Oil at $40

[ISIAnalyst]

The article is a bad propaganda piece.

1. Essentially, the author is trying (begging) through various arguments (stability, security, jobs, et al.) to convince OPEC to cut supply and raise prices. Its not going to happen. This is a price war.

2. On the other hand, this will put a dent into Pakistan's efforts to develop its shale oil reserves. Pakistan has 8th largest recoverable shale reserves. Estimated to be around 9.12 billion barrels.

See the detailed report at: eia gov/analysis/studies/worldshalegas/

 

[ISIAnalyst]

@LeveragedBuyout are you an economist? I have $XXXXX sitting in a chequeing account (I know stupid as hell but I don't know what to do with my RESP). What should I invest that in?

If you're in Canada, its not the time to invest for three reasons.

1. Canada will be hit harder than U.S. simply because your economy is smaller and more reliant on oil reveunes so lower oil prices will hit you harder in Canada. This will result in your dollar becoming weaker, just like Russia's rouble. Hence, you'll get less bang for your buck when you move your money to U.S. for investment, assuming you want to buy stocks that have little exposure to shale oil such as ExxonMobile and Chevron. But these stocks are only good for dividend and perhaps a 20% return. In any case, being a high-cost shale oil producer Canada will surely come out as a loser in this price war so becareful investing in Canadian stocks.

2. I don't believe oil prices have bottomed out yet. In fact, Rosneft CEO, Igor Sechin, said a few weeks back that oil will hit $60 and below, and here we are today. Prices volatility in the market will continue for up to a year as OPEC won't meet again until June, which means Canada's oil patch will see bankruptcies and buyouts. When you see a few companies who had too much exposure to shale oil file for bankruptcies or bigger rivals move in to buyout smaller ones then you know the market is starting to hit bottom. From there onward, its anybody's guess when to buy.

3. Other factor that you should consider is that Canadian real estate is too hot at the moment and I believe Canada's central bank has said its overvalued by as much as 30% in some provinces. This can turn into a nightmare scenario for Canada as shale oil bankruptcies, which are inevitable, will mean job losses resulting in lower tax revenues on top of losses in oil revenues for the government. Essentially, the government won't spend as much because it doesn't have the oil revenues, or the taxes, and the consumers won't spend because they have lost their jobs. Since they don't have jobs, who will pay the mortgages on the overvalued homes? Could this be the trigger for a real estate correction? This is the nightmare scenario.

Oil price collapse will be a delicate balancing act for Canada simply because Canada earn 6% of its GDP from oil. With a collapse in the oil price, that number has now shrunk to 2-3% of the GDP. So, Canada will have to show that their GDP expanded enough to cover the losses of oil revenue 2%-3% and resulting taxes and then some to avoid recession. Worse yet, Canada has a weird (socialist?) equalization system where oil producing provinces transfers money to others. Last year that number stood at $16 billion. Cut that in half and that's what other provinces will get going forward. How would it impact their spending?

Here's a view of how dependent other Canadian provinces are on these equalization payment:
en wikipedia org/wiki/Equalization_payments_in_Canada#Regional_fiscal_disparities_in_Canada

Some provinces are spending as much as $2,000 per capita. What happens when that figure is reduced to $1,000? Can this lead to further spending cuts, 'residual' job losses and 'hiring freezes'? What impact would that have on Canada's GDP? What is the 'Plan B'?

Canada is a one trick pony as in every time they face economic hardship they ease it by increasing immigration with the logic that more people means more demand and a bigger tax base. I'm sure they'll try this but it remains to be seen if that will do the trick. Till then I'm not investing in Canada. U.S. looks good so does Pakistan.

Source: I trade commodities and oil from time to time.

 

[Arya Desa]

If you're in Canada, its not the time to invest for three reasons.

1. Canada will be hit harder than U.S. simply because your economy is smaller and more reliant on oil reveunes so lower oil prices will hit you harder in Canada. This will result in your dollar becoming weaker, just like Russia's rouble. Hence, you'll get less bang for your buck when you move your money to U.S. for investment, assuming you want to buy stocks that have little exposure to shale oil such as ExxonMobile and Chevron. But these stocks are only good for dividend and perhaps a 20% return. In any case, being a high-cost shale oil producer Canada will surely come out as a loser in this price war so becareful investing in Canadian stocks.

2. I don't believe oil prices have bottomed out yet. In fact, Rosneft CEO, Igor Sechin, said a few weeks back that oil will hit $60 and below, and here we are today. Prices volatility in the market will continue for up to a year as OPEC won't meet again until June, which means Canada's oil patch will see bankruptcies and buyouts. When you see a few companies who had too much exposure to shale oil file for bankruptcies or bigger rivals move in to buyout smaller ones then you know the market is starting to hit bottom. From there onward, its anybody's guess when to buy.

3. Other factor that you should consider is that Canadian real estate is too hot at the moment and I believe Canada's central bank has said its overvalued by as much as 30% in some provinces. This can turn into a nightmare scenario for Canada as shale oil bankruptcies, which are inevitable, will mean job losses resulting in lower tax revenues on top of losses in oil revenues for the government. Essentially, the government won't spend as much because it doesn't have the oil revenues, or the taxes, and the consumers won't spend because they have lost their jobs. Since they don't have jobs, who will pay the mortgages on the overvalued homes? Could this be the trigger for a real estate correction? This is the nightmare scenario.

Oil price collapse will be a delicate balancing act for Canada simply because Canada earn 6% of its GDP from oil. With a collapse in the oil price, that number has now shrunk to 2-3% of the GDP. So, Canada will have to show that their GDP expanded enough to cover the losses of oil revenue 2%-3% and resulting taxes and then some to avoid recession. Worse yet, Canada has a weird (socialist?) equalization system where oil producing provinces transfers money to others. Last year that number stood at $16 billion. Cut that in half and that's what other provinces will get going forward. How would it impact their spending?

Here's a view of how dependent other Canadian provinces are on these equalization payment:
en wikipedia org/wiki/Equalization_payments_in_Canada#Regional_fiscal_disparities_in_Canada

Some provinces are spending as much as $2,000 per capita. What happens when that figure is reduced to $1,000? Can this lead to further spending cuts, 'residual' job losses and 'hiring freezes'? What impact would that have on Canada's GDP? What is the 'Plan B'?

Canada is a one trick pony as in every time they face economic hardship they ease it by increasing immigration with the logic that more people means more demand and a bigger tax base. I'm sure they'll try this but it remains to be seen if that will do the trick. Till then I'm not investing in Canada. U.S. looks good so does Pakistan.

Source: I trade commodities and oil from time to time.

Thank you so much for your detail response. Full disclosure, I am in my early 20s and am a university student. I'm simply a science student who has no clue about economics or anything related to money. Hell, I've have $XX,XXX amount in a no interest chequeing account for years now. I thought of putting it in a term deposit in India to get 9.5% interest but am not sure about laws in Canada and India regarding that. As you can tell I am very bad with money.

 

[ISIAnalyst]

Thank you so much for your detail response. Full disclosure, I am in my early 20s and am a university student. I'm simply a science student who has no clue about economics or anything related to money. Hell, I've have $XX,XXX amount in a no interest chequeing account for years now. I thought of putting it in a term deposit in India to get 9.5% interest but am not sure about laws in Canada and India regarding that. As you can tell I am very bad with money.

I understand that you don't know how to invest but its not rocket science. Besides your money has already lost roughly 15% of its value in the past year alone. Either put your capital into real estate in Canada and hope it doesn't go bust. If that's not an option then wire the money back to India and get 9.5%. You can consult an accountant to see how to minimize taxes or you can simply transfer the money over to your parents in India, if you have parents in India. An Indian acquaintance uses HSBC and ICICI to transfer money back and forth from India so can try them. Banks in the West won't offer you much interest when there is oversupply of money. If you want to keep the money in the West than your best bet is to park the money in a blue chip stock with a good dividend. You can diversify by investing in two or three stocks, a mutual fund, and you can include a safer bet like a long-term (3yr - 5yr) government backed bonds. Or you can avoid micromanagement and invest in an index. As for how to do this all, you just need a trading account.

In some places, you can get tax credits when you are a student so check your local law as you can use that when you finally cash out. Again, an accountant can sort it out for you. Good luck.

 

[nvKyleBrown]

Actually it is a counter attack by G.C.C to US. US invest of its Shall reserve and its level is Minimum 80$/barrel to become operational profitable. After US investment and stating that they don't need ME anymore. The G.C.C decrease the price to below 80$/barrel and if this situation will go more then 3 months then all companies in US will become bankrupt because of operational cost. I think now G.C.C will sale their oil less then 80$/barrel from now on and in that case US will have to rely on ME. So it seems good news for Oil Importer countries.

Bottom line: ME buy more time for their oil until US came up with new cheap technology for her Shall reserve which reduce cost for drill till 40$/barrel.

It is conceivable this could bankrupt some shale oil companies, but I doubt all of them. The problem for the Gulf states is that even if they bankrupt this round of companies, fracking is now a proven tech and the oil is still there. It isn't ever going to get much above the American cost to produce, because those wells immediately come back online again.

