# Oil price and share market behaviour



## SirRumpole (6 January 2015)

Can someone explain why the share market has slumped in response to lower oil prices ?

Apart from a few oil companies, I would have thought that everyone else would be delighted.


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## qldfrog (6 January 2015)

*Re: Share Market behaviour- Oil price*



SirRumpole said:


> Can someone explain why the share market has slumped in response to lower oil prices ?
> 
> Apart from a few oil companies, I would have thought that everyone else would be delighted.



except for the billions invested in fracking wells by US banks which is going in smoke, and here think loans for the ports/gas trains, etc


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## Smurf1976 (6 January 2015)

There's also the "why" factor.

Total world oil production has risen only slightly over the past 12 months, about 1.3%. That's growth, but it's not exactly a boom at the global level.

The real story is about demand growth, or rather the lack of growth, and that says rather a lot about the state of the world economy given that oil consumption is heavily tied to real (non-money shuffling) economic output.

There's also a point about future growth. USD50 oil is starting to kill new exploration and in due course will kill development, thus cutting off the growth in production. Meanwhile we've only got a surplus that's a bit over 2% of world consumption.

So I suspect the share market is pricing in a few realities there. The situation facing oil producers and their lenders is one. That we're effectively limited to a one-off 2% growth in output before running into the oil constraint once again is another. 2% growth is still growth, but as a one-off event it's not a lot when you consider that many economists see 3 - 4% _every year_ as some sort of target.

The situation I see, is one of a wedge if charted. Production costs of the marginal barrel are going up (few if any would dispute that), consumer's ability and/or willingness to pay for that marginal barrel seems to be going down (a theory - not proven but seems quite plausible). The economy is limping along even with cheap oil, so I'm not at all convinced that we could achieve any sort of real growth if oil was back well over $100.

There's the wedge - cost of production going up, ability to pay whilst maintaining consumption seems to be flat at best, quite likely falling. In due course the two lines meet and that's when the real fireworks begin. What happens is uncertain, but _something_ gives at that point it seems fairly certain. If we can't either drop production costs at that point and/or pay more, well then we get a peak in physical production. 

Note that the definition of "oil" that I'm using is total liquid hydrocarbons - crude oil, condensate, natural gas liquids (butane etc) and synthetic crude from tar sands, gas to liquids etc. That is, everything that can be used in the way that oil is used to produce fuel etc. If you just took actual crude oil as such, well then the situation is even worse since a lot of the growth has been with the unconventional sources as a by-product of natural gas extraction or as a stand alone activity (most notably tar sands in Canada).


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## waterbottle (6 January 2015)

*Re: Share Market behaviour- Oil price*



qldfrog said:


> except for the billions invested in fracking wells by US banks which is going in smoke, and here think loans for the ports/gas trains, etc




How many billions are we talking about here?


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## Julia (6 January 2015)

SirRumpole said:


> Can someone explain why the share market has slumped in response to lower oil prices ?



Rumpole this link goes to several discussions with Satyajit Das whom I've found to be very accurate and knowledgeable in his comments.
https://www.google.com.au/search?q=...&oe=utf-8&gws_rd=cr&ei=Jc2rVOqHI4r_8QWb8oGIBw


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## Julia (6 January 2015)

Rumpole, this might also help:
http://www.theaustralian.com.au/bus...pping-oil-prices/story-e6frg9df-1227173059806


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## SirRumpole (7 January 2015)

Thanks Julia, Ill check them out.


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## Value Collector (7 January 2015)

> The real story is about demand growth, or rather the lack of growth, and that says rather a lot about the state of the world economy given that oil consumption is heavily tied to real (non-money shuffling) economic output.




I agree, oil demand is a gauge of economic activity, But total oil demand has actually grown in the last 12months, it just hasn't grown as fast as supply.

Another key factor is how we use the oil, everywhere you look in the last few years there has been big efforts to use less or substitute. So I think a static oil demand doesn't really mean a static economy, because increases in efficiency mean more products and services can be supplied by each barrel.

For example, a static demand for Gasoline in the USA, doesn't mean a static number of miles being driven, because all of the following mean more miles are being driven on the same litres of oil.


more efficent engines and drive chains
smaller cars
increase usage of hybrids and electric cars
increase in cars powered by natural gas
Gas to liquid technology substituting some conventional diesel


And it doesn't stop there, every where you look in the last few years focus has been on reducing oil usage, eg airlines buying more efficient jet engines, US homes switching to natural gas from heating oil, mining companies switching to natural gas from diesel generators, trucks and trains switching to lng, Gas to liquid plants coming online. 

