Understanding Oil Prices

[explanade]

Gosh, pages 11 & 12 (Conclusions) really tell the story on the quantified risks. I can't copy it so you will have to read it online.

I've done oil & gas work all over western NY and also northern PA and western Ohio. NY only has stripper wells in most western areas that are near end of life. No real need to do anymore drilling there as the communities are small and do count for many votes in NY.

On the other hand, Ohio is going gangbusters with production in the Utica Shale. No complaints there and lots of new gas and jobs.

BTW, these plays are mostly gas and very little oil.

But the bottom line is, would you consider buying property which is near fracking activities?

The concerns are about water contamination and seismic instability.

 

[Lakewood90712]

A different view:

In September, Kerry visits the Saudi's...
The win-win scenario:
Saudi's worried about their neighbors Syria and Iran...
Saudi's have virtually unlimited oil..
Russia cozy with Iran and Syria.
US worried about a China collapse.
Saudi's sell oil below market $50 to China.
This destroys Russia and Iran economy.
Stops the Iran bomb threat
Gives China a lifeline.
US wins!

You forgot North Korea and Sony Pictures on the list

 

[ERD50]

But the bottom line is, would you consider buying property which is near fracking activities?

The concerns are about water contamination and seismic instability.

They are concerns, yes - but are they reasonable concerns? I don't know enough to have an opinion one way or the other, but I know that lots of people are concerned about things that are not worth being concerned about. And that just distracts from the stuff they should be concerned about.

-ERD50

 

[explanade]

Unless you get mineral rights, it might at least be like buying property which is near constant construction activities, even if you don't have water table problems.

The executives of those fracking companies probably aren't buying residential properties in those areas.

 

[aja8888]

Unless you get mineral rights, it might at least be like buying property which is near constant construction activities, even if you don't have water table problems.

The executives of those fracking companies probably aren't buying residential properties in those areas.

Let me tell you otherwise, the execs of the oil and gas companies are dying to get their hands on leases where drilling is going to occur.

Most modern wells are not near residential areas and you only break the formation once, then the well flows back. Once the reservoir pressure is equalized (over time and variable), the well is put on a pump system (if it's oil).

And many people are very happy to have wells near them or on their property, especially if it's just farmland or ranch land. Even if you don't have mineral rights (which could produce an income stream of several hundred thousand dollars to millions), you end up leasing the surface rights for a good fee.

It's not all bad.

I've seen monthly royalty checks to farmers that were over $100,000. Pretty much most of rural Fort Worth residents are now millionaires from the Barnett gas wells.

 

[eytonxav]

They are concerns, yes - but are they reasonable concerns? I don't know enough to have an opinion one way or the other, but I know that lots of people are concerned about things that are not worth being concerned about. And that just distracts from the stuff they should be concerned about.

-ERD50

Concern is a function of your proximity to the fracking, especially where residential communities are effected.

 

[imoldernu]

Another update on oil prices, that includes some of the farther ranging effects on select parts of the economy. Particularly interesting is the level of debt the growth fracking companies have incurred, and the potential of layoffs and cutbacks.
Oil Below $60 Tests Economics of U.S. Shale Boom - Bloomberg

As with any problems that happen in a single part of the economy, there are usually offsets... opportunities based on misfortune. If you've read "Market for Lemons",

A lemon market will be produced by the following:
Asymmetry of information, in which no buyers can accurately assess the value of a product through examination before sale is made and all sellers can more accurately assess the value of a product prior to sale
An incentive exists for the seller to pass off a low-quality product as a higher-quality one
Sellers have no credible disclosure technology
Either a continuum of seller qualities exists or the average seller type is sufficiently low (buyers are sufficiently pessimistic about the seller's quality)
Deficiency of effective public quality assurances (by reputation or regulation and/or of effective guarantees/warranties)

Paying others to do this in depth analysis can be problematical in a busy market. That doesn't mean an interested individual can't put the puzzle together to come up with a reasonable direction for action.

If not within the energy market, those parts of the market that will naturally be affected.

Not easy, but as oil seems to be leading the worldwide markets, looking beyond the headlines is a good headstart.

 

[freebird5825]

Nothing to contribute right now, but wanted to say thanks to all of the contributors to this thread. I'm getting a real education.

Keep it going...very good stuff here.