Bankrupting the companies doesn't eliminate the oil, and doesn't eliminate the equipment already built. It may get turned off, but it's mere presence keeps prices from going too high.

Think about it, would you consider buying a shale oil well for a few thousand dollars, even if it is currently unprofitable, on the chance that oil prices rise? Pretty good bet there. If the price of the well is low enough, someone will take that bet. Bankrupt means the price goes to zero (or near that). It doesn't mean the well evaporates.

Further, this technology is likely to improve over time, making it progressively less and less costly. The only fightback the GC states have is to reduce prices. Or, change their societies dramatically to diversify (and get more of their citizens working rather than living on government paychecks). I'm guessing the "more work" option is not going to go over well anywhere.

 

[raptor22]

Ya bro, ME'erns are turning back to the part of history they belong to.
I guess you can find it here,
Crude Oil Price History Chart | MacroTrends

I think it could cause big changes in the south west Asia, I mean chaos ... political, social and economical changes are on the way even it could effect global warming due to burning more hydrocarbon by countries like China resulted of low oil prices, on the other hand although producing oil for OPEC members cost less than 10$ per barrel and 40~70 $ for shale resources ,war on price couldn't last long. technology has already opened a new chapter in this field.
I dunno what would happen to hybrid cars and renewable energy industries.

 

[My-Analogous]

Not sure how you reached that conclusion that all companies in U.S. will become bankrupt just because cost of oil has gone done.

You are very wrong. The shale oil production has less costs than what you have mentioned, and the cost has been decreased each year by a rapid trend. OPEC has not much increased their oil production. The fall of oil prices is due to the increasing of production of non-OPEC oil producers, and also shale oil production.
@LeveragedBuyout Your thoughts would be appreciated.

US is bluffing and nothing more. Below USD 80 will kill US

Oil Wars: Why OPEC Will Win
Shale oil’s complex cost of production
This is the price that would kill U.S. oil production growth
http://www.ft.com/cms/s/0/0a25ecf4-5937-11e4-9546-00144feab7de.html

 

[DarkElf]

Thank you so much for your detail response. Full disclosure, I am in my early 20s and am a university student. I'm simply a science student who has no clue about economics or anything related to money. Hell, I've have $XX,XXX amount in a no interest chequeing account for years now. I thought of putting it in a term deposit in India to get 9.5% interest but am not sure about laws in Canada and India regarding that. As you can tell I am very bad with money.

If you really bad just put it in some government bond mutual fund, while learning more about investing/property. At least it's better than no interest chequeing account.

 

[anant_s]

Happy to comment, but I will steal a bit from my previous posts on this issue. As you say, shale oil is not going to be easy to kill. From the article:

Oil has dropped 38 percent this year and, in theory, production can continue to flow until prices fall below the day-to-day costs at existing wells. Stevens said some U.S. shale producers may break even at $40 a barrel or less. The International Energy Agencyestimates most drilling in the Bakken formation -- the shale producers that OPEC seeks to drive out of business -- return cash at $42 a barrel.

And with the diversity of shale fields we have, there will be many, many more places where $40 remains viable for drilling:

The U.S. Energy Information Administration estimated in 2009 that the U.S. had 1,722 trillion cubic feet of recoverable natural gas in six key shale formations, including the Marcellus in the northeastern U.S. EIA projected that identified natural gas deposits in the shale plays was enough to supply the country's needs for 90 years at then-current production rates. Other estimates of shale gas reserves extend the supply to 116 years.

Also, as you mentioned and has been said before, fracking technology continues to improve, thus improving productivity and bringing down the break-even price for drilling. Examples are new materials being injected into the rock that increase flow (such as Schlumberger's HIWAY, which adds fibers to the grain solution; more sophisticated pipe fittings that can target specific pockets of oil and gas, which cuts down on the need for water and time; and improved blast technology to break further into the rock to widen the funnel (and increase flow).

Unlike the OPEC members, who basically just had to stick a straw in the ground, fracking is a highly innovative and fast-moving industry. It's not sitting still, to OPEC's great misfortune, and gets harder to kill with each passing month. And between fracking and non-OPEC oil production, we can see that OPEC has been easily eclipsed. Look at this chart, showing the dominance of non-OPEC suppliers (light blue) dwarfing the contribution of OPEC (grey). Those negative grey bars are OPEC trying to cut supply to maintain the oil price, but they are getting swamped by the non-OPEC increases in production. Saudi Arabia finally threw in the towel and decided to join the party in order to protect its market share, which is why the grey bars (OPEC) turned positive. Now everyone is supplying oil:

We know that prices are determined by supply and demand. That's the supply side: fracking plus high output at OPEC. But demand is also weakening:

Europe, Japan, China, and even Russia have weaker oil demand than forecast, so the gap between production and consumption is growing faster than anticipated. As you can see, inventories (the blue bars) are starting to build rapidly, which is putting tremendous pressure on prices. Even as the US increases production rapidly, our demand is flat or declining:

(I guess the EPA fuel efficiency standards are good for something, after all).