So the total number of services has probably grown faster than the oil demand would suggest.


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## Value Collector (7 January 2015)

SirRumpole said:


> Apart from a few oil companies, I would have thought that everyone else would be delighted.




Cheaper energy is a net plus for the global economy, but there will be winners and losers. In general I think it is a net plus for my portfolio. 

My only exposure to Oil and gas is through BHP, their petroleum portfolio will be less profitable at current prices, But they are a big oil consumer too, so some of this will be offset by cheaper diesel used to run their Iron ore, coal and copper businesses.

Most of the other companies in my portfolio will benefit from cheaper oil, think of a company like the Walt Disney company, The American public will now on average have more cash in their account each week, there is a good chance this extra cash will be spent on leisure and entertainment, whether that be a trip to the movies, buying the kids a few extra toys this Christmas or birthday, maybe even a trip to Disneyland, or even just downloading a few movies to keep the kids happy.


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## Toyota Lexcen (7 January 2015)

the cheaper fuel we see as consumer may just negate the price rises we are going to see with the lower AUS$ i believe

a few items I have been looking at to buy(from Aus shop) have jumped quite a bit recently,


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## Value Collector (7 January 2015)

Toyota Lexcen said:


> the cheaper fuel we see as consumer may just negate the price rises we are going to see with the lower AUS$ i believe
> 
> ,




and if that were the only benefit, then it would still be a positive, its better to have lower oil prices when the dollar goes down, than higher oil prices.

But look, more energy (in all it's forms) being produced inside an economy is a giant plus, larger quantities and Cheaper energy is good, it means we can produce more stuff and ship it around.

But I don't think cheaper prices will stick around, at current oil price levels, less new wells will be drilled, and the existing wells will naturally decline and bring about a balance again, I don't know at what price, but shale and the other alternatives are produced at between $40 - $65 a barrel, So there will be a natural floor some where in that range, In my opinion it would be towards the top of that range, as wells decline I can't see enough new ones being drilled to maintain supply if the price is below $60.

The low price can stick around in the shorterm term, because the companies have already locked in capital in the current wells and drilling programs etc, but as the drilling programs are wound back, natural decline will see a floor appear, before fresh capital is injected to maintain the supply.


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## SirRumpole (7 January 2015)

> Most of the other companies in my portfolio will benefit from cheaper oil, think of a company like the Walt Disney company, The American public will now on average have more cash in their account each week, there is a good chance this extra cash will be spent on leisure and entertainment, whether that be a trip to the movies, buying the kids a few extra toys this Christmas or birthday, maybe even a trip to Disneyland, or even just downloading a few movies to keep the kids happy.




That's what I thought, ie it would have a net positive effect on the market, but that doesn't seem to be the case.

Would it be that the massive wealth of the oil rich nations will decline, making them less likely to invest abroad and therefore drying up the money supply ? 

It's doubtful whether this shortage would be made up by local consumers I would guess.


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## Value Collector (8 January 2015)

SirRumpole said:


> That's what I thought, ie it would have a net positive effect on the market, but that doesn't seem to be the case.
> 
> Would it be that the massive wealth of the oil rich nations will decline, making them less likely to invest abroad and therefore drying up the money supply ?
> 
> It's doubtful whether this shortage would be made up by local consumers I would guess.




Instead of exporting the funds overseas to the oil producers, and hoping the funds get reinvested in some way back into our economy, the funds will stay in our economy, inside a broad cross section of australian businesses ready to be distributed or invested.

Eg, lower oil prices means every farmer, miner, trucker, taxi driver, Coles and woolworths, manufacturer, local council, household etc etc, will all have more cash sitting on their balance sheet, inside our economy, thats a better outcome than sending it offshore and hoping it makes its way back through foreign ownership.

The current market reaction is just an over reaction based on shock and uncertainty, thats all.


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## Value Collector (8 January 2015)

In regards to the US economy, every 1cent drop in the price of petrel, adds $1billion dollars into the economy each year. That a big stimulus package right there.


