Author Topic: Where is the bottom for crashing oil prices?  (Read 45321 times)

SnackDog

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Re: Where is the bottom for crashing oil prices?
« Reply #50 on: November 30, 2014, 02:10:16 AM »
Trying to predict commodity prices is a fool's errand, particularly one as politically intertwined as oil, which has roller coastered for a century.  It appears that the middle eastern component of OPEC, particularly Saudi Arabia and probably with some encouragement from the West, wants to squeeze economically Russia for Ukraine crimes.  This formula (economic squeeze) worked well in the Reagan years to break up the USSR.  Russia and Venezuela are absolutely dying at these prices because their economies are a mess (not because their oil is expensive to extract, although the heavy Venezuelan crude is more costly to produce).

All the shale oil suppression talk is nonsense because 1) shale oil operations have a wide range of costs from low to high and quite a bit will remain in operation even at lower prices, and 2) short term low prices will choke off some shale oil but it bounces back immediately when prices rise.  Shale oil production is strictly a drilling exercise (no facilities costs) and rigs are cheap land-based units with relatively short rental terms.  If economics are poor, one stops drilling.  As prices rise, the spigot can be turned right back on again pretty quickly.

The companies getting hurt by low prices are those with large, long-term capital projects (huge facilities investments like deepwater platforms or LNG) which were developed based on higher price assumptions.  Those same giant companies can weather a 3-5 year downturn, and if they are integrated, offset upstream profit reductions with refining windfalls.  If they are clever, those large companies will snap up any weakened shale oil producers on this dip and gain long-term control of more acreage.

Where are prices going? Well, they will certainly hit $60/bbl which feels to me like a reasonable floor.  The absolute floor is probably closer to $45/bbl but that would take something like an OPEC production increase.  How long will this last? I'm betting not more than a year as there is no sound economic reason for the crash (e.g. no global collapse in demand and no gush of supply).   This feels like the big dip of 1999.  Watch for some interesting mergers!

ScroogeMcDutch

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Re: Where is the bottom for crashing oil prices?
« Reply #51 on: November 30, 2014, 07:07:20 AM »
If I were to do the crystal ball thing I'd say that supply will remain high for a long time yet. The reason is two-fold:

1) Russia and Saudi Arabia want to keep the US out of fracking. At $70 a barrel it's barely profitable for the US energy companies to get in, despite the benefits on a national security front from being diversified/self-sufficient in terms of energy.

2) Many oil nations have enough wealth invested in their sovereign wealth funds that they could theoretically draw down 4% per year and their population would never have to work again and would have a higher standard living than anywhere else in the world. They've "won" essentially, and anything they make going forward is just cream (of course, these nations also tend to have high levels of corruption, but the point is they've nothing to lose by selling at a lower price).

Anyone else who'd like to play CNBC please be my guest.

Before I join you on CNBC, I just want to point out that point numer 2 is very dangerous to do, to extrapolate a mechanic that works on an individual level such as saving and drawing down 4%, will also work on a national/global scale. The individual withdrawing won't influence the system it is working within, whereas a nation does influence the system. If the oil countries stop producing wealth (oil, and other products & services) for the world and start drawing down, it changes the dynamic in the economic system hugely.

That said, I like your reasoning. The current oil countries can and will influence global politics (which is exactly why extrapolating won't work well) and will use their resources to shift political power in their favor when they can. Russia is being hammered hard by the economic consequences of their behavior in Ukraine. I would expect oil prices to continue to decline, which in turn will provide an economic boost.

Bob W

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Re: Where is the bottom for crashing oil prices?
« Reply #52 on: December 01, 2014, 08:38:17 AM »
If I were to do the crystal ball thing I'd say that supply will remain high for a long time yet. The reason is two-fold:

1) Russia and Saudi Arabia want to keep the US out of fracking. At $70 a barrel it's barely profitable for the US energy companies to get in, despite the benefits on a national security front from being diversified/self-sufficient in terms of energy.

2) Many oil nations have enough wealth invested in their sovereign wealth funds that they could theoretically draw down 4% per year and their population would never have to work again and would have a higher standard living than anywhere else in the world. They've "won" essentially, and anything they make going forward is just cream (of course, these nations also tend to have high levels of corruption, but the point is they've nothing to lose by selling at a lower price).

Anyone else who'd like to play CNBC please be my guest.

Before I join you on CNBC, I just want to point out that point numer 2 is very dangerous to do, to extrapolate a mechanic that works on an individual level such as saving and drawing down 4%, will also work on a national/global scale. The individual withdrawing won't influence the system it is working within, whereas a nation does influence the system. If the oil countries stop producing wealth (oil, and other products & services) for the world and start drawing down, it changes the dynamic in the economic system hugely.

That said, I like your reasoning. The current oil countries can and will influence global politics (which is exactly why extrapolating won't work well) and will use their resources to shift political power in their favor when they can. Russia is being hammered hard by the economic consequences of their behavior in Ukraine. I would expect oil prices to continue to decline, which in turn will provide an economic boost.

