Ups and Downs
Ups and Downs
It seems that the dollar is not going to weaken any time soon, but interest rates will probably go up in Dec. or March. This being the case is it really reasonable for us to expect a move up in oil even though US production is falling? I am becoming skeptical.
Re: Ups and Downs
The move in the U.S. dollar index from 80 to just under 100 is responsible for approximately a third of the fall in oil prices from $100/bbl to where it is today. You can see the DXY chart at this link: http://www.marketwatch.com/investing/index/dxy/charts
The price of oil was actually coming down gradually before Saudi Arabia decided to over-produce in order to gain market share (at least that is the "official" reason for their move).
Since drilling and completion costs have come way down, if oil gets back to around $70/bbl the upstream companies will get about the same rate of return on shale and other tight formation horizontal wells that they did a couple years ago when oil was at $100/bbl. Keep in mind that 20% to 30% of the decline in D&C costs is lower fuel expense, so most of that will go away. Plus, the oilfield services firms do need higher margins than they are willing to take today just to keep their crews and equipment working.
Global oil supply / demand is now tightening rapidly. My guess is by at least 200,000 barrels per day each month. The rate of oil production decline in the U.S. is accelerating.
Crude oil prices are set by speculators who trade more then 20X the physical barrels produced each day. When the "speculators" decide it is time to bid up the price of oil, it will go up.
OPEC nations cannot survive at today's oil price. They meet again in Mid-December. Even a small cut in OPEC production will cause oil prices to bounce back to $60/bbl.
The price of oil was actually coming down gradually before Saudi Arabia decided to over-produce in order to gain market share (at least that is the "official" reason for their move).
Since drilling and completion costs have come way down, if oil gets back to around $70/bbl the upstream companies will get about the same rate of return on shale and other tight formation horizontal wells that they did a couple years ago when oil was at $100/bbl. Keep in mind that 20% to 30% of the decline in D&C costs is lower fuel expense, so most of that will go away. Plus, the oilfield services firms do need higher margins than they are willing to take today just to keep their crews and equipment working.
Global oil supply / demand is now tightening rapidly. My guess is by at least 200,000 barrels per day each month. The rate of oil production decline in the U.S. is accelerating.
Crude oil prices are set by speculators who trade more then 20X the physical barrels produced each day. When the "speculators" decide it is time to bid up the price of oil, it will go up.
OPEC nations cannot survive at today's oil price. They meet again in Mid-December. Even a small cut in OPEC production will cause oil prices to bounce back to $60/bbl.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group