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Musings on the oil market and my oily stocks March 3, 2016

Posted by shaferfinancial in Finance.

Two years ago no one could predict what the last 20 months would look like in the oil market. But, the one thing that people could know if they looked is that the oil market is known for having mind numbing large movements that don’t conform to the fundamentals of oil production.

Given all that, and the impossibility of predicting oil prices going forward, it is apparent we have hit an inflection point. Brent price closed up to over $37 today. Interday movement was over 3% from its high to its low [all before noon]. That in itself tells us that emotions are ruling the movements.

Shale oil is now down over 500,000 BPD from its peak. Quarterly and year end financials indicate huge losses in the industry totaling billions of dollars for 2015. Bankruptcies are increasing. The majors are lowering capex significantly. The tight oil companies have reduced capex 80% or more in some cases. Some companies are even stopping their drilling programs. OPEC producers are talking freezing production in concert with Russia and other countries.

Demand is up. India over 10%, China right at 10% and the good old USA, gasoline usage is up 2% over last year.

Now all the analyst point out that storage is filling up here in the US. But that is a little confusing as this is about imports coming in bought by the refiners. Why would they go to all the expense of storing oil if they didn’t foresee the price going up in the near future?

Compare this to 6 months ago when tight oil was still being produced at peak rates, Saudi A. and Russia was trying to increase production, and everyone was predicting that demand would level off.

Now there is considerable damage that has been done to the oil industry. Billions lost. 100s of thousands of people laid off. Projects postponed and canceled. Reserves not being replaced. Countries budgets being diminished. Production in the North Sea, Mexico, Venezuela and Brazil are in real trouble. The first three have mature fields that are depleting and not being replaced. Brazil self imploded.

But there is a time when things change, and I believe we are there. Maybe the price of oil will continue to be lower than what it costs to produce it for a while longer???? But, we are IMO, looking an a inflection point.


Musings on Oil September 23, 2015

Posted by shaferfinancial in Finance.
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Latest IEA report looks to 3rd quarter 2016 for the supply/demand lines to cross back over. Currently they estimate a almost 2 M BPD oversupply. For the last 6-9 months they have been overestimating US shale supply and understating actual demand. Take these figures with a grain of salt as no one knows how much Iranian oil is currently in the market and how quickly they can ramp that number up. They also totally missed the current over supply situation that started early in 2014.

However, I have learned that no one is very good at estimating oil supply/demand or predicting future price.
One thing we do know is that this is the tipping point for NA tight oil. Bankruptcies of smaller firms have begun, Wall Street has finally turned off the spigot of capital, and people are starting to actually look at companies financials to see the inability of 98% of these companies to make profit. Is this what Saudi Arabia has been waiting for?

Almost daily some oil company representative or analyst has been saying we will never get back to $100 oil. My experience suggests that such pronouncements are rarely correct, especially when you hear it from a lot of sources. My prediction; no one knows what the price of oil will be 2 months from now, let alone 2 years from now.

Finally, there is much hand wringing on economic activity changes in Asia. Yet, boots on the ground notice no difference throughout the region. One thing we do know is that people have short memories. For example, in the USA cars and truck sales have been brisk and dominated by SUVs, trucks and large sedans that get poorer gas mileage.

Energy into the Future October 27, 2014

Posted by shaferfinancial in Finance.
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Let me start off the post stating two facts:
1. I don’t invest/speculate for short term movement, but take Buffett’s advice to invest as if you are throwing the stock into a drawer for 10 years.
2. No one has ever been able to predict oil prices in the short term [less than 3 years]. Just look at the oil price predictions from 1 year ago if you don’t believe me.


I will start off with a few facts and then go into my opinion. World-wide almost all wells are producing less oil than they were. So we have a world wide per well decrease in production for the last decade that is increasing. This is true if we are talking the Saudi’s, North Sea, or even tight oil which has the highest depletion rate by far. So in order to increase oil production there must be an increase in wells drilled. No getting around that fact.

Over the last years there has been thousands of new oil wells drilled in North America because of the improvement in technology in fracking tight oil. But tight oil wells have a depletion rate as high as 40% for the first year alone, so in order for them to increase production NA shale oil players need to dramatically increase well drilling going forward. This is unsustainable as the best plays are drilled first and the lesser plays are starting to be drilled now. In order for their to be a decade long increase in production in tight oil, there either has to be several major discoveries the size of the Permian Basin and/or a dramatic increase in the technology. Neither are likely in my mind.

There has been much discussion on the majors moving to fracking tight oil, but that is really limited to two domestic majors, Chevron and Exxon with Exxon seemingly waiting to pick up some leases out of bankruptcy. Shell and BP have recently stated that they are ramping up their offshore drilling. And of course the nationals are for the most part dependent on offshore to ramp of their production. The truth is that for oil companies, they need to do everything they can to keep production up whether its onshore, fracking, or offshore. If they don’t then oil production will go down as their existing oil wells deplete.