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## jbocker (8 January 2015)

Toyota Lexcen said:


> the cheaper fuel we see as consumer may just negate the price rises we are going to see with the lower AUS$ i believe
> 
> a few items I have been looking at to buy(from Aus shop) have jumped quite a bit recently,




Will be interesting to see the effect on Aussie stocks that export and stocks that pay dividends in US $.


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## sydbod (8 January 2015)

Currently, the only economy that is doing well happens to be that of the USA.
The growth in employment as well as disposable income happened mainly in the American shale oil industry.
That industry will now slowly get crushed.
Expect unemployment in America to increase. Expect spending in America to decrease or at least wind back.
Expect the American economy to start to contract or stagnate. No more USA as the current growth engine for the world in the near future.

Is it any wonder that global company growth will in all probability start to wind back.

"We  DOOMED I TELLS YA!!!!!!!! DOOMED"


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## Value Collector (8 January 2015)

sydbod said:


> Currently, the only economy that is doing well happens to be that of the USA.
> The growth in employment as well as disposable income happened mainly in the American shale oil industry.
> That industry will now slowly get crushed.
> Expect unemployment in America to increase. Expect spending in America to decrease or at least wind back.
> ...




The low oil price is a big stimulus to the USA economy, it will mean broad stimulus across the nation, even the parts that have been missing out on the shale jobs.

Shale oil wells produce most of their oil in the first 12- 18 months, the production rate drops off very fast, So as I said above, any slow down in the rate of drilling will see production drop off, which will then stimulate more drilling, you have to be drilling continuously to maintain production.

What we will probably see is a slow down in the rate of drilling, Most of the cost of shale oil is in the initial drilling costs and completing the well which can be expensive when you're in a rush to complete as many wells as you can. So drilling won't stop, it will just slow down, as companies focus on completing each well as cheaply as possible.

a slow down in drilling will naturally see a slow down in production as existing fields decline, which will support prices again and then an increase in drilling again. that's why it's called cyclical.

Its actually a good thing, remember in 2008 we were all worried about peak oil, at least for now the oil supply is only limited by the price the market wants to pay and the speed we can drill shale beds.


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## qldfrog (8 January 2015)

*Re: Share Market behaviour- Oil price*



waterbottle said:


> How many billions are we talking about here?




did not forget your answer.
I can not find the reference again
I also seriously doubt every decrease in petrol cost is that beneficial anymore in the US.
Things are very different today from the same situation 10 years ago
it can not when you move from energy importer to exporter.
will keep looking for the figures regarding investment in sjhale oil by US banks


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## waterbottle (8 January 2015)

*Re: Share Market behaviour- Oil price*



qldfrog said:


> did not forget your answer.
> I can not find the reference again
> I also seriously doubt every decrease in petrol cost is that beneficial anymore in the US.
> Things are very different today from the same situation 10 years ago
> ...




I found this article on zerohedge. The article itself cites the wall street journal as its source:



			
				zerohedge said:
			
		

> American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion.
> 
> Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June.
> 
> ...





So according to this the debt owed by the companies and therefore held by the banks amounts to $199 billion. That figure doesn't seem that big compared to the subprime crisis that triggered the GFC.


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## Value Collector (8 January 2015)

*Re: Share Market behaviour- Oil price*



waterbottle said:


> So according to this the debt owed by the companies and therefore held by the banks amounts to $199 billion. That figure doesn't seem that big compared to the subprime crisis that triggered the GFC.




Also remember, when a shale company has a production cost of say $50 a barrel, The majority of that cost is related to the original cost of drilling the well being amortised, very little of the production cost relates to pumping the oil once the well has been completed.

So these wells would still continue pumping oil even if the price was $30 a barrel, and that $30 a barrel cash flow would be going back to pay off the debt, sure the company is not going to make any profit and will lose the equity they injected into the deal and may go bust, But if the bank had funded say 50% of the cost of the wells, they should be able to get most of that back even when the price is well below the on paper cost of production.

what I am trying to say, is that just because the oil price drops below the cost of production, doesn't mean there is no cash flow to repay debt, the cash will keep coming in and servicing debt.


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## sydbod (8 January 2015)

Value Collector said:


> The low oil price is a big stimulus to the USA economy, it will mean broad stimulus across the nation, even the parts that have been missing out on the shale jobs..




Are you sure?