The best part is that this low price range will probably last a long, long time. Even if demand picks up, it's unlikely OPEC will have the discipline to cut supply to the degree necessary to raise prices:

(OPEC consistently produces above its self-declared quotas).

Gentlemen, enjoy the windfall. For the oil importers, this will cut their import bills and boost GDP, providing a stimulus of several hundred billion dollars for the world economy. And the icing on the cake is that while the good guys win, the bad guys (Venezuela, Russia, Saudi Arabia, Iran, etc.) lose. Hopefully we'll see a knock-on effect where the mysterious money-and-weapons flow (where do all the Russian weapons and funding come from? No one knows, wink wink nod nod) to terrorist groups dries up. I'm sure it will be pure coincidence that the fiscal squeeze on the bad guys leads to a fiscal squeeze on the terrorist groups, right? Pure coincidence.

Thank for what to me is one of the most detailed reply on the subject.
A few days back there was a debate on a news channel and this question of Shale came up. one of the speakers had a very opposite view and he remarked that US companies may not put in more money on Shale exploration from next year with dwindling prices. & hence your post looks radical (& well explained if i may add) on the view.
It looks like US might actually ramp up the production even more in 2015 perhaps causing a bit more of heartburn to OPEC and others.
I think 3 factors would dominate crude prices in 2015
1. Demand in China and India. There are news that China has already built a large stockpile and India's demand won't change much and Euro-zone remaining in crisis and economy numbers coming from Japan are a bit pessimistic, Supply side can't be foreseen to be strained. In this scenario, unless there is a drastic cut by OPEC (say 30-40%), it is difficult to see prices rebounding. Also is there is a unanimity between OPEC members to enforce such a huge cut in production? Doubtful to say the least.
2. US Russia relations: Its a very well known fact that Russia's economy might be coming under heavy strain if oil falls further and policy makers at Capitol hill know this. With most diplomatic maneuvers against Russia failing this year, playing the oil card well, will be a priority for US administration. & i can see (from russia's side) ,the situation improving linked to Euro-zone or its ability to find new market.
3. OPEC. I do get a feeling that someone is trying to make OPEC irrelevant in future. Not sure if this might happen but in search for securing Energy security for future and avoiding any oil shock, several countries (India for one) would not mind it happening.

US economy is already showing signs of recovery and that means Dollar is going to strengthen against most currencies in 2015-16. Under such a scenario, the effect may undercut the gains made by falling prices of crude as far as import bills for a lot of countries and therefore its net effect on economies remain to be seen.
At Least as of now " the barrel is rolling on a very slippery slope" (no puns intended!)

The article is a bad propaganda piece.

huge reserves in Pakistan.
Is there any program underway to recover these. Can be a good source of Foreign currency.

 

[Arya Desa]

I understand that you don't know how to invest but its not rocket science. Besides your money has already lost roughly 15% of its value in the past year alone. Either put your capital into real estate in Canada and hope it doesn't go bust. If that's not an option then wire the money back to India and get 9.5%. You can consult an accountant to see how to minimize taxes or you can simply transfer the money over to your parents in India, if you have parents in India. An Indian acquaintance uses HSBC and ICICI to transfer money back and forth from India so can try them. Banks in the West won't offer you much interest when there is oversupply of money. If you want to keep the money in the West than your best bet is to park the money in a blue chip stock with a good dividend. You can diversify by investing in two or three stocks, a mutual fund, and you can include a safer bet like a long-term (3yr - 5yr) government backed bonds. Or you can avoid micromanagement and invest in an index. As for how to do this all, you just need a trading account.

In some places, you can get tax credits when you are a student so check your local law as you can use that when you finally cash out. Again, an accountant can sort it out for you. Good luck.

Thank you very much. I feel property is not good right now as a lot of people I know who bought houses got a floating mortgage b/c interest rate is 1% with a down payment of only 5%. I've heard this is very common, so if interest goes up even a little, they will walk away from it. Property values will definitely drop.

If you really bad just put it in some government bond mutual fund, while learning more about investing/property. At least it's better than no interest chequeing account.

Thank you also for you great input. I will seriously look into government bond mutual funds. As stated above, I feel it is a bad time to buy property in Vancouver.