Worldwide consumption of oil products continues to increase. This is on the back of China/Asia increasing GNP and India increases in GNP. China GNP went up last quarter 7.2% [higher than most predicted], while India went up 5.5% [again higher than expected]. USA went up a little over 4%. Europe stayed flat and might be going into a recession while Japan also remained flat. Worldwide the predictions is for a 3.5% GNP increase for 2015 [again look at how badly prognosticators did last quarter before you put any confidence in that number].

Hear is my prediction: Worldwide consumption of oil will continue to increase for the foreseeable future.

So this is a pretty simple equation for me. Consumption will increase, while production will continue to need more wells drilled to keep up with the world-wide consumption. Can NA shale oil drilling keep up with the increased demand and the lowering production of existing wells world-wide? No not even close.
World wide consumption was 90.4M barrels a day in 2013. Likely to be in excess of 93M in 2014. Increase in USA production from 2013 to 2014 is expected to be around 1.5M barrels a day. OPEC can manipulate its production over a fairly tight range to account for short term variations, but many believe the Saudi’s [largest OPEC producer] is running pretty close to full bore.

Now add in that companies have to plan out 5-10 years in advance to create production level. So they need to have big drilling projects starting now to maintain their production. Where will they get this oil? They have to go to the biggest reserves which are mostly offshore.

Nothing I have seen over the last year has changed any of that analysis. Not the drop in oil prices over the last few months, not the increase in production in NA tight oil.

What we are seeing is folks trying to predict something that they can’t [oil production and consumption and oil price]. It is all just noise. Barring a world-wide depression consumption will increase. The oil has to be drilled to produce. The major oil companies will drill where there is oil whether it is in NA or offshore.

Energy, Oil and other musings July 11, 2014

Posted by shaferfinancial in Uncategorized.
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I have made big investments in energy stocks. Just thought I would put my thoughts down, based on the research I have done over the last year.

1. Demand for oil continues to go up. This is a fact.
2. Existing wells are producing less oil. This is going on whether it is old-school land based [Middle East] wells, underwater wells, or tight oil [so called shale oil]. The depletion rate has been increasing for quite a few years, yet gets little analysis. This is a fact.
3. The tight oil drilling that is going on in North America is great for the US. But it has no chance of making us independent of imported oil. Great for jobs in Texas and the Dakota’s, but it clearly faces some issues, not the least the rapid depletion rates. Technology has made it all possible, but this technology took 3 to 4 decades to come on board. Can we really expect new technology to make drilling more efficient and profitable to come on in the next few years?
4. Most of the shale oil drillers are not profitable. They have burned up much Wall Street capital. But at least 2 of the CEOs of the major integrated oil and gas companies have withdrawn their companies from shale oil plays because it does not provide the IRRs they felt their companies required.
5. The major oil and gas companies are reeling from decreasing profit margins from their now highly depleted resources. The cost of getting a barrel of oil is increasing.

So, in short what we have is increasing demand, decreasing ability to meet that demand, and a tight oil market that apparently is not very profitable.

In 2013 the majors took a break from their massive investing in new resources to get their balance sheet more to their liking. However, eventually, and by eventually I mean by next year, they will need to produce more oil to feed their system of production and distribution. So how do they do that?

Tight oil helps, but it is never going to cover the depleting existing wells, let alone the increased demand. So where will this new oil come from? The vast majority of the known reserves exist under the water around the globe. The Arctic, the North Sea, GOM, off of South America [Brazil, Argentina, etc.] Africa, off of Nova Scotia and even the eastern Mediterranean all have proven deposits of oil.

Even if Russia and other countries start to drill for tight oil on land, there still is much unmet demand. The existing land wells are not going to miraculously start to produce more oil. That leaves drilling under the water as the only viable place to get the oil. There pretty much has to be a significant UW drilling program invested in by the major oil producers.

Wall Street interests would have you believe that the tight oil phenomenon will solve our oil demand problem. It won’t. They would have you believe that all this oil being taken out of shale deposits is going to make you rich if you invest in all these drillers. I doubt that. The big money has already been made. And if I have an accurate picture of how Wall Street and its interests work, then currently there is a movement going on to pull Wall Street investments out [with a great profit] and get retail investors in. Time will tell on this one.

Above is what led me to the underwater drillers like Seadrill [SDRL].

There is much misinformation about energy, investing in energy, our country’s position in energy, etc. Much of it can be characterized by political or Wall Street propaganda. But it doesn’t take long to dig through that and find out what is really going on. So use Google and take a look for yourself.

Here is an interesting article: http://oilprice.com/Energy/Energy-General/Orwellian-Newspeak-And-The-Oil-Industrys-Fake-Abundance-Story.html