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Old 12-12-2014, 11:13 AM   #41
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I have S&P 500 index in one of our Roths. I am reading predictions that the S&P will be hard hit by the drop in oil and recommendations to sell. If I did that what would be a better index fund? (other investments are Wellesley and Wellington)
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Old 12-12-2014, 11:59 AM   #42
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I have S&P 500 index in one of our Roths. I am reading predictions that the S&P will be hard hit by the drop in oil and recommendations to sell. If I did that what would be a better index fund? (other investments are Wellesley and Wellington)
Take a look at the chart I posted above. So far the predictions are wrong. I don't invest on predictions but they are entertaining.
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Old 12-12-2014, 05:43 PM   #43
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I'll be surprised if we see these price levels for an extended period in 2015. I am really thinking of adding more oil/gas/equipment to my port, as I don't see oil going much lower.
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Old 12-12-2014, 06:27 PM   #44
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The problem with swings like this is that they tend to undershoot before correcting. I don't see why it couldn't get a lot lower than this for a while, before settling at a higher level off the lows. Long enough to cause the most pain.
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Old 12-12-2014, 08:03 PM   #45
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Anyone buying large vehicles?

Supposedly there have been spikes in SUV sales.
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Old 12-12-2014, 08:09 PM   #46
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Anyone buying large vehicles?

Supposedly there have been spikes in SUV sales.
I am thinking about upgrading our 19,500 GVWR Isuzu truck to a FTR model (26,000 GVWR) if I can find one. That large enough for you?

We may need the extra capacity to carry our camper and gear.

I admit that watching fuel drop and hearing it might stay low for 5 years is making me want to go with the larger vehicle. MPG will probably go from 11 to 8.
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Old 12-12-2014, 08:31 PM   #47
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Neighbor up the street just rolled home in a new F150, lady somewhere in the area drives by in a new Dodge SUV, I have a new Passat, guy in the ROMEO club bought a new Audi Q7. This is thinking quickley off the top of my head.
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Old 12-12-2014, 08:58 PM   #48
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I'll be surprised if we see these price levels for an extended period in 2015. I am really thinking of adding more oil/gas/equipment to my port, as I don't see oil going much lower.
Shades of the tech bust thinking circa 2001?
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Old 12-12-2014, 09:17 PM   #49
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Thanks for confirming my guess on this.

So I guess we can say that the US frackers are putting a ceiling on how high oil might go in the future? When it goes incrementally higher, more supply will become available?
Note that also the low prices will wring out inefficiencies in the proceedures used in drilling and completing the wells. This will over time reduce the break even price just as directionally drilling multiple wells from one pad has done (once you go directional, one can drill wells in different directions from a single site)
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Old 12-12-2014, 11:02 PM   #50
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It seems there are much quicker reactions in terms of car purchasing behavior in response to oil price swings. When oil was like $150 and people were predicting $200 and $250, SUV sales plunged and public transit systems were packed.

Then previous drops in the price of oil saw sales spikes of large and performance cars.

You would think the car companies would be more inclined to offer incentives to buyers when oil price is high and they want to move the SUV inventory. As I understand it, pickups sell well all the time so they don't need incentives.
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Old 12-12-2014, 11:03 PM   #51
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Note that also the low prices will wring out inefficiencies in the proceedures used in drilling and completing the wells. This will over time reduce the break even price just as directionally drilling multiple wells from one pad has done (once you go directional, one can drill wells in different directions from a single site)
Is there a chance that environmental regulators crack down on the fracking processes, like the proprietary liquids they use, controlling the release of methane, etc. to raise the costs?
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Old 12-12-2014, 11:20 PM   #52
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Is there a chance that environmental regulators crack down on the fracking processes, like the proprietary liquids they use, controlling the release of methane, etc. to raise the costs?
In very simple terms for those who believe the talking heads in the news:

Oil companies have been "fraccing" wells since the 1940's. The perceived issues have been hyped beyond belief, kind of like Ebola to some extent.

These new wells are upwards of 3 miles under the ground and not hydraulically connected to useable groundwater supplies. Most chemicals used in formation fracturing and completion are high pressure water, sand, and diesel fuel. Controlled expolsive charges are set off in the well bore to initially fracture the formation.

EPA has not found one case in the U.S. of any shale or deep horizontal well that has caused a documented problem with water resources.

For a new shale well (Bakken, Eagle Ford) the cost is about $3-4 MM to drill it and $6-7 MM to frac it and complete the well. These are horizontals.

This is not the wild, wild, west remember.
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Old 12-13-2014, 08:27 AM   #53
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Shades of the tech bust thinking circa 2001?
I don't think OPEC will allow this to happen indefinitely, so from my perspective, this phenomena will not become the new normal. Now if an alternate and cheaper form of energy comes along, that would be a game changer, but those developments will slow up if this persists. Anyhow, I am willing to go over weight when an asset class is cheap.
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Old 12-13-2014, 08:38 AM   #54
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I don't think OPEC will allow this to happen indefinitely, so from my perspective, this phenomena will not become the new normal. Now if an alternate and cheaper form of energy comes along, that would be a game changer, but those developments will slow up if this persists. Anyhow, I am willing to go over weight when an asset class is cheap.

Why I am still hesitant is while the oil asset is "cheap", I worry the stocks themselves are not (I am referring to the bigger oil producers, not oil equipment and services, etc.). These stocks have not came down nearly as far as oil, so I wonder if there is another shoe to fall when earnings get reported the following quarter. Then I have read many companies have their oil price hedge out through second quarter next year which would cause them to continue current production levels. Clearly you can see where I am heading. Paralysis by analysis and I will miss the buying opportunity waiting for it to fall "just a little bit more".


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Old 12-15-2014, 06:56 PM   #55
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One of the most complicated subjects ever. Trying to understand the reasons why crude oil could drop 45% in less than 6 months is a mind bending exercise.
There are so many factors that influence the barrel price that any five or six that you could pick, would be only a beginning.
Worldwide economic situations on a by-country basis are just a part of the overall price fall, though indicative of the shaky GDP in the largest nations.
While the low price is being touted as a chance to grow the US GDP, the offset in job loss may prove a cure worse than the disease.
China, Russia, OPEC, Venezuela and a score of other countries are in the middle of this change.

This article mentions some of the individual factors:
Ten Reasons Why A Sustained Drop In Oil Prices Could Be Catastrophic

Following the pundits on TV and in the financial media only adds to the confusion. This week, so far, the VIX is up 56%... confirming the uncertainty.

And so we're left to wonder if the $15 we'll save at the pump will be worth it. The noise factor suggests a new $1/gal tax to pay for infrastructure. At the same time, is the worry about leaving the oil in the ground would leave a return to higher prices with higher taxes.

Has anyone here seen a comprehensive explanation that makes sense?

... and yes, I know that there are other threads on the subject of investment in oil stocks. The future of oil as a factor in international economic stability will be extremely important in the near term.
I read the article you linked and do not disagree with his conclusion about this coming as an end to debt financing. Most of the financing for oil production has occurred in the junk bond markets after the conclusion of the subprime mess as the central banker's zero rate interest policies made real assets to be a place you could raise massive amounts of capital these projects required at very cheap interest rates. Russia at the start of the year was at 5% interest rates, toal debt up 25% at the start of this year from Jan 2013 levels and today their central bank raised interest rates to 17 percent.

For me the reason the oil market held up until summer was the market's belief that no matter what OPEC would adjust down production to maintain pricing. Now that the surge in production that is due to begin next year is arriving at the same time as a decline in worldwide oil demand reality is being priced in. It seems obvious that OPEC looked at the present financial vulnerability of the oil producers in North America being in a bubble made possible by cheap financing and have taken a long term view that there may need to be a 1-2 year period where they let oil find it's own price, meaning they don't cut production and eliminate a growing competitive threat. This was not expected and the goal is to bankrupt the competition and stop further production from coming online, which is likely if OPEC does not adjust their production. If production in North America is stopped and these producers go out of business, cheap financing will not be available to make these projects available in the future.

Something to consider is that the price of natural gas for decades was priced very closely to oil in energy equivalence and at recent prices would be at 32 dollar oil.

This oil decline is a highly deflationary move to the economies of the world and the idea that this is stimulative seems incredulous to me how many people truly believe oil declines are good for the economy. A 1.3 trillion dollar per year revenue stream is being taken away at present prices, with oil valuations of earning assets being priced at 3X EBITDA this means an additional decline of 5 trillion in the value of the assets producing the world's oil, whether those are junk financed assets or AAA assets.

This is the reason you are seeing the Ruble, the Candian Dollar and the Kroner fall. This has impacted Emerging market stock markets to fall to where they were in Sep and real effects have not even occured. Russia fell first because oil is laying bare the fact they will not have revenues to pay their debt, Norway has a sovereign fund where they invested their excess oil reserves in stock markets around the world, if the price of oil stays down, their plan is to balance their budgets and social costs by selling their sovereign fund assets, about one trillion dollars in total, these assets support the lifestyle of 5 million people and this fund owns 2 percent of the total stock market of Europe.

