Oil Prices

[specuvestor]

Beginning of the End?

Extracts:

"Several large oil producers, including ConocoPhillips and Apache Corp, have set lower capital spending budgets for 2015, rattled by a near 40 percent drop in global crude prices since June.

Goodrich lowered its capital spending budget for 2015 to $150 million-$200 million. The company has budgeted spending of $325-$375 million for 2014, but said spending would likely be at the lower end of that range.

Oasis Petroleum said it expects to spend $750 million-$850 million in 2015. It expects to spend about $1.43 billion in 2014."


So why are companies cutting capex budget when they can still produce profitably at $40 per barrel? Most manufacturers would have died for a 30% margin ($60 minus $40).

Shale will be the collateral damage to geopolitics, no doubt about it. Just as one side of the people were cynical about rise of shale, the other side of the fence is now delusional about the competitiveness of shale

People's anchored views don't change even when Mr Market is already shouting. I've learnt not to just listen to what people say, but also listen to what people DO. That's where the academics always fall short because they wait for the statistics. Just like Singapore property market is actually not so bad if we just look at URA index, yet developers are preparing for the worst by trying to circumvent the QC penalties.

According to the International Energy Agency (IEA) annual Medium-Term Oil Market Report (MTOMR) released on May 14, 2013 and re-published by University of California Santa Barbara Department of Geography, supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15 years. The shift will not only cause oil companies to overhaul their global investment strategies, but also reshape the way oil is transported, stored and refined...

The MTOMR forecasts North American supply to grow by 3.9 million barrels per day (mb/d) from 2012 to 2018, or nearly two-thirds of total forecast non-OPEC supply growth of 6 mb/d. World liquid production capacity is expected to grow by 8.4 mb/d – significantly faster than demand – which is projected to expand by 6.9 mb/d. Global refining capacity will post even steeper growth, surging by 9.5 mb/d, led by China and the Middle East.

With the commencement of major downward move for the oil prices only recently, this might be a disruptive structural change to the Oil & Gas industry and can be expected to last for at least next 3~4 years.

As such, personally I am of the view that the possibility of share prices of companies involved with oil and gas production (such as Sembcorp Marine, Keppel Corp, Ezra, etc) to catapult up to its heyday will likely be very very SLIM... they will more likely to slide lower and lower each day if the report is giving the full picture of the global oil supply and demand situation!

We had already discussed about shale more than a year ago when these reports were coming out. More importantly the physical markets and prices were reacting yet there were still skeptics on shale

http://www.valuebuddies.com/thread-5526-...l#pid91168

I doubt Saudi or OPEC suddenly just woke up on the emergence of shale. What has changed since then was Russia/ Ukraine

Honestly we are no longer looking at emergence of shale anymore. We are looking at the bust of shale. No doubt there will be survivals but it's gonna be pretty ugly. Like i posted prior in this thread, they are the unfortunate collateral damage

http://www.valuebuddies.com/thread-5541-...#pid100091

Nobel Laureate and Former US Secretary of Energy, Dr Steven Chu addresses the National Press Club in Canberra on energy policy
Watch video here
Very interesting and informational recent speech. Wonder why he quit the Obama administration. He does mention that energy providers are moving to increase renewables from 25% up to 50% of energy mix without energy disruptions and that renewables like wind and solar are getting 20 year profitable contracts. However he does admit that fully depreciated older coal and oil/gas power plants are still profitable and will continued to be run.

As mentioned below, the problem is the competitors. If the cost of producing electricity goes down hence to the grid price, these renewables will be delayed unless heavily subsidised, which actually makes sense for policy makers with long term strategic view. Private capitalistic sectors will NEVER do that.

And that is why the whole electricity sector is correlated and behaves like one even when the input costs and mechanics are different.

^^ If you don't care about the environment

AFAIK most powerplants basically need heat to turn turbine so it's a matter of how cost efficient they can do that. Theoretically they can modify and switch from one heat source to another but they better have a good estimate of the cost/benefit ie cost of generating a kW. But in a competitve environment you will have to match your competitors, so the whole sector correlates even though it is obvious that gas is different from coal.

Just curious. Do all power plants accept gas, coal and oil ? If the plant cannot work with oil, reduced oil price may not help ... and can be a real disadvantage to alternative that taps on oil to generate electricity.

[greengiraffe]

Plunge claims its first scalp as Red Fork Energy goes under
THE AUSTRALIAN DECEMBER 12, 2014 12:00AM

Paul Garvey

Resources Reporter
Perth
THE collapse of Perth-based oil and gas play Red Fork Energy has reinforced the precarious outlook facing other Australian companies pursuing riches in the US shale ­industry.

Red Fork Energy has become the first Australian scalp from the oil price plunge, with the group sliding into receivership late on Wednesday. It had raised more than $125 million from investors during the past three years but collapsed after it was unable to refinance a $100m debt facility from US firm Guggenheim Partners.

Red Fork had been working aggressively to roll out oil and gas wells across its shale acreage in the US state of Oklahoma, following a similar strategy to many other players in the industry.

But it has become a victim of the sudden fall in the oil price, which has dropped by more than 40 per cent during the past six months amid a stand-off between traditional OPEC producers and the rapidly expanding US shale oil industry. OPEC recently decided not to support falling prices by cutting production, a move widely seen as trying to squeeze US shale producers.

