$20 Oil If OPEC Doesn’t Act : Venezuela

  • Don’t Cry for Me Venezuela
  • It won’t be easy, you’ll think it strange
    When I try to explain how I feel
    That I still need your love after all that I’ve doneI had to let it happen, I had to change
    Couldn’t stay all my life down at heel
    Looking out of the window, staying out of the sun
  • OPEC member seeks `equilibrium price’ of $88 a barrel
  • Saudis, Qatar to consider proposal, Venezuelan minister says

Oil prices may drop to as low as the mid-$20s a barrel unless OPEC takes action to stabilize the market, Venezuelan Oil Minister Eulogio Del Pino said.

Venezuela is urging the Organization of Petroleum Exporting Countries to adopt an “equilibrium price” that covers the cost of new investment in production capacity, Del Pino told reporters Sunday in Tehran. Saudi Arabia and Qatar are considering his country’s proposal for an equilibrium price at $88 a barrel, he said.

OPEC ministers plan to meet on Dec. 4 to assess the producer group’s output policy amid a global supply glut that has pushed down crude prices by 44 percent in the last 12 months. OPEC supplies about 40 percent of the world’s production and has exceeded its official output ceiling of 30 million barrels a day for 17 months as it defends its share of the market. Benchmark Brent crude settled 48 cents higher at $44.66 a barrel in London on Friday.

“We cannot allow that the market continue controlling the price,” Del Pino said. “The principles of OPEC were to act on the price of the crude oil, and we need to go back to the principles of OPEC.”

OPEC ministers will meet informally on Dec. 3 in Vienna, a day before the group’s formal session, he said.

Credit Suisse: Oil Has Stabilized Because Saudis Got What They Wanted


Forget wealth effect. The global equity market can’t have a smooth bull run if oil prices are tanking.

This is because commodity-related capital expenditure accounts for around 30% of total capex globally, so even though consumers may benefit from cheaper oil, companies are hit first.Credit Suisse estimates that the fall in commodities capex has taken at least 0.8% off the U.S. economic growth in the first half this year and 1% off global growth over the last year.

But the worst is over, according to analyst Andrew Garthwaite and team. They listed three reasons: 1. demand for oil has stabilized; 2. non-OPEC production has peaked; 3. Saudi Arabia has achieved its goal of deterring new entrants.

Since Saudi Arabia is the wild card, Credit Suisse analysts took pains to explain their position:

We believe that the key variable is Saudi Arabia. If it were not for Saudi Arabia, then we fear that oil would have to behave like other commodities and if there is excess supply fall to levels where a third of production is below the cash cost and, given the likely fall in commodity currencies, this in turn would lead to a much lower oil price (maybe down to $30/barrel).

This leads to the question ‘Can Saudi Arabia support the oil market?’. We think the answer is yes. They control the vast majority of spare capacityaccording to our oil team and 13% of output.

Their clear aim was to restore market share against non-OPEC and avoid being a swing producer (and thus not repeat the 1980 to 1985 experience, when their oil production fell by 70% as they sought to defend the oil price) and also limit the growth in alternative energies. The key is clearly at what point they have achieved their objective. The issue is nearly always the same – costs fall much more quickly than expected, partly because commodity currencies fall and partly because of cost deflation.

Moody’s highlight that the breakeven for median shale is around $51pb. Thus it may be the case that around the current oil price, Saudi Arabia believe they have achieved their objective of pricing out new shale projects.

Additionally the reduction in the oil price has come at a cost, with the budget deficit estimated to be 20% of GDP in 2015 (IMF Article IV – Saudi Arabia). While government debt to GDP is very low at c1%, we view the recent selling of Sama reserves and the first sovereign bond issue since 2007 as signs that there is some degree of stress.

Brent crude jumped another 2.2% to trade at $49.58 recently after a 5% rally overnight.

Oil stocks rallied. CNOOC (883.Hong Kong/CEO) advanced 12.1%, China Oilfield Services(2883.Hong Kong) gained 9.5%, PetroChina (857.Hong Kong/PTR) was up 7.8%. Sinopec(386.Hong Kong/SHI) jumped 6.8%. The Hang Seng China Enterprises Index advanced 4%. Overnight, the United States Oil Fund (USO) rose 4.9%.

Natural Gas Drillers Can’t Catch a Break : Bloomberg News

Natural gas drillers who flocked to liquids-rich basins in search of better profits just can’t seem to catch a break.

