     

    Penn Virginia (PVA) from $17 to $4.8

     

    Quicksilver (KWK) from $3 to $0.40

     

    and many many other producers have returned back to their 2010 levels. I can continue if you want. This might help you see the big picture.

     

    Regards,
    VD

    6 Dec, 10:38 AMReplyLike0
     
  • CAPTAIN SIR

    Comments (7) | Send Message

     

    HEY VD U B DA MAN KEEP NSIPPN DAT 1 BUCK CHAMPAIGN ON yr boat/and kickn ass-ITS A BOAT TIME U CORRALATED GEOPOLY WIT/REALITY==keep dign bro.

    4 Dec, 10:50 PMReplyLike2
     
  • Kevin Hess

    , contributor
    Comments (153) | Send Message

     

    Best comment in this article.

    5 Dec, 09:05 AMReplyLike0
     
  • CAPTAIN SIR

    Comments (7) | Send Message

     

    good advice-keep guzzlin bro/try puttn more geo poly wit/da articles like this-thanks.

    4 Dec, 11:21 PMReplyLike0
     
  • 8596381

    Comments (7) | Send Message

     

    Rrb1981, agree $40/bbl would probably cover variable cost and thus existing producing tight oil wells would not be shut in. But you are right that much higher price needed for new wells to be economic. From what I Recall best locations in Baaken formation could probably be economic for new wells at $65, maybe a little lower. Eagle Ford would be something like $55, believe Niobrara in between. But, many wells have been drilled in less productive parts of these formations and those need much higher oil price to be economic. Again, these are rough, directional estimates. In reality production techniques keep improving, and some companies are will better, or have better locations, than others.

     

    My view is some new tight oil wells would still be drilled if oil stayed below $70, but likely not enough to overcome the rapid depletion from existing wells. I believe we will start to see US production drop sometime in H2 2015, but until then US production keeps going up. Think it will take maybe 6 months for wells already committed to be drilled and completed. After that market should at some point get back to $80-$85, maybe 12 months. But likely to be a volatile ride along the way. I personally think we have not seen bottom yet. Too much downward momentum, global oil production likely to keep increasing for the near term.

     

    Best to prepare for the volatility and try to recognize the opportunities as they play out, IMO. So many things could intervene ( geopolitics, global economic activity, China credit, etc)!

     

    Take care

    4 Dec, 11:22 PMReplyLike1
     
 
  • Nawar Alsaadi

    , contributor
    Comments (432) | Send Message

     

    Excellent article Value Digger, I share your outlook on oil as well. I would strongly advice reading this article as well in regards to the significant risks of $150B in cancelled oil capex in 2015 and a subsequent supply crunch later in the decade. At current prices up to 12.2m barrels in new supply are at risk between today and 2025:

     

    http://bit.ly/12EquNo

     

    Regards,
    Nawar

    5 Dec, 12:03 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Nawar,

     

    Thank you for your compliments and your insightful comment. Yes, the news you mention is another very strong bullish indicator.

     

    Regards,
    VD

    5 Dec, 08:08 AMReplyLike0
     
  • rv3lynn

    Comments (438) | Send Message

     

    The one and singular reason that world oil prices have collapsed is that U.S. shale production has gone from zero to 5 million BOEPD in 5 years.

     

    If this 5 million BOEPD were not on the world market today, where would we be?

     

    We would be short on oil.

     

    Instead, we are long on barrels because every dumba** American oilman that drills a good well immediately turns around and puts all of the cash flow from his good well into ANOTHER well. Plus he borrows a few million bucks to drill a few more wells.

     

    How else can you explain the unprecedented exponential oil production growth in this country?

     

    I wish these geniuses would spend their profits on wine, women, song, jet airplanes, country houses or something, besides plowing every single dollar of profit back into the ground.

    5 Dec, 01:20 AMReplyLike1
     
  • Dr. Z.

    Comments (93) | Send Message

     

    Excellent suggestion for the next shareholders meeting. What were they thinking…

    5 Dec, 02:49 AMReplyLike2
     
  • Goldens

    Comment (1) | Send Message

     

    This is all about the Ukraine. Saudi is the US’s bitch and driving down the price of oil is simply to put the hurt on Russia. Price of oil will bounce back once Russia gets the hell out of the Ukraine. As far as the laws of supply and demand all you need to do is take a look at copper. The LME is sitting at a 5+ year low and the price is below $3. Don’t make the mistake of thinking the markets make any sense. Listen to technicals.

    5 Dec, 09:06 AMReplyLike2
     
  • IOROUSSO

    Comments (19) | Send Message

     

    Good article. This market is not for traders, but for real investors. When you are a true investor you must be cool, sober, analytical but especially well informed. This is exactly what Value Digger is doing. I think his analysis is excellent and his <<cool blood>> will win in the end. Do you really believe that the oil sector will be destroyed? I don’t. But careful don’t spent your OWN money at once, keep them for worst times. There is no other way to make money in these markets. Value Digger you have my respect.

    5 Dec, 09:48 AMReplyLike2
     
  • Holthusen

    Comments (638) | Send Message

     

    Value Digger, thank you for another informative article of Petroleum production, pricing and demand. The amount of comments is indicative of your timely in depth analysis.

     

    You make a statement in your piece that sums up your whole thesis: “new oil is not cheap.”

     

    Any way we look at the supply situation, most new production will continue to come from expensive unconventional means such as shale or tar sands. Surely there are new conventional pockets of crude to be found, but they won’t be Elephants and will probably be expensive “deep water” reservoirs.
    Petroleum remains a key product for Global Energy & Industrial production and current low prices will NOT allow future demand to be satisfied.

    5 Dec, 04:32 PMReplyLike2
     
  • charles hinton

    Comments (2798) | Send Message

     

    pumping oil back into ground makes up alot of demand
    Us reserves….
    http://bit.ly/1vYF4uf

     

    china oil reserves
    http://bit.ly/1vYF4ug

    5 Dec, 05:25 PMReplyLike2
     
  • Brett Fromme

    Comments (6) | Send Message

     

    Value Digger,

     

    I agree with much of what you wrote.

     

    In a recent interview with Jim Cramer, Boone Pickens stated that the Saudis will eventually have to cut production. (my comments: OPEC will not survive if the Saudis let Venezuela, Iran, Algeria, Nigeria, Libya, as well as Russia descend into chaos. Not to mention destabilizing an already fragile world economic situation. When the Saudis cut, oil will soar.) B.P. also stated that the producers will be forced to cut CapEx. As they do US production will come down. Based on this, B.P. thought oil would rebound to $100 by mid-2015. Most people will dismiss Boone Picken’s comments. But when a wise old billionaire oilman speaks, I pay attention.

     

    I think most oil services companies will have a rough 2015 (buying opportunity for HAL, SLB). Also, highly leveraged small producers may be forced into bankruptcy, but stronger producers will benefit by picking up their producing acreage and reserves for pennies on the dollar.

    5 Dec, 11:36 PMReplyLike2
     
  • Holthusen

    Comments (638) | Send Message

     

    Brett, I watched the same interview and although his projects over the past several years have not really been home runs, this slump in pricing is certainly not his first rodeo! As you aptly stated “when a wise old billionaire oilman speaks, I pay attention.”

    6 Dec, 09:23 AMReplyLike0
     
  • Watermellon56

    Comments (451) | Send Message

     

    Thanks for the food for thought.
    Regarding Syria, it seems clear the US has opted to fight a war of attrition in northern Iraq rather than cut the head off the snake in Syria. This approach takes care of a number of problems (high casualties on both sides) and is training a whole new generation of US pilots and drone operators.
    I take your comments regarding portable fusion to be light hearted because the neutron flux off such reactors would kill everyone in the car.
    The greatest proof against Fleischmann–Pons knuckleheaded claims of nuclear fusion at room temperature was that they were alive at the announcement. The thought that Fleischmann & Pons conducted such an experiment in an occupied building should have been grounds for dismissal or incarceration.
    LMT is relying on plasma (not room temperature). This compounds the problems with having some random drunk driving around with a nuclear fusion device. Perhaps LMT can make electricity that is too cheap to meter, which would be big, but it is just speculation and not 5 years away.
    In the end, the House of Saud is still in control of the price of oil. Thank God the Iranians are not in that seat.
    By the way, in 1938, the US producers predicted the US has a 10 year supply of oil. I think producers can only see ten years ahead.

    6 Dec, 09:56 AMReplyLike0
     
  • KiteFlyer

    Comments (36) | Send Message

     

    Value Digger,

     

    Thanks for your article!

     

    It confirms what I have been thinking, although without the sources that you cite!

     

    Geo-politically, the world is a much more uncertain place at present! As for the pace of economic activity in the U. S. and elsewhere, the numbers are always after the fact! Can’t measure what hasn’t happened yet! Prognostication is fine for what it is, but it is just that- a guess, however educated!

     

    Oil prices may have further to decline, I don’t know, but the value of some of the oil stocks, I find compelling at these levels.

    6 Dec, 10:42 AMReplyLike0

Capital Controls Feared As Russian Rouble Collapses

‘Funding problems are increasing dramatically.  We think Russia is now flirting with systemic problems,’ said Danske Bank

https://i1.wp.com/l2.yimg.com/bt/api/res/1.2/WmBton1MRYnr0RMDXl9XMw--/YXBwaWQ9eW5ld3M7Zmk9ZmlsbDtoPTM3NztweG9mZj01MDtweW9mZj0wO3E9NzU7dz02NzA-/http://globalfinance.zenfs.com/images/SG_AHTTP_OLGBBUS_Wrapper_NewFeed_1/2014-11-10T132927Z_1_LYNXNPEAA90JQ_RTROPTP_3_RUSSIA-CENBANK-CAPITAL_original.jpg

The currency has been in free fall since Saudi Arabia and the Gulf states vetoed calls by weaker OPEC members for a cut in crude oil output. By Ambrose Evans-Pritchard, The Telegraph

The Russian Rouble has suffered its steepest one-day drop since the default crisis in 1998 as capital flight accelerates, raising the risk of emergency exchange controls and tightening the noose on Russian companies and bodies with more than $680bn (£432bn) of external debt.

The currency has been in free fall since Saudi Arabia and the Gulf states vetoed calls by weaker OPEC members for a cut in crude oil output, a move viewed by the Kremlin as a strategic attack on Russia.

A fresh plunge in Brent prices to a five-year low of $67.50 a barrel on Monday caused the dam to break, triggering a 9pc slide in the Rouble in a matter of hours.

Analysts said it took huge intervention by the Russian central bank to stop the rout and stabilize the Rouble at 52.07 to the dollar. “They must have spent billions,” said Tim Ash, at Standard Bank.

It is extremely rare for a major country to collapse in this fashion, and the trauma is likely to have political consequences. “This has become disorderly. There are no real buyers of the Rouble. We know that voices close to president Vladimir Putin want capital controls, and we cannot rule this out,” said Lars Christensen, at Danske Bank.

“Funding problems are increasing dramatically. We think Russia is now flirting with systemic problems,” he added.

Some Russian banks have already started limiting withdrawals of dollars and euros to $10,000, an implicit lock down for big depositors.

Rouble against the dollar since December 2012.

Russian premier Dmitry Medvedev said 10 days ago that capital controls are out of the question. “The government, myself, my colleagues and the central bank have repeatedly stated that we are not going to impose any special restrictions on capital flows,” he said.

Ksenia Yudaeva, the central bank’s deputy governor, said the authorities are battening down the hatches for a “$60 oil scenario” lasting deep into next year. “A long decline is highly probable,” she said.

Russia has lost its ranking as the world’s eighth biggest economy, shrinking in just nine months from a $2.1 trillion petro-giant to a mid-size player comparable with Korea or Spain.

In a further setback, Mr Putin gave the clearest signal yet that the South Stream gas pipeline – intended to supply Europe without going through Ukraine – may never be built. “If Europe does not want to carry it out, then it will not be carried out,” he said.

Oil and gas provide two-thirds of Russia’s exports and cover half of its fiscal revenues, a classic case of the “Dutch Disease” that leaves the country highly exposed to the ups and down of the commodity cycle.

Protracted slumps in crude prices crippled the Soviet Union in late 1980s, and caused Russia to go bankrupt in the late-1990s. “The Rouble will not stabilize until oil does,” said Kingsmill Bond, at Sberbank.

The bank said Russia faces a mounting deficit on its capital account. The country is no longer generating a big enough trade surplus to cover capital outflows. Sberbank warned that reserves are “likely” to fall to levels that ultimately require capital controls, unless Western sanctions are lifted.

While Russia has $420bn of foreign reserves, this war chest is not as a large as it seems for a country with chronic capital outflows that relies heavily on foreign funding. Lubomir Mitov, from the Institute of International Finance, said investors may start to fret about reserve cover if the figure falls to $330bn.

The Rouble’s slide has led to fury in the Duma, where populist politician Evgeny Fedorov has called for a criminal investigation of the central bank. Critics say the institution had been taken over by “feminist liberals” and is a tool of the International Monetary Fund. The office of the Russia general prosecutor said on Monday it was opening a probe.

The central bank has refused to intervene to defend the Rouble over recent weeks, letting the exchange rate take the strain rather than burning through reserves to delay the inevitable, as Nigeria and Kazakhstan are doing. It squandered $200bn of reserves in a six-week period in late 2008 and triggered an acute banking crisis, learning the hard way that currency intervention entails monetary tightening.

By letting the Rouble fall, it shields the Russian budget from the slump in global oil prices, though not entirely. Deutsche Bank said the fiscal balance turns negative at crude prices below $70.

Yet the devaluation is causing prices to spiral upwards in the shops and may at some point cause a self-feeding crisis if it evokes bitter memories of past currencies crashes. The finance ministry said it expects inflation to reach 10pc in the first quarter of 2015.

There is already a dash to buy washing machines, cars and computers before they shoot up in price, a shift in behavior that signals stress.

The Rouble slide is ratcheting up the pressure on Russian companies facing $35bn of redemptions of foreign debt in December alone, mostly in dollars. Yields on Lukoil’s 10-year bonds have jumped by 250 basis points since June to 7.5pc.

Most Russian companies have been shut out of global capital markets since the escalation of Western sanctions, following the downing of Malaysia Airlines Flight 17 in July. They are forced to pay back debt as it comes due, seek support from the Russian state or default. The oil giant Rosneft has requested $49bn in state aid.

Sberbank said companies must repay $75bn next year in dollar debt and cannot hope to roll over more than a tiny sliver of this. Nor can they expect more than $10bn of fresh capital from China.

The bank said there are companies that are profiting nicely from the devaluation, since they sell abroad yet their costs are local. These include the base metals groups Norilsk and Rusal, as well as steel producers, and fertilizer groups such as Uralkali and PhosAgro. “Some of these are making a lot of money right now, and their stocks are flying,” said one trader.

The Russian equity index is trading at 0.5pc of book value. Rarely has a market ever been so cheap.

The Real Reason Saudis Didn’t Cut Oil Production

https://i1.wp.com/www.touristmaker.com/images/saudi-arabia/medina-saudi-arabia.jpgby Martin Vleck

Summary

  • There have been plenty of explanations why OPEC didn’t cut production quotas.
  • Most of them make sense. But they fail to explain the whole strategic long-term picture.
  • There is a rarely mentioned strategic reason why – counter intuitively – oil prices falling and staying low in 2015 is in the best long-term interest of most oil exporters.
  • Moreover, the current status threatens OPEC’s influence over oil prices. OPEC will need to reform and include virtually all major oil producers in quota negotiations. Otherwise, OPEC will become irrelevant.
  • There is also an unexpected historical parallel for the current oil slump.

