A "Flood" of new oil..........

[charliebrown]

Re: A "Flood" of new oil : Be Careful What You Wish For

During this plunge, I have been selling some other high flying stocks and picked up some vde. I had no oil before this so this adds some diversity to my holdings. I would like to see another 10% knock down before I start using new cash to buy more stocks.

[Raz]

Re: A "Flood" of new oil : Be Careful What You Wish For

During this plunge, I have been selling some other high flying stocks and picked up some vde. I had no oil before this so this adds some diversity to my holdings. I would like to see another 10% knock down before I start using new cash to buy more stocks.

I paid $64 for the Conoco I bought back in mid-October, and while I knew it wouldn't remain above $73 on the first bounce I decided to hold on to it because it will be MUCH higher in two or three years - unless we see WTI below $80 at that time.
The odds are high that Conoco will be able to pay their dividend throughout that time period.

VDE is an even better choice than the XLE in my opinion. Thanks for tuning me in to that one.

I have GTC orders in to buy Vermillion Energy (NYSE: VDE; Toronto: VDE.TO) at $37.70 US. I bought it at $19 in November 2008 and sold it at $61 last spring. (Then watched it zoom up to $70!).

I am going to buy it back for several reasons, some of which are spelled out in this research piece, although I believe their "fair value" price should, at the present time, be about $45 US.

[touchring]

Re: A "Flood" of new oil : Be Careful What You Wish For

Any thoughts on EQT, a gas producer and utlity company but whose price has crashed as much as Oil ETFs?

[Raz]

Re: A "Flood" of new oil : Be Careful What You Wish For

Any thoughts on EQT, a gas producer and utlity company but whose price has crashed as much as Oil ETFs?

Equitable Resources is not a stock I follow. I did take a look at the weekly chart and it remains in an intermediate downtrend.
But it's only about three dollars from the 200-week exponential moving average, so if it can drop below $73-74 and then immediately regain about $78 it would then begin to look like it might have bottomed.

Morgan Stanley is neutral on the stock but really likes the management, saying they are very friendly to the shareholders.
That's not easy to find in the corporate world of today.

[touchring]

Re: A "Flood" of new oil : Be Careful What You Wish For

Equitable Resources is not a stock I follow. I did take a look at the weekly chart and it remains in an intermediate downtrend.
But it's only about three dollars from the 200-week exponential moving average, so if it can drop below $73-74 and then immediately regain about $78 it would then begin to look like it might have bottomed.

Morgan Stanley is neutral on the stock but really likes the management, saying they are very friendly to the shareholders.
That's not easy to find in the corporate world of today.

Thanks for replying to my question. Looking at the 5 year chart, EQT has doubled in the last 3 years (as of before the oil collapse) despite the falling price of gas and stagnant earnings. I find this interesting. It appears that there are multiple factors affecting the price of a stock rather than just fundamentals. As you mentioned, a friendly management is one factor. The other factor is the general stock market - which had been on an uptrend since 2012.

[ProdigyofZen]

Re: A "Flood" of new oil : Be Careful What You Wish For

Deutsche Bank weighs in:

The Great 2014 Oil Shock - Aftermath

The fall in the price of oil – down more than 40% since June – is a textbook macroeconomic “shock”. Stripping it down to its most fundamental level, a fall in the price of oil predistributes real income from oil producers to oil consumers. Money oil consumers would have exchanged with oil producers for the stuff, can instead be put towards other purchases or savings. At the global level it means less spent on oil imports for oil importing nations and less income from oil exports for oil exporting nations. To put some rough numbers around this, US average net imports of oil and the like has averaged 5.2m barrels per day in 2014, thus the fall in the oil price by $43 since late June is saving the US economy about $224m a day on its net oil transactions and costing its oil trade partners the same amount. This is after accounting for the dramatic fall in US net oil imports driven in part by the country’s shale boom.




