Register

Peak Oil is You


Donate Bitcoins ;-) or Paypal :-)


Page added on December 29, 2014

Bookmark and Share

Why Low Oil Prices Are Not Sustainable

Why Low Oil Prices Are Not Sustainable thumbnail

Summary

  • There have not been any considerable fundamental changes in the oil market from June to December that justify the big drop in oil prices.
  • OPEC surplus of crude oil production capacity has changed very little between June and December.
  • Now is an excellent opportunity to make a long-term investment in good energy stocks at a relatively cheap price.

Oil prices have fallen sharply during the last six months. WTI crude oil’s last price of $54.73 per barrel is a 45.9% drop from its peak of $101.18 on June 25, while Brent crude oil has declined 46.6% from its peak price of $112.12 per barrel.

WTI crude oil February 2015 leading contract

(click to enlarge)

Chart: TradeStation Group, Inc.

According to the U.S. Department of Energy’s recent analysis release on December 18, the principal reasons for the sharp fall in crude oil prices are as follows: lowered expectations for global economic growth, reduced oil demand, and strong production growth. Furthermore, the Organization of the Petroleum Exporting Countries (OPEC) announced after its November meeting that it would maintain a production level of 30 million barrels per day (bbl/d).

However, if we compare the market conditions for December 2014 to those of June 2014, when oil recorded top prices, we can see that there was no significant change, as shown in the table below.

(click to enlarge)

Data: EIA June and December reports

The table clearly shows that there have not been any significant differences between global production and consumption from June to December that justifies such a big drop in oil price. Moreover, OPEC surplus of crude oil production capacity has changed very little. In addition, U.S. commercial inventory has decreased from June, and OECD commercial inventory has risen by only 3%.

I do not see any considerable fundamental changes in the oil market from June to December; global economic growth has not deteriorated, and global oil consumption has even increased since June. As such, in my opinion, other factors such as psychological, political and speculative have been the primary influence on the fall of oil price. Therefore, I believe that the current low oil prices cannot be sustainable over a long period of time.

Energy Companies

Energy stocks have fallen sharply during the last few months as a result of the crash in crude oil price. Since, in my view, the current low oil prices cannot be sustained over a long period of time, I believe that now there are many long-term investment opportunities among energy stocks. The table below shows the top 30 S&P 500 energy stocks according to their TTM operating margin.

(click to enlarge)

Ensco (NYSE:ESV), the offshore contractor of drilling services, has suffered a 45.1% drop in its share price during the last 26 weeks. The company has had a TTM operating margin of 38.3%, and its annual dividend yield is very high at 9.84%. In my opinion, ESV’s stock is quite a bargain right now, see my article about ESV.

ConocoPhillips (NYSE:COP), the world’s largest independent exploration and production company based on proved reserves and production of liquids and natural gas, is down 18.5% in the last 26 weeks. COP’s stock is also very attractive; its TTM Enterprise Value/EBITDA ratio is extremely low at 4.31, one of the lowest among all S&P stocks, see my article about COP.

Schlumberger (NYSE:SLB), the world’s leading supplier of technology and services to oil and gas exploration and production industries, has fallen 26.1% during the last 26 weeks. Schlumberger has a very low PEG ratio of 0.93, and, in my opinion, its stock is very attractive right now, see my article about SLB.

An investor, who shares my view that the current low oil prices cannot be sustainable over a long period of time, can also buy an ETF like Energy Select Sector SPDR ETF (NYSEARCA:XLE). The ETF’s top holdings are Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Schlumberger, Kinder Morgan (NYSE:KMI) and ConocoPhillips. XLE is down 20.9% in the last 26 weeks.

(click to enlarge)

Conclusion

Since there have not been any considerable fundamental changes in the oil market from June to December, I believe the current low oil prices cannot be sustained over a long period of time. Therefore, in my opinion, now is an excellent opportunity to make a long-term investment in good energy stocks at a relatively cheap price.

seeking alpha



71 Comments on "Why Low Oil Prices Are Not Sustainable"

  1. Plantagenet on Tue, 30th Dec 2014 4:38 pm 

    Here’s something for you to consider, NorDent. Why would an oil trader store oil on a tanker in the first place?

    Answer: He thinks the price of oil will go up soon, so he is waiting to sell.

    Now think about that for a second. Why isn’t that happening now?

