Oil price discussion and analysis

[Tom32]

http://www.brisbanetimes.com.au/business/banking-and-finance/oil-price-fall-will-be-costly-for-australian-banks-morgan-stanley-says-20160118-gm8s89.html
impact of low oil on australian banks
CBA the worst affected ...

It is amazing with the global economy propped up on a mountain of debt what should be good news for most economies has investors rattled, me included.

Imagine how catastrophic it would be if tommorrow we discovered an infinite free power source? You would think the world economies would boom with a few exceptions. Massive developments in fresh water / agriculture in deserts etc ect. No famine no droughts just big pumps and big pipelines and a bucketload of new consumers. In stead we are panicking with one of the most important inputs of production becoming cheaper???

Ones first thought is that surely with oil at 28dollars surely the global economy in aggregate is better off than it is with oil at 100dollars.

The single problem with this is the amount of debt in the system. In stead of the oil and coal industry collapsing to be replaced by new industries we see risks to the behemoth finance industry and then risks knocking on to the whole world economy. This seems to be what spooks everyone due to finance being such a huge part of all developed economies. I can think of no other cause for concern. (Outside of oil and thermal coal stocks).

Yeh if one did invent an unlimited power machine the scary thing is it would seem the worlds economies would collapse due to massive bad debts...

Something serious has to be wrong with my 1990 economics textbooks when in 2015-16 - an oil shock is considered; the price of oil becoming too cheap...

 

[Value Collector]

It is amazing with the global economy propped up on a mountain of debt what should be good news for most economies has investors rattled, me included.

Imagine how catastrophic it would be if tommorrow we discovered an infinite free power source? You would think the world economies would boom with a few exceptions. Massive developments in fresh water / agriculture in deserts etc ect. No famine no droughts just big pumps and big pipelines and a bucketload of new consumers. In stead we are panicking with one of the most important inputs of production becoming cheaper???

Ones first thought is that surely with oil at 28dollars surely the global economy in aggregate is better off than it is with oil at 100dollars.

The single problem with this is the amount of debt in the system. In stead of the oil and coal industry collapsing to be replaced by new industries we see risks to the behemoth finance industry and then risks knocking on to the whole world economy. This seems to be what spooks everyone due to finance being such a huge part of all developed economies. I can think of no other cause for concern. (Outside of oil and thermal coal stocks).

Yeh if one did invent an unlimited power machine the scary thing is it would seem the worlds economies would collapse due to massive bad debts...

Something serious has to be wrong with my 1990 economics textbooks when in 2015-16 - an oil shock is considered; the price of oil becoming too cheap...

Yeah it's weird hey, I see it as a net plus, sure the energy businesses in my portfolio are taking a hit, but every thing else will be doing better, eg I am sure Disney has sold more tickets to the force awakens due to the low oil price etc

 

[luutzu]

It is amazing with the global economy propped up on a mountain of debt what should be good news for most economies has investors rattled, me included.

Imagine how catastrophic it would be if tommorrow we discovered an infinite free power source? You would think the world economies would boom with a few exceptions. Massive developments in fresh water / agriculture in deserts etc ect. No famine no droughts just big pumps and big pipelines and a bucketload of new consumers. In stead we are panicking with one of the most important inputs of production becoming cheaper???

Ones first thought is that surely with oil at 28dollars surely the global economy in aggregate is better off than it is with oil at 100dollars.

The single problem with this is the amount of debt in the system. In stead of the oil and coal industry collapsing to be replaced by new industries we see risks to the behemoth finance industry and then risks knocking on to the whole world economy. This seems to be what spooks everyone due to finance being such a huge part of all developed economies. I can think of no other cause for concern. (Outside of oil and thermal coal stocks).

Yeh if one did invent an unlimited power machine the scary thing is it would seem the worlds economies would collapse due to massive bad debts...

Something serious has to be wrong with my 1990 economics textbooks when in 2015-16 - an oil shock is considered; the price of oil becoming too cheap...

Good point.

Cheap oil cannot be bad for the economy, it wouldn't be bad for oil (in the long term) either - what with getting more people addicted to it, sell more of the stuff, turn the tap off a bit and make more money later...