Therefore if oil prices stay where they currently are this appears to be a meaningful headwind for the big oil consuming nations. The biggest net oil importers in 2013 were (1) the US, (2) China, (3) Japan and (4) India. Major exporters will suffer. Probably the most prominent current example of an economy that will struggle to cope with the fall in the oil price is Russia, which in 2013 was the world’s second largest net exporter of oil. As we’ve already discussed, estimates suggest that at oil prices below $90 the Russian economy will go into recession and DB estimates the government will fail to balance its budget at $100 (Figure 133). At current levels none of the major oil exporters will be able to balance their budgets next year.







Overall, most estimates suggest that a fall in the oil price is a net positive for the total world economy. According to the IMF’s Tom Helbling, “a 10% change in the oil price is associated with around a 0.2% change in global GDP” (The Economist) as oil consumers are greater spend-thrifts than oil producers. Given those estimates the current fall of more than 40% should add about +0.8% to global GDP growth.

With so much of the global growth story resting on US shoulders next year the fall in the price of oil should help, although not as much as it used to given the USA’s shale boom. The EU should also gain given its $500bn of energy imports in 2013. However the drop in the price of oil might prove a mixed blessing given that sharp drops in the oil price will weigh on inflation (Figure 134) and another negative headwind to inflation (in any form) is not something the euro area really needs or wants currently with CPI running at just +0.4% YoY. On the other hand the drop in inflation pressures should be a boon for a number of EM economies whose central banks may otherwise have had to hike rates in the face of rising inflation even as their growth rates remained tepid.

It’s also important to remember that whilst oil is an important global commodity it is rare for it alone to drive global economic outcomes. The halving of global oil prices in 2008 didn’t prevent many of the world’s oil importing economies from suffering severe recessions and as Figure 135 shows there is no easy nor automatic relationship between falling oil prices and rising US growth. The environment within which the oil price change occurs is important. Indeed if the current drop in the price of oil is being driven by expectations of falling demand driven by expectations of a slowdown in global growth it’s possible that the drop in the oil price is at best going to partially cushion the global economy from a slowdown rather then drive it to higher growth rates.




Also importantly for investors, falling oil prices will not affect all areas of economies equally, even in those economies that should benefit at an aggregate level. As our US credit strategy team wrote recently, energy companies make up the largest single sector component of the US HY market at 16% (US HY DM Index) and so the falling oil price may prove a negative for the US HY credit market. Our US team added that if the WTI price fell to $60/bbl this would push the whole US HY energy sector into distress, with around 1/3rd of US energy Bs/CCCs forced to restructure, implying a 15% default rate for overall US HY energy which would contribute 2.5% to the broad US HY default rate. This could be a sizeable enough shock to cause concern throughout the rest of the US HY market.

There is no doubt that the fall in the price of oil in 2014 has been a significant economic shock. Most estimates suggest that this should add to global growth, weigh on global inflation and most likely have varied but oil-specific asset price implications (EM oil producing nations and US HY weakness stand out); however it is likely that growth tailwinds from this year’s fall in oil prices will not be the main story for investors in 2015.

No mention of the consequences of the fall in oil prices on US manufacturing (petrochemicals) and the engine of US growth the last 5 years Shale E&P. This provided jobs, higher than average income and a construction boom in the states associated with shale.

Two years ago the chart showing net job gain in the US since the Great Recession showed all the job gains from two states: Texas and North Dakota, every other state had negative job growth.

I don't think this is going to be the boon to the US economy/consumer that everyone thinks.

[thriftyandboringinohio]

Re: A "Flood" of new oil : Be Careful What You Wish For

No mention of the consequences of the fall in oil prices on US manufacturing (petrochemicals) and the engine of US growth the last 5 years Shale E&P. This provided jobs, higher than average income and a construction boom in the states associated with shale.

Two years ago the chart showing net job gain in the US since the Great Recession showed all the job gains from two states: Texas and North Dakota, every other state had negative job growth.

I don't think this is going to be the boon to the US economy/consumer that everyone thinks.