Let us break up the American workforce into 2 groups.
Group1 (those working in the shale oil industry):
These are the ones that have almost 100% accounted for the increase in the American workforce.
It is becoming clear that these highly paid workers $30 and higher per hour workers are going to be squashed like a cockroach under a boot. Within 1 year that industry will be dead.
These are the people that have had the greatest disposable income and have been spending it.

Group2 (the ordinary peasants):
These are the ones that have seen almost no drop in unemployment.
Worse still, if one looks at their employment breakdown, over the past few years, the ratio of full time employees to part time employees has been decreasing. More and more of these people are being pushed from full time employment into part time employment and their income has been steadily declining. Unemployment may have stayed steady, but the value of the average job has gone down. With the huge amount of debt that this group have amassed over the recent past, any drop in fuel costs will go towards paying off a small fraction of that debt rather than wildly spending on consumer items.

Rough American money flow for oil:
Very approximately ........ America produces around 50% of its own oil as normal oil. This will keep going even at these low oil prices.
America produces 25% of its oil requirement  also from shale oil (LTO), and imports the last 25% of its oil requirements externally. 
When finally shale oil gets squashed, then America will be importing roughly 50% of its oil requirement.
Although oil imports will have to double, but with the price of oil now halved, there should be virtually no net change in Americas money flow because of this.

As one can see ... with one group of employees losing their jobs and eventually being forced on unemployment, and likewise decreasing by a large margin the money spent on discretionary items, while the other group of employees slowly being impoverished by being moved from full time employment to part time employment and not being able to help by increasing discretionary spending, the way for America looks to be slowly downwards.

Yes there may be a small flurry upwards in the market in the short term (next 6 months) .... but longer than that and it is looking grim.

We still have not taken into account a potential significant financial crisis that may be caused by all those shale oil bonds that may default over the next year or so ..........

As I said: "We DOOMED I TELLS YA!!!!!!!! DOOMED"


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## Value Collector (8 January 2015)

sydbod said:


> Are you sure?
> 
> Let us break up the American workforce into 2 groups.
> Group1 (those working in the shale oil industry):
> ...




Well that's just false, where are you getting this 100% figure from?



> It is becoming clear that these highly paid workers $30 and higher per hour workers are going to be squashed like a cockroach under a boot. Within 1 year that industry will be dead.




Drilling will be reduced, not stopped, if the drilling stopped, within a short time the wells would decline, prices surge and drilling activity surge again, the big players will just reduce drilling.



> These are the people that have had the greatest disposable income and have been spending it.




With the drop in oil, a lot of people in every other industry will now have more disposable income.



> Group2 (the ordinary peasants):
> These are the ones that have seen almost no drop in unemployment.
> Worse still, if one looks at their employment breakdown, over the past few years, the ratio of full time employees to part time employees has been decreasing. More and more of these people are being pushed from full time employment into part time employment and their income has been steadily declining. Unemployment may have stayed steady, but the value of the average job has gone down. With the huge amount of debt that this group have amassed over the recent past, any drop in fuel costs will go towards paying off a small fraction of that debt rather than wildly spending on consumer items



.

Again, where are you getting these figures?




> When finally shale oil gets squashed, then America will be importing roughly 50% of its oil requirement.
> Although oil imports will have to double, but with the price of oil now halved, there should be virtually no net change in Americas money flow because of this.




take shale out of the picture and the current low prices will vanish, oil would be over $100 in a heart beat, and shale wells will be drilled again.



> We still have not taken into account a potential significant financial crisis that may be caused by all those shale oil bonds that may default over the next year or so ..........




as I explained, the majority of those bonds are not really in danger.


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## Smurf1976 (8 January 2015)

sydbod said:


> Rough American money flow for oil:
> Very approximately ........ America produces around 50% of its own oil as normal oil. This will keep going even at these low oil prices.
> America produces 25% of its oil requirement  also from shale oil (LTO), and imports the last 25% of its oil requirements externally.




Some actual data (source = EIA)

2014 production for USA (with 2015 forecast in brackets):

Crude oil (all sources onshore, offshore, polar, shale etc) = 8.6 (9.32)

Natural Gas Plant Liquids (which are considered to be oil and a completely different thing to LNG) = 2.96 (3.22)

Fuel ethanol (which is not oil, but is a liquid fuel nonetheless) = 0.93 (0.95)

Biodiesel (also not oil, though closer to it than ethanol) = 0.08 (0.084)

Consumption (includes ethanol and biodiesel) = 18.96 (19.10)

So on a net basis the US is presently 66% self sufficient in oil, rising to 71% in 2015 based on current forecasts.