 

[imoldernu]

Realize that that post was very obscure. Another case of overthinking, but giving a poor explanation.
So... Here's what I see. A concentration on the price of oil as a driver of the market and the economy... an over simplification of cause and effect on a subject that is worldwide... and recognized by itself as a "crisis" driver.

In fact the current change in world markets is an involved combination of oil, and banking stability which may be threatened by oil prices. Add in the news about Germany, Greece, Russia and China debt and the fragility of the world wide banking system... and there is an almost perfect storm. Central Banks around the world are stressed with liquidity margins that are at all time lows.
In the last downturn, the ballooned values of housing, confused by the web of derivatives mandated the bank bailout. Similar futures/derivatives in oil are causing stress. (The BOA change to the US budget was likely a considered addition in light of the oil price disruption.) (just a guess)... Also... Citibank in the middle, with surge in OTC swaps. Mucho $$$.

Anyway, watching the parts of the market changes may be more valuable than looking at the whole. The direction of oil prices could be a hint. IMHO, the things to watch will be the actions of nations, not of companies like Halliburton. OK to look at charts, but actions... reality... beat charts.

With some settlement of the Greece problem, and if Draghi can pull off an ECB stabilization, it could cause a huge improvement in World markets. Add to that some "come to my senses" from Putin, and more defensive diplomacy with China, and the gas crisis could be forgotten in a NY minute.

So much more than oil. We don't have to have a meltdown. Just sayin'

 

[Koolau]

Concern is a function of your proximity to the fracking, especially where residential communities are effected.

Same with most environmental issues, it would seem. Here in paradise, we burn some of our waste to produce power. I'm sure it's not as clean as either NatGas (which we don't really have) or other "clean fuels." However, it helps solve part of our waste disposal problem. Still, it was a miracle that it ever happened and probably will never be increased, even though it actually works and isn't particularly dirty. We'll probably never permit another landfill either (too many folks can take turns complaining about NIMBY - and on a 600 sq mi island, its ALL of our back yards) so folks are all fired up to ship our waste 3000 miles away (to someone else's back yard.) It's the old ox being gored, etc.

Heh, heh, back to oil for a moment: From my perspective here, I say "frack, baby frack!" YMMV

 

[eytonxav]

Heh, heh, back to oil for a moment: From my perspective here, I say "frack, baby frack!" YMMV

OK then, your beach looks good for some near shore drilling

 

[jimnjana]

Any merit to saving our petroleum resources and using up the other guy's first?

This is what Charlie Munger believed, not sure if he still does.

Charlie Munger On Energy Independence - Business Insider

 

[Koolau]

OK then, your beach looks good for some near shore drilling

Unfortunately, the only oil we have plenty of is what covers the areas NOT covered by bikinis. Guess we all have to make do with what we have.

 

[imoldernu]

Just as farmers guarantee payment for their crops in the commodities futures market, so do airlines, trucking companies, cruise lines, public utilities and any business relying on obtaining energy price guarantees... also trade in futures.

Since many of these contracts to provide and buy go for months and even longer than a year, where and when do contract settlements take place? Hedging on these is usually comes from derivatives, which in turn are traded on margin.

Risk can be traded, but settlement differentials do not go away.

Perhaps someone here can explain why this subject seems to receive little or no attention, whether the largest US banks have a major stake in this. While there seems to be no definitive number, some financial sources have estimate as much as 3.9 Trillion in commodity derivative contracts.

So... when oil was selling at $100+/barrel, an airline might have seen a guarantee of $90 a barrel in January of 2014, to be worthwhile and contracted to pay that price when the January shipment was made. Not so good for the oil company if the price had stayed at $100. But the oil company would have hedged that potential profit loss, through a derivative guarantee. As the potential price changes played out, there would be offsetting derivatives... eventually to even out the hedge. The problem would come in when the actual contract came due. As in the days when the bottom fell out of the housing market.
Saved by the bell!... or the federal bailout.

As it turns out, the above example went the other way... but either way... a price differential, and risk.

Financialization is always based on the presumption that risk can be cancelled out by hedging bets made with counterparties. This sounds appealing, but risk cannot be disappeared, it can only be masked or transferred to others.

This stuff gets confusing to me... since almost no one in the finance industry or the government or here on ER seems to see this is as a worry, I wonder where my thinking goes wrong?

I'm not alone in this:
Rob Kirby: Oil Derivatives Explode In Early 2015 | ETF DAILY NEWS

 

[explanade]

How about covering up those shorelines with windmills?

 

[Brat]

Remember that 'little' exception to Dod Frank that was included in a bill just before congress adjourned last year? I wonder if this was foretold.

 

[audreyh1]

Remember that 'little' exception to Dod Frank that was included in a bill just before congress adjourned last year? I wonder if this was foretold.

Yeah, you wonder!

 

[Lakewood90712]

Remember that 'little' exception to Dod Frank that was included in a bill just before congress adjourned last year? I wonder if this was foretold.

Those "Little" amendments are always put in for big reasons .

 

[M Paquette]

The good news is that now banks can modify risk exposure through a straightforward process. The various forward options can be pooled, evaluated and divided into multiple tranches assigned appropriate risk levels, which may then be securitized and remarketed as tools to fine-tune risk and return. The highest risk tranche may then be re-evaluated and subdivided to create new tranches of varying risk levels all rated relative to the original tranch. That is, the top rated sub-tranche of the original highest risk tranche would be the AAA slice of the junk parent tranche, and would be securitized and marketed as an AAA instrument for that class of the original instruments, in much the same manner as hot dogs are converted into steak.

So, there is really minimal risk to the banks here, as much of the risk can be remarketed in the form of an AAA rated Structured Investment Vehicle (SIV) to be bought by Somebody Else, and any remaining with the bank can be covered by FDIC insurance.

 

[Fermion]

Need more info on this process of converting hot dogs into steak. Silly me has been buying thick cut top grade rib eye when it is on sale for $12 to $15 a pound.

 

[imoldernu]

At a time when money is moving fast, an article from December 19 is almost ancient history, but covers some possibilities. It also analyzes the effect of the watering down of the Dodd Frank Bill.

http://ellenbrown.com/2014/12/19/russian-roulette-taxpayers-could-be-on-the-hook-for-trillions-in-oil-derivatives/

The derivatives explanation is a little more involved, and may take two readings to determine the risk factor.

As M Paquette notes, the workings of risk modification normally provide a levelling effect on risk trades. the keyword here is "normal" going outside of the management parameters...ie. if corn fell below $2, throws projections into a no man's land... as in "last september, who would have foreseen $40 oil?

The "Somebody Else" concept is really great for bankers and those who are wise enough to understand the security of the FDIC. Instead of being mad about the bankers avoiding loss, we should all be happy that the debt will be spread out and borne by all of us. small comfort.

Most of this would normally be filed under the "conspiracy nut" heading, but so far, the OP cited article and the above linked articles seem to be on course.

In any case, even if we avoid the more serious economic threats, the economic implications of lower oil prices will go much further than the $504 boost to the average family's pocketbook. A broad leap of faith to believe that $40 oil will solve the international economic ills.

Understanding the possible effects on investing and where to put your money during the next year may be more difficult that just following the market. At the very least, watching the differing scenarios play out could be worth the study time.

 

[eytonxav]

There have been an unprecedented number of earthquakes in the past year near the site of the old Cowboys stadium. Many homes are seeing cracked walls and slabs. SMU recently placed a number of sensors in the area to try and determine the cause of these quakes. Irving has always been known for unstable soils, but many wonder if fracking is the cause of the quakes. Same situation down in Burleson.

 

[imoldernu]

Some interesting news about the valuation of oil prices.The Price of Oil Is About to Blow a Hole in Corporate Accounting - Bloomberg Business

(Bloomberg) -- There’s one place in the world where oil is still $95 a barrel.
On paper.
The U.S. Securities and Exchange Commission requires drillers to calculate the value of their oil reserves every year using average prices from the first trading days in each of the previous 12 months. Because oil didn’t start its freefall to about $45 till after the OPEC meeting in late November, companies in their latest regulatory filings used $95 a barrel to figure out how much oil they could profitably produce and what it’s worth. Of the 12 days that went into the fourth-quarter average, crude was above $90 a barrel on 10 of them.
So Continental Resources Inc., led by billionaire Harold Hamm, reported last month that the present value of its oil and gas operations increased 13 percent last year to $22.8 billion. For Devon Energy Corp., a pioneer of hydraulic fracturing, it jumped 31 percent to $27.9 billion.
This year tells a different story. The average price on the first trading days of January, February and March was $51.28 a barrel. That means a lot of pain -- and writedowns -- are in store when drillers’ first-quarter numbers are announced in April and May.