This line of thinking is pretty interesting.
For petrochemicals, I would expect higher profits; the oil feed stock suddenly got cheaper, but industrial customers for bulk olefins and aromatics would not demand price reductions for polyethylene or vinyl acetate.

While the shale oil boom did create jobs that will be reduced, I wonder if that is not fully offset by gains in oil consuming business like transportation, steel and cement ?

It's not at all clear to me how cheap oil nets out.
Isn't a big spike in oil prices bad for the economy of the US and the world, and isn't this the opposite of a scary giant oil spike?
I filled my gas tank this morning, and noticed I have ten or twelve extra dollars still in my pocket.

[ProdigyofZen]

Re: A "Flood" of new oil : Be Careful What You Wish For

This line of thinking is pretty interesting.
For petrochemicals, I would expect higher profits; the oil feed stock suddenly got cheaper, but industrial customers for bulk olefins and aromatics would not demand price reductions for polyethylene or vinyl acetate.

The Petrochemicals statement was in regards to domestic manufacturers taking away market share from European manufacturers etc. Now that Brent and WTI have converted and collapse that may not be the case any longer.

While the shale oil boom did create jobs that will be reduced, I wonder if that is not fully offset by gains in oil consuming business like transportation, steel and cement ?

Steel and cement to build what? Most of the building was driven by 1: Shale boom (and perpetual rent increases) and 2) QE for the top 10%. Household wealth already dropped last month due to the market fall/volatility. With depressed oil prices the construction boom associated with Shale will recede.

Perhaps getting an extra 530 bucks or so per annum for the US consumer (saved on gas consumption) is enough marginally to net out the effect the oil price drop on other industries.

The consumer probably just drives more.

[thriftyandboringinohio]

Re: A "Flood" of new oil : Be Careful What You Wish For

Thanks PoZ I'm alway interested in your take on these things.

[touchring]

Re: A "Flood" of new oil : Be Careful What You Wish For

Isn't a big spike in oil prices bad for the economy of the US and the world, and isn't this the opposite of a scary giant oil spike?
I filled my gas tank this morning, and noticed I have ten or twelve extra dollars still in my pocket.

Time to change to a bigger car?

The drop in oil price is not just affecting oil companies but also natural gas companies, solar and wind energy companies, battery car companies, train transport companies, etc.

http://www.google.com/finance?cid=707027
http://www.google.com/finance?q=paci...L4PZkAXs8IHgDA
http://www.google.com/finance?q=tesl...JY-nkgW2_YHICw

Perhaps this is the Ka that EJ talked about?

[don]

Re: A "Flood" of new oil..........

The Inverted ‘J-Curve’ In The Shale Patch—–Production Will Rise Before It Falls

by Lee Adler • December 17, 2014

The November industrial production data reported yesterday shows no slowdown yet in US oil and gas production, and as goes oil and gas, so goes the US economy.

The Oil and Gas Production Index for November rose by 1.55 points to 161.04 (2007= 100). This is one of the rare series where there’s no seasonality, so I need not rant about the media not reporting the actual, not seasonally adjusted data like I usually do. In fact, the media doesn’t even bother to report the oil and gas production component index of industrial production, so, sadly, there’s nobody to harangue. I miss it.

The year to year gain was 11.5%. That’s a bit of deceleration from the peak growth rate of 13.9% that was hit in June, but it’s still not too shabby. The oil and gas drilling boom/bubble–whatever you want to call it–was still raging last month while prices were already collapsing.




The question is how long this can go on.

It may take a while for production to be shut in. Exploration activity will slow but the drilling that has started but is not yet producing will continue to come on stream. That’s because the bulk of production costs are in finding oil. Once found, the lifting costs are very low. Where the oil has been found or almost found, the drilling and production will go on.

The US EIA said that lifting costs of US oil in 2007-09 were less than $13/BBL. Inflation might have added a bit to that since then, but one of the big component costs is energy, and that will obviously be lower now. Taxes will also be lower.