Various EIA and IEA reports and studies have been predicting a peak in US tight oil ("shale") production around 2016-17 for quite some time now and these forecasts were generally made before the recent plunge in prices. Assuming them to be correct, US net self sufficiency in liquid fuels will top out at about 75% in 2016 - 17 before beginning a gradual decline. Other studies suggest that tight oil may peak a bit later toward the end of this decade.


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## sydbod (8 January 2015)

I do not plan to get involved in "my numbers are better than your numbers".
What I am espousing is based on very rough numbers that reflect reports from various business sites that I read and thus should be taken as a crude distillation of how I see the American economy.
I was putting forward a broad based argument as to why I disagree with " The low oil price is a big stimulus to the USA economy, it will mean broad stimulus across the nation, even the parts that have been missing out on the shale jobs."
People can take what I have written as having some merit, or disregard it completely as rubbish, for all I care. What will happen will happen, but maybe some will look a little deeper than just accepting that cheap oil is always good.


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## qldfrog (9 January 2015)

*Re: Share Market behaviour- Oil price*



Value Collector said:


> Also remember, when a shale company has a production cost of say $50 a barrel, The majority of that cost is related to the original cost of drilling the well being amortised, very little of the production cost relates to pumping the oil once the well has been completed.
> 
> So these wells would still continue pumping oil even if the price was $30 a barrel, and that $30 a barrel cash flow would be going back to pay off the debt, sure the company is not going to make any profit and will lose the equity they injected into the deal and may go bust, But if the bank had funded say 50% of the cost of the wells, they should be able to get most of that back even when the price is well below the on paper cost of production.
> 
> what I am trying to say, is that just because the oil price drops below the cost of production, doesn't mean there is no cash flow to repay debt, the cash will keep coming in and servicing debt.



true Value Collector, the above mitigates the cost but these wells have very short life 3/5 years max  if I remember well
so the companies will go bust very quickly, even faster if rates are raised and debt can not be serviced:
will the banks /loan owner try to manage the operations?it is not free
 even if most of the capex has been spent oncewe stop digging any new well, the actual return after opex is not that great with oil at 50$ or below
what about the alberta tar sands: 2nd biggest reserve of oil after saudi arabia, but not profitable at the currenty price.
Digging can stop there (better than wells which age rapidly) but the infrastructure and its debt is not paid back and the hardware decays :trucks/pipes, roads
In my view, cheap oil is very good for europe, asia.
not for australia or northern america
and very bad for south africa/africa/middle east.
As this war goes on, the casualties will not take long to appear;
we should know within a year.


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## Value Collector (9 January 2015)

*Re: Share Market behaviour- Oil price*



qldfrog said:


> true Value Collector, the above mitigates the cost but these wells have very short life 3/5 years max  if I remember well
> so the companies will go bust very quickly, even faster if rates are raised and debt can not be serviced:
> will the banks /loan owner try to manage the operations?it is not free
> even if most of the capex has been spent oncewe stop digging any new well, the actual return after opex is not that great with oil at 50$ or below
> ...




yes, shale wells produce 80-90% of the oil in the first 12-18months, so pay back is very fast. Any wells drilled prior to 12 months ago have already paid back the initial investment plus healthy returns. So the current fleet of wells would have been finanaced in part by the cashflow of the older wells, so the lenders have a buffer of the producers equity that needs to be eaten up before they start to lose their investment.

If a shale producer goes bankrupt, no liquidator is going to shut off the taps, they will continue to produce cashflow for the debt holders and eventually be absorbed into another producer willing to pay out the debt.

The oil price would not be anywhere near $50 if it wasn't for shale and tar sands, so it's not going to stay below their cost of production, for long, as you pointed out, shale well decline real fast, so within 12 months supply side pressure would force up prices.



> In my view, cheap oil is very good for europe, asia.
> not for australia or northern america
> and very bad for south africa/africa/middle east.
> As this war goes on, the casualties will not take long to appear;
> we should know within a year




low prices are bad for countries who are large net exporters.

But is will be good for Australia.

think of Australias Iron Ore miners, diesel is one of their biggest expenses to run the trucks, trains, ships, power plants etc, the reduction in oil prices has got to be good for them as they deal with lower iron prices.

look at coles and woollies, and all the other companies that spend millions shipping goods around this continent.

