Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
20 Days Left to Find Buying Opportunities In Gold - 25th Mar 19
Will the Historic Imbalance in Gold Stocks to Gold Price Resolve ? - 25th Mar 19
EasySMX Wireless Games Controllers Review - 25th Mar 19
Stock Market Short-term Top - 25th Mar 19
UK Population Growth - Latest ONS Immigration Statistics and Consequences - 24th Mar 19
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

As Oil Price Falls, These Kinds of Drillers Become Irresistible

Commodities / Oil Companies Nov 02, 2014 - 05:22 AM GMT

By: Money_Morning


Dr. Kent Moors writes: Thanks to the drop in prices, some TV pundits are now talking about the end of the “new” oil age.

Of course, most of these misfits couldn’t find an oil slick if they slipped on it. But that’s not stopping them, not one bit.

Now admittedly, it’s true. With oil now trading in a band between $80 and $88 a barrel, there’s a “new normal” for crude. (And as I’ll explain later, it just won’t last).

But what these characters don’t seem to get is that lower oil prices never hit everyone the same.

The little-known truth is that, in some cases, lower oil prices actually make some companies even more attractive.

Let me explain…

Why These “Chicken Littles” Couldn’t Be More Wrong

First, let’s get something straight right off the bat.

It’s important to realize that a decline like the one we’ve had lately is not a signal that there is a recession coming. If there was, that would be a cause for concern.

But there is nothing to even remotely indicate that an economic correction is coming – actually the indicators are all pointing in quite the opposite direction.

This is simply a supply/demand event. There is too much production to match what is needed and the market needs only a few months to compensate for it. That’s the way markets work.

Here’s where my major contention comes in, the one these talking heads fail (or refuse) to acknowledge. Keep in mind that those who fail to understand it are just not “oil savvy.”

What’s more, many of these guys are just really interested in making more money. They tell everybody “the sky is falling,” then rake in the cash by shorting the result.

My major point is this: When oil prices fall in a non-recessionary environment, it is all about the cost of production.

The onshore projects that are now falling off are the unconventional (shale and tight oil), deep horizontally drilled, fracked wells that are more expensive to develop. And while these projects have the potential to produce large volumes, they cost millions to complete.

Projects like these make perfect sense when oil prices are above $100 a barrel. At those levels, economies of scale take over and improve profit margins. The higher production volumes offset the higher operating costs.

That margin shrinks considerably when crude oil prices drop. On average, $90 a barrel is required for a “greenfield” or new unconventional project, while over $75 is preferred for a “brownfield” project, or the reworking of an existing wellhead location.

Of course, a project’s profit margin is calculated over the life of the well, not simply over a span of a few months. But the expenses are loaded upfront. That means more than 80% of what it costs to drill a well are paid before anything comes out of the ground. The longer the well lasts, therefore, the greater the profit.

Of course, a dry hole could easily cost $5 million or more. In times of higher oil prices, these non-producers are simply figured into the overall budget. It becomes a more difficult proposition if the market price is low.

The Market Just Loves These Kinds of Producers Right Now

But more conventional producers don’t have these problems.

The companies that prosper during lower price periods drill traditional, conventional, shallow and vertical wells. These wells are quick in and quick out. They cost very little in comparison to complete, usually less than 10% of a deep fracked horizontal. Dry holes, therefore, are less of a problem in a drilling program that can finish wells in a week, as opposed to several months.

So when oil prices drop, extraction from shallow vertical wells tends to crowd out production from more expensive competitors.

Why? It’s due to one simple overriding factor. Traditional wells are often profitable at $65 a barrel, and sometimes even less.

And remember, supply may be up right now (resulting in lower market prices), but demand – even a sluggish demand scenario – will still require product.

So the “cheaper wells” end up grabbing a greater percentage of an existing market and the companies that drill those wells actually benefit from the falling overall price. They just grab a bigger market share.

This is why both of our most recent direct investment projects – Money Map Project #2 and #2(A) - have emphasized combining already producing wells (where the operating costs are minimal) with cheap, quick, shallow, vertical drilling of new wells.

In short, these projects are designed to move right into today’s oil “sweet spot” where the bulk of the profits will be made. And, of course, those profits continue for the life of the wells. That could easily be 10 or 15 years and even longer – in all pricing environments.

That’s the advantage of owning what comes out of the ground, not simply stock issued by a company looking for it.

Of course, oil prices are never static. We may see some brief moves around $80 a barrel, but the most likely move from here will be up. Not to $120 or even $110, but above $90 a barrel.

The reason for this is pretty straight forward.

As I noted earlier, lower oil prices are not an indicator of approaching economic problems. They are rather a barometer of supply and demand.

Two things happen in these cases. First, the lower the price the more oil we use. It is just axiomatic that we use more of a product like oil when the price is lower.

However, the second factor (and more decisive) occurs on the supply side. Lower prices discourage marginal production. That reduces the supply side of things and puts upward pressure on prices.

This is going to occur regardless of the geopolitical situation (which could of its own accord result in a big price jump) or moves by the Saudis (who have “proved their point” and will be relaxing their own export price cuts).

So the truth is there are plenty of ways to make money in oil these days.

Source :

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules