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Energy / Oil Prices

  • Basic Arithmetic Letting Oil Companies Down

    Sesame Street is better at math than the oil companies are right now. Virtually every midsized oil exploration and production company has recently claimed not only to maintain production levels for 2015, but to increase production in the next year, all while slashing capital expenditure budgets to the bone. That math doesn’t compute at all: Where is the Sesame Street “Count” when you need him? It really is as simple as 1, 2, 3…. This week after capex slashes were reported from several US oil companies, including a stunning 75% drop in the budget of Abraxas energy (AXAS), Canadian oil…

  • Strike While The Majors Are Cheap

    This big collapse in the price of oil that has occurred in the second half of this year is the result of a combination of factors. Dollar strength as other major economies, such as Japan and Europe, face problems has played a part, as has some worry about a slowing of global growth. If the numbers are to be believed, though, the single biggest factor has been the increase in supply as unconventional wells, most notably in the U.S., have come on stream. Understanding that this is principally a supply shock is important for investors as it determines strategy for…

  • Oil Price Scenarios For 2015 And 2016

    A couple of weeks ago I had a post titled The 2014 Oil Price Crash Explained. In this post I use the empirical supply and demand dynamic described in that earlier post (Figure 1) to try and constrain the oil price a year from now and in 2016. The outcome is heavily dependent upon assumptions made about supply and demand and the behavior of OPEC and the banking sector. Three different scenarios are presented with December 2015 prices ranging from $45 to $100 / bbl. Those hoping for a silver bullet forecast will be disappointed. Individuals must judge the scenarios…

  • Sanctions, Oil Prices Push Russia Into Currency Crisis

    As oil prices show no sign of recovery, Russia is facing a sudden and acute currency crisis. Oil prices have essentially dropped by half in just a few months, and the speed has caught many by surprise. Russia, one of the world’s largest oil producers, had already been bracing itself for a recession, admitting in early December that its GDP might fall by about 0.8 percent in 2015. We have heard much about the breakeven points for many oil producing countries – for Russia, it needs somewhere in the range of $105 per barrel for its budget to breakeven. But…

  • Don’t Expect Low Oil Prices To Last For Long

    When I last wrote about the global supply of oil, it was back in October, as the fall in oil prices was developing. Since then the price has continued to fall, with prices now below $60 a barrel. I was doubtful back then that the price would fall as far as it has, and remain cynical that it will remain down for very long. Since this seems to go against much current wisdom, let me explain why I remain pessimistic that the boost to the global economy from access to cheaper fuel will continue for any great length of time.…

  • How Will US Fed React To Low Oil Prices

    Falling oil prices are the newest wrench in the Fed’s decision making, but the effect might seem counter-intuitive. Since the Fed’s last meeting in October, oil prices have fallen 25%. With a meeting scheduled for this week, markets have two major questions about the Federal Open Market Committee’s (FOMC) decision: how long will rates stay at zero, and will oil prices change that? There is a growing belief among market participants that the FOMC’s first rate hike will be delayed by the glut of oil. That sentiment is misplaced. If anything, the fall in oil prices will cause the Fed…

  • The Hidden Costs Of Cheap Oil

    As a consumer of oil, you may regard recent sharp declines in the world oil price as a blessing. But... If you work in the oil industry, you will not. If you work in the renewable energy industry, you will not. If you work in the energy efficiency business, you will not. If you work to address climate change, you will not. If you have investments in the oil industry (and nearly everyone does through pensions or 401k plans), you will not. If you live in a country that exports a lot of oil (not just Saudi Arabia, but Mexico,…

  • OPEC Denies Price War, Shows Faith In Markets

    OPEC Secretary-General Abdullah al-Badri is urging the cartel’s 12 members to maintain production and exploration despite a lower demand for oil. Yet al-Badri told an energy conference in Dubai on Dec. 14 that he is as baffled as anyone why the price of oil has dropped by so much in recent days. “The fundamentals should not lead to this dramatic reduction [in price],” Badri said, according to his Arabic-English interpreter. As for sustained exploration and production during a period of low demand, al-Badri said such a strategy would prevent a shortage of supply once demand eventually is restored. He said…

  • Low Oil Prices Could Point To A More Serious Problem

    West Texas Intermediate sold for $105 a barrel at the start of July, but ended last week at $58. The most important factor has been surging U.S. production. But another reason oil prices have slid so much is weakness in demand for the product, which may be related to a slowdown of overall world economic growth. Here I comment on the importance of that second factor.Price of crude oil (West Texas Intermediate, dollars per barrel). Source: FRED. For example, the price of copper fell from $3.27/pound to $2.93, a 10% drop over those same six months. This of course has…

  • Looking At The Data Behind Low Oil Prices

    With so much talk swirling about the current oil price drop, I feel compelled to focus less on the rhetoric and more on the data. So the vibe of this post lands somewhere between Elvis Presley’s ‘action ‘and one of my boss’s favorite phrases: ‘In God we trust, all others must bring data‘. First up, let us take a look at the apparent key culprit for the recent sell-off: US oil production. While conspiracy theories may persist about OPEC targeting the demise of the US shale oil revolution, it is impossible to deny how startling the ramp up in US…