Farmers and other primary producers all have high fuel costs also.

Even just the average car owner will be saving $15 per week, and the taxi drivers and couriers will be quadruple that.


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## qldfrog (9 January 2015)

*Re: Share Market behaviour- Oil price*



Value Collector said:


> But is will be good for Australia.
> 
> think of Australias Iron Ore miners, diesel is one of their biggest expenses to run the trucks, trains, ships, power plants etc, the reduction in oil prices has got to be good for them as they deal with lower iron prices.
> 
> ...



yes some will benefit, it is funny how we fully agre on the fact/figures but I still differ on my analysis
Once again probably because I am based in Brisbane;
in qld, we had the mining boom: here coal mostly if not only: i know, this is my domain
then it crashed followed by public service sacking when LNP took power, only the gas expansion mitigated what was a real disaster for the local economy (tourism being dead due to high AUD, 
There is not much left here as wealth generator and we had a terrible drought which is not really over to hit agribusiness
now gas is having trouble because of low oil price and some projects are reduced.
sure the unemployed will pay less at the servo but where will the jobs come from, all services needs to have some wealth generating source along the chain.
my apologies as well, when rereading my mail, I meant south america will have negatives from low oil price:
think brasil/venezuela
the link food to oil will probably also quickly mean lower food commodities price which is not that great for australia as a major food producer.


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## sydbod (9 January 2015)

*Re: Share Market behaviour- Oil price*



Value Collector said:


> low prices are bad for countries who are large net exporters.
> 
> But is will be good for Australia.




It may be worth looking at the impact this will have on the Australian LNG industry. This was supposed to be the saviour for the Australian resources boom. It was supposed to be the saviour for the government budget also.
It is looking like many if not all of the new Australian LNG plants will now be financial loss making ventures.
There will be huge write downs by companies like STO, ORG, WPL, etc.
Hell..... at the current oil price of less than $50 (LNG prices linked to OIL prices in contracts) companies like Santos actually have a negative market value. http://www.smh.com.au/business/sant...nt-oil-price-broker-says-20150107-12jahi.html.

I will admit I am a "cup half empty" type of person, and believe we will go through a very rough patch in this country over the next few years.


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## Value Collector (9 January 2015)

*Re: Share Market behaviour- Oil price*



qldfrog said:


> the link food to oil will probably also quickly mean lower food commodities price which is not that great for australia as a major food producer.




Australian food production probably has a much higher energy/oil content in its cost base than other sources, So any reduction in the cost of that energy, would reduce the cost base of Australian production more than its competitors.

the vastness of the Australian land mass means transporting the raw materials (fertilisers, chemical, equipment etc) to the farms, then transporting the produce to market, then distributing the end product to the consumers, takes a lot of energy.


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## qldfrog (9 January 2015)

*Re: Share Market behaviour- Oil price*



Value Collector said:


> Australian food production probably has a much higher energy/oil content in its cost base than other sources, So any reduction in the cost of that energy, would reduce the cost base of Australian production more than its competitors.
> 
> the vastness of the Australian land mass means transporting the raw materials (fertilisers, chemical, equipment etc) to the farms, then transporting the produce to market, then distributing the end product to the consumers, takes a lot of energy.




and my counter argument is that comparing a corn field in france and australia, cormn is much much denser in europe than here which means much higher fertiliser input required in europe per feet;
similarly, fuel price in europe due to taxes is MUCH higher than here so .....
could probably be researched but the french wheat belt has no soil, just limestone + fertiliser whereas we stil;l do some soil use in australia;
anyway, time will tell;
was nice having the different point of views


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## Smurf1976 (9 January 2015)

There's really multiple sets of relevant financial numbers in the energy production business.

1. Cost to find it (minerals) or cost to assess, measure and design it (wind, hydro etc).

2. Production cost including cost to build it, cost to operate it, return on capital / interest on debt, cost of end of life decommissioning.

3. Cash cost of operating once built.

3 is generally very much lower than 2 with a few exceptions, whilst 1 is a sunk cost whether or not the development goes ahead.

Oil wells, gas wells, hydro and brown coal are all cheap to run once built. Cash costs tend to be higher for black coal (particularly underground mines) and biomass in many cases. Tar sands cash cost is relatively high due to the ridiculous amount of wear and tear on the equipment (some of which has a lifespan measured in hours, not even days or weeks but literally hours) due to the abrasiveness of the sand.

