Ebola!! ISIS!! Putin!! Yet Oil Prices Drop

Despite plenty of turmoil in several oil-producing areas of the world, crude oil prices have dropped. Russia at war in Ukraine, Ebola striking fear into N Africa, ISIS wreaking havoc in the Mid East, Libya once again in civil war, terrorists in Nigeria on the loose.  Yet oil is dropping, from 110/bbl a yr ago to 90/bbl today

There are several reasons for this strange phenomenon. One is the global economy is slowing down, Europe in brink of recession, China slowing noticeably.  Another is the large advances automakers have made in getting better mileage in new vehicles with even more to come. (100 MPG or better cars are coming soon!!).  But the biggest reason is the advance of horizontal drilling and hydraulic fracturing getting huge increases in oil production in the US.

  US citizens and the entire world should be very happy that HVHF has saved them from drastic jumps in energy prices and prices of nearly everything else because energy is a key component to just about every product made and shipped. Food is especially affected by energy prices so keeping people fed at reasonable prices is critical.

But while we should rejoice that HVHF and those evil oil companies have insulated us from the affects of global crisis, it does have a downside for landowner/mineral rights owners.  If oil prices are actually dropping if the face of multiple foreign disruptions, what does that mean for future drilling and royalties? Will companies continue to invest hundreds of millions of dollars going after new resources or will they cut back because of fears that oil will continue to drop? If oil drops under these circumstances, will it drop even further if and when things calm down? How rapidly will other countries use the new technologies to develop their own fields? Will prices fall enough that it is no longer feasible to keep leasing, keep drilling, keep building out infrastructure? 

Areas that are marginal will certainly be affected. Even some of the best areas may see a slow down in activity. And people that are already getting royalties will see a drop in their checks.

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Permalink Reply by Bluflame on October 15, 2014 at 9:25am

In my opinion, the price decline is merely a matter of too much supply chasing dwindling demand. Crude storage capacity along the Gulf Coast is full to overflowing, and it keeps coming! OPEC is out of control and unwilling to reduce production.European and Asian economies are slumping.  Something's got to give!

 

BluFlame

Permalink Reply by Trapper on October 15, 2014 at 9:41am
As log as there is a market for ethane (come on crackers)and methane (thank you old man winter),I would simply be thrilled to death with $1.00-$1.50 gasoline! Oil prices have been hyperinflated for too long. Our economy would be limitless with cheap diesel and gasoline. Screw the Arabs. We are soon to be energy independent and I love it!
Permalink Reply by Joseph-Ohio on October 15, 2014 at 9:51am

Definitely on that bus Trapper.

Heating fuel also.

Permalink Reply by Trapper on October 15, 2014 at 9:53am
Amen to that friend,amen to that!
Permalink Reply by Bluflame on October 15, 2014 at 9:53am

Hello Trapper,

 

  In my opinion, you may get your wish. No one yet seems willing to cut production. Frankly, the North American E&P's may find themselves in a real bind where they must continue to produce more oil to generate enough revenue to service debt on previous wells and continue to fund operations. Not a good situation!

BuFlame

Permalink Reply by Trapper on October 15, 2014 at 10:17am
Hello Bluflame,

http://inflationdata.com/Inflation/Inflation_Rate/Gasoline_vs_Oil_P...
By the looks of this graph,it would appear the oil companies survived just fine (even prospered) at sub $40.00/bbl.,so forgive me if my eyes are dry over their conundrum. ;-)
Permalink Reply by Dexter Green on October 15, 2014 at 12:39pm

Very few companies can be profitable at oil below a certain price.  What that price is will be determined on a company-to-company basis, but if prices stay low for long enough (six months?) don't be shocked to see a few small caps go belly up.  

Permalink Reply by Joseph-Ohio on October 15, 2014 at 12:46pm

Kindly define what a 'small cap' is ?

Financial world jargon throws me for a loop Dexter.

Permalink Reply by Dexter Green on October 15, 2014 at 1:06pm

Well it depends on the brokerage, but small cap companies have a market cap of between $300 million and $2 billion.  That is admittedly a wide range, but again the definition isn't universal.  Examples of small caps would be GST, MHR, REXX, etc.  

Permalink Reply by Trapper on October 15, 2014 at 1:35pm
Survival of the fittest.
Permalink Reply by Dexter Green on October 15, 2014 at 1:44pm

More like survival of those with the best house in a bad neighborhood.

Permalink Reply by Bluflame on October 16, 2014 at 2:05am

Trapper,

   This is the first downturn since the shale boom began. The economics for shale well drilling may bring a new dimension to the table. The very rapid production declines evident in type curves (some producers profess to have reduced the decline due to aggressive choking programs) is problematic. In theory, it means they need to drill even more aggressively to maintain cash flow. The really big guys (XTO, Chevron, Shell, etc) are somewhat immune due to cushions of cash. It's the newbies specializing in shale drilling and with lots of debt on their balance sheets who, in my opinion, will feel the heat. i.e. CHK, GPOR, Rice, Continental, etc., etc. etc..

 

BluFlame

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