I like Oil

Don't know much about anything about oil, but here are my two cents anyway. As the price falls high cost producers will have obviously have to close, but the technology that enables that production will not be going away, indeed will become more efficient. Seems to me that this overhanging supply would put a cap on too much of a rise in prices. And that prices lower than the peaks of the past few years may be here to stay for quite a while.
 
CaliforniaMan said:
Don't know much about anything about oil, but here are my two cents anyway. As the price falls high cost producers will have obviously have to close, but the technology that enables that production will not be going away, indeed will become more efficient. Seems to me that this overhanging supply would put a cap on too much of a rise in prices. And that prices lower than the peaks of the past few years may be here to stay for quite a while.
Click to expand...

I agree. OPEC is still over producing by nearly a million barrels per day based on their 30 million bpd ceiling. Before Saudi will agree to a production cut, that over production will need to come down. US production growth will start to taper later in 2015, Canada perhaps even earlier.
 
BUM said:
DCA'ing BBEP and some BP. I like BBEP I'm following it down, down, down...
Click to expand...


Cost of exploration for the Big Integrated Oils getting expensive to increase output. I read in a few articles recently that it would be cheaper for Exxon just to buy BP and their reserves than it would to find that amount of oil. But I doubt if they were figuring in the still potential overhang of the remaining lawsuits costs from gulf in that calculation.


Sent from my iPad using Tapatalk
 
MichaelB said:
Really going out there on a limb, aren't you Gypsy Ed? :)

This is pretty treacherous ground, unforgiving to those making the wrong choices. One thing we know for sure is petroleum is a critical component and driver of global economic growth. A price decline this big, if sustained, should be an important and unexpected tailwind for some of those moribund and anemic developed economies such as EU and Japan. An increase will do the opposite. Which will it be?
Click to expand...
I think it will be beneficial overall, but not for everyone. My O&G prices are being hurt, but I am not selling and the dividends are still there. I am expecting the dividends will ride out the next few (emphasis on FEW) years pretty well.
 
BUM said:
DCA'ing BBEP and some BP. I like BBEP I'm following it down, down, down...
Click to expand...
I decided to sell my BP stock a few years ago and I will not buy it again. Actually, I am not anticipating buying any individual stock again.

If I were still looking at individual stocks these days, I would be looking to buy Chevron first or Exxon second on weakness, but I am sticking with Vanguard's energy ETF for now.
 
My energy plays are simple...VGENX in a Roth and BHP for some global exposure in energy and hard assets.
I had some shares in PetroHawk, a US natural gas enterprise. When BHP acquired PetroHawk, I accepted the tender offer and kept slowly adding to BHP "when the price was right". :D
I just scored 40 shares at a pretty good price. That will help average out my unrealized losses on previous purchases.
Holding for the long term, loving the dividends. :dance:
 
I think prices will stay down for a while - at least a couple of years and that will make a big difference. It will take a while for the "glut" to clear. I never understood why oil prices were so high earlier this year while US was ramping oil production so quickly.

An additional hopeful benefit - this is very hard on Russia, and means they suddenly don't have the resources to fund operations like the Ukraine business. So we can hope it keeps them quiet for a while too.
 
audreyh1 said:
An additional hopeful benefit - this is very hard on Russia, and means they suddenly don't have the resources to fund operations like the Ukraine business. So we can hope it keeps them quiet for a while too.
Click to expand...
My concern is the opposite.

If the economy becomes really rough for the average Russian citizen they may lose their admiration for Czar Putin and turn against him. That could result in him creating an external threat in an attempt to rally the population to defend the motherland - and deflect the frustrations away from him.
 
Oil services firms are really going to get slammed on lower oil prices. Friends who work for Halliburton and Weatherford are already hearing scuttlebutt on layoffs before Christmas.
 
REWahoo said:
My concern is the opposite.

If the economy becomes really rough for the average Russian citizen they may lose their admiration for Czar Putin and turn against him. That could result in him creating an external threat in an attempt to rally the population to defend the motherland - and deflect the frustrations away from him.
Click to expand...

the average Russian is not being impacted much at all. As their currency has fallen off a cliff. Russia is able to sell gas in dollars and still can pay its pensions/bills in Rubles. You are aware of Ukraine? Putin is playing that for all its worth with the Russian masses.
 
MichaelB said:
Really going out there on a limb, aren't you Gypsy Ed? :)

This is pretty treacherous ground, unforgiving to those making the wrong choices. One thing we know for sure is petroleum is a critical component and driver of global economic growth. A price decline this big, if sustained, should be an important and unexpected tailwind for some of those moribund and anemic developed economies such as EU and Japan. An increase will do the opposite. Which will it be?
Click to expand...

From everything I have seen in the past the price of oil is positively correlated with the strength of economic growth, not negatively correlated. Oil dropped from $140 in June 2008 to $44 in February of 2009. From there in 2009 it increased back to over $100 as the economy has improved only to suddenly see a 40% drop to the present levels. The economy is typically affecting the direction of the price of oil not the price of oil effecting the direction of economies.

I have been contemplating this recent development quite a bit lately and have come to the conclusion this is the first significant economic event that has been created by central banks zero interest rate policies which is now not controllable by central banks. A consequence of desire for yield has seen a level of junk bond issuance that is simply a bubble with over a trillion dollars of junk bonds issued in the last 4 years which is about 2-3 times higher than even in prior junk bond bull markets. This is the unintended consequence of giving governments the ability to borrow at no cost and rescuing oil drilling and service companies is not something governments are going to be able to do.

The cheap interest rates made possible the finanancing of many wells which cost on average around 5 million dollars each and record low junk interest rates made the breakeven point on these wells about $70 per barrell. This drilling has been accomplished primarily through financing via junk bonds, of which the oil sector now accounts for 15% of the total junk bond market which is a record for the oil sector. The payment of this debt is made possible through the selling of oil the first few years of the operation of these wells so the Saudi decision to bankrupt the oil speculators is understandable.

So I can easily envision the following scenario:
1) Short term oil producers with decent financing capabilities push as much oil as possible in attempt to stay solvent further decreasing prices below present level.
2) Marginal high debt producers go bankrupt quickly resulting in the closing of unprofitable wells, reducing the amount of oil being served by the pipeline companies, reducing their profiabliity.
3) High Yield bonds undergo a serious bear market as the number of oil companies with high yield debt have no way to pay their debt. the amount of ETF's with junk bonds make getting out of this market very easy for investors but those bonds are not in strong hands.
4) Pipiline MLP's go into bear market as future financing costs are raised by oil sector route and volume of oil pumps drops rapidly in US as oversupply is reduced by US bancruptcies and the decline in suply is mostly absorbed in the United States as this is where most of the weak hands are, subsequently the negative economic impacts of this for the US will be more than people presently realize. I think pipeline MLP's are about to get routed, sold my overwieght position in these names Friday.
5) Many open wells with bankrupt companies will become target of enviromental groups raising the cost of any future drilling (this is a much longer term effect) blocking a return to the drilling boom we have seen recently.

This has been a classic bubble bull market cycle that is only now ending and ending quickly as bubbles tend to do. The end of the cycle will most likely take a while to play out, and many of the negative consequences may lead to outcomes that are not controllable by the central banks.
 
Running_Man said:
From everything I have seen in the past the price of oil is positively correlated with the strength of economic growth, not negatively correlated. Oil dropped from $140 in June 2008 to $44 in February of 2009. From there in 2009 it increased back to over $100 as the economy has improved only to suddenly see a 40% drop to the present levels. The economy is typically affecting the direction of the price of oil not the price of oil effecting the direction of economies.
Click to expand...
A decline in the rate of global growth may lead to a fall in petroleum prices. An increase in production can also lead to a fall in prices, and in this case it would have a positive impact on growth. The reason for the change in prices matters. Changes in the price of gasoline are highly correlated to changes in the US CPI, and here the price of oil is the leading factor, so this decline should lead to higher real growth in GDP and wages.

One additional possibility in the scenario you paint would be a weakening in demand for US Treasuries. The Middle Eastern OPEC nations channel much of their surplus in Treasuries and as their income falls, so does their surplus.
 
MichaelB said:
A decline in the rate of global growth may lead to a fall in petroleum prices. An increase in production can also lead to a fall in prices, and in this case it would have a positive impact on growth. The reason for the change in prices matters. Changes in the price of gasoline are highly correlated to changes in the US CPI, and here the price of oil is the leading factor, so this decline should lead to higher real growth in GDP and wages.

One additional possibility in the scenario you paint would be a weakening in demand for US Treasuries. The Middle Eastern OPEC nations channel much of their surplus in Treasuries and as their income falls, so does their surplus.
Click to expand...
All the oil countries together only hold 249 billion of US debt of 17 trillion by far the largest holder is the FED followed by China. This amount is dwarfed by the creation of junk bond debt to support this oil market, as for the oversupply helping economic activity this time, we will see if this is true in the coming 12-18 months I think the loss of oil sales and major tax revenues in the US, layoffs in the oil sector and immediate end in capital spending boom and loss of state and federal revenue will swamp the positive effect of consumer sales for other items. Especially in the US
http://www.treasury.gov/ticdata/Publish/mfh.txt
 
Last edited by a moderator:
Running_Man said:
as for the oversupply helping economic activity this time, we will see if this is true in the coming 12-18 months I think the loss of oil sales and major tax revenues in the US, layoffs in the oil sector and immediate end in capital spending boom and loss of state and federal revenue will swamp the positive effect of consumer sales for other items. Especially in the US
Click to expand...
I agree the Treasury impact may not be meaningful. As for global growth, for sure we'll know in 12-18 months, as you wrote.
 
REWahoo said:
My concern is the opposite.

If the economy becomes really rough for the average Russian citizen they may lose their admiration for Czar Putin and turn against him. That could result in him creating an external threat in an attempt to rally the population to defend the motherland - and deflect the frustrations away from him.
Click to expand...
Well, considering that Putin was already messing with "external threats" when Russia was rolling in money from high oil prices, this case is would be no different from 6 months ago.
 
MichaelB said:
A decline in the rate of global growth may lead to a fall in petroleum prices. An increase in production can also lead to a fall in prices, and in this case it would have a positive impact on growth. The reason for the change in prices matters. Changes in the price of gasoline are highly correlated to changes in the US CPI, and here the price of oil is the leading factor, so this decline should lead to higher real growth in GDP and wages.

One additional possibility in the scenario you paint would be a weakening in demand for US Treasuries. The Middle Eastern OPEC nations channel much of their surplus in Treasuries and as their income falls, so does their surplus.
Click to expand...


I still think the old saying still applies.. "The cure for low oil prices, is lower oil prices." Will help spur the economies and then bring demand levels up, increasing the price. But I am certainly not going to buy oil stocks with the illusion of $115 oil prices soon.


Sent from my iPad using Tapatalk
 
Running_Man said:
From everything I have seen in the past the price of oil is positively correlated with the strength of economic growth, not negatively correlated. Oil dropped from $140 in June 2008 to $44 in February of 2009. From there in 2009 it increased back to over $100 as the economy has improved only to suddenly see a 40% drop to the present levels. The economy is typically affecting the direction of the price of oil not the price of oil effecting the direction of economies.



I have been contemplating this recent development quite a bit lately and have come to the conclusion this is the first significant economic event that has been created by central banks zero interest rate policies which is now not controllable by central banks. A consequence of desire for yield has seen a level of junk bond issuance that is simply a bubble with over a trillion dollars of junk bonds issued in the last 4 years which is about 2-3 times higher than even in prior junk bond bull markets. This is the unintended consequence of giving governments the ability to borrow at no cost and rescuing oil drilling and service companies is not something governments are going to be able to do.



The cheap interest rates made possible the finanancing of many wells which cost on average around 5 million dollars each and record low junk interest rates made the breakeven point on these wells about $70 per barrell. This drilling has been accomplished primarily through financing via junk bonds, of which the oil sector now accounts for 15% of the total junk bond market which is a record for the oil sector. The payment of this debt is made possible through the selling of oil the first few years of the operation of these wells so the Saudi decision to bankrupt the oil speculators is understandable.



So I can easily envision the following scenario:

1) Short term oil producers with decent financing capabilities push as much oil as possible in attempt to stay solvent further decreasing prices below present level.

2) Marginal high debt producers go bankrupt quickly resulting in the closing of unprofitable wells, reducing the amount of oil being served by the pipeline companies, reducing their profiabliity.

3) High Yield bonds undergo a serious bear market as the number of oil companies with high yield debt have no way to pay their debt. the amount of ETF's with junk bonds make getting out of this market very easy for investors but those bonds are not in strong hands.

4) Pipiline MLP's go into bear market as future financing costs are raised by oil sector route and volume of oil pumps drops rapidly in US as oversupply is reduced by US bancruptcies and the decline in suply is mostly absorbed in the United States as this is where most of the weak hands are, subsequently the negative economic impacts of this for the US will be more than people presently realize. I think pipeline MLP's are about to get routed, sold my overwieght position in these names Friday.

5) Many open wells with bankrupt companies will become target of enviromental groups raising the cost of any future drilling (this is a much longer term effect) blocking a return to the drilling boom we have seen recently.



This has been a classic bubble bull market cycle that is only now ending and ending quickly as bubbles tend to do. The end of the cycle will most likely take a while to play out, and many of the negative consequences may lead to outcomes that are not controllable by the central banks.
Click to expand...


I love your analysis. Very strategic and realistic view.


Sent from my iPhone using Early Retirement Forum
 
MichaelB said:
I agree the Treasury impact may not be meaningful. As for global growth, for sure we'll know in 12-18 months, as you wrote.
Click to expand...

For our neighbors to the North this is not good either Canadian Dollar is basically a peg to the oil price and as it falls this will also put significant pressure on Canadian Real Estate which for the most part totally avoided the real estate crash of 2008 2015/2016 could be the years of the Canadian real estate crash if oil prices do not bounce back. Basically the Susan Rice portfolio could be in for a world of hurt
 
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