Seven years ago, as shale output surged and gas futures tumbled more than 60 percent, producers abandoned reservoirs that only yielded gas and moved rigs to wells that also contained ethane, propane and other so-called natural gas liquids, or NGLs. These NGL prices were tied to oil futures, which climbed in 2009 as the economy recovered. It was a strategy that worked well — for a while.

Drillers fled natural gas for oil and liquids as commodities collapsed.
Drillers fled natural gas for oil and liquids as commodities collapsed.

Those days are over. Oil has plunged 56 percent from a year ago, and propane at the Mont Belvieu hub in Texas has tumbled 64 percent. The spread between NGL prices and natural gas shrank 9.2 percent last week to $7.02 a barrel, the lowest in at least two years, squeezing producers’ profits.

The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers' profits.
The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers’ profits.

The culprit is a repeat offender: shale production. This time, the boom in oil output from reservoirs like the Bakken in North Dakota has created a glut of NGLs, and the market is poised to remain well supplied. To survive, gas producers will have to focus on the lowest-cost wells.

Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.
Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.

“Drillers are going to have to retreat to where the sweet spots are,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “At these price levels, the rig count isn’t going to move higher.”


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Oil Bear Market Will Be Prolonged : Goldman Sachs

Oil dropped to the lowest in more than four months in New York on expectation a global glut that drove prices into a bear market will be prolonged.

Goldman Sachs Group Inc. estimates the global crude oversupply is running at 2 million barrels a day and storage may be filled by the fall, forcing the market to adjust, analysts including Jeffrey Currie said in a report dated Thursday. U.S. crude supplies remain about 100 million barrels above the five-year seasonal average, Energy Information Administration data on Wednesday showed.

Oil moved into a bear market in July on signs the global surplus will persist as the U.S. pumps near the fastest rate in three decades and the largest OPEC members produced record volumes. The Bloomberg Commodity Index, which fell almost 11 percent in July, has resumed its decline.

“Prices are under pressure because we’ve got more and more crude coming out of the ground,” Michael Corcelli, chief investment officer of hedge fund Alexander Alternative Capital LLC in Miami, said by phone. “Questions about storage capacity have already been brought up.”

WTI for September delivery fell 49 cents, or 1.1 percent, to settle at $44.66 a barrel on the New York Mercantile Exchange. It’s the lowest close since March 19. Prices are down 16 percent this year.

Supply, Demand

Brent for September settlement dropped 7 cents to end the session at $49.52 a barrel on the London-based ICE Futures Europe exchange. It touched $48.88, the lowest since Jan. 30. The European benchmark crude closed at a $4.86 premium to WTI.

“It’s the familiar theme of oversupply and shaky demand,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. “The negative reaction to yesterday’s inventory report set up for another drop today. We clearly have more than ample supply.”

About 170 million barrels of crude and fuel have been added to storage tanks and 50 million to floating storage globally since January, according to the Goldman report. Global oil oversupply has risen from 1.8 million barrels a day in the first half of 2015, Goldman said. The balance between supply and demand may only be restored by 2016, Goldman said.

Shoulder Months

“While we maintain our near-term WTI target of $45 a barrel, we want to emphasize that the risks remain substantially skewed to the downside, particularly as we enter the shoulder months this autumn,” the Goldman analysts said.

Crude supplies in the U.S. fell 4.4 million barrels to 455.3 million last week, the EIA said. Output expanded by 52,000 barrels a day to 9.47 million a day, the first gain in four weeks. Refinery utilization rose by 1 percentage point to 96.1 percent, the highest level since 2005.

Inventories of distillate fuel, a category that includes diesel and heating oil, rose 709,000 barrels to 144.8 million, the most since February 2012, the EIA report showed.

Ultra low sulfur diesel for September delivery rose 1.14 cents, or 0.7 percent, to settle at $1.5499 a gallon in New York. On Monday it closed at its lowest level since July 2009.

“Diesel isn’t up because of the fundamentals,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone. “It’s getting support from the upcoming refinery-maintenance season, the harvest season and anticipation of thermal needs later this year.”

The Bloomberg Commodity Index of 22 raw materials dropped 0.3 percent. Eighteen of the components, which include gold, have declined at least 20 percent from recent closing highs, meeting the common definition of a bear market.