Sovereign wealth funds?   You mean there are countries that have actually invested their money instead of going into debt?   That is crazy shit!  lol

By the way,  bought gas at $2.35 this morning in Missouri.  I assume the reduction in barrel pricing hasn't made it to the pump yet, so I look forward to a xmas day price of $2.10. 

Brando

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Re: Where is the bottom for crashing oil prices?
« Reply #53 on: December 10, 2014, 10:10:17 AM »
It seems to me people have the same idea about oil that they had about real estate, it can't go down, its a commodity. I must buy it. Yeah right. I wouldn't even think about trading oil unless it hit $50, then it would be a short term counter trend bounce using derivatives to keep my risk very small. To answer your question, the bottom in oil prices is when there are more buyers than sellers ;-)
« Last Edit: December 10, 2014, 12:52:47 PM by Brando »

Bob W

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Re: Where is the bottom for crashing oil prices?
« Reply #54 on: December 10, 2014, 01:19:58 PM »
Saw where gas was selling for $1.99 in Oklahoma now.   Still heading down I believe. 


DrF

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Re: Where is the bottom for crashing oil prices?
« Reply #55 on: December 11, 2014, 02:33:06 PM »
So...upon further investigation, I have bought an inverse position in an oil ETF. For the foreseeable future, it appears as though oil will tumble. How low will it go? Who can say. I'm doing a trailing stop at 20%. If the oil environment shows signs of reversal, then I will buy a long oil ETF. As of now, I am up ~4%. I'll update bi-weekly with the overall change.

dungoofed

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Re: Where is the bottom for crashing oil prices?
« Reply #56 on: December 11, 2014, 05:46:19 PM »
Riyadh no longer hides the fact that it is targeting the American shale industry, Bank of America Merrill Lynch said in a report at the end of last month. It aims to slam the brakes on U.S. shale production by leaving crude prices low, the investment bank explained, predicting that the Saudis will wait until prices tumble below the break-even point for shale development.

http://asia.nikkei.com/print/article/64715

Just gonna put that there.

Fallenour

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Re: Where is the bottom for crashing oil prices?
« Reply #57 on: December 11, 2014, 06:13:37 PM »
Sorry to break everyone's hearts here, but most of you are very wrong indeed.

The money making points for the major oil monsters are as follows;

US: shale industry mostly, 80/barrel minimum
Russia: 4/barrel minimum (thats right, FOUR)
Saudi Arabia: 10/barrel minimum (would be much lower with the royal family)
Venezuela: Needs roughly 110/barrel (due to excessively bad political economics, and no other real economy, and excessively expensive social programs)

So roughly, even with oil at all time lows, costs arent really russia and saudi arabia.

The ruble has suffered currency lows due to propaganda, and a decrease in its STANDARD income levels (which decreased roughly 15% due to oil). mostly though, the issues with the ruble come from issues with the EU, which russia will hve fixed by midterm according to russian sources and trade partners.

Additionally, due to syria selling oil at 30/barrel, it is hurting market prices, driving them further down.

dungoofed

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Re: Where is the bottom for crashing oil prices?
« Reply #58 on: December 11, 2014, 06:48:38 PM »
So where's the floor?

Stasher

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Re: Where is the bottom for crashing oil prices?
« Reply #59 on: December 12, 2014, 12:00:25 PM »
Fallenfour....where do you get your stats on shale oil? Do you reference averages on the US as a whole or are you speaking to a specific region. The ND region can weather much lower prices than $80 for Bakken. Do you work in the oil industry?
The key thing on oil prices is to speak towards production costs or exploration/drilling costs.

Dumb it down into MMM terms, I can easily afford to make less money and happily live my life maintaining my house. But if funds are tight I need to save up my stash to put on a brand new roof. Now if I had some extra side hustles and was still working then my FU money would be nice and could do what I want.

SO think of that how the oil industry will roll along, we will watch our pennies and make sure things are looked after. Just no FU money to drill new wells and do massive expansions. Consistent low cost operation is the tune of the day.

DrF

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Re: Where is the bottom for crashing oil prices?
« Reply #60 on: December 12, 2014, 01:46:13 PM »
Sorry to break everyone's hearts here, but most of you are very wrong indeed.

The money making points for the major oil monsters are as follows;

US: shale industry mostly, 80/barrel minimum
Russia: 4/barrel minimum (thats right, FOUR)
Saudi Arabia: 10/barrel minimum (would be much lower with the royal family)
Venezuela: Needs roughly 110/barrel (due to excessively bad political economics, and no other real economy, and excessively expensive social programs)

So roughly, even with oil at all time lows, costs arent really russia and saudi arabia.

The ruble has suffered currency lows due to propaganda, and a decrease in its STANDARD income levels (which decreased roughly 15% due to oil). mostly though, the issues with the ruble come from issues with the EU, which russia will hve fixed by midterm according to russian sources and trade partners.

Additionally, due to syria selling oil at 30/barrel, it is hurting market prices, driving them further down.

Russia and Saudi Arabia may be able to pump oil if it reaches that low, but from what I understand the governments have already spent the oil revenue at a per barrel dollar amount much higher than that.

Cwadda

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Re: Where is the bottom for crashing oil prices?
« Reply #61 on: December 12, 2014, 02:02:07 PM »
Currently looking to max my Roth in 3 weeks and putting around $3000 into VDE the Vanguard ETF and the other $2500 in VTSAX.

This means my portfolio would be 17% VDE and the rest VTSAX. Does this seem like a viable plan?

dungoofed

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Re: Where is the bottom for crashing oil prices?
« Reply #62 on: December 12, 2014, 05:15:31 PM »
Currently looking to max my Roth in 3 weeks and putting around $3000 into VDE the Vanguard ETF and the other $2500 in VTSAX.

This means my portfolio would be 17% VDE and the rest VTSAX. Does this seem like a viable plan?

17% seems like a lot for "play money."

Keep buying the entire market until your portfolio is about 100K, then "reward" yourself with a $5000 speculative investment.

Leisured

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Re: Where is the bottom for crashing oil prices?
« Reply #63 on: December 13, 2014, 03:53:33 AM »
Interesting idea, CowboyandIndian and Tuxedo, that the falling oil price is meant by the Gulf states and USA to squeeze Russia, Iran and Venezuela. Dungoofed suggested that many Gulf states can live off their sovereign wealth funds for a while, and there is a list of sovereign wealth funds in Wikipedia. UAE, Saudi Arabia, Kuwait and Qatar could live off their fund earnings, Saudi with some difficulty because of their relatively high population. I had heard of OPEC pushing down the price of oil in the past to discourage oil exploration, but I had not thought of pushing down the price of oil as a means of regime change.

Islamic State has seized oil production facilities, so a fall in the price of oil will hurt them too.How effective would Islamic State be if oil went to $20 a barrel? It would be easier to bomb the oil production facilities.

Bob W

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Re: Where is the bottom for crashing oil prices?
« Reply #64 on: December 13, 2014, 01:10:16 PM »
Noted that Sweet crude has gone from 104 to 59 since July 4.   And 65 to 59 since Monday. 

That appears to be a "crash" by definition.  My take is that it is the new normal.   Lower prices means that the Saudis and Russians need to pump more thus lowering prices more.   Some of the higher priced folks will be screwed but I don't think they will stop pumping either.   You don't just stop your business because your losing money.  You might eventually but that is very long term.

So yeah,  the question is -- "Where is the Bottom?"  The answer is who the hell knows,  but I bet that $40 per barrel won't be the bottom.   It was around that in 08ish.  There is a lot more supply than 08 and less demand worldwide.   More supply coming on daily.   

On a related note -- Volkswagon has a car that gets 300 mpg at decent acceleration, safety and speeds.  It won't be coming anywhere but it is far more than a concept car.  It is actually being produced.  That holds promise for the future as VW already sells some pretty high efficiency cars in the US. 

That and the electric batteries will give cars 200 mile ranges in just 1.5 years.  The battery storage capability has essentially just doubled or better this year.   

anisotropy

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Re: Where is the bottom for crashing oil prices?
« Reply #65 on: December 13, 2014, 05:08:33 PM »
Bottom?

$49.09 +/- $2.44 around Jan. 25th +/- 12 days. ;)

last I heard the cost per barrel for Aramco is about $18 dollars. Personal opinion is that the price of oil is currently lower than it "should" be.

/fortunetellingmodeoff

DrF

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Re: Where is the bottom for crashing oil prices?
« Reply #66 on: December 19, 2014, 11:10:22 AM »
Historical gas pump pricing over the last 5 years. Pretty cyclical. Is there really enough overabundance in supply to prevent prices from reversing?


RichMoose

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Re: Where is the bottom for crashing oil prices?
« Reply #67 on: December 19, 2014, 11:21:53 AM »
Historical gas pump pricing over the last 5 years. Pretty cyclical. Is there really enough overabundance in supply to prevent prices from reversing?

That's the million dollar question!

Bob W

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Re: Where is the bottom for crashing oil prices?
« Reply #68 on: December 19, 2014, 11:24:22 AM »
Thanks for that chart.   It appears they need to add a whole other section of sub $2 levels. 

That and the past is not necessarily indicative of the future.   The present is more closely aligned with the future,  so if I guess $2 a gallon by June 1st I'm likely closer than looking at something from 4 years ago.

 "The past isn't over. It isn't even past."  William Faulkner, courtesy wikiqoutes 

DrF

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Re: Where is the bottom for crashing oil prices?
« Reply #69 on: December 19, 2014, 11:41:57 AM »
That chart is specific to Chicago.

Go to gasbuddy.com and you can enter your own city/multiple cities. Click on gas price charts, enter your city.
« Last Edit: December 19, 2014, 11:45:31 AM by DrFunk »

Fallenour

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Re: Where is the bottom for crashing oil prices?
« Reply #70 on: December 19, 2014, 12:42:11 PM »
If I were to do the crystal ball thing I'd say that supply will remain high for a long time yet. The reason is two-fold:

1) Russia and Saudi Arabia want to keep the US out of fracking. At $70 a barrel it's barely profitable for the US energy companies to get in, despite the benefits on a national security front from being diversified/self-sufficient in terms of energy.