Under any circumstances, the current lifting costs are still a long way below current market prices even after the crash. So it’s likely that wells that are being drilled will continue to come on stream for a while longer. Due to the short productive life of fracked wells, existing production falls off quickly, but there’s no evidence that is having an impact yet.

The US oil boom should continue to contribute to the world wide oil glut for some months to come. While we may hear anecdotal reports of production shutdowns, the industrial production data should be the first hard data we get on that.






The oil and gas boom and its ripple effects throughout the entire energy and industrial complex have contributed mightily to overall US growth. Without the boom, US growth would look a lot more like the rest of the world, that is, moribund. Which leads to the questions, when the wells stop what happens to the US economy and…

What Becomes of the North Dakotans (with apologies to Jimmy Ruffin)

As I walk this field where I once grew beans,
I have visions of many things.
But the oil boom was just an illusion,
Trailed by bad debts and confusion.

What becomes of a broken market,
which had a boom that’s now departed?
I know we’re going to find,
A price where we can hold the line.
Maybe.

Drilling rigs grow all around
But for me they come a tumblin’ down.
Every day when the price goes much lower,
I want to stick my head in a snow blower!

I walk in shadows,
Searching for price lows.
Offers alone,
No buyers in sight.
Hoping and praying for someone who’ll cover,
Price is moving and goin’ lower.

(Refrain)

I’m searching though I don’t succeed,
For someone’s rigs, there’s a growing need.
All is lost, there’s no place for beginning,
All that’s left is an unhappy ending.

(Refrain)

I’ll be searching everywhere,
Just to find some gas to flare.
I’ll be looking everyday,
I know I’m gonna find a play.
Nothings gonna stop me now,
I don’t want no farm to plow.
I’ll be searching everywhere…

[photon555]

Re: A "Flood" of new oil..........

Anyone have an opinion on whether this is a good time to expand the Strategic Petroleum Reserve? Would doing so smooth out the overall price curve going forward enough to improve the US industry's stability?

[jk]

Re: A "Flood" of new oil..........

Anyone have an opinion on whether this is a good time to expand the Strategic Petroleum Reserve? Would doing so smooth out the overall price curve going forward enough to improve the US industry's stability?

unfortunately it looks like there's a lot of politics around those decisions, and a brief look left me unclear as to whether the energy department is authorized, and has funds for, actual purchases. prior additions to the spr have been royalties in kind - petroleum offered in lieu of cash payment on royalties due the u.s. gov't.

[touchring]

Re: A "Flood" of new oil : Be Careful What You Wish For

To be honest Raz, I don't know.

I use Suncor's Toronto listing as one indicator, and historically any time it falls below CAD $28 I usually buy it. Right now it's still at CAD $32, despite the carnage and SU's exposure to higher cost oil sands. That's interesting to me and causes me to pause for now.

Suncor's now at $36. Did we all miss it?

[jpetr48]

Re: A "Flood" of new oil : Be Careful What You Wish For

Suncor's now at $36. Did we all miss it?

I am sure GRG55 can comment best on this but I have noted several postings asking about "is this the bottom or is it time to buy."
Ever since early October according to COT, the largest speculators have continued to stay on the long side of the oil trade.
They probably believe that low prices will cure themselves with shut down production and then lower supply

The problem is that the IEA has dropped in consecutive forecasts the rate of oil demand going into 2015. And Saudi Arabia is in no rush to cut supply
One of our itulip posts commented that once a shale gas well is left idle, the ability to continue production at prior levels is lessened
And a good number of these wells can continue to make money at $50-$60 oil- think I recall only 400K barrels per day will be affected from higher cost regions

All this to say, I hate to see some of our members feel like they missed the rally, chase this thing up to get good price and good yield, then get slammed by another downdraft

The damage to some oil producers like CVX has been significant. Three year rising trendlines have been broken. Its going to take more than a couple of weeks to shake these speculators out, get capitulation, form a bottom and then start increasing again- unless geopolitical scenario changes w Saudi, Iran and their smaller OPEC producers.