Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

As Oil Prices Climb, Here’s How to Play the Rebound in Energy

Commodities / Crude Oil Feb 14, 2015 - 03:02 PM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: As I write this, crude oil prices continue to advance. Brent is over $61 a barrel, while West Texas Intermediate (WTI) is pushing $53.

Both are higher than at any time since before Christmas.

Absent any major geopolitical tension, beyond the levels we’re already seeing, oil prices should begin to level off.


And while oil is not going to surge in the short-term, a floor has emerged that is going to hand us some fantastic new opportunities.

Oil won’t have to hit triple digits for them to pay off either, provided certain factors continue to fall into place.

But in today’s world it’s not all about oil, not by a long shot. The biggest gains are more likely to be found elsewhere in the sector.

So in today’s issue, I want to sketch out my strategies to profit off the rebound in energy…

Oil Prices: Unconventional Production is Still the Wildcard

This strategy has two central considerations. The first involves what’s happening with oil. The second outlines the broader energy investment opportunities this changing market will provide.

Today, I’ll discuss oil. Next week, I’ll talk about a range of opportunities outside of crude.

Even with higher prices, it’s important to keep in mind that crude is still subject to several major considerations. Initially, and still most importantly, are the ongoing supply side issues. The oil “glut” is the biggest reason oil prices fell over the last quarter of 2014.

That’s because there was a much bigger increase in U.S.-based shale and tight oil production than originally estimated. What’s more, on a longer-term basis, these unconventional reserves are going to develop into a global supply issue, since some 86% of the recoverable unconventional oil reserves are actually located someplace other than North America.

Now admittedly, these global reserves will take longer to develop, since they require considerable capital expenditures to create a full infrastructure network and service support system. But this is a trend that will unfold by the end of this decade and continue at least until 2035.

However, unlike previous downturns in oil prices, the demand side is holding up well.

Despite the overblown alarm spouted by the so-called pundits, 2014 recorded the highest daily global demand for oil on record, and it’s expected to grow by about 1.6% this year.

In fact, both OPEC and the International Energy Agency have raised their demand estimates again, while lowering non-OPEC conventional production expectation. U.S. shale and tight oil remains the wildcard, and it will probably take two quarters to determine the impact production cuts will have.

The difference this time is that, despite global daily demand being within 2 million barrels of the available export supply reserves (virtually all Saudi), we now know there is considerable excess capacity available on the unconventional side.

As expanded U.S. crude oil exports are approved, that capacity will have a more worldwide effect. All that’s needed on this front is for Congress to change the statute. That’s very likely now.

It’s as Simple as Supply and Demand

The key here remains a balance between supply and demand. That also means a new balance between OPEC and non-OPEC production.

OPEC continues to control 40% of the world’s production. But that doesn’t buy what it used to. As I and several other analysts have noted, the traditional “call on OPEC,” the monthly draw on extractions by which the market used to be balanced, has quickly given way to the “call on shale.”

The U.S. ultimately determines the supply-demand equation. But remember: While the excess supply is now American, the demand is still determined by regions elsewhere in the world.

Of course, oil prices will still have much to say about the overall strength of the energy sector. But it’s not nearly as important as it was just six months ago. There are different energy expectations now in play that will determine where we invest.

In the current pricing spread, oversold oil and natural gas stocks offer some nice upside. In fact, by the second quarter of this year, I expect WTI to trade between $60 and $65 a barrel, and I expect Brent to see a range between $68 and $72 a barrel. By the end of this year, WTI could trade in the low $80 range.

Yet, as I told Energy Advantage subscribers earlier today, this will only happen if certain factors fall into place.

The most important is lower production in the face of continuing supply side surpluses. This will depend on the ability of U.S. operating companies to limit new projects of a certain type.

Not all new production will be discouraged. The extension of vertical, shallow pattern drilling emphasizing known basins and low-cost operations will actually be encouraged in this kind of climate. The reductions are going to come from the larger, deeper, horizontal/fractured, and much more expensive projects.

But this rebalancing will take some time and we will continue to see excess production until it kicks in.

Of course, several pundits continue to insist that declining rig counts aren’t an indication of a cut in production, since nearly the same volumes continue to be extracted from existing projects.

There is some truth to this. Falling rig counts simply point toward a readjustment of capital expenditures, but say nothing directly about the wells already finished.

After all, since 80% of the costs of these project is front-loaded, it makes sense to continue production at existing wells.

However, what this analysis misses is the declining production curve at these wells. All wells reach maximum production rather quickly. It then becomes a consideration of what secondary recovery techniques (water flooding, natural gas reinjection, chemical additives) are added to reduce the rate of decline.

When shale and tight oil/gas production is considered, that decline curve happens even faster. The majority of the extraction from these wells takes place over the first 18 months of operations.

This is the important point to remember. Given the age of currently producing wells, the aggregate declines won’t begin to show up until this summer. The market understands this and is already building it into futures contract pricing.

Where We Go From Here

Now that doesn’t mean there will be a race in the other direction. But it does mean the supply side excess will begin to level off. Given that global demand is moving up again, the prospect emerges for a better pricing picture.

But there is not going to be a “rising tide that lifts all boats” in this scenario.

The location of the drilling, increasing efficiency, the ability to expand known reservoir development with step-out wells, access to existing infrastructure, and direct tie-ins to end users (read: refineries) will be important.

Then there are the financial pressures. Some companies will require either mergers or straight acquisition to continue operations. There will be more consolidation, and the sector promises to look different (and leaner) in only a few months.

In addition, we will also see a restructuring of assets throughout the upstream (production) to midstream (transport and soon export) to downstream (refining and distribution) process.

All of these will hand us some very nice investment opportunities.

But again, this story is much bigger than oil. And in the next issue, I’ll discuss the range of opportunities outside the world of crude.

Source :http://oilandenergyinvestor.com/2015/02/oil-prices-climb-heres-play-rebound-energy/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning 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