The conventional explanations for OPEC not cutting the production

The OPEC leaving production quotas unchanged has naturally been the top news last week and most investors have spent at least some time over the weekend to reflect on the implications of the move on their portfolios. There have been several theories and explanations as to why the OPEC didn’t cut. The obvious reasons stretch from the lack of agreement between OPEC members on whether to cut, by how, and most importantly, how much production each country sacrifices. Other explanations include the strategy of the dominant OPEC member, Saudi Arabia, to let the prices fall in order to squeeze out high-cost oil producers, such as Canadian oil sands and U.S. shale oil. The explanations or speculations also include some supposed secret deal between the U.S. and Saudi Arabia to damage Russia, Iran, ISIS and other “rogue” regimes or interest groups around the world. There are certainly many more theories for why OPEC didn’t cut.

Saudis are most probably thinking long term, so any explanation needs to include a combination of short term and long-term strategic goals. And the question also lingers whether OPEC still has enough power over oil prices.

Is this the real reason why Saudis didn’t cut?

There have been plenty of explanations why the OPEC didn’t cut production quotas. But there is one very long-term strategic reason why the price fall may be welcome by OPEC. This explanation has not been discussed too much, at least I haven’t seen it mentioned. Yet over the very long, very strategic time horizon, this would be the most probable explanation for letting the price of oil to fall now.

Who is the biggest competitor for the Saudis, or OPEC countries? Is it Canada? Is it the U.S.? Russia? Offshore Africa? The answer is no. Let me give you a hint. What is the biggest threat to not just Saudi Arabia, or OPEC, but to all oil producers? The answer is simple:

The biggest threat to all oil producers of the world is the high oil price. (No, that’s not a typo).

Alternative energy sources are the true competitor of all participants in the oil and gas industry.

High price of oil spurs faster development and implementation of alternative energy technologies. It is just a matter of time before solar, wind and other alternative sources of energy will become competitive or cheaper than oil and gas in many applications. In some places they already are. Sometimes even without any subsidies and including the benefits that oil and gas industry receives in the form of free negative externalities, such as the damage to the water and environment in general. To be fair, the negative environmental impact of the solar panel production and disposition is rarely mentioned.

Moreover, the cost of generating alternative energy has been falling and there is no reason why the cost should stop falling as the technological process keeps leaping ahead. It will probably take centuries before the world runs out of good sunny or windy spots (Sahara, Saudi desert – interestingly, Southern U.S. for solar and plenty of shores for wind are just some examples), so the costs to extract additional alternative energy megawatts will not rise. Plus, the sun rises every day, so the source of this energy is almost infinite and doesn’t deplete or deteriorate. It is like a fixed cost which will never rise over time.

On the other hand, the reserves of oil and gas are finite and the cost of extracting an additional barrel of oil has been rising – and will most probably keep rising – due to cheap sources of oil being always extracted first as well as due to generally rising overall costs associated with oil production.

Alternative energy space is rapidly developing

The recent technical development in the area of electricity storage (batteries, etc.) and alternative energy is surprisingly fast. Panasonic, Tesla and many others are investing in cheaper and more efficient large-scale batteries for economically viable electricity storage. The sales of electric cars, while still tiny, grow at rapid annual rates globally. Hydrogen fuel cell powered cars are emerging (Honda, Hyundai and Toyota already sold/leased some hydrogen models to the public, Audi has a fully functional prototype, many other brands are at similar stages but the technology is evolving rapidly). Ironically, hydrogen is usually produced from natural gas or methane. However, the efficiency is roughly 80%, which is extremely high, much higher than conventional combustion engines. Natural gas also has a much lower value for the oil and gas producers than the oil (lots of it is still just burnt on the spot). So the overall revenue for the oil and gas industry will be significantly lower from a hydrogen-powered car than from a conventional gasoline car. The same holds true for electric cars of course. The hydrogen fueling stations infrastructure is in its infancy, and only a true fan would buy/rent a hydrogen car now, but judging from the hydrogen car mileage and activities of car manufacturers, fuel cell infrastructure may be just 2-3 years behind the electric vehicle infrastructure. If some favorable legislation chips in, the gap could actually close very soon.

But cars are just one of many examples of how alternative energy sources threaten to replace significant volumes of oil in the future. On the other end of the spectrum are speculative developments, such as the fusion power which has been a fata-morgana for many decades. Even a working solution now would probably take five to ten years to make it commercially available. However, Lockheed Martin now claims to have made a breakthrough in fusion technology, offering no details though. So their claim may easily be just part of a creative PR campaign. (I am not suggesting they are lying, but I have to discount the information because there is no way to prove it)

Oil is here to stay for decades

Of course lots of oil will still need to be consumed, for many decades to come. But the market will be shrinking or stagnant in dollar terms. Actual physical volumes may moderately rise. The improvements in power consumption efficiencies are not exactly going to help the price and volume. On the other hand, growing global population and rising buying power of a global consumer is a major positive factor. All in all, I believe the current oil price weakness will continue only in the short run. The prices of WTI crude should stabilize in the medium term of several months or quarters at the level of $60-$80 per barrel.

http://allsortsofposts.files.wordpress.com/2013/02/riyadh-saudi-arabia.jpg

The only way many oil and gas exporting countries can survive in the long run

Oil and gas revenues are often a dominant source of income for the producing countries. To say many are very dependent on oil and gas revenues is a gross understatement. Preserving at least some oil and gas revenue is a matter of life and death for these countries. Therefore, the only way to survive the next few decades for most oil and gas producing countries is to cut the price of oil drastically NOW. That is their only chance to at least slow down the development and implementation of alternative energy sources into widespread usage, before it is too late from their point of view. If they fail, the price of oil will get stuck at much lower levels almost permanently.