Petrobas in Brazil is not even capable of producing financial results for the 3rd quarter, this means you probably have 2 countries with a total of 5 trillion dollars in GDP (Russia & Brazil) that are probably bankrupt as a result of this oil price decline.

The interconnected pieces are to me so much more complex than consumers save 1.3 trillion to pay for other goods. This is an unepected decline built from ironically enough LTCM which required in 1998 as a result of the Russian and Brazil financial collapse not following the Nobel prize winning theory of market implementation. 3.6 Billion from the Federal Reserve was required to save the markets then. The resulting lower interest rates over the following years to prevent financial impairments have led to this point in the debt cycle, we will see if this is really a positive boon for the economy, I sure hope it is and I am totally wrong about the complexity of the transactions being far too complex for any central bank to possibly understand.
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Old 12-16-2014, 07:31 AM   #56
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I read the article you linked and do not disagree with his conclusion about this coming as an end to debt financing. Most of the financing for oil production has occurred in the junk bond markets after the conclusion of the subprime mess as the central banker's zero rate interest policies made real assets to be a place you could raise massive amounts of capital these projects required at very cheap interest rates. Russia at the start of the year was at 5% interest rates, total debt up 25% at the start of this year from Jan 2013 levels and today their central bank raised interest rates to 17 percent.
First... thank you for your time to produce this thoughtful analysis. It deserves re-reading.
Watching the central banks and the actions of the governments that are in the most trouble (Japan, Russia, China, Brazil, Venezuela, and a score of smaller countries), indicates a bubble that will not be easily deflated or perhaps reflated.

The common thinking seems to be that as cheap oil becomes available, the more expensive sources of US oil will be temporarily shut down, that OPEC will then raise rates, and the oil market will recover. That remains to be seen.

In any case, the thought that lower priced gasoline will boost the economy and create jobs may be wishful thinking.

The most interesting part of this unusual spike, is the reaction of the financial analysts. Extremes of opinion.

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The interconnected pieces are to me so much more complex than consumers save 1.3 trillion to pay for other goods. This is an unepected decline built from ironically enough LTCM which required in 1998 as a result of the Russian and Brazil financial collapse not following the Nobel prize winning theory of market implementation. 3.6 Billion from the Federal Reserve was required to save the markets then. The resulting lower interest rates over the following years to prevent financial impairments have led to this point in the debt cycle, we will see if this is really a positive boon for the economy, I sure hope it is and I am totally wrong about the complexity of the transactions being far too complex for any central bank to possibly understand.
Adding to the general confusion is the not-well-understood difference between inflation, deflation and disinflation. The time differential in disinflation could mask a long term negative change in international markets. The recent addition of the rollback of parts of Dodd Frank, may well serve to extend a hiatus of debt reconciliation. The mind of the FED is either inscrutably wise, or exceptionally naive.
(my opinion only)
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Old 12-16-2014, 08:26 AM   #57
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This oil decline is a highly deflationary move to the economies of the world and the idea that this is stimulative seems incredulous to me how many people truly believe oil declines are good for the economy.
A lot of what comes from the media is repeated as if it were researched and discussed. It's mostly short-term thinking, though. There probably was an immediate boost to consumer spending, but the effect as we get months into the oil price reductions will not play out as "they say."
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Old 12-16-2014, 08:28 AM   #58
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If the price of cheap oil comes at the collapse of the US shale industry, I think the working joe will find he has cheap gas but no job to drive to.
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Old 12-16-2014, 09:43 AM   #59
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If the price of cheap oil comes at the collapse of the US shale industry, I think the working joe will find he has cheap gas but no job to drive to.
Construction jobs....building more Walmarts and Costcos to move the cheap Chinese goods even more. Where we live north of Houston, there are 7 Super Walmarts in a 10 mile radius and a new Costco just went up in two months (next to the new Mercedes dealer).

The shale oil and gas industry won't go away. We still need lots of gasoline in this country and also natural gas. The price to obtain leases and drill new wells will decrease to bring on new wells. This always happens.
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Old 12-16-2014, 09:50 AM   #60
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Construction jobs....building more Walmarts and Costcos to move the cheap Chinese goods even more. Where we live north of Houston, there are 7 Super Walmarts in a 10 mile radius and a new Costco just went up in two months (next to the new Mercedes dealer).

The shale oil and gas industry won't go away. We still need lots of gasoline in this country and also natural gas. The price to obtain leases and drill new wells will decrease to bring on new wells. This always happens.
Great. So our trade deficit becomes even larger as we import more Chinese goods for our superstores and import more oil because it is cheaper to import than produce ourselves.

If you play the very long game, I don't see how that is a positive for the USA.
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