Half of U.S. Fracking Companies Will Be Sold OR Dead This Year

Half of the 41 fracking companies operating in the U.S. will be dead or sold by year-end because of slashed spending by oil companies, an executive with Weatherford International Plc said.
There could be about 20 companies left that provide hydraulic fracturing services, Rob Fulks, pressure pumping marketing director at Weatherford, said in an interview Wednesday at the IHS CERAWeek conference in Houston. Demand for fracking, a production method that along with horizontal drilling spurred a boom in U.S. oil and natural gas output, has declined as customers leave wells uncompleted because of low prices.
There were 61 fracking service providers in the U.S., the world’s largest market, at the start of last year. Consolidation among bigger players began with Halliburton Co. announcing plans to buy Baker Hughes Inc. in November for $34.6 billion and C&J Energy Services Ltd. buying the pressure-pumping business of Nabors Industries Ltd.
Weatherford, which operates the fifth-largest fracking operation in the U.S., has been forced to cut costs “dramatically” in response to customer demand, Fulks said. The company has been able to negotiate price cuts from the mines that supply sand, which is used to prop open cracks in the rocks that allow hydrocarbons to flow.
Oil companies are cutting more than $100 billion in spending globally after prices fell. Frack pricing is expected to fall as much as 35 percent this year, according to PacWest, a unit of IHS Inc.
While many large private-equity firms are looking at fracking companies to buy, the spread between buyer and seller pricing is still too wide for now, Alex Robart, a principal at PacWest, said in an interview at CERAWeek.
Fulks declined to say whether Weatherford is seeking to acquire other fracking companies or their unused equipment.
“We go by and we see yards are locked up and the doors are closed he  said. “It’s not good for equipment to park anything, whether it’s an airplane, a frack pump or a car.”

Oil: Value trap or buying opportunity?


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Oil: Value trap or buying opportunity?

Depends if you are investing or a speculating/trading. The previous week’s oil inventory numbers show U.S. crude oil inventories are at the highest level for this time of year in at least the past 80 years. (Source: U.S. Energy Information Administration 11Feb15 for week ending 6Feb15) Investors reacted Tuesday to Citigroup indicating that $20 oil/barrel may soon be on the way. They must have an awful lot of short positions they need going back the right way: “Oil Could Plunge to $20 & this Might be the end of OPEC”: Citigroup goes on to say, “The recent surge in oil prices is just a “headfake,” and oil as cheap as $20 a barrel may soon be on the way, as it lowered its forecast for crude. Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the U.S. is still rising, wrote Edward Morse, Citigroup’s global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out. A pullback in production isn’t likely until the third quarter, Morse said. In the meantime, West Texas Intermediate Crude, which currently trades at around $52 a barrel, could fall to the $20 range “for a while,” according to the report. The U.S. shale-oil revolution has broken OPEC’s ability to manipulate prices and maximize profits for oil-producing countries.

“It looks exceedingly unlikely for OPEC to return to its old way of doing business,” Morse wrote. “While many analysts have said in past market crises ‘the end of OPEC,’ this time around might well be different,” Morse said. Citi reduced its annual forecast for Brent crude for the second time in 2015. Prices in the $45- $55 range are unsustainable and will trigger “disinvestment from oil” and a fourth-quarter rebound to $75 a barrel, according to the report. Prices this year will likely average $54 a barrel.” (Bloomberg 9Feb2015)

Thursday, Swanzy Quarshie of Sentry Investments was on BNN and gave some of our historical favorites some exposure. Her macro-view of the sector/market is a positive outlook for energy and energy related equities for 2015, however, Sentry remains cautious in the short term. Although much of the issues inherent in the oil markets have been priced into the commodity, they see the possibility of a retest of the oil price lows of January driven by growing crude inventory levels globally (levels are at an 80 year high!). For now, they are firmly in the camp that the current demand/supply imbalance is driven by excess supply and expect the market to move closer to equilibrium towards the end of the year with a slowdown in North American drilling activity. At this time, they do not expect demand to have a negative impact on the imbalance. In this environment, they favour companies with strong balance sheets and good cost structures who can take advantage of this downturn to further strengthen their businesses. They prefer oil weighted producers in the short to midterm given the structural challenges in the North American gas market. In the longer term, they are optimistic that growing export channels and increasing industrial demand for natural gas will help to strengthen the North American gas market. Her Top picks: Bankers Petroleum (BNK-tsx), Raging River Exploration (RRX-t) and Whitecap Resources (WCP-t). Legendary value investor Seth Klarman has built a position in Bellatrix (BXE-tsx): According to reports, legendary value investor Seth Klarman has built a position in Bellatrix. Klarman has purchased 21,839,400 common shares of BXE, representing 11.4% of the company’s shares outstanding. Separately, Orange Capital, LLC at last report held 28,146,263 common shares of BXE, representing 14.7% of the company. This week, Canaccord Genuity Energy Analyst Anthony Petrucci initiated coverage on BXE and highlights the company is currently trading at 7.1x 2015E EV/DACF, which is a discount to its peer group at 10.3x. Likewise, its P/NAV of 0.6x is also discounted to the group average of -1.2