OPEC will lose relevance if it doesn’t manage to reform and include virtually all major oil producers in quota negotiations

Higher-cost producers are planning to increase their oil/oil products exports to global markets. For example, Canada prepares to sign a free trade agreement with South Korea “in the coming months” which will cut crude oil and LNG duties by 3% and by 8% on refined products virtually immediately upon signing the deal, and this deal would serve as a “gateway to the wider Asia-Pacific region”). Similarly, the U.S. has been warming up to the idea of looser oil export policies and discussing a free trade deal with the EU. The fact that Saudi Arabia recently cut price for its Asian customers while raising them for the U.S. would give some more support the theory that the North American market and its producers are the prime target of its strategy. And this is probably the medium-term goal of the Saudis, according to my opinion.

The fact that oil prices topped in the middle of June, almost exactly on the date when the message about the planned free trade agreement with South Korea was officially released (June 16, 2014), is certainly an interesting coincidence. Or is it? Additionally, it is likely that the Saudis see the waning pricing power of OPEC due to flexible production from the U.S. shale oil fields which can be quickly boosted or cut in order to influence the total world production. This ability takes away the power over oil from the Saudis which have possessed this power to adjust production until recently. Therefore, the Saudis probably try to reign in all OPEC members and force them to respect the set quotas and share any potential cuts among all members, without the Saudis bearing most of the quota cut. But the falling oil price has an interesting historical parallel and implications.

Lower price of oil serves as an inverse oil price shock (the opposite of the 70’s)

Besides the conventional explanations for the current oil price slump, there is a surprising inverse historical parallel – the first and second oil price shock in the 70’s (1973 and 1979). Back then, prices of oil spiked rapidly and remained high and the time was generally characterized by booming population growth, young population, rapid inflation, high interest rates which subsequently caused a supply-side shock and a recession. But this period also spurred unprecedented innovation around the world with advances in robotics, miniaturization, semiconductors, and other fields which radically improved efficiencies which decreased energy and material intensity of production, especially in Japan.

The current situation is almost exactly the opposite. The price of oil is not rising but falling rapidly. Inflation is extremely low (parts of the world already experience deflation), aggregate demand is sluggish amid falling real income, almost non-existent population growth and aging population (in the U.S. and other developed countries). All this discourages investments in energy innovation and energy efficiency (low interest rates help a lot, though).

Existing alternative energy solutions are becoming more and more uneconomical compared to falling price of oil and gas, and the opportunity cost of using subsidized “green” energy is rising relative to cheaper oil. Existing subsidies suddenly may not be high enough to cover the costs to install further alternative energy capacities. Investments into further alternative energy R&D will be hard to obtain due to low potential ROI of the innovations if the future price of oil is expected to remain low. This will help conserve the status quo or at least slow down alternative energy advances. For the current oil producers – from all around the world, not only for Saudi Arabia or OPEC – lower prices are great news in the long run, even though they are painful now.

My oil price outlook

In the short run (several months and quarters), I am very bearish on oil prices because the oil producers have motivation to keep the price low until the highly leveraged, high-cost oil producers go out of business or are bought for pennies by their stronger competitors. Also, oil producing countries would need to maintain at least several quarters of weak oil to discourage long-term investments into alternative energy innovation, possibly until the current round of alternative energy R&D companies and some solar energy companies go out of business or consolidate.

However, over the medium to long term (years and decades), I am neutral to moderately bullish on oil prices as I believe the markets and industry will find a decent equilibrium around $60-80 per barrel. However, I don’t expect long-lasting spikes above $90-100 per barrel (barring the global security situation getting out of hand) because the flexible U.S. shale producers currently hold a permanent “call option” on the oil market. Every time the price spikes, they will quickly add more production, balancing the market. It is quite similar to the Bernanke put option, just working the opposite way and in oil.

Investment implication

I opened a long position in United States Oil ETF (NYSEARCA:USO) (selling covered calls to help mitigate contango issues) and Seadrill (NYSE:SDRL) late last week. I am also considering establishing a long position in British Petroleum (NYSE:BP). Furthermore, for long-term investors with high risk tolerance, I recommend smaller positions in more speculative and risky oil and gas services small-cap stocks which I analyzed in the past few weeks. These include Tidewater (NYSE:TDW), TGC Industries (NASDAQ:TGE), Dawson Geophysical (NASDAQ:DWSN), GulfMark Offshore (NYSE:GLF), Ion Geophysical (NYSE:IO) and CGG Industries (NYSE:CGG). I don’t hold any positions in any of these due to my preference for a highly concentrated portfolio but may decide to open long positions depending on future situation.

OPEC Refuses to Cut Production, Oil Plunges off the Chart

https://martinhladyniuk.files.wordpress.com/2014/11/a4b67-a2boil2bworker2bin2bnorth2bdakota.jpg

   Oil rig in North Dakota. Increased US drilling is a factor in the current decline in prices.  This article by Wolf Richter

The global oil glut, as some call it, is caused by the toxic mix of soaring production in the US and lackluster demand from struggling economies around the world. Since June, crude oil prices have plunged 30%. It drove oil producers in the US into bouts of hand wringing behind the scenes, though they desperately tried to maintain brittle smiles and optimistic verbiage in public.

But everyone in the industry – particularly junk bondholders that have funded the shale revolution in the US – were hoping that OPEC, and not the US, would come to its senses and cut production.

So the oil ministers from OPEC members just got through with what must have been a tempestuous five-hour meeting in Vienna, and it was not pretty for high-cost US producers: the oil production target would remain unchanged at 30 million barrels per day.

“It was a great decision,” Saudi Oil Minister Ali al-Naimi said with a big smile after the meeting.

Saudi Arabia and other Gulf states were thus overriding the concerns from struggling countries such as Venezuela which, at these prices – and they’re plunging as I’m writing this – will head straight into default, or get bailed out by China, at a price, whatever the case may be.

Venezuelan Foreign Minister Rafael Ramirez emerged from the meeting, visibly steaming, and refused to comment.

The US benchmark crude oil grade, West Texas Intermediate, plunged instantly. Even before the decision, it was down 30% from its recent high in June. As I’m writing this, it crashed through the $70-mark without even hesitating. It currently trades for $68.51. Chopped down by a full third from the peak in June.

This is what that Thanksgiving plunge looks like:

US-WTI_2014-11-27

Nigerian Oil Minister said OPEC and Non-OPEC producers should share responsibility to stabilize the markets. I don’t know what he was thinking; maybe some intervention by central banks around the world, such as the coordinated announcement of “QE crude infinity” perhaps?

Ecuadorian Oil Minister called the decision a rollover. However, the Iranian Oil Minister, whose country must have a higher price, kept a positive face, saying, “I’m not angry.”

The next OPEC meeting will be held in June, 2015. So this is going to last a while. And there is no deus ex machina on the horizon.

It seems OPEC, or rather Saudi Arabia and some of the Gulf States, decided for now to live with the circumstances, to let the markets sort it out. High-cost producers around the world will spill red ink. Governments might topple. Junk bondholders and shareholders of oil-and-gas IPOs that have blindly funded the miraculous shale revolution in the US, lured by ever increasing hype, will watch more of their money go up in thick smoke.

And the bloodletting in the US fracking revolution will go on until the money finally dries up.

OPEC’s Prisoner’s Dilemma Unfolding

https://i0.wp.com/www.econlife.com/wp-content/uploads/imported/16422_8.26_000005651286XSmall.jpg
by Marc Chandler

Summary

  • OPEC faces internal and external challenges.
  • A large cut in output is unlikely.
  • Prices may have to fall by another $10 a barrel or so to begin having impact on production.

Prisoner’s Dilemma Unfolding. The oil producing cartel will be 55 years old next year. It is not clear, but it may be experiencing an existential crisis. It’s share of the world oil production has fallen with the rise of non-OPEC sources, like Russia, Norway, the UK, Canada, and significantly in recent years, increasingly the US.

In addition to the external threat, OPEC faces internal challenges, There is a divergence of perceptions of national interest by the political elite. Indeed, Middle East politics is arguably incomprehensible without appreciating the tension between Saudi Arabia and Iran.

Generally speaking, OPEC countries have tended to fall into one of two groups. The first has greater oil reserves relative to population. Saudi Arabia and Kuwait are the obvious examples. The second have relatively less oil and more people. Iran and Iraq are examples. This has often created conflicting strategies. The former wants to protect the value of their reserves by discouraging alternatives, which means relatively low prices. The latter want to maximize their current value.

OPEC, like all cartels, have governance or enforcement challenges. It long faced difficulty ensuring that the production agreements and quotas are respected. By OPEC’s own reckoning, there is often production in excess of the prevailing agreement. Last month, while oil prices were falling, OPEC says that it produced 30.25 mln barrels a day, which is 250k barrels a day over the production agreement. This may under-estimate OPEC’s production. Iran, for example, appears to be selling greater amounts of (condensate) oil than the sanctions allow.

The prisoner’s dilemma is both within OPEC and without. For the Saudis to continue to act as the swing producer, it would mean the surrender of revenue and market share to its rival Iran. Iran would very likely use the proceeds for purposes that would frustrate Saudi Arabia’s strategic interest. In a similar vein, a substantial cut in OPEC output, even if it could be agreed up, would benefit non-OPEC producers and only encourage the expansion of US shale development.

https://i2.wp.com/static2.businessinsider.com/image/54748126ecad04c815222db7/russia-doesnt-have-a-great-reputation-with-opec.jpg

Putin with Igor Sechin (right)

Contrary to the some conspiracy theorists who claim Saudi Arabia is doing US bidding by allowing the price of oil to fall to squeeze Russia, it has its own reasons not to want do Russia favors. Putin’s support for Assad in Syria and the Iranian regime puts Russia in opposition to Saudi Arabia. If the Saudis pick up the mantle again as the swing producer, Russia would a beneficiary. A recovery in oil prices would allow Putin to replenish his coffers, which would make its foreign assistance program even more challenging.

Moreover, and this is a key point, given OPEC’s reduced leverage in the oil market, a large cut in the Middle East production of mostly heavy sour crude might not be sufficient to support prices. It could lead to a loss of both revenue and market share. It could also lead to new widening of the spread between Brent, the international benchmark, and WTI, the US benchmark.