I think you're right that collapsing oil is being blame for current economic/market stuff up... but it can't be true.

Maybe they can't really blame bad economic management and things like Austerity and free trade agreements that ruin jobs everywhere.

 

[Tom32]

Yeah it's weird hey, I see it as a net plus, sure the energy businesses in my portfolio are taking a hit, but every thing else will be doing better, eg I am sure Disney has sold more tickets to the force awakens due to the low oil price etc

Exactly.

That is unless, first small specialist resource heavy banks start collapsing followed by bigger banks and then funding dries up for otherwise profitable business. In competing for scarce funding interest rates rise independent of Government rates and finally consumers cannot buy a car or house with finance and then our world (esp Australia) really gets rocked to its core.

Kicking the can of the Gfc down the road by allowing funding to become too cheap, I believe is the root cause for the more extreme overshoot in resource and oil production than what would happen in a higher interest rate environment. It was two pronged cheap funding allowed many businesses to consume many resources plus it allowed the resource companies including oil ones to build massive capacity that is still coming on line now.

We berated US banks for lending money to people to buy houses they couldn't afford in 08, I expect at some point in the next 6 months we will have coined a term for loans to oil companies that could only be repayed if oil maintained a price level of 60dollars plus...

OASIS loans perhaps? Oil At Sixty or InSolvency....

Yeh it isn't quit as neat as NINJA but give me time.

 

[luutzu]

Was watching an old docu the other day on Peak Oil - just to see if their argument back then make sense.

I know there are reports of oil glut and some IEA spokeman reportedly said the world may drown in oil during 2016, China worries, Iran sanction lifted etc.

But if we were to take it that there is just too much oil in the world; not just too much that's being pumped now and oversupplying it, but too much oil in the ground - hence the world's producers just pump and flood the market because they have too much of the stuff.

If that were true, why do they pump it now and not pump it then when oil was 4 or 5 times the price now?

If they have abundant oil, why did they go towards Fracking/Shale, Tar Sand and offshore - high cost oil to bring it to market? Yes the high price of oil then meant it was economic to get those stuff, but you would think they could still save that and make more profit/high margin with conventional stuff they're now pumping.

If we were to assume, as some Lefty would (haha) that Iraq was liberated for control of its oil; that Iran was put on the Evil watchlist and being smack bang between a rock and a hardplace so it'd behave (with its oil)...

Then you see the phony proven reserve figures; the merely 1.5% oversupply when they pump at full speed.

What am I missing? A lot I know, but what are they?

Has new major reserves been discovered last couple years? I heard a while back we've used 1/3 of all known oil reserves, the other 1/3 are at places we can't get to or spread over too large an area it's not economical to get; and so there's only 1/3 left to use.


if that's true, then there isn't much left in the gas tank. But if there isn't much left, you shouldn't be revving the engine... Unless you only do it to big up the babes.

Anyway, interesting... don't know why people gamble when they can invest in stocks

 

[Tom32]

Good point.

Cheap oil cannot be bad for the economy, it wouldn't be bad for oil (in the long term) either - what with getting more people addicted to it, sell more of the stuff, turn the tap off a bit and make more money later...

I think you're right that collapsing oil is being blame for current economic/market stuff up... but it can't be true.

Maybe they can't really blame bad economic management and things like Austerity and free trade agreements that ruin jobs everywhere.

My recollection is that the theory definitely says cheap inputs for production makes us all better off but in the modern world of international debts and funding and reliance on finance it seems this is no longer true.

I suspect cheap oil may be the catalyst for our current problems, but this is only exposing the underlying problem of high corporate debt levels used for building excess capacity.

What should be good is only bad because of debt. The odd thing is everyone seems to be onto this counterintuitive logic and markets are being smashed across the board.

The scary thing is that if it starts to hurt too much we will go to war with a major oil producing country, burn their oil wells and order will be restored.