In the context of a drop in the oil price, there will certainly be examples where, at $50 oil, 1 & 2 would never have gone ahead in the first place but 3 (operation once built) remains profitable. Those in that position sure won't be walking away and abandoning the oil field, but likewise they rationally won't be developing any more high cost sources of production either.

Anecdotally, there's already plenty of stories coming from the US about job losses in the tight oil ("shale") industry. For every 1 job loss that reaches the media, you can be pretty sure that there's a lot more that aren't mentioned. So there's already a slowdown in exploration and/or development it seems. Meanwhile, production carries on since it's still profitable to do so, even though at these lower prices the companies may end up wishing they'd never drilled the wells in the first place.

Same concept with a lot of things actually. Costs a lot of money to clear land and put a house on it. But once it's built, it doesn't cost that much to simply live in the house at least until a major refurbishment is required.

The one big difference with oil versus other energy is the recent absolute reliance on tight oil ("shale"), NGL's and tar sands to grow production. Take those out of the numbers and production has gone nowhere for almost a decade.  

Tar sands = a very "fixed" sort of operation in that it runs at a constant output from the processing plant for decades. It's more akin to building a coal-fired power station or a metal smelter than with conventional oil extraction in that sense. You build the processing plant and run the mine to feed it, production normally being determined by plant capacity not by any geological constraint.

NGL's = a by-product of conventional (non-coal seam) natural gas extraction. The future level of production here is tied to how much non-CSM gas we produce, not to the demand for oil.

And finally tight oil ("shale"). The unique factor here is the very high decline rate those wells have. It's very much an extraction operation economically. Go in, get a lot of it out, then you're left with a very long and slow tail end production. At a guess, I can see a lot of the old wells being sold as low risk "slow and steady" investments to other operators in due course. 

As for what happens next, my main thought is that the current combination of price and volume is not sustainable. That is, producing 94 million barrels per day at USD50 per barrel doesn't work in the long term since it doesn't make enough new development profitable. If we're happy with a lower volume then we could probably sill have $50 oil a decade from now, but if we want even the current volume of production at that time then prices will need to be higher. I won't make any attempt to predict the actual price or volume, just noting that the current combination seems unsustainable.


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## Smurf1976 (9 January 2015)

sydbod said:


> I do not plan to get involved in "my numbers are better than your numbers".




I don't think anyone here is trying to do that.  Posting facts and figures yes, but then volume and price are really at the heart of the discussion we're having here. 

My reason for posting detailed data is (1) to dispel the myth that the USA is somehow becoming "independent" so far as oil is concerned and (2) to put the various sources of supply into perspective.


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## Smurf1976 (9 January 2015)

*Re: Share Market behaviour- Oil price*



sydbod said:


> It is looking like many if not all of the new Australian LNG plants will now be financial loss making ventures.There will be huge write downs by companies like STO, ORG, WPL, etc.




Australia is an interesting position here. Not sure if it's unique, but it's certainly unusual.

We are a net importer of actual oil (including refined products) and are likely to remain so but we are becoming a large net exporter of something else (gas) that is linked to the oil price.

So in physical terms, we're an oil importer no doubt about that. But in financial terms, we're a net exporter of things directly linked to the price of oil.

In addition to that national perspective, there are also large variations between the states. Some states end up as major net exporters, others remain totally reliant on supply from outside the state. At the extreme, it's fair to say that NSW and Tas benefit from lower oil prices since they have no oil production (either) and only a little bit of gas in NSW. It's a very different story in WA, NT or Qld however.


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## qldfrog (11 January 2015)

*Re: Share Market behaviour- Oil price*



Smurf1976 said:


> So in physical terms, we're an oil importer no doubt about that. But in financial terms, we're a net exporter of things directly linked to the price of oil.
> 
> In addition to that national perspective, there are also large variations between the states. Some states end up as major net exporters, others remain totally reliant on supply from outside the state. At the extreme, it's fair to say that NSW and Tas benefit from lower oil prices since they have no oil production (either) and only a little bit of gas in NSW. It's a very different story in WA, NT or Qld however.



Well put and that might explain my point of view, being in a state which was supposed to grow based on boom gas


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## Smurf1976 (11 January 2015)

*Re: Share Market behaviour- Oil price*



qldfrog said:


> Well put and that might explain my point of view, being in a state which was supposed to grow based on boom gas




So far as other states are concerned, it's more complex given that gas production volumes are likely to change. 