The significant drop in oil prices over the last several months has not deterred the expansion of US output. In the week ending November 7, the US produced nine mln barrels a day, which was the most in more than two decades. Output slipped in the week through November 14 by less than 60k barrels a day, but we would not read much into that.

Industry estimates suggest that more than three-quarters of the new light oil production next year is expected to be profitable between $50 and $69 a barrel. The press reports that rather than be deterred by the decline in prices, some companies, like Encana (NYSE:ECA) plan to dramatically increase the number of wells in the US Permian Basin (Texas) next year.

https://i2.wp.com/oilindependents.org/wp-content/uploads/2013/05/Permian-Basin-drilling-info-5-1-13.jpg

Reports do suggest that parts of nearly 20 fields are no longer profitable at $75 a barrel. There has been a very modest reduction of oil rigs. However, this has been largely offset by the rise in productivity of the existing wells. For example, in the North Dakota Bakken area, the output per well has risen to a record. In addition, industry reports suggest that the costs of shale and horizontal drilling is falling.

Although the price of oil has fallen below budget levels for many oil producing countries, the situation is not particularly urgent. Seasonally this is a high demand period. Most countries have ample reserves to cover the shortfall in the coming months. Around March, the seasonal factors shift and demand typically eases. That is when some key decisions will have to be made. It may not sound like a significant tell, but when the next OPEC meeting is scheduled may be indicative of a sense of urgency. A meeting in the February-March period may indicate higher anxiety than say a meeting in the middle of next year.

One study by Bloomberg found that only two OPEC quota cuts have been for less than one million barrels. A Bloomberg’s survey found that the respondents were evenly split between expecting a cut and not, few seem to be actually anticipating a significant cut. This suggests the scope for disappointment may be limited. That said, there is gap risk on the US oil futures contract come Friday, when they re-open after Thursday’s holiday.

As a consequence of lower oil prices, some oil producers may have to draw down their financial reserves to close the funding gap. Some will assume this will translate into liquidation of US Treasuries. However, it is not as easy as that. According to US Treasury data, in the first nine months of this year, OPEC increased its holdings of US Treasuries by $41 bln. In some period last year, it had sold about $17 bln of Treasuries. Could OPEC countries also be unwinding the diversification of reserves into euros, with yields so low and officials explicitly seeking devaluation (something not seen in the US since Robert Rubin first articulated a “strong dollar” policy almost two decades ago).

There may be political fallout from a continued decline in oil prices. An agreement between Baghdad and Kurds may be more difficult. Pressure in Libya and Nigeria is bound to increase, for example.

Back in 2009 when some observers began warning that higher food prices were the result of the extremely easy and unorthodox monetary policy. We argued that the shock was more on the supply side than the demand side and that commercial farmers would respond to the price signal by boosting output. Oil is similar but opposite. Oil prices will bottom after producers respond to the price signal by cutting production because they have to, not because they want to. Fear not greed will be the driver. It does not look like this can happen until Brent falls below $70 a barrel and WTI is nearer $60-$65.

https://i2.wp.com/www.mapsofworld.com/images/world-opec-members-countries-map.jpg

Oil & Gas Stocks: ‘Stability At The Bottom’ May Be A Positive Sign

https://i0.wp.com/www.avidtrader.com/wordpress/wp-content/uploads/2012/10/oil_and_gas.jpgby Richard Zeits

Summary:

  • The article provides “correction scorecards” by stock and by group versus commodities.
  • In the past two weeks, oil & gas stocks firmed up, despite the continued slide in the price of oil.
  • Small- and mid-capitalization oil-focused E&Ps were the strongest winners.
  • Emerging markets Oil Majors and Upstream MLPs were the worst performers.

During the two weeks since my previous update, stocks in the Oil & Gas sector demonstrated what an optimist might interpret as “stability at the bottom.” The net effect of another sequence of high-amplitude intraday moves was a slight recovery from the two weeks ago levels across the vast majority of segments and stock groups, as shown on the chart below. It should be no surprise that those groups that had declined the most were also the biggest gainers in the past two weeks.

Most notable is the fact that the descend trend in the Oil & Gas stocks was interrupted (and even marginally reversed) in spite of the new lows posted by the price of oil. One could try to interpret this performance as an indication that the current price levels already discount the market’s fear that the oil price paradigm has shifted. This stability may also indicate that the wave of forced liquidations by hedge funds and in individual margin accounts has run its course and the worst part of this correction may be already behind us.

Even though this recent stock price “stability” is a welcome development, it provides little consolation to investors in the Oil & Gas sector who still see their positions trading far below the peak levels achieved last summer. The correction scorecard graph below summarizes average “peak-to-current” performance by individual stocks that are grouped together by sector and size. Individual stock performance is provided in full detail in the spreadsheets at the end of this note.

Mid- and small-capitalization stocks, in both Upstream and Oil Service segments, remain the worst performing groups, now trading at an average discount to each individual stock’s recent peak price of over 40%, a staggering decline. Large-capitalization E&P independents and large-capitalization oil service stocks are trading at a 20%-24% average discount.

Emerging Markets Oil Majors Post A Strong Decline:

Emerging markets Oil Majors were one of the worst performing categories during the past two weeks:

Petrobras (NYSE:PBR) continued to slide down, moving 12% down since my previous update. Petrobras stands out as one of the most disappointing Oil Majors in terms of stock performance in the past five years, having lost a staggering three-quarters of its value during that period. The company’s market capitalization currently stands at only $62 billion.

· Lukoil (OTCPK:LUKOY) and Petrochina (NYSE:PTR) are other examples of strong declines in the past two weeks, with the stocks losing 8% and 7%, respectively. Lukoil’s performance may in fact be interpreted as “solid,” given the continued deterioration of Russia’s political and credit risk.

A strong contrast is the performance of the three oil super-majors – Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Shell (NYSE:RDS.A) – that gained ~2% during the past two weeks and remain the best performing group in the Oil & Gas sector. I have argued in my earlier notes that, given the combined $0.9 trillion market capitalization of these three stocks, the resilient performance by the Super-majors has effectively isolated the correction in the Oil & Gas sector from the broader markets. From a fundamental perspective, the Super-majors are characterized by very low financial leverage, high proportion of counter-cyclical production sharing contracts (“PSAs”) and the effective hedge from downstream assets, which limits their exposure to the oil price decline.

Small-Capitalization E&P Stocks Bounce Back:

After a dramatic underperformance, small- and mid-capitalization E&P stocks posted meaningful gains in the past two weeks. However, in most cases the recovery is “a drop in the bucket,” given that high-percentage moves are measured off price levels that sometimes are a fraction of recent peak prices. The sector remains a menu of bargains for those investors who believe in a recovery in oil prices.

  • Enerplus (NYSE:ERF): +20%
  • Northern Oil & Gas (NYSEMKT:NOG): +17%
  • Concho Resources (NYSE:CXO): +15%
  • Approach Resources (NASDAQ:AREX): +48%
  • Goodrich Petroleum (NYSE:GDP): +24%
  • Synergy Resources (NYSEMKT:SYRG): +15%
  • Penn Virginia (NYSE:PVA): +17%
  • Comstock Resources (NYSE:CRK): +25%

E&P MLPs Retreat:

Upstream MLPs were one of the exceptions in the E&P sector, declining by an average of 4% in the past two weeks. The largest Upstream MLP, Linn Energy (NASDAQ:LINE) and its sister entity LinnCo(NASDAQ:LNCO), are again trading close to their lows, after having enjoyed a strong bounce a month ago. The previously very wide gap in relative performance between Upstream MLPs and other Upstream equities has contracted substantially which, arguably, makes sense given that both categories of companies participate in the same business, irrespective of the corporate envelope.

Oil & Gas Sector Correction Scorecards:




The Cruel Injustice of the Fed’s Bubbles in Housing


by Charles Hugh Smith

As the generational war heats up, we should all remember the source of all the bubbles and all the policies that could only result in generational poverty: The Federal Reserve.

Federal Reserve chair Janet Yellen recently treated the nation to an astonishing lecture on the solution to rising wealth inequality–according to Yellen, low-income households should save capital and buy assets such as stocks and housing.

It’s difficult to know which is more insulting: her oily sanctimony or her callous disregard for facts. What Yellen and the rest of the Fed Mafia have done is inflate bubbles in credit and assets that have made housing unaffordable to all but the wealthiest households.

Fed policy has been especially destructive to young households: not only is it difficult to save capital when your income is declining in real terms, housing has soared out of reach as the direct consequence of Fed policies.

Two charts reflect this reality. The first is of median household income, the second is the Case-Shiller Index of housing prices for the San Francisco Bay Area.

I have marked the wage chart with the actual price of a modest 900 square foot suburban house in the S.F. Bay Area whose price history mirrors the Case-Shiller Index, with one difference: this house (and many others) are actually worth more now than they were at the top of the national bubble in 2006-7.

But that is a mere quibble. The main point is that housing exploded from 3 times median income to 12 times median income as a direct result of Fed policies. Lowering interest rates doesn’t make assets any more affordable–it pushes them higher.

The only winners in the housing bubble are those who bought in 1998 or earlier. The extraordinary gains reaped since the late 1990s have not been available to younger households. The popping of the housing bubble did lower prices from nosebleed heights, but in most locales price did not return to 1996 levels.

As a multiple of real (inflation-adjusted) income, in many areas housing is more expensive than it was at the top of the 2006 bubble.

While Yellen and the rest of the Fed Mafia have been enormously successful in blowing bubbles that crash with devastating consequences, they failed to move the needle on household income. Median income has actually declined since 2000.

Inflating asset bubbles shovels unearned gains into the pockets of those who own assets prior to the bubble, but it inflates those assets out of reach of those who don’t own assets–for example, people who were too young to buy assets at pre-bubble prices.

Inflating housing out of reach of young households as a matter of Fed policy isn’t simply unjust–it’s cruel. Fed policies designed to goose asset valuations as a theater-of-the-absurd measure of “prosperity” overlooked that it is only the older generations who bought all these assets at pre-bubble prices who have gained.

In the good old days, a 20% down payment was standard. How long will it take a young family to save $130,000 for a $650,000 house? How much of their income will be squandered in interest and property taxes for the privilege of owning a bubblicious-priced house?

If we scrape away the toxic sludge of sanctimony and misrepresentation from Yellen’s absurd lecture, we divine her true message: if you want a house, make sure you’re born to rich parents who bought at pre-bubble prices.

As the generational war heats up, we should all remember the source of all the bubbles and all the policies that could only result in generational poverty: The Federal Reserve.