In Petrucci’s view, the discount for Bellatrix is too severe, particularly given the company’s asset base and growth profile. While a 2015E D/CF (trailing) of 4.8x is concerning, Petrucci notes BXE’s ability to spend JV dollars to bridge the gap during the current pricing environment. Forbes refers to Klarman as an “investing demigod.” Here is one of Klarman’s most notable quotes, “In capital markets, price is set by the most panicked seller at the end of a trading day. Value, which is determined by cash flows and assets, is not. In this environment, the chaos is so extreme, the panic selling so urgent, that there is almost no possibility that sellers are acting on superior information. Indeed, in situation after situation, it seems clear that fundamentals do not factor into their decision making at all.” (CG 11Feb2015) due to the length of the report, please call/email us if you would like it in its entirety.


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Oil Extends Drop : Worsening Glut – With Oil Companies and Investors In Denial

Oil extended losses to trade below $45 a barrel amid speculation that U.S. crude stockpiles will increase, exacerbating a global supply glut that’s driven prices to the lowest in more than 5 1/2 years.

Futures fell as much as 2.6 percent in New York, declining for a third day. Crude inventories probably gained by 1.75 million barrels last week, a Bloomberg News survey shows before government data tomorrow. The United Arab Emirates, a member of the Organization of Petroleum Exporting Countries, will stand by its plan to expand output capacity even with “unstable oil prices,” according to Energy Minister Suhail Al Mazrouei.

Oil slumped almost 50 percent last year, the most since the 2008 financial crisis, as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. Goldman Sachs Group Inc. said crude needs to drop to $40 a barrel to “re-balance” the market, while Societe Generale SA also reduced its price forecasts.

“There’s adequate supply,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by phone today. “It’s really going to take someone from the supply side to step up and cut, and the only organization capable of doing something substantial is OPEC. I can’t see the U.S. reducing output.”

West Texas Intermediate for February delivery decreased as much as $1.19 to $44.88 a barrel in electronic trading on the New York Mercantile Exchange and was at $44.94 at 2:26 p.m. Singapore time. The contract lost $2.29 to $46.07 yesterday, the lowest close since April 2009. The volume of all futures traded was about 51 percent above the 100-day average.

U.S. Supplies

Brent for February settlement slid as much as $1.31, or 2.8 percent, to $46.12 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $1.24 to WTI. The spread was $1.36 yesterday, the narrowest based on closing prices since July 2013.

U.S. crude stockpiles probably rose to 384.1 million barrels in the week ended Jan. 9, according to the median estimate in the Bloomberg survey of six analysts before the Energy Information Administration’s report. Supplies have climbed to almost 8 percent above the five-year average level for this time of year, data from the Energy Department’s statistical arm show.

Production accelerated to 9.14 million barrels a day through Dec. 12, the most in weekly EIA records that started in January 1983. The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, or fracking, which has unlocked supplies from shale formations including the Eagle Ford and Permian in Texas and the Bakken in North Dakota.

OPEC Output

The U.A.E. will continue plans to boost its production capacity to 3.5 million barrels a day in 2017, Al Mazrouei said in a presentation in Abu Dhabi yesterday. The country currently has a capacity of 3 million and pumped 2.7 million a day last month, according to data compiled by Bloomberg.

OPEC, whose 12 members supply about 40 percent of the world’s oil, agreed to maintain their collective output target at 30 million barrels a day at a Nov. 27 meeting in Vienna. Qatar estimates the global surplus at 2 million a day.

In China, the world’s biggest oil consumer after the U.S., crude imports surged to a new high in December, capping a record for last year. Overseas purchases rose 19.5 percent from the previous month to 30.4 million metric tons, according to preliminary data from the General Administration of Customs in Beijing today. For 2014, imports climbed 9.5 percent to 310 million tons, or about 6.2 million barrels a day.

Oil Companies and Investors In Denial : Portfolio Profits At Risk

My rant – the  curse of Cassandra :

Cassandra, daughter of the king and queen, in the temple of Apollo, exhausted from practising, is said to have fallen asleep – when Apollo wished to embrace her, she did not afford the opportunity of her body. On account of which thing :

when she prophesied true things, she was not believed.

I have written :

Managed Accounts Year End Review and Forecast