Is This The End Of The 'Shale Oil Bubble?' Or The Beginning?

Perhaps the biggest conundrum of the recent oil price decline is that it arrived as a complete surprise.

Just as recently as six months ago, the probability of the January 2015 WTI contract dropping from $101.64 per barrel (June 23, 2014 closing price) to below $60 per barrel currently was viewed as essentially negligible, as implied by option prices.

While explanations abound - ranging from conspiracy theories to "permanent oil glut" scenarios - there is hardly a consensus in the market with regard to where the price of oil is going from here and what are the longer-term implications for stock valuations and prices.

Are we experiencing a paradigm shift in the global oil business (akin to what has occurred in North American natural gas) or is it just a short-lived aberration that will soon correct itself?

If the latter is true, when will investors feel a relief?

A simple answer to all the three questions may be as follows:
    The oil price paradigm is unlikely to have changed. However, the financial community may have underestimated Saudi Arabia's preparedness to take decisive steps to protect the value of its most important asset. The move not to cut production when it seemed warranted for price stability may in fact be a proactive price management policy by Saudi Arabia aimed at curtailing multi-year capacity growth that the Kingdom possibly saw as a dangerous threat to long-term oil prices.
    If such interpretation is accurate, oil price may have further downside from here and it may take at least several months for the price to recover.
    However, the ultimate outcome of this "capacity management" maneuver should be "higher for longer" oil prices and continued growth for U.S. shale oil production, possibly at the expense of mega-projects.

Is It The End Of The "Shale Stocks Bubble?" Or The Beginning?
A "hard landing" oil price scenario could mean more pain for stock investors in the short term - let's admit it, stock performance has mirrored oil price performance. I would argue, however, that a "hard landing" would help to create a foundation for a highly probable oil price recovery and strong upcycle.

http://seekingalpha.com/article/2751165-is-this-the-end-of-the-shale-oil-bubble-...
=======================================================
Ho! Ho! Ho!

It must be time, for a good Christmas laugh?

That said, I will simply say, this current scenario is certainly NO surprise, it was predictable & it is a "paradigm shift"!

Declining Demand, due to Global Demographic issues, plus massive existing Debt levels, will ensure that Declining Commodity Prices remain much lower, for much longer than expected and one of the consequences will see many of the "newer" Energy sources (such as shale) start to collapse and there will be no quick bounce back!

perceptions_now wrote on Nov 13^th, 2014 at 10:00pm:


Well, we're not yet at GFC levels, which went down to around $42, But we certainly have gone thru the $60 level!

In fact, trading this morning went under $53, down to a morning low of $52.95, before rising again to trade around $53.60-$53.70.

Trading overnight had been considerably higher and at one point hit $55.59. 
http://www.investing.com/commodities/crude-oil

A point worth considering is that IF the US$index had remained at its average level of the last 5 years, which was around 80, instead of rising to its current 90, then the current price for a barrel would be $47.70!
http://www.barchart.com/interactive_charts/stocks/$DXY

Now, there are a number of possible reasons, for the current Decline in Oil Pricing and for the increase in the value of the US$index, But I would suggest Demographics & Declining Demand are the likely major reasons and if that is correct, then the lower Oil Price is likely to be here for quite a bit longer than many expect AND the ramifications much greater, than most expect.

Those ramifications are far greater on the Global Economic downside, than most expect and the "somewhat" cheaper petrol will pale into insignificance, in comparison! 

Finally, I think it is likely, there is still "some downside" on the Oil Pricing!
 

Shale Oil Boom Uncertain In Wake Of Falling Oil Prices

No state in the U.S. has benefited more from the shale oil boom than North Dakota. Just as quickly as the transformation came, it could disappear with low oil prices.

The question the state faces now, when the price of oil has fallen 50% in just a few months, is what will happen to the industry in the future. Has the tremendous growth in production lowered prices too far for it to be profitable?

To answer those questions, producers need to know whether they will be profitable and whether they will be able to secure the financing to drill new wells. Both carry a high level of uncertainty.

Analysts have put together a wide range of estimates of "breakeven" points, the price below which producing oil is no longer profitable. For the Bakken range, the consensus is between $60 and $65, although one headline number cannot capture the complexity of assessing project viability.

With oil prices sitting near those prices now, companies are becoming wary about drilling new wells. This poses two problems.

First, consistent production in the Bakken Field requires consistently drilling new wells. Continental Resources, the largest producer in North Dakota, recently lowered its forecast of new Bakken wells in 2015 by 14%. All wells decrease in production over time, but fracking wells decrease much faster. The wealth from the region could quickly dry up without reinvestment.

Complicating the situation is OPEC, which in late November decided not to cut production.

If oil prices remain near or below the breakeven point, the impact on the North Dakota economy could be catastrophic.
Worse yet would be the impact emanating from the oil companies operating in North Dakota. These companies are heavily indebted, and ending operations would begin a wave of defaults and losses in corporate bonds.

Already the corporate bond market has seen a major retreat based on worry over this scenario. Interest rates on high-yield energy bonds rose over 500 basis points in the last six months and credit spreads, a good indicator of the risk of default, rose 33 basis points in early December. That magnitude of spread volatility has usually been reserved for Greek government debt.

http://seekingalpha.com/article/2798525-shale-oil-boom-uncertain-in-wake-of-fall...
========================================

Oil Production Vital Statistics - February 2015

The main oil production changes from November to December are:

1) World total liquids up 150,000 bpd
2) OPEC up 80,000 bpd
3) N America up 80,000 bpd
4) Russia and FSU up 180,000 bpd
5) Europe down 70,000 bpd (compared with December 2013)
6) Asia down 60,000 bpd

The main dynamic statistic has been the plunge in US oil rig count down to 1223 rigs on January 30th from a recent high of 1609 rigs on October 10th 2014.

I anticipate that the price rout is not yet over and it will require significant falls in production to take root before a real price recovery gets underway.



Daily Brent and WTI prices from the EIA, updated to 26 January 2015. The plunge continues at a similar speed to the 2008 crash. The 2008 oil price crash began in early July. It was not until 16th September, about 10 weeks later, that the markets crashed. The recent highs in the oil price were in mid July but it was not until WTI broke through $80 at the end of October that the industry became alert to the impending price crisis.


Oil and gas rig count for the USA, data from Baker Hughes up to 30 January 2015. The recent top in operating oil rigs was 1609 rigs on 10 October 2014. On January 30th the count was down 386 to 1223 units. The oil rig count is down 259 for the month of January. News of the plummeting US rig count led to a strong rally in oil price. However, the drilling slow down has yet to show up significantly in US oil production statistics.

http://seekingalpha.com/article/2880876-oil-production-vital-statistics-february...
=======================================================
It's all about Demand, Supply & Pricing!

Demand is slowing & will slow further, quite a bit slower, in fact.

Supply has been up, but mainly due to higher Priced Production coming out of the USA & Canada and that higher priced Product is going to be a difficult sell, for some time, due to slowing Demand.

So, it would seem that lower Pricing is set to stay for a while and arising from that I would suggest that those higher Price Production areas, such as Canada & the USA, are likely to become permanently non starters, as Bankers & Governments will get severely burned in the current fiasco, they will have long memories and they will not rush in again, at least not for quite some time!   

Oil seems to have bottomed in recent weeks. Any thoughts on what we can expect in the near future?

In The Wake Of Recent Months, Here's What To Expect From Oil

Yemen: A Country at War
When oil prices were mainly determined by the ongoing oversupply, it was fairly easy to say that they were going to go down and that the bottom was only going to deepen. But at the moment, a few extra factors have come in to play. One of them is Yemen.
The spike from $56 to $66 was also supported by shorters who panicked and covered their position upon hearing the news, as well as the fact that speculators are focusing on the numbers of active rigs that dropped again, according to data from Baker Hughes (more on this later).

46% of Tight Oil Plays Have Closed Since 2014
Following the latest reports, the rig count for shale gas plays has decreased by only half as much as for the tight oil plays. While this hasn't been good for gas prices, oil prices were massively supported by this news during Q1 2015.


Short-Term and Long-Term Thinking
So let's recap for a moment here and give the reader some practical "advice." For oil investors who think short term, occasionally taking profits on your long position might not be a bad idea, since there's a rather high chance that prices might come down again -- which gives you the possibility to re-enter at a lower price. Only a serious crisis/conflict in the Middle East or less supply from other countries could push oil prices higher for a longer period of time.

For oil investors who are thinking long term and don't care about the short term, you might want to use the dips of the cycle just to add to your positions. In the long term (10 years from now), oil will still be the raw material that we use to produce 90% of the products we use on a daily basis. There will be demand for decades to come, and its natural inventories will continue to decrease, which should drive the price of a barrel higher -- in normal circumstances.

I'm sure we all know that studies have actually shown that fracking is very bad for the environment and that the U.S. is polluting and ruining the ground (and thus their drinking water) with its fracking practices. How long can the government and the companies promoting fracking justify this specific method of energy extraction? When fracking, you're not only polluting the air, you're also polluting the ground and your water supplies. This could have serious negative long-term effects.

So if we really think about it, long-term fracking can not be sustained by the U.S. or any other country.

OPEC
OPEC is clinically dead, and it is questionable whether the oil giants of yesteryear will soon rise again.
Saudi Arabia has always been fair and has always limited its production to what was agreed, but the smaller producing countries have often broken the rules and produced more than what was agreed upon. This made the Arabs lose market share time and time again, as they always decided to produce less in order to keep oil prices high.

So this time, they were quite fed up with this little game and now they have decided to keep their production at full speed in order to maintain their market share. This created an explosive cocktail of oversupply and falling prices, since other oil producing countries (such as Russia, Brazil and Venezuela) are experiencing budgetary difficulties and tried to remedy this by producing even more oil.

Iraq Is Back
As if all of the above wasn't enough for oil investors to become depressed, Iraq's growing production (due to fewer sanctions) will continue to feed the oil glut. At full capacity, Iraq is able to produce 3.6 million barrels per day. A few days ago, Iraq reported that oil exports rose to a record 3.08 million bpd from 2.98 million bpd in March. This figure is only expected to grow.

Conclusion
There is still a gigantic glut in oil. Iraq's oil export is rising to record highs, OPEC supply in April rose to its highest in more than two years, and despite a sharp drop in U.S. shale drilling, storage tanks remain at record highs.

Speculators have been driving oil prices up way too fast and way too soon. I fear that this will only cause rigs to restart and make the glut even bigger.

    What is driving prices these days is less physical markets, which remain very weak, but more expectations of future tightening. If markets don't tighten as quickly as people are expecting, the sell-off can be large. (Source)

In the short term, I really feel as if it might be wise to take some of your profits, as I can't see oil going much higher considering the massive glut that will continue to be present in future months.

http://seekingalpha.com/article/3135146-in-the-wake-of-recent-months-heres-what-...
========================================================
Nuff said!