 

[Tom32]

Has new major reserves been discovered last couple years? I heard a while back we've used 1/3 of all known oil reserves, the other 1/3 are at places we can't get to or spread over too large an area it's not economical to get; and so there's only 1/3 left to use.


if that's true, then there isn't much left in the gas tank. But if there isn't much left, you shouldn't be revving the engine... Unless you only do it to big up the babes

the infrastructure set up on a reserve is usually balanced to get the best cost / time outcome.

This means there are some fields with reserves that will supply for decades (big reserves) with massive amounts of infrastructure. Why build double the infrastructure to rush this extraction when you can extract it over double the time? There is no good reason to make this investment.

Sorry to harp on about it yet again, but it comes back to a stupid low time cost for money... Might as well build double the plant and double production even if it means running out in half the time.

We possibly have brought forward a future scarcity in oil but between now and this future scarcity there will be pain due to this mis allocation of capital.

 

[luutzu]

My recollection is that the theory definitely says cheap inputs for production makes us all better off but in the modern world of international debts and funding and reliance on finance it seems this is no longer true.

I suspect cheap oil may be the catalyst for our current problems, but this is only exposing the underlying problem of high corporate debt levels used for building excess capacity.

What should be good is only bad because of debt. The odd thing is everyone seems to be onto this counterintuitive logic and markets are being smashed across the board.

The scary thing is that if it starts to hurt too much we will go to war with a major oil producing country, burn their oil wells and order will be restored.

Maybe debt being so cheap is also another cheap input, so cancels out? Never mind, haven't had fresh air all day.

Ey, maybe that's what these planners are doing - burning oil. Instead of Saddam on Kuwait, they're a bit nicer and not burn it in the open but pump it out, sell it so consumers around the world could burn it faster - more civilised and practical that way.

All these aside, it's not going to be good for the alternative energy guys. They'll be set back a decade and then some while to get the engineers trained right for alternative sources.

 

[Smurf1976]

Was watching an old docu the other day on Peak Oil - just to see if their argument back then make sense.

Fundamentally it's a finite resource, there's no serious question about that.

How much we can economically extract, and at what rate are the key unknown questions noting that it's far more complex than simply geology. Not all reserves can be put into production due to factors such as politics (and that includes everything from dictatorships, wars thorough to environmental objections) and then there's things like finance as another constraint. But ultimately there's a limit, that's a given, we're just not sure what that limit is and if it's low enough to be a problem or not.

Logic tells me that if there was plenty of oil outside the Middle East then the West wouldn't pay anywhere near as much attention to what goes on there. That we do says rather a lot about how much oil we don't have elsewhere.

All that said, investing on oil simply because it's a finite resource could well send you broke in the meantime.

 

[Tom32]

Maybe debt being so cheap is also another cheap input, so cancels out? Never mind, haven't had fresh air all day.

.

That is as good a way to look at it as any in that cheap inputs drive activity.

The difference is a cheap input like oil drives down production costs and likely drives increased production and consumption of just about everything including (esp) oil in the longer run. All this with no future repayment to worry about.

Cheap money drives down investment costs driving more investment but at some point you still have to pay the debt off. It remains after the investments are made.

It's the portion of those unable to pay it off is where the issue was in 08 and could well be again in 2016.

we have had the benefit of cheap funding driving both stock and economies in the recovery since 08 In the same way cheap inputs should drive outputs and consumption due to more abundant / cheap goods. Trouble is funding is going to get more expensive this year and perhaps this is what has investors even more rattled than the oil price.

 

[Value Collector]

Cheap money drives down investment costs driving more investment but at some point you still have to pay the debt off. It remains after the investments are made.

.

Yeah, but that's the same with an investment funded by equity too, equity investments aren't charitable donations that don't have to be paid back.

I mean if a project costs $1000. whether that's funded by ($1000 equity/cash) or ($700 Bonds + $300equity/cash) doesn't really matter, either way the project will be expected to earn enough cash to return the $1000 to both equity and debt investors along with a return on investment, eg interest to debt holders and dividends or equity reinvested into new projects for the equity holders.

----------------------------------------------------------

Debt only becomes a problem when low interest rates cause companies to do silly things like overpaying for assets, but over paying for assets will be a bad move regardless of whether its funded by debt or equity.

 

[notting]

Perhaps the Saudi's and co have deliberately let the oversupply run so that they can bring Iran into line as Iran starts to pump.
When everyone is on their knees begging for some food they tend to forget about ideologies and will be more conciliatory when it comes to agreeing on behaving so we can all eat!

On the demand side it would be interesting to see the numbers on 'mean' fuel consumption per car these days compared to say 2007 when oil peaked at $150 and global warming became of critical concern setting off a whole new design paradigm based on more fuel efficient cars.
I'd guess cars on the road these days are using about 1/3rd less fuel than back in 2007.
You'd imagine that even if there are more cars on the road now, the over all fuel consumption would be a far bit less!

Still that can be address by an oil cartel when everyone sees you can make twice the money pumping 10% less!
Who wouldn't want to make that deal once we ensure market share is not going to be shifted by mavericks!

 

[luutzu]

Fundamentally it's a finite resource, there's no serious question about that.

How much we can economically extract, and at what rate are the key unknown questions noting that it's far more complex than simply geology. Not all reserves can be put into production due to factors such as politics (and that includes everything from dictatorships, wars thorough to environmental objections) and then there's things like finance as another constraint. But ultimately there's a limit, that's a given, we're just not sure what that limit is and if it's low enough to be a problem or not.

Logic tells me that if there was plenty of oil outside the Middle East then the West wouldn't pay anywhere near as much attention to what goes on there. That we do says rather a lot about how much oil we don't have elsewhere.

All that said, investing on oil simply because it's a finite resource could well send you broke in the meantime.

Yea, in the meantime I'd be fired if I managed anyone else's money.

In terms of going broke though, was planning for payback over two years. One down so 5 to go, haha. But for retirement fund it'll be another 20+ years (it's no longer 65 ey?)... Anyway, I can wait longer than the OPEC and oilers can so might work out pretty good - unless Sceptre or others lop an offer now then it'll only be somewhat good.

---

Since we both agree that oil is a finite resource that runs the world, what are these producers doing pumping it all out just to make less money?

I think it might be more than merely defending their market share against unconventional and alternative energies. It will do that but also more important to the oilers it is a way for them to whack small and weaker operators then take them over to gain their reserves and rights.

Another potential gain would be to appear like you have a lot of the stuff left (that's why you pump it out like you don't care), then attract a few Chinese corporations to take it off you or partner with you.

Saudi Arabia has a the world's best/largest reserves, they've been pumping it out since WW2. If we take that broad estimate of the world already consuming 1/3, the other 3rd can't get to, only 1/3 to last etc... how much oil could there still be in the place?

Interesting these investing stuff.

 

[Smurf1976]

what are these producers doing pumping it all out just to make less money?

My guess is that they expect to end up making more money overall.

Crash the price, put a halt to US shale, Canadian tar sands and any other source of supply that was actually growing, then let the price go back up.

 

[luutzu]

My guess is that they expect to end up making more money overall.

Crash the price, put a halt to US shale, Canadian tar sands and any other source of supply that was actually growing, then let the price go back up.

I may have newfound respect for the games these guys are playing.

 

[Tom32]

Yeah, but that's the same with an investment funded by equity too, equity investments aren't charitable donations that don't have to be paid back.

I mean if a project costs $1000. whether that's funded by ($1000 equity/cash) or ($700 Bonds + $300equity/cash) doesn't really matter, either way the project will be expected to earn enough cash to return the $1000 to both equity and debt investors along with a return on investment, eg interest to debt holders and dividends or equity reinvested into new projects for the equity holders.

----------------------------------------------------------

Debt only becomes a problem when low interest rates cause companies to do silly things like overpaying for assets, but over paying for assets will be a bad move regardless of whether its funded by debt or equity.

The difference is:

With debt there is a promise to repay that debt.

With equity there is only a duty to do the best you can with other people's money.

Equity.

While it is not be this simple, to summarise: This difference between the two is important in that equity losses generally only effects the single investors in that stock. Potentially banks loan assets through margin lending but banks are cautious enough here to close large positions out in this area.

Loan assets.

When a loan asset (bank asset) is destroyed through liquidation of the borrower it requires the bank to cover the position through raising further capital or reining in deposit liabilities and loan assets shrinking both sides of the banks balance sheet to maintain the capital requirement it requires to operate as a bank. 10bn loss in bank capital roughly equates to 100bn less deposit liabilities allowed.

This the effects asset prices and hurts other banks balance sheets and then we enter the potential spiral of doom we came close to in 2008.

I am far from certain there is going to be a lack of funding for business in 2016 due to Shrinking balance sheets especially considering I have been mostly cash since early 2015. I have got it wrong to date.

That said less wrong than I have been with my godfreys ( ) .

I am just not comfortable with where this heads when a few major oil companies go broke. They all have loads of debt and this is what worries me so far as the market more generally is concerned. Not destruction of equity but destruction of banks loan assets.

While this will sound absurd: that bhp has seen 10s of billions of dollars equity wiped due to its fall from grace doesn't hurt Woolworths shares directly. However If 10s of billions of working capital (what stands in place to balance deposit liabilities at banks when loan assets are destroyed) was was wiped from commbanks balance sheet, Australia including woolworths would be in more trouble than Flash Gordon. This is why I posted in this oil thread at first instance. The reference to CommBank above.

btw Woolworths is only a reference to a broader market stock that of course has no special relationship with oil stocks if that isn't clear from my post.

Finally what people I move with find most perverse about my view on this is that I am considering again hitting oil producers hard with my smsf.

As I see it if oil stays where it is or moves lower oil stocks along with most of the market will be hit pretty hard. Oil worse sure but; if oil moves up only oil stocks will rally hard.

I see only limited upside for the time being in stocks (broad world economies) except oddly enough oil stocks (oil economies) assuming oil price moves positive.

 

[shouldaindex]

Few interesting links:

1. http://www.biofuelsdigest.com/bdigest/wp-content/uploads/2015/01/US-Saudi-total-011315.png

2. https://www.eia.gov/finance/markets/supply-nonopec.cfm

3. http://www.reuters.com/article/us-opec-idUSTRE5BJ1AA20091220

The 3rd has a twist if you pay attention to detail.

 

[fiftyeight]

The 3rd has a twist if you pay attention to detail.

I think I get the gist of the 3rd link, is the twist?

"The kingdom is estimated to need only around $50 a barrel to balance its books and avoid deepening foreign debts"

The kingdom has already run up foreign debts even when prices were at much higher levels

 

[CanOz]

The 3rd has a twist if you pay attention to detail.

Deja vu

 

[CanOz]

It is amazing with the global economy propped up on a mountain of debt what should be good news for most economies has investors rattled, me included.

Imagine how catastrophic it would be if tommorrow we discovered an infinite free power source? You would think the world economies would boom with a few exceptions. Massive developments in fresh water / agriculture in deserts etc ect. No famine no droughts just big pumps and big pipelines and a bucketload of new consumers. In stead we are panicking with one of the most important inputs of production becoming cheaper???

Ones first thought is that surely with oil at 28dollars surely the global economy in aggregate is better off than it is with oil at 100dollars.

The single problem with this is the amount of debt in the system. In stead of the oil and coal industry collapsing to be replaced by new industries we see risks to the behemoth finance industry and then risks knocking on to the whole world economy. This seems to be what spooks everyone due to finance being such a huge part of all developed economies. I can think of no other cause for concern. (Outside of oil and thermal coal stocks).

Yeh if one did invent an unlimited power machine the scary thing is it would seem the worlds economies would collapse due to massive bad debts...

Something serious has to be wrong with my 1990 economics textbooks when in 2015-16 - an oil shock is considered; the price of oil becoming too cheap...

These are good points, however the decline in oil energy prices are really hiding a bigger issue, the overall decline in commodities prices. Sure it might be good for consumers, but there is a mountain of debt associated with commodity related business. From Iron ore, to copper and energy.

The culprit is double whammy of glut due to overproduction, weak demand and a strong USD driven by "lift off"...

It is arguable that most of the world is actually in recession or on the brink, especially the commodity producing countries....that debt is not getting paid back any faster at these prices....