Oil price discussion and analysis

[tradernor]

Another bold bet on oil, from CLR's CEO:


http://www.businessinsider.com/r-us-oil-ceo-hamm-goes-out-on-a-limb-scraps-hedges-2014-11

 

[Wysiwyg]

Another bold bet on oil, from CLR's CEO:

Interesting to read about old Hamm in the midst of a divorce. One wonders what influence if any this has had on his decision to drop all oil hedges.

"Hamm, who founded the Oklahoma City-based company in 1967, is in the midst of a bitter divorce battle with his wife Sue Ann.

Since Hamm owns about 68 per cent of the company, the divorce settlement holds vast implications. During much of August and September, the CEO spent most days in court to attend his divorce trial, which may result in one of the largest divorce judgments in U.S. history".

 

[CanOz]

On the monthly you can see that the next solid support is 40 ish. That would have a dramatic effect on communities from North Dakota to Northern Alberta, countries from Norway to Nigeria. Traders will be flocking to the intraday volatility in the oil and gas markets with new shorts being cleaned out from time to time. Transport stocks will move, air tickets will be cheaper again, palm oil prices will plunge, consumers will have new spending power, the industrial stocks will rally with less energy costs, currencies of oil producing nations will plummet.

this is big...

If you're an intraday trader, you need to be watching these markets and these currencies in the next few days/weeks.

 

[Smurf1976]

fracking wells production is boom and crash aka after an initial huge production flow

There's a few reports starting to emerge, and that was when oil was in the 70's, about rigs being idled since it's just not profitable to drill some of these well in the US at that price.

Also in the Australian today, Russia is struggling economically with the falling oil price (apparently that's having a far bigger impact than the sanctions) and needs about $100 per barrel to balance the budget.

The price could certainly fall a lot further in the short term, but I can't see it staying down in the longer term.

 

[So_Cynical]

Transport stocks will move, air tickets will be cheaper again, palm oil prices will plunge, consumers will have new spending power, the industrial stocks will rally with less energy costs, currencies of oil producing nations will plummet.

this is big...
.

Bigger picture, maybe this is the kick that the western economies need to get going again...winners and losers all round i suppose...consumption is such a large part of western GDP, a low oil price = a pay rise that's not inflationary or coming out of the bosses pocket.

 

[DeepState]

 

[DeepState]

Bigger picture, maybe this is the kick that the western economies need to get going again...winners and losers all round i suppose...consumption is such a large part of western GDP, a low oil price = a pay rise that's not inflationary or coming out of the bosses pocket.

Inflation expectations are a strange thing. They are now concerned that deflationary pressures will be exacerbated in EZ and Japan by these developments. If true, this may be the more powerful force than the tax cut or pay rise you are raising. We have reasons locked and loaded to explain any outcome in the weaker Western economies...

One view: Lower oil prices will bring down inflation expectations in EZ...increase chances of full bore QE....hopefully a tick up in GDP.

 

[Uncle Festivus]

I think there are 3 points at play here - demand, US import independance due to shale, and currency wars.

Demand - essentially the global economy is in recession, or at least not growing, and depending on how you interpet the data, the US is as well. No demand from the US due to shale.

US shale oil - the Saudis won't blink first, they will force as many US shale companies out of business as they can.
Shale companies won't be able to just shut down and sit idle, they either make money to pay debt or go broke.

Currency wars - commodity producers margins are getting squeezed because of the flight to the worst best currency.

It's now officially getting very ugly, even between allies, in a last desperate attempt to grow economies on debt (QE) when there is no demand for it, apart from blowing non productive bubbles? I expect to wake up one day and see the bastions of irrational exuberance, the US equity markets, halted on limit down very soon...........

 

[McLovin]

View attachment 60510

Can you explain that chart, RY? Is that the oil price where the govt runs a balanced budget?

TIA

 

[CanOz]

The Saudi's are among the cheapest for operational costs, but I'm guessing that when you throw the economy in there, they are not as competitive?

 

[Smurf1976]

Can you explain that chart, RY?

Looks like it shows the price per barrel (presumably in USD) required to balance their government's budget? That's my guess, since all those countries are substantially dependent on oil revenue to fund non-oil related things.

