Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
The Death of the US Real Estate Dream - 22nd Jul 18
China is Now Officially at War With the US and Japan - 22nd Jul 18
You Buy the Fear in Gold - 22nd Jul 18
Trumponomics Stock Market 2018 - The Manchurian President (1/2) - 21st Jul 18
The Death of Japan's Real Estate Dream - 21st Jul 18
SMIGGLE Amazing Mega Shopping Haul, Pencil Cases, Smigglets and Giant Back Packs! - 21st Jul 18
Cayton Bay Beach Caravan Park Holiday - What's it Like? - 21st Jul 18
Gold Stocks Investment Wanes - 20th Jul 18
Diversifying Your Stock Investing Strategies is Smart Investing - 20th Jul 18
Custom Global Stock Market Indexes May Be Sounding Alarms - 20th Jul 18
S&P 500 Just 2% Below Record High, But There's More Stock Market Uncertainty - 19th Jul 18
Stock Market Technical Picture - 19th Jul 18
Gold Market Signal vs. Noise - 19th Jul 18
Don’t Get Too Bullish on Gold - 19th Jul 18
Bitcoin Price Rallies to Upper Channel – What Next? - 19th Jul 18
Trump Manchurian President Embarrasses Putin By Farcically Blowing his Russian Agent Cover - 19th Jul 18
The Fonzie–Ponzi Theory of Government Debt: An Update - 19th Jul 18
Will the Fed’s Interest Rate Tightening Trigger Another Financial Crisis? - 18th Jul 18
Stock Market Investor “Buy the Dip” Mentality is Still Strong, Which is Bullish for Stocks - 18th Jul 18
Stock Market Longer-Term Charts Show Incredible Potential - 18th Jul 18
A Better Yield Curve for Predicting the Stock Market is Bullish - 18th Jul 18
U.S. Stock Market Cycles Update - 18th Jul 18
Cayton Bay Hoseasons Caravan Park Holiday Summer 2018 Review - 18th Jul 18
What Did Crude Oil - Platinum Link Tell Us Last Week? - 17th Jul 18
Gold And The Elusive Chase For Profits - 17th Jul 18
Crude Oil May Not Find Support Above $60 This Time - 17th Jul 18
How Crazy It Is to Short Gold with RSI Close to 30 - 16th Jul 18
Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18
Stock Market Uptrend Continues, But... - 16th Jul 18
Emerging Markets Could Be Starting A Relief Rally - 16th Jul 18
(Only) a Near-term Stock Market Top? - 16th Jul 18
Trump Fee-Fi-Foe-Fum Declares European Union America's Enemy! - 16th Jul 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

The Four Real Reasons Crude Oil Prices Are Slipping

Commodities / Crude Oil Aug 05, 2015 - 11:39 AM GMT

By: ...

Commodities

MoneyMorning.com Dr. Kent Moors writes: As I write, I am flying from Kansas to Baltimore. I’ll be visiting Money Map Press headquarters to discuss some exciting developments we’ll tell you about shortly.

But today’s Oil & Energy Investor is all about where I have just been…

Years ago, a legendary wildcatter told me you have to smell the crude and get it under your fingernails before anybody should call you a genuine oilman.


Well, yesterday I was addressing a convention hall full of them.

I’ve been at the annual meeting of the Kansas Independent Oil and Gas Association (KIOGA). More than 800 industry insiders were in attendance for my keynote address in downtown Wichita.

I always look forward to spending time with the “little guys” in oil exploration and production (E&P). These are the fellows who have comprised the bedrock of American domestic production for over a hundred years – the very small, very local companies. Many are running some of the smallest operations around. The average KIOGA member company has just more than three employees!

And in my address, I shared with them the four real reasons oil prices are declining.

Here’s what I discussed in my briefing…

Why Small Oil Operators Are Hurting

Throughout the decades, small E&P outfits have endured market downswings, vicious weather, profit constrictions (or outright profit disappearances), and virtually every conceivable problem with oil field service, equipment/supply prices, and the cost of running debt.

This year, all of these crises – and more – have hit at once.

There were those in the audience who knew they would not make it to January. But this is also a resilient bunch. The collective history sitting in front of me was flat-out extraordinary.

However, they face difficult times.

As crude settles in below $50 a barrel for WTI (West Texas Intermediate, the benchmark used in New York for futures contracts), operators at the wellhead are making about 15% below that figure. To survive, they need to be lean and selective in drilling.

The plunge has hit hardest those companies developing deep drilling operations in shale and tight formations, those requiring horizontal drilling and fracking. Without a price for oil of around $65 a barrel, there is no likelihood that forward investment commitments can be sustained. Here is where the main cuts in new projects have been taking place.

The Best Strategy for Survival

It just so happens that the best strategy to use in such times is an approach the folks in Kansas know well. It has allowed them to weather storms before, and it will do so again.

Yes, as I have often said, a rising tide does not lift all boats. Yet it is also true that a declining water line does not scuttle all boats, either. In a low price environment that nonetheless has strong demand, a specific positioning in known and prolific, completed infrastructure, along with attention to managing forward capital expense, is essential.

Most of the folks in the audience already knew that, but not all of them are able to move on it. Vulnerability is intensifying.

Deliverance from the current malaise is not going to be across the board. In fact, that was part of one of the four primary points I wanted to make in my address.

The Four Reasons Behind the Decline in Oil Prices

I began by laying out the current dynamics attending the price decline: supply gluts, the value of the dollar, excessive short positions on crude, OPEC-related sovereign wealth funds undercutting the price of their own production, and the widening spread between “paper” barrels (futures contracts) and “wet” barrels (the actual consignments of oil in trade).

All of these we have discussed here in Oil & Energy Investor.

The current price for crude oil in New York (WTI) is some $11 below where it should be based on straight market factors. Meanwhile, Dated Brent (the benchmark set daily in London) is closer to $15 below “fair market value.” The differential is the result of elements having very little to do with either supply or demand dictating price.

The next two factors I have also considered at length in Oil & Energy Investor: the changing nature of the oil balance and the acute crisis in energy debt.

The balance considers sources of supply and expanding end use markets. Supply is now coming from places quite different than only a few years ago, as the “call on shale” has begun to replace the more traditional “call on OPEC.”

Meanwhile, the debt issue involves the increasingly too expensive interest that must be paid when high yield (i.e., “junk”) bonds are issued. The ability to roll over debt, a staple of cash poor operators in the U.S., is vanishing, as is any genuine option of hedging current prices against future prospects.

The Coming Wave of Consolidation

This sets the stage for my fourth and final main point in Wichita. We are moving again into a major period for mergers and acquisitions (M&A). Some companies will simply go belly up. On the other hand, others having choice leases and well operations (but becoming exceptionally weak in capital) will become primary targets for takeovers.

However, there is an additional wrinkle emerging. A widening number of companies are prepared to sell select wells and leases for the immediate funds needed to stay afloat until the broader market stabilizes.

In these situations, whole companies are neither going under nor being acquired. The focus here is on selective assets.

Remember this. Because it is the key to a major initiative we are about to open up. And I’ll be there, monitoring the situation, every step of the way.

Source :http://oilandenergyinvestor.com/2015/08/the-four-real-reasons-oil-prices-are-slipping/

Money Morning/The Money Map Report

©2015 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: customerservice@moneymorning.com

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.


© 2005-2018 http://www.MarketOracle.co.uk - 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