Oil is down - and this is bad?

[CaptTom]

Interesting article which is sort of related to my OP:

Opinion: Why stock investors should want higher oil prices

It's mostly a fluff piece (aren't the all?) but still gives a very brief overview of the relationship between stock prices and oil prices.

I don't think it does anything to negate my contention that, in normal times, relatively higher oil prices are a drain on the overall economy. The stock market may or may not respond the same way, for many reasons. The last line sums it up pretty well:

Quote:

In the meantime, both bulls and bears need to look elsewhere than oil’s price for compelling stories about what the stock market has in store.

In other words, a dramatic change in oil prices CAN impact stocks, but other forces are in play, and less dramatic changes will have less impact.

To that I'd add that stock prices aren't the only measure of "good" or "bad" economic conditions. Since I'm using the traditional "three-legged stool" model, low inflation and low stock market returns maximize the long-term value of my fixed pension. So I'm not a huge fan of "growth," which to me only means "inflation." Although I don't want the bottom to fall out, for me personally, higher oil prices are always a bad thing.

[ponyboy]

Gotta love the fact that our planet relies almost entirely on a fossil fuel that will one day be gone.

[Breedlove]

Cheap prices could get bad for the overall workforce . Short term the drillers will drill baby drill . Rig rates will drop to get a job . Over all a glut could build that could cause heartburn to a lot of independent drillers and pumpers . Look at Weatherford today seems it is going down soon with cheap prices . Others will follow. Lots of these boys are working on a prayer. Lots people in the industry don't belong a way to purge.

[audreyh1]

Quote:

Originally Posted by Breedlove Cheap prices could get bad for the overall workforce . Short term the drillers will drill baby drill . Rig rates will drop to get a job . Over all a glut could build that could cause heartburn to a lot of independent drillers and pumpers . Look at Weatherford today seems it is going down soon with cheap prices . Others will follow. Lots of these boys are working on a prayer. Lots people in the industry don't belong a way to purge.

Gluts usually happen when prices are higher, driving oil prices down. When prices are lower, less drilling occurs.

[W2R]

I don't have much to say about this from an investing standpoint, since I just buy and hold broad index funds for the most part.

BUT - - I have been getting a big kick out of buying gasoline for my car recently because of the lower prices.

[Bigdawg]

Quote:

Originally Posted by ponyboy Gotta love the fact that our planet (currently)relies almost entirely (USA 68%, UK 64%) on a fossil fuel (slowly moving away from)that will one day be gone.

Fossil fuels will last many more generations. New technologies are progressing nicely. I am not worried for my grand or even great grandchildren. Without fossil fuels where would we be today?

[Car-Guy]

Quote:

Originally Posted by W2R I don't have much to say about this from an investing standpoint, since I just buy and hold broad index funds for the most part. BUT - - I have been getting a big kick out of buying gasoline for my car recently because of the lower prices.

I can remember seeing gas for 19.9 as a kid in the late 50's. It was about 30 to 35 cents a gallon when I started driving in the late 60's.


Considering inflation, it's about the same price/value now.

[Breedlove]

I don't think we are near a glut in oil , just a small blip . When things slow down the leases can run out and the drilling companies reduce rig time to get a job . lots of the drillers and Service companies are neck deep in debt so they have to chase every job . This compounds all the way through the supply chain . People have wells drilled at a cheap price then call the pumping company in to cement it in . A few years ago they had over 1200 wells cemented in . At 55.00 a barrel everyone is still making money . Enjoy the cheap price, it will be up soon.

[audreyh1]

Quote:

Originally Posted by Breedlove I don't think we are near a glut in oil , just a small blip . When things slow down the leases can run out and the drilling companies reduce rig time to get a job . lots of the drillers and Service companies are neck deep in debt so they have to chase every job . This compounds all the way through the supply chain . People have wells drilled at a cheap price then call the pumping company in to cement it in . A few years ago they had over 1200 wells cemented in . At 55.00 a barrel everyone is still making money . Enjoy the cheap price, it will be up soon.

You were talking about a glut building while prices were low.

Look at what happened in 2015/2016. Prices dropped precipitously. Some companies went out of business. Many stopped drilling.

What you are saying here doesn’t mesh with your earlier post.

[Breedlove]

I'm probably not explaining it easily . In the oil business you have many independent drilling companies . Most are leveraged big time when the price of oil goes down they must continue to work ie reducing rig costs to pay debts. Same for pumping companies . a few years ago with the 27.00 oil Odessa had rigs stacked for miles . But before that happened the people with land leases had them drilled at the cheaper rig and pumping costs ..a mad rush . They cement the well in with a BP so it is not performing . This is like money in the bank as soon as the price goes up they come in and drill out the BP and stimulate the well . The Service companies have to work and at 54.00 they are making money.


A good indicator is Halliburton , Schlumberger Baker . Their profits are down but they are working like crazy .

[pj.mask]

If the too 25 oil companies make $2.2trillion out of a $78 trillion global economy - seems significant if it crashes. The US has a lot of capacity on standby so oil prices will not rise because if the price increases they will bring more wells online (swing producer).

Oil is a big part of the economy. Oil companies have been reducing staff since 2012 so not a whole lot of people to shake out still. When/if price picks up they won’t have available talent (people will move on) so will have to pay a lot for staff. This adds to major swings in prices. Better to run consistently.

