Tag Archives: Oil

Is OPEC Back?

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It was initially considered something of a big deal when, on November 30, the Organization of Petroleum Exporting Countries (OPEC) ended years of squabbling and mutual frustration by announcing that their members would cut oil production in the coming year by 2 million barrels a day.  If the deal holds, it will represent the first reduction on the global markets in eight years.

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What’s Next for Oil Prices?

Last year, the big news in the U.S. economy was the dramatic fall in Brent crude oil prices, from just under $110 a barrel last July to something less than $45 a barrel in mid-March. (See chart) Since then, oil prices have jumped back up to more than $60 a barrel. Does that mean the era of cheap oil is over?

CA - 2015-5-5 - Oil charts

Probably not, say the experts. Bill O’Grady, at Confluence Investment Management, points out that U.S. energy production, when you add 9.2 million barrels per day of oil production to 1.0 million barrels per day (equivalent) of natural gas, is the highest it has ever been, even higher than the production levels during the OPEC oil embargo in the 1970s. Meanwhile, Saudi Arabia appears to be pursuing a multi-pronged political agenda by keeping its pumps working overtime: when the world’s largest oil exporter drives down the global price of oil, it harms the economies of Russia and Iran (which need higher oil prices to prop up their domestic economies) and also discourages even higher oil production in the U.S. At the same time, the Saudi effort to suppress oil prices also suppresses the economic drivers of alternative energy, by making solar and nuclear power seem expensive compared with oil-generated electricity.

Meanwhile, more oil is on the way. Iran’s oil minister recently announced that if/when sanctions on the country are lifted, it will raise its oil production from 2.7 million barrels a day to four million over the subsequent eight months.

The recent Confluence report also offers a couple of very interesting statistics. First, the average citizen of planet Earth consumes about 4.7 barrels of oil a year in energy use. That in itself may not be surprising; what is striking is that this number has barely fluctuated since 1983, and is down from 5.3 barrels in the late 1970s. There are huge differences among countries. U.S. citizens, on average, consume 21.8 barrels a year, while the average Chinese resident consumes 2.9 barrels.

The other interesting statistic is the declining amount of energy required to produce an inflation-adjusted dollar of economic production in the world. In 2013, the most recent year this data has been collected, the figure was the lowest it has ever been, and is more than 50% lower than in 1980. (See Figure 2) The world economy, in other words, is at least 50% more efficient in its energy use than it was 30 years ago, and that efficiency has been increasing steadily over that three-decade period. Last year, European oil use hit its lowest level since the mid-1990s, and U.S. oil demand peaked in 2007, and is expected to fall by between 1.8 million and 2.7 million barrels a day by 2035. In an op-ed piece in the Wall Street Journal, economist Steve Yetiv says that as economic growth becomes increasingly disconnected from oil in the next 20 years, attention will shift to scarcities in food, water and minerals.

None of this guarantees that oil prices will fall back to their mid-March lows, but it does suggest to energy experts that the recent rise in prices won’t take us back to last year’s $100+ prices either. Yetiv speculates prices in the range of $52 to $68 a barrel for the foreseeable future. Translated, that means the days of (relatively) cheap oil could be with us for a while.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

http://www.wsj.com/articles/oil-prices-rise-on-signs-glut-may-abate-1430991274?tesla=y

http://www.wsj.com/articles/why-the-worlds-appetite-for-oil-will-peak-soon-1430881507

http://fortune.com/2015/05/07/oils-wild-ride-where-will-prices-go/

http://confluenceinvestment.com/assets/docs/2015/WEC_Q2_2015.pdf

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Lower Oil, Less Looking For It

gasYou already know that oil prices are lower than they have been in a long time, in part because U.S. oil production is higher than it has ever been, and still climbing steeply.  But you have to wonder how long these conditions will last, since lower oil prices make it less economical for oilfield services companies to drill.

The accompanying chart, courtesy of the oilfield services company Baker Hughes, may be the most dramatic illustration of economic reality you will see this month.  It shows how the U.S. has increased the millions of barrels of oil per day that we’re pumping out of U.S. soil in the past four years.  Looking at the orange line rising ever-more-steeply, you wonder whether oil prices will ever go back up to previous levels.

But then you see the purple line, which tracks the number of active oil rigs that are out there looking for new sources of oil.  The last quarter of 2014 and the first few months of this year have created a dramatic bear market for drilling rigs in action.  In just two fiscal quarters, the number of rigs in the field has dropped almost by half, and there is no sign that the trend is slowing down.

What does that mean?  Nothing in the short term, since the orange line represents existing production.  But longer-term, you have to expect that fewer active rigs will mean fewer wells and, at the very least, a leveling out of that orange line.  Oil prices may be down today, but that doesn’t mean supplies will outrun demand forever.  Enjoy the low gas prices while you can.

CA - 2014-3-10 Oil Rigs Chart

 

 

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Source:

http://www.bloomberg.com/news/articles/2015-03-06/oil-rigs-get-slammed-for-the-13th-week

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Howard Marks: Russia

As always, great insight from Howard Marks:

I’d say we should start getting interested in the asset class. Declines are not a reason to get worried. Declines are a reason to get excited. The investing public like things better at high prices than at low prices. The professionals like things better at low prices than at high prices.

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