2) Many oil nations have enough wealth invested in their sovereign wealth funds that they could theoretically draw down 4% per year and their population would never have to work again and would have a higher standard living than anywhere else in the world. They've "won" essentially, and anything they make going forward is just cream (of course, these nations also tend to have high levels of corruption, but the point is they've nothing to lose by selling at a lower price).

Anyone else who'd like to play CNBC please be my guest.

More specifically, Iran, Iraq, and saudi arabia.

Saudi arabia makes oil at 4-6/barrel USD, and russia t roughly 10-15 depending on the process.

Oil wont go much lower than 50/barrel, as the US doesnt generate healthy profit at 80, and starts to eat losses at 70/barrel from shale.

Canada is in the same boat as the US, and needs 80/barrel with their Tar sands.

venezuela constantly operating in severe negatives need oil at some ludacris 200/barrel, so they are definitely out LOL. But anywho, thats the bigger picture on oil.

The only piece not listed is syria, who due to ISIS, is losing oil on the blackmarket at 30/barrel. Not enough to sustain anyone, but its cheap, and makes them a few million.

astvilla

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Re: Where is the bottom for crashing oil prices?
« Reply #71 on: December 19, 2014, 01:39:29 PM »
couldn't part of the drop in oil prices also be from drop in domestic demand? cars are now more fuel efficient than before, dropping the number of times we refill at the station.

personally i'd still get a fuel efficient car anyways as i support a cleaner environment since i'm young and will suffer the climate change wrought by older and current generation. hopefully this forces tesla and other cleaner car companies to lower prices to stay competitive? maybe that 3 wheel car mentioned on MMM will drop their price

Indexer

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Re: Where is the bottom for crashing oil prices?
« Reply #72 on: December 20, 2014, 10:17:35 AM »
I read a great article on this recently. 

Basically the underlying problem in oil is that the US can just about make enough oil to take care of itself.... now add in Canada, and 'North America' can take care of itself.  This has taken the biggest buyer of oil out of the international markets in a big way.  So now OPEC, and all the other oil rich countries are fighting over just China and Europe.  Europe isn't doing so hot, and it looks like China is slowing down.  So they are all fighting over a smaller pie, and the pie isn't growing as fast as they thought it was.  OPEC can't 'stop' producing oil, its their only form of income.  Russia is in a similar boat.  If any major supplier slows production they risk losing market share with China/Europe.

As for the price different countries can produce oil at... yes Saudi can produce very cheap, but this leaves something out...
Saudi uses oil to fund their country.  They need oil at about $100/barrel to balance their budget.  Russia is also around $100/barrell. 

And its not about choking the US.  The shale drillers in the US aren't a couple of tiny companies that could go under and never come back.  If the price drops too much "Exxon" will drill less holes, yes.... but then once the price comes back they will drill again.  Supply = Demand.  In this new world supply just happens to match demand at a much lower price than before.

I don't think OPEC has a lot of control on price right now.  If they raise prices they lose market share in the only markets they have.  Oil probably isn't coming back up in price until demand matches supply at a higher price.....  the world economy outside of the US&Canada actually has to grow.

Source:  http://www.wsj.com/articles/crude-oil-prices-continue-to-fall-on-tepid-demand-ample-supply-1418209538?KEYWORDS=oil

On the topic of buying oil futures.  The closest I would even consider coming to doing that would be to buy an energy company sector stock index fund, but I would go in with the expectation that it would be a long hold time before seeing profits.  I wouldn't buy oil right now as a short term bet.  That trade might takes years to pay off.

dragoncar

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Re: Where is the bottom for crashing oil prices?
« Reply #73 on: December 22, 2014, 12:01:32 AM »
If any major supplier slows production they risk losing market share with China/Europe.


I've seen this comment a few times.  My question is: why do they care if they lose market share, above and beyond the lower revenues from reduced production?  It's not like Apple losing market share to Microsoft, since oil is theoretically a fungible good, right?

James

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Re: Where is the bottom for crashing oil prices?
« Reply #74 on: December 22, 2014, 07:54:14 AM »
1) Russia and Saudi Arabia want to keep the US out of fracking. At $70 a barrel it's barely profitable for the US energy companies to get in, despite the benefits on a national security front from being diversified/self-sufficient in terms of energy.


I believe your number (and others posted above) is wrong in two ways. First, US energy companies are already in. Technology, equipment and and a host of other costs have been spent and can't be considered going forward. The only cost per barrel that counts going forward is actual cost going forward, sunk costs don't count.So the cost per barrel going forward is going to be a whole lot less than the cost per barrel including the up front costs. No one knows that number, but it is certainly less than $70, my thought is around $40 on average, but it varies for every well.


Second, even considering up front costs, the $70 is too high. It is either an old number or a high number, there are changes in technology, equipment and scale that have brought the profitable number per barrel down in the past couple years, even considering up front costs. So US oil production is profitable at much lower number than anyone thought in the past and I don't see production going down any time soon. Low prices are here to stay for the next few years at least, but that is just my best guess.