Oil is a big industry, maybe the price being cheap is good for you but like other industries (steel, coal, manufacturing, etc) there is a societal impact. I look forward to a transition to renewables (in both energy consumption and peoples jobs). I’m not saying we should work to support a global industry because it benefits a few but I don’t feel we should (ruthlessly) try to get the best deal for ourselves. In my experience that tends to increase volatility.

I will say the ‘oil is a bunch of cheating sleaze-balls’ comment represents the smaller or independent producers I have dealt with but the major players have too much at risk and are too standardized to mess with that at any significant scale. If someone was drilling a well next to my house I’d always rather it be a major. They actually follow the rules and standards.

[Brat]

My take on the cost of oil: I don't think demand is soft, I think existing reserves and technology improvements have decreased the cost of production.

New fracking technology has driven down the cost of that production dramatically, frackers are small operators as the oil industry goes. BP and Exxon won't play as big a role in exploration as they have in the past, likely concentrate on refining. As I understand it, fracked oil is very pure. Tar sands oil (Canada) is the opposite. Between fracked oil, tar sands and production in the Gulf the US has more than enough to meet its needs. The challenge is building out pipelines to refineries and then the distribution of the product.

Because there are few pipelines through the Rockies the US actually has two oil markets.

East of the Rockies your oil is relatively inexpensive because of low distribution costs, natural gas from fracking is being flamed off. Coal will die because natural gas is so cheap. Mid-west now is your opportunity to re-industrialize.

To the west, our oil is transported by tanker so our costs are higher.

Venezuelan oil is so bad even the Chinese don't want to take it home (there is a story to go with that). They will go bankrupt.

That leaves the Gulf states and Russia as the big producers.

Iran and Saudi Arabia need to keep pumping to maintain their economies but they are at each other's throats, my take is that they are pumping like crazy - that is pushing prices down. Civil unrest is being provoked by both sides, particularly near oil fields. If that gets going Katie bar the door. Oil prices with go sky high as SE Asia nations are dependent on that resource.

Russia has Europe by the old pervertable, Europe is dependent on pipes from Russia so IMHO even if the world price of oil goes down the Russians will set the price for those customers.

[Breedlove]

Worked 35 years in the oil patch for a (pumping company ) What people call a fracking company . When you pump domestically it is expensive not so labor intensive but most U S wells run slick water . This destroys pumps and FE 's To the tune of 200K each. In todays world a well might have 40 or more stages . That is like 40 producing wells from one hole .
Too expensive for off shore , Venezuala was good for us Lake Maricaibo is a good producer we kept 2 frac boats busy but the government ran us out. I don't think the Tar sands are profitable right now at 58.00 BBL Natural gas is almost free , everytime they drill liquids well they have to get rid of the Gas . Nowadays the pumpers hook right into the Gas to pump hurts the HP on the pumpers.
Transportation of oil in the U S where there are not pipelines is handled by rail ( Warren Buffet ) this is why the Keystone keeps fumbling.


Russia is a mess I worked in Russia when we bought a Canadian company out . Without endangering my life it is corrupt beyond your dreams.


One well in the MER is almost like a whole field in the U S Saudi needs U S help and chemicals to produce . Germany could be a producer of Natural Gas and probably supply all Northern Eu. but their environmentalists will not permit fracking. There are so many caveats to the O&G business and somehow it always works .


Loved the O&G business , and I loved the people in it

[SnowBound]

What clearly is not well: Natural gas is climbing fast and oil is moving in the opposite direction just as fast. If this continues, it could end up the biggest bubble pops in this decade.

[aja8888]

Quote:

Originally Posted by SnowBound What clearly is not well: Natural gas is climbing fast and oil is moving in the opposite direction just as fast. If this continues, it could end up the biggest bubble pops in this decade.

You mean pricing? If so, nat gas prices are always higher in the winter months. They are not dependent on how crude pricing goes. Crude is worldwide while nat gas pricing here is U.S. only.

[Breedlove]

Crude will go up as soon as the dollar gets weaker . Right now the U S dollar is real strong . Just pump some more money .

[revhappy]

Quote:

Originally Posted by revhappy A large part of my networth (60%) is denominated in Indian rupees. So lower oil prices is good for me. If oil crosses 80, it will be disastrous. Brent at 60 is like perfect.

Brent is getting close to 60 and INR is appreciating. Can everyone agree and stick with 60 please?

[Tom52]

I have no opinion whether lower oil prices are good or bad for the economy but it sure opens up the door for state and federal government to pass legislation to jump up the taxes. Home state did it early 2015 when gas prices were fairly low. I heard news stories recently about jumping the federal tax on gasoline by $0.25 per gallon. Much less public outcry to raise taxes when price of fuel is low.

[explanade]

Heard this podcast where they discuss the economics of fracking.

Low interest rates as a result of the financial crisis led to a boom in fracking, which is capital intensive.

One of the guys interviewed is Jim Chanos, hedge fund manager who has studied the economics of fracking.

He believes unlike standard wells, fracked wells require constant capital infusion to keep up production.

But with interest rates rising, that makes the economics precarious.

He also thinks there are bad incentives in the industry, where production rather than profitability is incentivized.

He didn’t say it but sounds like he was shorting or considering shorting many of these fracking companies.

[Brat]

Berkshire sold oil and bought financials recently.