oil


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So there’s a tension here. Saudi Arabia is supposed to be the world’s swing producer and they have finally acceded to output cuts to stabilize oil prices, getting Russia onboard too. But, at today’s prices, a lot of North American shale production is viable and these guys are swamping the market, with rig counts up every week.

Rig count 2017-05

Now, if you look at the North American rig count numbers in a multi-year context things, we are nowhere near the highs of 2014.

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But back in March, I was calling the rig count a bubble. And the longest term view makes clear why.

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So, while one could legitimately call the increase in rig count and the switch of oil majors to shale oil investment an echo bubble, the size of the uptick is nowhere near what we saw before. And given where oil prices are coming from – $50 a barrel, there is no support for the kind of capex we saw when oil traded above $100 a barrel.

Why this matters. Oil prices are not going up dramatically. Shale oil has become the swing producer, and these shale projects are viable at these levels, ensuring a supply glut which will keep prices under pressure. But the downdraft in capex from any collapse in prices is likely to be more muted and have less impact on the economy. At the same time, with global growth re-accelerating, the fall in prices could be a windfall for consumers, especially in developed economies where workers’ real earnings is still recovering.

On net, I believe the scenario is negative for global growth, if marginally so. The risk is in credit, particularly regarding knock-on effects for emerging markets, commodity credits and high yield more generally.

The Fed is only likely to pause if we get a panic situation that drags oil back down to $30 a barrel. But, while the Fed is on course for three or four rate hikes this year because of a tightening bias, oil in the $40 range will get the Fed’s attention because of the capex and consumption implications.

Bottom line: oil prices will continue to be under pressure as long as rig counts are rising. We will see a yo-yoing of prices, but the calls for $60 or $70 a barrel look misplaced. Analysts still expect WTI to average $55 for the whole of 2017; these forecasts will be under pressure. Yield curve flattening and pressure on emerging market and high yield credits are the biggest risks.

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Looking at oil. Sentiment has pretty much run its course on oil. The previous article was a good example of this.

That being said, the world demand for oil isn’t going to disappear anytime soon. Therefore holding oil for a period of time is not going to be overly risky. Yes, there is an increased supply, which will keep prices lower, but we simply need some fluctuation, not necessarily a strong bull market.

The quite long period of consolidation should give us a reasonably low risk entry point. The $7 – $9 range is a 28% fluctuation range, enough to trade consistently.

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Oil hasn’t been at the forefront of market discussion for a little while now. It may be soon. Oil is falling once again.

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With it, now, are the energy stocks who’s fortunes are tied to the oil price. Oil supply is plentiful and no-one on the producer side seems willing to cut or halt production. Therefore, you would expect further pressure on the price of oil.

Will the overall market follow oil and oil stocks lower?

Who really knows. But the overall market as measured by SPY, DIA, QQQ, hasn’t really moved anywhere in the last month or so. Earnings reports that beat, go nowhere.

Cheaper oil for me is great if it brings down petrol prices, and good for manufacturers/producers that use oil somewhere in their product.

But the overall market just doesn’t seem to like lower oil prices. If oil continues lower to retest the previous lows, the overall market may just follow again.

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Earnings recession history and market reaction.

Energy, which is in [large] part to blame for this current series of earnings’ misses has always been a significant component in the over-all market’s capitalisation.

Weakness in energy, is then almost a weakness in the market…in respect to earnings.

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I remember lining up for petrol as a child with my parents. I think we could only buy petrol on certain days of the week depending on car registration or something, might have been alphabetical based on your licence.

When we first went to the States, petrol was something like $0.30/gallon. Incredibly cheap. Prices sky-rocketed.

Currently, after the ‘peak-oil’ scare, oil is again [seemingly] in plentiful supply. Electric cars have established enough of a toe-hold to eventually replace petrol based cars, although it will take a while yet. Thus one of the safest trades, the oil trade, is now questionable.

Its not going to totally fall apart, but buying oil producers as an investment will become much harder than it has been. Previously you could buy the big national producers and ride out any slumps. Can you still do this?

I’m going to have a look at the various ETF’s in the space just to see what’s on offer and whether there are any compelling valuations that might overcome the decidedly questionable longevity of the trade now.

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Oil’s charge on the day is being led by data from the US Energy Information Administration (EIA) released on Wednesday that showed oil production in the country has fallen to its lowest level since September 2014. US production decreased by 113,000 barrels per day last week, marking the biggest weekly decline in output since last July. US domestic output has now fallen for 11 consecutive weeks.

That further fall in production suggests that the markets are going someway to addressing the supply/demand imbalance that has plagued markets and caused prices to fall from more than $100 per barrel in 2014 to as low as $27 in January.

Oil was also given an extra boost after, as Accendo Markets’ Mike van Dulken says: “Wildfires in Canada were seen to affect production there, while an escalation of violence in Libya did the same on this side of the pond.”

Despite the good news from the EIA, oil inventories actually continued to grow last week. The EIA’s Weekly Petroleum Status Report showed that U.S. commercial crude inventories increased by 2.8 million barrels for the week ending April 29.

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The blowup of Halliburton-Baker Hughes will reverberate beyond the energy patch. The promised merger of two of the world’s top oil-services companies is the latest mega-deal foiled by regulatory pressure this year, after Pfizer’s $160 billion bid for Allergan. Baker Hughes pockets a $3.5 billion payment for its efforts, at Halliburton owners’ expense. Punishing Halliburton’s boss and board would yield a more enduring lesson in M&A hubris.

Investors were already pricing in failure for the deal, valued at $35 billion when it was agreed in November 2014. Baker Hughes shares finished last week trading 26 percent below Halliburton’s cash-and-shares offer. Even the thwarted acquirer’s shares held up despite the colossal break fee, reflecting the market’s anticipation of failure all along.

That doesn’t mean there shouldn’t be a reckoning. Baker Hughes boss Martin Craighead ought to emerge unscathed. The saga wasted management time, but playing hard-to-get when Halliburton came courting has proven wise. Baker Hughes plans to buy back stock and pay down debt, thanks to negotiating the largest cash break fee ever. That will go some way towards numbing the pain of the $980 million net loss the company suffered in the first quarter as the slump in oil-drilling activity worsened.

Halliburton Chairman and CEO David Lesar, on the other hand, emerges a loser for his poor reading of the antitrust zeitgeist. The promise of $2 billion of annual cost savings might have made the huge break fee seem worth the risk at the time. Yet having agreed to pay away most of the present value of those savings to Baker Hughes shareholders to clinch the deal, he is now handing over cash worth more than the next three years of Halliburton’s expected net profit to a leading competitor.

Lesar already forwent his 2015 bonus because of Halliburton’s poor financial performance. Another zero this year might start to restore some lost credibility – and might make other empire-building CEOs think twice before getting caught up in merger mania. Stricter sanctions, including a rethink of Lesar’s job, would more effectively reinforce the point.

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