DrF

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Re: Where is the bottom for crashing oil prices?
« Reply #75 on: December 23, 2014, 08:32:11 AM »

LordSquidworth

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Re: Where is the bottom for crashing oil prices?
« Reply #76 on: December 23, 2014, 08:51:08 AM »
If I were to do the crystal ball thing I'd say that supply will remain high for a long time yet. The reason is two-fold:

1) Russia and Saudi Arabia want to keep the US out of fracking. At $70 a barrel it's barely profitable for the US energy companies to get in, despite the benefits on a national security front from being diversified/self-sufficient in terms of energy.

2) Many oil nations have enough wealth invested in their sovereign wealth funds that they could theoretically draw down 4% per year and their population would never have to work again and would have a higher standard living than anywhere else in the world. They've "won" essentially, and anything they make going forward is just cream (of course, these nations also tend to have high levels of corruption, but the point is they've nothing to lose by selling at a lower price).

Anyone else who'd like to play CNBC please be my guest.

More specifically, Iran, Iraq, and saudi arabia.

Saudi arabia makes oil at 4-6/barrel USD, and russia t roughly 10-15 depending on the process.

Oil wont go much lower than 50/barrel, as the US doesnt generate healthy profit at 80, and starts to eat losses at 70/barrel from shale.

Canada is in the same boat as the US, and needs 80/barrel with their Tar sands.

venezuela constantly operating in severe negatives need oil at some ludacris 200/barrel, so they are definitely out LOL. But anywho, thats the bigger picture on oil.

The only piece not listed is syria, who due to ISIS, is losing oil on the blackmarket at 30/barrel. Not enough to sustain anyone, but its cheap, and makes them a few million.

You might be quoting production costs, but that doesn't set the minimum per barrel these countries need.

Many have their social programs are built around their oil production.

Losing billions upon billions of dollars in revenue in a rapid amount of time will sting these countries.

ncornilsen

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Re: Where is the bottom for crashing oil prices?
« Reply #77 on: December 23, 2014, 04:17:31 PM »
So if Saudi Arabia et al begin to have budget problems due to low oil prices, what's that gonna do to the US government when they quit buying bonds and such at the rate they currently do, or god forbid, start selling them to keep their heads above water...

Interest rates start to increase, siphoning off demand from stocks and making it pay to keep money in the bank instead of the S&P500?

My crystal ball is a'swirlin


dragoncar

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Re: Where is the bottom for crashing oil prices?
« Reply #78 on: December 23, 2014, 04:58:59 PM »
So if Saudi Arabia et al begin to have budget problems due to low oil prices, what's that gonna do to the US government when they quit buying bonds and such at the rate they currently do, or god forbid, start selling them to keep their heads above water...

Interest rates start to increase, siphoning off demand from stocks and making it pay to keep money in the bank instead of the S&P500?

My crystal ball is a'swirlin

Oil exporters have about 1.5% of treasury debt, so that doesn't sound so catastrophic to me

LordSquidworth

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Re: Where is the bottom for crashing oil prices?
« Reply #79 on: December 23, 2014, 06:56:42 PM »
American banks will likely buy what little they have to sell.

Indexer

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Re: Where is the bottom for crashing oil prices?
« Reply #80 on: December 23, 2014, 07:46:33 PM »
If any major supplier slows production they risk losing market share with China/Europe.


I've seen this comment a few times.  My question is: why do they care if they lose market share, above and beyond the lower revenues from reduced production?  It's not like Apple losing market share to Microsoft, since oil is theoretically a fungible good, right?

On a gas station VS gas station basis this applies.  You can easily drive across the street.  On a global scale it is a different matter.  Deals have to be made, pipelines are built, trade routes are protected.   Economies of scale come into play helping smaller players control prices better as they get bigger.  OPEC & Russia don't want China & Europe to start doing more trade with smaller players. 

Why do you think the US gets most of its imported oil from Canada?  Its cheaper to ship a short distance plus its politically & economically beneficial to import from a close ally that we have close economic ties to(Canada) rather than shipping a long distance from countries that are untrustworthy at best(and sponsors of terrorism at worst).

dragoncar

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Re: Where is the bottom for crashing oil prices?
« Reply #81 on: December 23, 2014, 09:02:46 PM »
If any major supplier slows production they risk losing market share with China/Europe.


I've seen this comment a few times.  My question is: why do they care if they lose market share, above and beyond the lower revenues from reduced production?  It's not like Apple losing market share to Microsoft, since oil is theoretically a fungible good, right?

On a gas station VS gas station basis this applies.  You can easily drive across the street.  On a global scale it is a different matter.  Deals have to be made, pipelines are built, trade routes are protected.   Economies of scale come into play helping smaller players control prices better as they get bigger.  OPEC & Russia don't want China & Europe to start doing more trade with smaller players. 

Why do you think the US gets most of its imported oil from Canada?  Its cheaper to ship a short distance plus its politically & economically beneficial to import from a close ally that we have close economic ties to(Canada) rather than shipping a long distance from countries that are untrustworthy at best(and sponsors of terrorism at worst).

Interesting. this guy would seem to disagree

Indexer

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Re: Where is the bottom for crashing oil prices?
« Reply #82 on: December 24, 2014, 07:15:32 PM »
If any major supplier slows production they risk losing market share with China/Europe.


