Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

If Only These Two Things Come to Pass, Crude Oil Prices Will Rise

Commodities / Crude Oil Nov 18, 2016 - 12:14 PM GMT

By: John_Mauldin

Commodities

Will oil prices recover as Wall Street presumes? That depends on the balance of supply and demand. 

Climate change agreements notwithstanding, the world still burns and will go on burning a lot of fossil fuel. Slowing economic growth has reduced energy demand growth, but the absolute numbers remain strong. This will change as greener technology spreads, but very slowly.

The real mystery is on the supply side.


We know OPEC is trying to agree on production quotas. They will meet this month to make a final decision. I’m not optimistic that they can reach a deal, and I have no illusions that they can enforce any deal they might reach. The vast majority of OPEC members will cheat.

There’s also non-OPEC Russia to consider. Putin is in no position to reduce cash flow right now. The situation is further complicated by the fact that the US shale industry is the pivot point now, filling the role formerly held by Saudi Arabia.

Our companies can dial production up and down quickly too.

Even bankruptcies won’t stop the price leak

Many observers have thought the shale industry would fall, as many debt-laden companies went belly up. It hasn’t turned out that way.

This Oct. 24 Wall Street Journal headline tells the story:

It appears that even bankruptcy can’t make these companies turn off the pumps. From the WSJ:

Energy investors have long hoped that falling prices would solve themselves by driving producers into bankruptcy and stanching the flood of excess supply. It turns out that while bankruptcy filings are up, they have barely impacted fossil-fuel markets.

About 70 US oil and gas companies filed for bankruptcy in 2015 and 2016. They now produce the equivalent of about 1 million barrels a day, about the same as before they declared bankruptcy, according to Wood Mackenzie. That represents about 5% of US oil-and-gas output.

That resilience has kept energy inventories flush and prices capped. Oil shot to $50 a barrel this summer, but has had trouble making much progress beyond that mark.

This is exactly the way chapter 11 was meant to work. The process is designed to save companies that can be saved. And many energy companies are using it to lighten their heavy debt loads, adapt to lean times, and keep producing.

I believe what’s happening here is that people are forgetting the concept of “sunk cost.” If you’ve already spent the money to locate oil and drill into it, pumping it out is not expensive.

Your creditors will want you to do exactly that too, so you can stay current on your payments. Go bankrupt and the court-appointed trustee will order you to pump.

There is profit even at $40

In addition, the new technologies I described last year (see “Riding the Energy Wave”) are making it profitable to drill and produce oil at ever-lower prices. The result is that more production comes online every time prices rise to $50 or so. That seems to be the cap on WTI crude, at least for now.

There are companies in the Permian basin that can reliably lift oil out of the ground and make a profit at $40 a barrel, and I am told that the same thing is happening in North Dakota’s Bakken.

The last I read, the Permian Basin in West Texas had produced some 50 billion barrels since oil was first struck in West Texas in 1920. The naysayers were talking about running out of oil in West Texas in the ’70s.

Present estimates are that there are another 50 billion barrels of recoverable oil in and around the Permian. And it is getting cheaper every quarter to produce that oil.

These two things are required to get oil prices to rise

We need to see some sustained combination of higher demand and/or lower supply. Wall Street’s 2017 earnings forecast is not going to come true unless crude can punch its way higher, to the mid-$50s, and stay there.

We haven’t talked about currencies, either. The strong dollar has been cutting into the revenues of US multinationals. Many analysts think the dollar will change directions next year, too, and that shows up in their earnings projections.

I’m the first to admit the greenback looks a tad overbought, but think about the competition. What other currency will get more attractive than the USD in the next year? The euro? Sterling? Yen? All the other major currencies have their own problems, far greater than the dollar’s.

Yes, the US could well enter recession next year, and the Fed might cut rates even into negative territory. But currency values are relative. The dollar may weaken, but everything else will weaken even more. 

One additional point: Investors are moving in a herd from active management to passive management, moving literally hundreds of billions of dollars into passive funds. Sometimes they do ring a bell.

FREE Report: How the High Priests of Economics Are Leading Us to Monetary Hell

Contrary to common belief, it’s not greedy Wall Street brokers that are wrecking the US economy—but academic policymakers like the ones employed by the Federal Reserve. And they all have the best intentions… Read financial-bestseller author John Mauldin’s riveting special report, How the High Priests of Economics Are Leading Us to Monetary Hell. Click here to get your free copy now.
John Mauldin Archive

© 2005-2019 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