Vic - produces more gas than the state uses. Also produces oil but is a net importer.

SA - produces oil and gas. Roughly self-sufficient in gas (though in a physical sense there's a lot of movement between NSW, Vic and SA). Net importer of oil (all of which is refined outside the state). Since most gas in SA is used for electricity generation, any rise in price would be partly offset by increased use of coal and supply from Vic as well as encouraging further development of wind generation within SA.

Also a tad complex in Tas. Imports all the oil (refined) and gas (from Vic) it uses. Where it gets complex is with electricity, since exports (to Vic) of peak load electricity compete directly with gas-fired generation in Vic and other states and on a few occasions against oil-fired generation. All other things being equal, a change in the gas price does influence the value of that peak load electricity to some extent, though it's complex given that electricity is a market in itself which is somewhat oversupplied most of the time. But nonetheless, there's certainly an opportunity to buy electricity from Vic when it's cheap, store it as water, then sell back when the price goes up. That works either daily (off-peak versus peak) or over a much longer time up to several years. 

For WA, Qld and NT they are more directly exposed as net exporters (of gas) which is linked to the oil price. But that does get a bit complicated in WA and NT given the very high use of gas, both in nominal terms and as a % of energy supply, by industry within WA and that most parts of the NT are 100% reliant on gas-fired electricity generation (and the rest is mostly oil apart from minor use of renewables).


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## rimtas (11 January 2015)

It is interesting to read so many opinions, most of which see lower oil as a threat to economy. I just wanted to clear things a little-most of the time price of oil was below $50, with exception of a few years in 2007 and 2012-2014 above $100.
 So $100 and more is not normal, and $50 is normal. The world knows how to live with low oil and is used to $50 more than to $100.   So now things are getting back to normal. 






And what concerns correlation between stocks and oil-there is none.  In times stocks tend to move in line with oil, and some times not. The same can be said about smaller time frames, as market is a fractal-if you take hourly chart,there are moments when oil and stocks correlate and moments when they are not. 
I do not see any reasons why anyone must look at the price of oil while investing in stocks overal(with exception of those directly linked to price of oil).


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## hhse (11 January 2015)

rimtas said:


> And what concerns correlation between stocks and oil-there is none.  In times stocks tend to move in line with oil, and some times not. The same can be said about smaller time frames, as market is a fractal-if you take hourly chart,there are moments when oil and stocks correlate and moments when they are not.
> I do not see any reasons why anyone must look at the price of oil while investing in stocks overal(with exception of those directly linked to price of oil).
> 
> View attachment 61071




Agreed. Confirmation below:

https://www.tastytrade.com/tt/shows...il-and-transportation-12-05-2014?locale=en-US


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## Smurf1976 (11 January 2015)

rimtas said:


> It is interesting to read so many opinions, most of which see lower oil as a threat to economy. I just wanted to clear things a little-most of the time price of oil was below $50, with exception of a few years in 2007 and 2012-2014 above $100.




Agreed there. $100 oil is not "normal" historically, even $50 is still very expensive by historic standards. In the past, $40 was long considered the nightmare scenario and any talk of $100 implied a major economic crises (and quite likely war). 

The trouble is that a great many investments and other decisions have been made on the assumption that expensive oil would continue. Lower priced oil makes those investments nowhere near as profitable as expected and in some cases an actual financial loss results.

The same could be said of, say, interest rates. The current level is below normal, but if rates were to double in the next 6 months then I think we'd have a few problems. A great many decisions have been made on the assumption that rates won't rise at all, or will only rise very slowly. A quick doubling of rates would cause a lot of pain I'd expect (though of course there are some who would benefit).

Personally, I don't think that $50 oil is here to stay. US gasoline demand has already started to rise, the active drilling rig count in Canada has dropped by a massive two thirds and it's dropping week by week in the US too. Simply extrapolating the trend in the US suggests that in the US drilling will drop below the rate needed to offset natural decline in aging oil fields within just a few months. I don't have data for the rest of the world, the US is the king of publicly available oil data whilst the OPEC nations are somewhat secretive, but presumably the broad trend would be similar globally.


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## waterbottle (16 January 2015)

9000 jobs to be cut from world's No.1 oil field services provider


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