A point many miss is that in 2014 "big oil" is in fact government. The likes of Shell and ExxonMobil are small players these days in terms of upstream production. They produce some yes, but the likes of Saudi Aramco make the "big oil" companies look trivial in comparison. And even where the oil is produced by private companies, in some countries there's still a lot of government involvement particularly with where the profits go.

As for what's going on, I suspect that Russia has something to do with it. Pure speculation here, but an agreement between the US and the Saudi's and possibly other major producers to crash the price of oil, crippling Russia economically, seems plausible to me. When you look at Russia's economy, they're very much an "oil country" in terms of exports and to a significant extent government revenue too. Oil is more important to Russia than coal or iron ore is to Australia. Many would argue that the mid-1980's oil price crash had a lot to do with the unraveling of the USSR given the economic stress imposed. History repeats?

 

[CanOz]

Looks like it shows the price per barrel (presumably in USD) required to balance their government's budget? That's my guess, since all those countries are substantially dependent on oil revenue to fund non-oil related things.

A point many miss is that in 2014 "big oil" is in fact government. The likes of Shell and ExxonMobil are small players these days in terms of upstream production. They produce some yes, but the likes of Saudi Aramco make the "big oil" companies look trivial in comparison. And even where the oil is produced by private companies, in some countries there's still a lot of government involvement particularly with where the profits go.

As for what's going on, I suspect that Russia has something to do with it. Pure speculation here, but an agreement between the US and the Saudi's and possibly other major producers to crash the price of oil, crippling Russia economically, seems plausible to me. When you look at Russia's economy, they're very much an "oil country" in terms of exports and to a significant extent government revenue too. Oil is more important to Russia than coal or iron ore is to Australia. Many would argue that the mid-1980's oil price crash had a lot to do with the unraveling of the USSR given the economic stress imposed. History repeats?

Agree, I've heard this about Iran and Russia already in a few Bloomy podcasts...

Spot on also on the fiscal cost.

Really interested in this shift in energy costs. I don't think it is dire but the opposite, especially coming into winter in Europe. Interesting that Nat gas can sometimes trade inversely to oil, however I wonder if this shock can bring the two back to closer correlation....

 

[TheUnknown]

Oil price collapsing has nothing to do with shale oil, economy or recession. This is a repeat of the 1980s when the USSR collapsed it is to starve the Russian economy by the scumbag western governments supported and agreed with king of terror and king of human rights abuser saudia arabia.

It is also aimed at Iran to try and tame them from getting nuclear.


What will happen?

* Smaller countries that produce Oil and rely on Oil will soon starve if price stays this level or drops more.
* One side of the world will give in and in 3-4 months oil will be back up again

In other news oil has been its lowest since 4-5 years but in aus we are still paying $1.30 +p/l work that one out.

 

[Smurf1976]

Really interested in this shift in energy costs. I don't think it is dire but the opposite, especially coming into winter in Europe. Interesting that Nat gas can sometimes trade inversely to oil, however I wonder if this shock can bring the two back to closer correlation....

One thing about oil is that it's the universal fuel. Apart from making steel and a few other things like that, what you can do with coal or gas can be done with oil in a technical sense. Eg in Australia we generate electricity from coal, gas and renewables (mostly hydro and wind) but if oil became cheap enough then we do have capacity to burn it in a few current power stations, and if it stayed down long enough then it's not difficult to convert most coal and gas plants to run on oil.

We're not at that point yet, the price of black coal is equivalent to oil at USD18 per barrel (roughly, depends on the quality of the coal etc).

For gas it's a bit more complex, since there's no real "single" global price for gas and gas prices themselves are in some circumstances (particularly LNG) set simply as a fixed % of the oil price. But looking at the EU, gas is currently equivalent to oil at about $57 per barrel. For the US it's equivalent to oil at $22.

If the oil price continues falling then the EU may end up using more oil and less gas in industrial facilities, power generation etc. The ability to switch in the short term does have definite limitations, but it's not zero. Now, if the EU starts using more oil and less gas, then they need to import less gas from a recently troublesome supplier - Russia.

The more I think about this one, the more I see politics being involved as a cause.