I've seen this comment a few times.  My question is: why do they care if they lose market share, above and beyond the lower revenues from reduced production?  It's not like Apple losing market share to Microsoft, since oil is theoretically a fungible good, right?

On a gas station VS gas station basis this applies.  You can easily drive across the street.  On a global scale it is a different matter.  Deals have to be made, pipelines are built, trade routes are protected.   Economies of scale come into play helping smaller players control prices better as they get bigger.  OPEC & Russia don't want China & Europe to start doing more trade with smaller players. 

Why do you think the US gets most of its imported oil from Canada?  Its cheaper to ship a short distance plus its politically & economically beneficial to import from a close ally that we have close economic ties to(Canada) rather than shipping a long distance from countries that are untrustworthy at best(and sponsors of terrorism at worst).

Interesting. this guy would seem to disagree

Really?  He NEVER once says in the entire article that oil costs the same everywhere.  He freely admits that oil is cheaper in some places rather than others and shipping costs play a role.  He argues shipping costs aren't a huge premium(tell that to people in Hawaii), and he argues that oil prices all around the world move in tandem.  Well obviously.  If there is extra oil in the US it will drive down prices everywhere else because of the extra oil on the markets not going to the US.  Thats exactly what I said in my first post on this topic.

He does argue that countries trying to control oil supply isn't important because its a big bath tub anyway... but the OPEC embargoes of the past prove that wrong.  On this issue I do disagree with him.  We should buy our oil from Canada because it encourages Canada to produce more oil specifically for our demand which prevents OPEC from ever screwing us with an embargo again.  Sure they could stop shipping oil to the entire world and castrate themselves, but as long as we get the majority of our oil from Canada they can only influence 'world' oil prices and they can't screw the US individually. 

Higher prices also encourages developing countries like China and India to go in and drill new wells.  As they do this OPEC loses market share, market share it will never get back, and this will drive prices down.  So yes, OPEC is worried about losing market share it will never get back, and that is another reason to keep prices low now.

In short SUPPLY and DEMAND are determining current prices, and there is actually not a whole lot OPEC can do about it.  They can try in the short term, but they will just hurt themselves in the long term.  So until demand rises prices should stay very low.
« Last Edit: December 24, 2014, 07:18:19 PM by Indexer »

dragoncar

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Re: Where is the bottom for crashing oil prices?
« Reply #83 on: December 26, 2014, 12:25:34 PM »
If any major supplier slows production they risk losing market share with China/Europe.


I've seen this comment a few times.  My question is: why do they care if they lose market share, above and beyond the lower revenues from reduced production?  It's not like Apple losing market share to Microsoft, since oil is theoretically a fungible good, right?

On a gas station VS gas station basis this applies.  You can easily drive across the street.  On a global scale it is a different matter.  Deals have to be made, pipelines are built, trade routes are protected.   Economies of scale come into play helping smaller players control prices better as they get bigger.  OPEC & Russia don't want China & Europe to start doing more trade with smaller players. 

Why do you think the US gets most of its imported oil from Canada?  Its cheaper to ship a short distance plus its politically & economically beneficial to import from a close ally that we have close economic ties to(Canada) rather than shipping a long distance from countries that are untrustworthy at best(and sponsors of terrorism at worst).

Interesting. this guy would seem to disagree

Really?  He NEVER once says in the entire article that oil costs the same everywhere.  He freely admits that oil is cheaper in some places rather than others and shipping costs play a role.  He argues shipping costs aren't a huge premium(tell that to people in Hawaii), and he argues that oil prices all around the world move in tandem.  Well obviously.  If there is extra oil in the US it will drive down prices everywhere else because of the extra oil on the markets not going to the US.  Thats exactly what I said in my first post on this topic.

He does argue that countries trying to control oil supply isn't important because its a big bath tub anyway... but the OPEC embargoes of the past prove that wrong.  On this issue I do disagree with him.  We should buy our oil from Canada because it encourages Canada to produce more oil specifically for our demand which prevents OPEC from ever screwing us with an embargo again.  Sure they could stop shipping oil to the entire world and castrate themselves, but as long as we get the majority of our oil from Canada they can only influence 'world' oil prices and they can't screw the US individually. 

Higher prices also encourages developing countries like China and India to go in and drill new wells.  As they do this OPEC loses market share, market share it will never get back, and this will drive prices down.  So yes, OPEC is worried about losing market share it will never get back, and that is another reason to keep prices low now.

In short SUPPLY and DEMAND are determining current prices, and there is actually not a whole lot OPEC can do about it.  They can try in the short term, but they will just hurt themselves in the long term.  So until demand rises prices should stay very low.

What.  So if you agree that "oil prices all around the world move in tandem" then you haven't explained why anyone cares about "market share."  If you have 5% market share, you can still get the same price as if you have 10% market share.

DarinC

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Re: Where is the bottom for crashing oil prices?
« Reply #84 on: December 26, 2014, 05:50:17 PM »
I believe your number (and others posted above) is wrong in two ways. First, US energy companies are already in. Technology, equipment and and a host of other costs have been spent and can't be considered going forward. The only cost per barrel that counts going forward is actual cost going forward, sunk costs don't count.So the cost per barrel going forward is going to be a whole lot less than the cost per barrel including the up front costs. No one knows that number, but it is certainly less than $70, my thought is around $40 on average, but it varies for every well.


Second, even considering up front costs, the $70 is too high. It is either an old number or a high number, there are changes in technology, equipment and scale that have brought the profitable number per barrel down in the past couple years, even considering up front costs. So US oil production is profitable at much lower number than anyone thought in the past and I don't see production going down any time soon. Low prices are here to stay for the next few years at least, but that is just my best guess.
It depends on the well. Since most of the increase has come from shale plays, capital costs do play a substantial part because many of these wells produce a lot initially, but drop down to next to nothing quickly.

In order to keep production up, new wells need to be drilled, which requires a lot of capital investment in drilling. Citigroup estimates that $50/bbl to stop shale oil growth, which is where we're pretty much at.

http://www.cnbc.com/id/102094881

I doubt prices will recover immediately, but my crystal ball says they'll recover sooner or later, probably in couple years or so. I remember seeing gas at less than a buck a gallon in the 90s and ~$1.50 in 2008, but neither of those stuck around for long. +/-$3/gallon is my guess for long run gas prices.

Indexer

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Re: Where is the bottom for crashing oil prices?
« Reply #85 on: December 26, 2014, 08:59:48 PM »
What.  So if you agree that "oil prices all around the world move in tandem" then you haven't explained why anyone cares about "market share."  If you have 5% market share, you can still get the same price as if you have 10% market share.

More market share is better.  I don't think that needs explaining.  Blackberry phones cost about the same as iPhones.  Apple is the most profitable company in the world... is Blackberry even still in business?  Market share matters.

If OPEC had kept oil prices a little lower in the past instead of high no one would have bothered fracking in the US, or refining the oil sands in Canada, or building fleets of electric cars.   They wouldn't have the problems they have now!  Keeping prices high cost them their biggest customer, the USA.  They can't afford to let the same thing happen with Europe and China.  By keeping prices low they keep new entrants out of the market. 

So OPEC has two choices.  One, they can cut supply to push up prices, but then the US will keep fracking new wells, Canada will keep refining the sands, every car company will push out new electric cars, and who knows what the next player will do.  OPEC will become as insignificant in oil as Blackberry in smart phones.  Two, they can keep the supply steady.  With no new demand prices tank.  Their revenues drop, BUT no new competition.  Once demand does return prices can stabilize and they get to keep their customers.

CarFIRE

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Re: Where is the bottom for crashing oil prices?
« Reply #86 on: December 26, 2014, 10:55:23 PM »
Commodity cycles are typically at leaast 7 years.  That is about where we are since they jumped in the first place.  It took a long time to get the capacity online in ND and Alberta.  Now the US can do 6M Barrels a day vs less than 1 million in 2007.  For reference Saudi does 9M barrels.  So if $65-80/barrel is the fully-loaded cost of shale or tar sands, what is the incremental cost i.e. keeping an established "well" running?  Secondly factor in that Russia and Venezuela need the money to meet their obligations.  Just because their budgets are based on $120 oil doesn't mean that they won't keep pumping.  They will pump more to generate more cash and drive the price lower.  The incremental cost to the shale supply is the key since they will likely be the first ones to actually stop.  I don't think we've seen the bottom or will for a while.

DrF

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Re: Where is the bottom for crashing oil prices?
« Reply #87 on: January 05, 2015, 01:22:27 PM »
Since I bought my inverse oil ETF I'm up ~12%.

Once this graph reverses I'll sell and buy a long oil etf. Graph is from gasbuddy.com

Bob W

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Re: Where is the bottom for crashing oil prices?
« Reply #88 on: January 05, 2015, 01:52:05 PM »
Since I bought my inverse oil ETF I'm up ~12%.

Once this graph reverses I'll sell and buy a long oil etf. Graph is from gasbuddy.com

You the man.  When will it reverse?

DrF

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Re: Where is the bottom for crashing oil prices?
« Reply #89 on: January 05, 2015, 01:56:32 PM »
I'll let you know.

I'm in on the way down for now.

marketnonsenses

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Re: Where is the bottom for crashing oil prices?
« Reply #90 on: January 05, 2015, 02:28:27 PM »
Im thinking about doing some math and figure out if I can hedge gas prices by buying USO now. Either I make money from the ETF going up and pay more in gas in the future, or ETF stays low and I dont pay more for gas. Imply gas is tied to oil prices.

dungoofed

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Re: Where is the bottom for crashing oil prices?
« Reply #91 on: January 05, 2015, 03:52:37 PM »
Alternatively you could buy XOM to the tune of "35 times the amount you spend on gas in a year" and have Exxon Mobil pay for your gas for the rest of your life.


cowstash

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Re: Where is the bottom for crashing oil prices?
« Reply #92 on: January 06, 2015, 04:10:10 AM »
Im thinking about doing some math and figure out if I can hedge gas prices by buying USO now. Either I make money from the ETF going up and pay more in gas in the future, or ETF stays low and I dont pay more for gas. Imply gas is tied to oil prices.