The collapse of Red Fork will intensify scrutiny of other Australian companies working in the US shale industry. The industry is awash with companies that have borrowed money to fund the rollout of additional wells but the dramatic collapse in oil prices has left many companies battling to service debt commitments.

Several Australian-listed companies have joined the US gas rush in recent years. While each company has different levels of indebtedness, all are being squeezed by the current price downturn.

Red Fork was among the first Australian companies to take a position in the US shale oil industry, with the company owning a number of shale oil and gas fields in Oklahoma.

The fields had generated the equivalent of about 1795 barrels of oil a day during the September quarter, generating $US9.8m ($11.8m) in revenue, but the continued slide in oil prices in recent months appears to have forced Guggenheim’s hand.

Shares in Red Fork were worth as much as 38c a year ago but had plummeted to just 0.6c at the time of the group’s collapse.

It had raised more than $47m at 43c a share in mid-2013 and another $50m at 67c in September 2012 as it looked to pump cash into additional wells across its fields.

Red Fork had advised earlier that it was in breach of its debt covenants in the March, June and September quarters but had been able to obtain waivers from its ­lenders.

It had been working on refinancing the debt and said in early October that it had selected a preferred refinancing partner, but the continued slide in oil prices since then appears to have killed off those discussions.

Among the biggest losers from the Red Fork collapse appears to be Ashok Jacob’s Ellerston Capital, which according to Australian Securities Exchange disclosures emerged as a 10.9 per cent shareholder in the group earlier this year. Ellerston, which is 75 per cent owned by employees and 25 per cent by billionaire James Packer, had spent about $10m earlier this year building its position in the company.

[weijian]

Plunge claims its first scalp as Red Fork Energy goes under

I had thought that in this current bear market for oil specifically, we should be focusing on balance sheet strength , rather than breakeven prices or oil spot prices. Years of high oil prices + Helicopter Ben's QE Xs have created the perfect platform to suck in air for the bubble to become substantially ripe (for a bursting) now. The trigger point comes with oil rout (a severe 40% drop in 6 months) and maybe the sucker punch will come for many, when Fed Chairwoman takes away the party punch bowl in the not too long distant future.

http://www.bloomberg.com/news/2014-12-11...rkets.html

[specuvestor]

^^ Not only O&G... I think the last few low i/r & oil driven asset bubble will pop together as well. Energy reserves will be cut quite drastically for year end I think and that will affect their credit.

[HitandRun]

fed-bubble-bursts-in-550-billion-of-energy-debt-credit-markets

[Behappyalways]

Very low commodity prices are telling us something – and it’s not entirely the good news story one might think. Rather, it is that the world economy is down in the dumps, and in the view of money markets and central bankers, likely to remain that way for a long time to come


Falling oil prices - the benefits and the costs
http://www.telegraph.co.uk/finance/oilpr...costs.html



Texas has been home to 40% of all new jobs created since June 2009. In 2013, the city of Houston had more housing starts than all of California. Much, though not all, of that growth is due directly to oil. Estimates are that 35–40% of total capital expenditure growth is related to energy. But it’s no secret that not only will energy-related capital expenditures not grow next year, they are likely to drop significantly. The news is full of stories about companies slashing their production budgets. This means lower employment, with all of the knock-on effects.

Macroeconomics Finally Gets Interesting
http://www.investorsinsight.com/blogs/th...sting.aspx

[Boon]

There's more to oil prices than just supply and demand

December 11, 2014

Chris Tomlinson

http://www.theage.com.au/business/mining...252iz.html

[lilvestor]

Very low commodity prices are telling us something – and it’s not entirely the good news story one might think. Rather, it is that the world economy is down in the dumps, and in the view of money markets and central bankers, likely to remain that way for a long time to come


Falling oil prices - the benefits and the costs
http://www.telegraph.co.uk/finance/oilpr...costs.html



Texas has been home to 40% of all new jobs created since June 2009. In 2013, the city of Houston had more housing starts than all of California. Much, though not all, of that growth is due directly to oil. Estimates are that 35–40% of total capital expenditure growth is related to energy. But it’s no secret that not only will energy-related capital expenditures not grow next year, they are likely to drop significantly. The news is full of stories about companies slashing their production budgets. This means lower employment, with all of the knock-on effects.

Macroeconomics Finally Gets Interesting
http://www.investorsinsight.com/blogs/th...sting.aspx

In hindsight this was all a bubble. The fed created the environment for the shale oil industry to boom, a lot of jobs were created but it also created excess capacity that the market didn't need or want.

QE has done more harm than good in the end, God knows what other bubble is ready to pop, other than the obvious one we see here.

[BlueKelah]

WTI Below $60 now http://www.bloomberg.com/news/2014-12-12...share.html

Next bubble would be the stock markets which has also been prop up by QE. Have been expecting markets to react to end of QE and so far they have not reacted much but looks like a correction will finally be here, lead by oil drop.

[greengiraffe]

If one think that Central Bankers are so naive to see all their efforts going up in smoke, then black whatever events will occur... weak oil prices is to punish the dark forces of geo-politics while giving the ailing world the long over due octance...

economics is a good see-saw... not a one sided depressing deflationary view cause the world has proven that there is no room for pain and deflation - we are all human beings afterall...

WTI Below $60 now http://www.bloomberg.com/news/2014-12-12...share.html

Next bubble would be the stock markets which has also been prop up by QE. Have been expecting markets to react to end of QE and so far they have not reacted much but looks like a correction will finally be here, lead by oil drop.