 

[TheUnknown]

One thing about oil is that it's the universal fuel. Apart from making steel and a few other things like that, what you can do with coal or gas can be done with oil in a technical sense. Eg in Australia we generate electricity from coal, gas and renewables (mostly hydro and wind) but if oil became cheap enough then we do have capacity to burn it in a few current power stations, and if it stayed down long enough then it's not difficult to convert most coal and gas plants to run on oil.

We're not at that point yet, the price of black coal is equivalent to oil at USD18 per barrel (roughly, depends on the quality of the coal etc).

For gas it's a bit more complex, since there's no real "single" global price for gas and gas prices themselves are in some circumstances (particularly LNG) set simply as a fixed % of the oil price. But looking at the EU, gas is currently equivalent to oil at about $57 per barrel. For the US it's equivalent to oil at $22.

If the oil price continues falling then the EU may end up using more oil and less gas in industrial facilities, power generation etc. The ability to switch in the short term does have definite limitations, but it's not zero. Now, if the EU starts using more oil and less gas, then they need to import less gas from a recently troublesome supplier - Russia.

The more I think about this one, the more I see politics being involved as a cause.

Oil cartel is going against Russia nothing else. You can only push a super power so far until it really hits you back.

 

[Value Collector]

Oil cartel is going against Russia nothing else. You can only push a super power so far until it really hits you back.

Russia is not a superpower,

 

[explod]

Russia is not a superpower,

I would question that from a military perspective. If they were easy to bowl over the US would have done that.

Check out "zero hedge" for a week or two.

 

[DeepState]

I would question that from a military perspective. If they were easy to bowl over the US would have done that.

Check out "zero hedge" for a week or two.

Why wait?



But, really, nuclear arms use is off the table. It would be MAD to use them. Or, if used, will obliterate the table anyway.

Russia still runs a current account surplus of $50bn. It has USD 429bn in FX reserves. IT has a very small sovereign debt load.

Russia's private sector does have substantive foreign debt. I do not know at this time whether that is substantively hedged one way or another. In the event of sovereign distress which prevents these from rolling, FX reserves will have to be tapped to prevent these enterprises from folding for lack of foreign sourced funds. Pressure from this issue will also arise as a result of the sanctions which are now in place. Somehow, I suspect that FX will be available via friendly trade partners, so it is not as big an issue as might appear to be the case. A certain country to the south is a major buyer and seems to have a stack of USD in its coffers looking for productive uses.

 

[CanOz]

RY, what do you think $50 oil would do to the industrials in developed markets? What effect do you think it would have on emerging markets? Love to hear your view!

 

[DeepState]

RY, what do you think $50 oil would do to the industrials in developed markets? What effect do you think it would have on emerging markets? Love to hear your view!

In isolation, a marginal move in energy costs consumed in the production process will clearly be beneficial to industrials. However, there is a real concern that this can wash through to weaken inflationary expectations in countries/regions like Europe and Japan. In circumstances of excess capacity, profitability gains from reduced energy input costs will get passed along to consumers who will experience a disinflationary outcome...purportedly leading to reduced demand if the orthodoxy is believed. This effect would generally be bigger in the near to medium term than the relatively small savings made on input costs. Hence, lower energy costs do not necessarily have to be a good thing. It depends a lot on whether consumers extrapolate the deflationary effect. The authorities are clearly very concerned. If they are correct, $50bbl would be great for the economy in the very long term if sustained. In the nearer term, it isn't good for industrials serving the domestic market. You would also see a bunch more monetary stimulus, weakening the currency further.

For export manufacturers, all of this is generally good as their profitability improves with competitive positioning.

In countries like UK and US where things are much better, the lower input costs and final costs serve as more of a tax cut and encourage further demand. It is more likely that these companies can hang on to some of the benefit arising from lower input costs. Hence, industrials in these countries which serve the domestic market can be expected to benefit.

For EM, it is mixed. Depends on the country by country scenario with straightforward translations from importance of energy to the listed market and economy more generally.


All of the above is just thinking about things as the impact from marginal movements in oil. If a $50bbl scenario arose because there was an aggregate destruction in demand on a major scale, everything is screwed.

Cheers