I'm wondering about this too. I've been buying a share or two of UCO here and there as it falls in price (This is why I like Robinhood for small experiments. It's small change, really, and even if it goes belly-up as an ETF, I'll be out a couple hundred dollars.) My bigger question is: if the oil market bounces back in a few years, will ETFs like UCO or USO by definition also rebound, or does it not work like that? If the futures for oil look lousy now, the price of these ETFs should be lousy now; when futures improve, the prices should in principle too, right?

Here's the UCO ETF summary:
Quote
The investment seeks to provide daily investment results (before fees and expenses) that correspond to twice the daily performance of the Dow Jones—UBS Crude Oil Sub-IndexSM. The fund invests primarily in any one of or combinations of Financial Instruments, including swap agreements, futures contracts, and options on futures contracts or forward contracts with respect to the applicable benchmark to the extent determined appropriate by the Sponsor. It invests other assets in cash or in cash equivalents and/or U.S. Treasury securities or other high credit quality short-term fixed-income or similar securities that serve as collateral for the financial instruments.

marketnonsenses

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Re: Where is the bottom for crashing oil prices?
« Reply #93 on: January 06, 2015, 06:20:06 AM »
Alternatively you could buy XOM to the tune of "35 times the amount you spend on gas in a year" and have Exxon Mobil pay for your gas for the rest of your life.

You lost me on this. Was this directed to my comment about Oil ETF?


Indexer

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Re: Where is the bottom for crashing oil prices?
« Reply #94 on: January 06, 2015, 06:32:10 AM »
Alternatively you could buy XOM to the tune of "35 times the amount you spend on gas in a year" and have Exxon Mobil pay for your gas for the rest of your life.

You lost me on this. Was this directed to my comment about Oil ETF?

The dividend is a little over 3%.  If you bought 33 times as much XOM as you spend on gas your dividends would exceed your gas spending so Exxon would be paying for your gas every year in dividends.

marketnonsenses

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Re: Where is the bottom for crashing oil prices?
« Reply #95 on: January 06, 2015, 07:01:52 AM »
Alternatively you could buy XOM to the tune of "35 times the amount you spend on gas in a year" and have Exxon Mobil pay for your gas for the rest of your life.

You lost me on this. Was this directed to my comment about Oil ETF?

The dividend is a little over 3%.  If you bought 33 times as much XOM as you spend on gas your dividends would exceed your gas spending so Exxon would be paying for your gas every year in dividends.

Oh, not really was I was talking about but ok.

RichMoose

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Re: Where is the bottom for crashing oil prices?
« Reply #96 on: January 06, 2015, 10:00:06 AM »
Im thinking about doing some math and figure out if I can hedge gas prices by buying USO now. Either I make money from the ETF going up and pay more in gas in the future, or ETF stays low and I dont pay more for gas. Imply gas is tied to oil prices.

In the past I've read in several places that because of their structure, commodity ETF's do a horrible job of accurately tracking the value of the commodity. This seems to happen because they don't hold the commodity itself, but instead they actively trade spot contracts and forward contracts using leverage. So really your return can be influenced more by the changes in spot and forward contracts, including the spreads between the two, than by the commodity itself. I personally know some people that experienced some financial pain this way playing gold ETF's.

As an alternative, why not invest in VDE or a similar ETF? Profitability of oil companies is generally tied to oil prices, oil product prices, and refining margins so when crude goes up, they go up, when crude goes down, they go down, but its a smoother ride. Right now it's paying a nice 2.5% dividend.

hodedofome

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Re: Where is the bottom for crashing oil prices?
« Reply #97 on: January 06, 2015, 10:07:07 AM »

DrF

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Re: Where is the bottom for crashing oil prices?
« Reply #98 on: January 06, 2015, 10:51:07 AM »
thanks for the link hodedofome.

Bob W

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Re: Where is the bottom for crashing oil prices?
« Reply #99 on: January 08, 2015, 12:54:45 PM »
Alternatively you could buy XOM to the tune of "35 times the amount you spend on gas in a year" and have Exxon Mobil pay for your gas for the rest of your life.

You lost me on this. Was this directed to my comment about Oil ETF?

The dividend is a little over 3%.  If you bought 33 times as much XOM as you spend on gas your dividends would exceed your gas spending so Exxon would be paying for your gas every year in dividends.

Love that thinking!  I think I'll wait until the trend end is evident before dumping into XOM.

Here is a quote from the OP when they started the thread on Nov 30. 

"Where are prices going? Well, they will certainly hit $60/bbl which feels to me like a reasonable floor.  The absolute floor is probably closer to $45/bbl but that would take something like an OPEC production increase.  How long will this last? I'm betting not more than a year as there is no sound economic reason for the crash (e.g. no global collapse in demand and no gush of supply)."

We have far surpassed the $60 reasonable floor and closing in on the $45.   Although, some may differ on if there is an over supply and collapse in demand.  From what I am hearing there is indeed both and it is much more than the Saudis' trying capture market share by messing with the US and Russia.