Category Archives: Oil

Is OPEC Headed for the Ash Heap of History?

We read an intriguing essay by Brian Wesbury of First Trust today.  Using the phrase that Ronald Reagan used nearly 25 years ago about the Soviet Union about Marxism and Leninism being left on the “ash-heap of history,” Wesbury thinks that OPEC (Organization of Petroleum Exporting Countries) may be headed the same way.

Now it appears OPEC, another nemesis of the US from the prior century is heading for the ash heap of history as well, not because of geopolitics, but because of the hard work of engineers.

A combination of fracking, seismic imaging, and horizontal drilling has led to a huge reduction in the cost of drilling and an increase in the supply of oil and natural gas, not just in the US but around the world.

Case in point: in the past twelve months the US has run an $8.4 billion goods trade surplus with OPEC, including Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. What a difference from less than a decade ago. Back in 2007-08, the US ran a $190 billion goods trade deficit with OPEC. The reason for the change in the trade balance is that the US is importing much less from OPEC, $64.8 billion in the past twelve months versus $253.4 billion at the peak in 2007-08.

Those are amazing statistics.  A $200 billion dollar change in the balance of trade in just under a decade, all due to a technological revolution in the production of oil and gas.  We are accustomed to thinking about technology in terms of silicon chips, iPads and cell phones.  But the bigger sociopolitical change may have been in the dirty, greasy, un-glamorous field of petroleum engineering.

Who would have guessed?

Tagged , ,

Global Stocks Lower After Brussels Explosions

Major Stock Indexes

4:09 PM EDT 3/22/2016

Last Change % CHG
DJIA 17582.57 -41.30 -0.23%
Nasdaq 4821.66 12.79 0.27%
S&P 500 2049.80 -1.80 -0.09%
Russell 2000 1096.95 -1.63 -0.15%
Global Dow 2315.94 -7.42 -0.32%
Japan: Nikkei 225 17048.55 323.74 1.94%
Stoxx Europe 600 340.30 -0.52 -0.15%
UK: FTSE 100 6192.74 8.16 0.13%

 

Currencies

4:09 PM EDT 3/22/2016

last(mid) change
Euro (EUR/USD) 1.1224 -0.0018
Yen (USD/JPY) 112.28 0.33
Pound (GBP/USD) 1.4214 -0.0154
Australia $ (AUD/USD) 0.7623 0.0045
Swiss Franc (USD/CHF) 0.9724 0.0025
WSJ Dollar Index 87.26 0.10

Futures

3:59 PM EDT 3/22/2016

last change % chg
Crude Oil 41.48 -0.04 -0.10%
Brent Crude 42.54 0.31 0.73%
Gold 1248.5 4.3 0.35%
Silver 15.895 0.048 0.30%
E-mini DJIA 17497 -31 -0.18%
E-mini S&P 500 2041.75 -1.00 -0.05%

Government Bonds

4:08 PM EDT 3/22/2016

price chg yield
U.S. 10 Year -6/32 1.939
German 10 Year 7/32 0.215
Japan 10 Year 3/32 -0.101
 
Tagged , , ,

A quick market roundup – January 22, 2016 @ 10:00 AM

January 2016 has been challenging for investors. The DJIA had been down about 8% year-to-date. But even as we post this there is a major relief rally going on across the globe.

European Central Bank President Mario Draghi hinted at more stimulus at the World Economic Forum in Davos, Switzerland, saying that he had “plenty of instruments” and was willing to use them.

The price of oil has bounced around wildly, starting the year at $37.95, dropping as low as $28.35 (a 25% drop) before rebounding. It’s up to $31.57 as we write, up over 6% just today. This despite an excess of supply.

Oil is causing problems for Venezuela with a $120 billion in foreign debt. The country gets 96% of its export earnings from oil and is facing both an economic and political crisis.  This could have an impact on foreign banks that have lent them money.

All this is going on while a massive winter storm is barreling toward the Mid-Atlantic and Northeast. An inch of snow snarled traffic so badly in Washington DC yesterday that many abandoned their cars and some slept in hospitals, unable to get home.  The storm that’s in the forecast has already shut down a great deal of air traffic in the region.

Have a safe weekend.

Tagged , , , ,

Warren Buffett lost money this year.

Even the savviest investor can have a bad year. Buffett’s Berkshire Hathaway is down over 11% in 2015.

The reason for the decline is the declining price of oil and other commodities. Berkshire Hathaway has a big investment in railroads that make much of their money hauling commodities such as oil and coal.

It also has big positions in American Express and IBM which declined 24% and 13% respectively this year.

If you broke even this year you beat the “Wizard of Omaha.”

Tagged , , ,

The Oil Price War

The talk on the Street is that there is an oil price war sparked by Saudi Arabia.  The surge in oil and gas production due to fracking in the US has increased the supply, putting downward pressure on prices.  The cost of producing oil by the Saudis is estimated at $20 per barrel, lower than the cost of production via fracking.

However, the Saudis, and many other producers have swollen public budgets which depend on the continuing profits from oil.  Throw those costs into consideration and some estimate that the Saudis need oil to be priced at $90 to $100 to cover all the services the government currently provides.

Other countries that depend heavily on high oil prices to support their public services are Russia and Venezuela.

Wood Mackenzie, a global energy consulting group, surveyed 2,222 oil fields worldwide and found that at $50 a barrel – around where Brent crude trades now, only 0.2% of oil supply faces negative cash flow. At $40, that figure rises, but only to 1.6%.

That means that oil prices would have to go a lot lower if the Saudis are to be successful in shutting down a lot of current production.

The Saudis have foreign-exchange reserves roughly equivalent to their annual gross domestic product.  It remains to be seen how this oil price war ends.

Tagged , ,
%d bloggers like this: