Monday, 1 December 2014

Oil Price: This Is So Big

CU called it: the price of oil continued to fall last week.  Unless we are heavily invested in oil production we are mostly consumers, short oil, and therefore potentially big winners.  The forward end of the curve has fallen significantly too, so this looks to be substantial and enduring.

And big: we may shortly have seen a 50% price reduction in a matter of months.  Gas and coal will follow oil down, if not maybe in quite that degree.  CU listed a few of the losers from all this, but I want to add a couple of riders.
  • ISIS.  Yes, they have a little oil racket going on.  But the whole Arab Spring thing was kicked off by poverty and I'd say they will be quite happy, on balance, to trade oil revenues for increasingly discontented arab populations from Algeria to Iraq. 
  • Shale.  Yup, revenues down for shale producers as well, BUT let no one forget the power of Sunk Costs, one of, if not the the most critical dynamics in capital-intensive industries.  Hey, you've invested the capital, you have debt to service, your marginal costs are (relatively) tiny, and you have to choose: diappointing revenues or no revenues ?  This is not a decision that will trouble the board for very long this Monday morning. 
No relief for Saudi, Russia or Iran in the above.  These are folks with much pain, few scruples and plenty of semtex to hand.  I fully expect some ugly plays on the geo-political stage, and if I were (say) the state of Qatar I'd be very worried indeed.



dearieme said...

It'll soon be time to buy, buy, buy.

Timbo614 said...

looking at a couple of charts... it puts a new slant on "Black Friday" was on the day? -11%? Wow!

andrew said...

I see many comments to the effect that the Saudis are letting the price fall for their reasons.

Or it is all an illumiati plot

However, isn't this just the market balancing demand and supply?

More seriously, when do you buy all those bombed out penny oilers?

BrianSJ said... on the state of Areva, and includes: Areva is a supplier, and not an equity partner for Hinkley Point

hovis said...

I saw Liam Halligan in the T'graph whinying on about how only a fool tries to predict the oil price, then go ad do just that. I am not ocnvinced the price isnt down for a good while.

I don't buy the Saudi's punishing the country X Y or Z. The Saudi must pump and sell as do most oil producers as it is teh main comodity they survive on. It will affect Russia Iran and Nigeria more as their break even rates require higher prices, but remember the Sheiks in the Gulf states must effectively bribe their populations to maintain power.

As to Shale, many puff pieces on how this won't affect them in the US blah blah blah,( it's good for the US as a net importer of oil, but the Shalers both large and small let's see. Miraculously the break even production price is always claimed to fall always fall to under the current price, with eac market decline. With that amount of debt loading and nature of the beats the jury is out.

DtP said...

I wonder if it really is Israel pushing for retention of sanctions for Iran then. Apparently Russia were full of ideas for workarounds but at the latest meeting just kinda STFU maybe as Iran would depress the price even more.

Here's fun, Hinkley C may be the most expensive thing ever built in Blighty!!

Shame about the trolls at the Speccie these days.

Nick Drew said...

oh yes, Dick, I should have noted UK energy policy as one of the Big Losers

rwendland said...

Luckily there is still a chance we may be saved from Hinkley Point C financial disaster by Areva's financial mess. Areva won't put up the 10% finance it was supposed to, and after Areva said it would deliver components of the existing EPR builds a year late, it looks like various people are looking at their spreadsheets again to see the impact of a few years build delay on the bottom line. I also see that the local paper says "over-excessive demands from the Chinese partners have caused setbacks for Hinkley which prompted new talks with Saudi Electric". So now EDF seems to be looking to "rebel"-funding Qatar for finance.

A sorry mess. Lucky our govt has not yet signed the final contract!

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