    Its actually the absence of those tankers waiting offshore filled with oil that is so interesting here, because if the price of oil is headed LOWER, then there is no point in storing it. If the price is headed lower then oil traders are going to sell sell sell into the market, thereby driving the price down even more.

    Which is just what we are seeing in the oil market. The price of oil has been in free fall.

    Cheers!

  2. Northwest Resident on Tue, 30th Dec 2014 5:10 pm 

    Most of us on this forum are a lot smarter than average. There are notable exceptions, obviously. This little conversation has been a very good demonstration of just why the human race is in desperate need of a little Darwinian Law interaction of the kick-ass kind. So, I smile, I wait, I prepare, and I ask dumb questions — dumb questions that nobody can answer because there IS no answer — because I AM a hoot! ๐Ÿ™‚

  3. Dredd on Tue, 30th Dec 2014 5:19 pm 

    The oil slut (MOMCOM – A Mean Welfare Queen).

    I think you know what a glut is (Jabber The Whut?).

  4. clifman on Tue, 30th Dec 2014 6:06 pm 

    Still wondering where it is in the table that Plantagenet sees that’supply exceeds demand by about 2 mbd’. I see production and consumption even at 92.2 mbd. Where’s the excess? Where’s the glut? Anybody? Bueller?

  5. rockman on Tue, 30th Dec 2014 6:19 pm 

    Plant – “Clearly we donโ€™t have an oil shortage now”. By your definition of course we have a shortage of oil…a shortage of $35/bbl oil. In fact, there’s no amount of quality crude in the market place at that price. Just as we have a glut oil which, as you pointed out, forced the price down to $55/bbl and thus balancing demand. But I guess that also means we had a shortage of $60/bbl oil when it was selling for $90+/bbl.

    So if I follow your logic today we have a glut of $90/bbl oil, a shortage of $35/bbl oil and just the right amount of $55/bbl oil.

    I get it now: we’ve hit the “Goldilocks Oil Zone”…the price and supply of oil is “just right”. Maybe we should start a new web site: glz.com. Now all we can do is hope Papa Bear does arrive and f*cks everything up. LOL.

  6. Harquebus on Tue, 30th Dec 2014 6:20 pm 

    Crude oil is basically being purchased on credit. How much more credit can energy intensive economies obtain. When the credit card stops working, everything stops. Until that day, suck it up as hard and as fast as you can.

  7. Makati1 on Tue, 30th Dec 2014 6:37 pm 

    Question 1: If I have 8 million barrels of oil per day to sell and I decide to sell it for 20% less than my competitors, what happens to the over-all price of oil?

    Question 2: If my competition has to sell their oil for much more than I can sell my oil for, what happens to my competition over the long run?

    Question 3: Am I gaining or losing if I spend my Charmin UST reserves to destroy my competition before they destroy me?

    You fill in the names. Just askin’.

  8. rockman on Tue, 30th Dec 2014 6:38 pm 

    Opps…goz.com.

  9. MSN Fanboy on Tue, 30th Dec 2014 8:16 pm 

    There is no glut stored anywhere NR, hmm.

    I think our definition of glut is slightly different.

    I mean by glut that the price is down due to less demand through a decaying economy.

    Not a physical glut, as in we have x more oil stored up under the mattress lol

    by your definition however I can see what you mean.

  10. MSN Fanboy on Tue, 30th Dec 2014 8:18 pm 

    So… my definition of glut turned out to be wrong according to my dictionary.

    As such I must change my answer: There is no glut.

  11. MSN Fanboy on Tue, 30th Dec 2014 8:28 pm 

    โ€”-you simply need to have a supply overhang large enough to drive the price lower in the world markets.

    But that’s the point Plant: WHERE IS THE PHYSICAL? I want to know. If there is so much the world economy should be starting to boom.

    ITS LIKE THE GOLD MARKET, TRADING PAPER CONTRACTS OVER THE PHYSICAL IS A DISTORTION OF REALITY.

    NOTHING FUNDAMENTAL HAS CHANGED IN OIL PRODUCTION ASIDE FROM THE PRICE.

    The psychological aspect has changed, and it is argued many times the market trading paper contracts trades through subjective psychology, not reason.

    No reasonable man would declare there is an oil glut with no evidence.

    I understand what you are saying, econ 101 and all but there are major flaws in this theory of yours, as rockman pointed out.

    ANYHOW, AT LEAST SHORTONOIL MUST BE HAPPY lol

  12. GregT on Tue, 30th Dec 2014 9:02 pm 

    With Plant’s logic, if we all as a group were hungry, and we were sitting around in a circle with a stack of Pizzas in the middle that none of us could afford to buy, even as we starved to death, we would be in a food glut.

  13. Plantagenet on Tue, 30th Dec 2014 11:29 pm 

    @GregT: Your idea to sit around in a circle with a stack of pizzas in the middle and starve to death is unusually bizarre, even for you.

    I suggest you reach over and eat some pizza instead of starving to death.

    There—was that so hard?

  14. Plantagenet on Tue, 30th Dec 2014 11:33 pm 

    @MSN:

    The evidence that there is an oil glut is the plunge in oil prices.

    Consider how markets work—when supply exceeds demand the price goes down—when demand exceeds supply the price goes up. If there is a large oversupply of a commodity (i.e. a glut) then the price drops dramatically.

    Cheers!

  15. Plantagenet on Tue, 30th Dec 2014 11:36 pm 

    @Rockman

    Roger that on Papa Bear arriving and F***ing everything up.

    Looks like Papa Bear is ticked off that Goldilocks thinks there is a glut of porridge.

  16. Northwest Resident on Wed, 31st Dec 2014 12:25 am 

    It’s a special kind of dumb we’re witnessing here. What a performance!

  17. 35Kas on Wed, 31st Dec 2014 2:39 am 

    There is no “glut”.

    Definition:
    “To flood (a market) with an excess of goods so that supply exceeds demand”.

    There was no flood of supply. There may have been a decrease in demand but what has obviously happened here was clearly delineated by Makati1:

    “Question 1: If I have 8 million barrels of oil per day to sell and I decide to sell it for 20% less than my competitors, what happens to the over-all price of oil? ”

    The Saudis are crashing the market by selling at a loss in dollars, which is OK for them because they have a large surplus of dollars that they can burn through.

    At the end of this market scheme, when they decide to stop subsidizing their low priced selling, a significant portion of producers that require higher prices to survive and cannot depend on nations to keep them up will be consolidated.

    There will be tens of thousands of energy related jobs lost, hundreds of companies will go broke, and the larger players that pick up the pieces will enjoy astronomical profits for their investment because even at U$90/bbl there was no sudden demand destruction so the prices will go back up eventually. Even more so if you take in all the suppliers that will have gone out of business.

    When the prices rebound to a more realistic price and continue up, the real market crash will come. Just you wait and see. Might take another 6 months but the Saudis are not the FED and they can’t create money out of thin air.

  18. 35Kas on Wed, 31st Dec 2014 2:47 am 

    Well, after doing some math, selling oil that should be costing U$95 for U$55 costs about U$40/bbl. At 8 million a day it comes at about US$10 Billion a month.

    Maybe they can run this for as long as it takes them to destroy their competition. They have nothing (but paper) to lose and everything to gain on the long run.

    Haha, we better enjoy these subsidized prices because I doubt we will ever see such low prices again after it goes back up.

  19. MSN Fanboy on Wed, 31st Dec 2014 4:23 am 

    Plant I understand what you’re trying to say lol

    Yet, let me put it this way, imagine copper prices halving in say a month, does this mean there is a glut of copper?
    Trick question lol, its a flawed theory as it fails to ask the condition of the buyer & the seller.

    You’re arguing a supply driven glut.

    However if prices of my copper half due to demand destruction as my peeps cant afford my copper, irrespective of my constant cost mining operations and volume produced is this really a glut?

    Its a Demand driven ‘glut’ (if that is the right word, I prefer demand driven starvation lol)

    Youre correct from a narrow minded point of view plant: JUST CONSIDER THE BIGGER PICTURE.

  20. rockman on Wed, 31st Dec 2014 10:09 am 

    Plant – “Looks like Papa Bear is ticked off that Goldilocks thinks there is a glut of porridge.” Oddly enough that fits: there was a “glut” of porridge: there was too much porridge that was too hot to handle. Just like there is now a “glut” of $95 oil that is too expensive to handle. Thus Goldilocks went for the porridge she could deal with just like the consumers are going for the $60/bbl oil they can deal

  21. DMyers on Wed, 31st Dec 2014 4:41 pm 

    No glut

Leave a Reply

Your email address will not be published. Required fields are marked *