A war has been begun and is getting more serious every day. When Saudi Arabia and OPEC chose not to cut production, and even increase production, they knew it would lead to all out war.
Some in the business community are saying the price of oil won’t stay down for long. They’re mistaken. It will stay down, and probably go even further down until this war ends as all wars do, with a victor and a defeated. You see, there can be no peace treaty because the pie is shrinking and is already too small for everyone at the table.
Buried by the non-stop chorus of economists, analysts, and market cheerleaders telling us we’re in a recovery, is the cold hard truth that the world is sinking further and further into a deflationary collapse. Despite trillions of dollars printed, the lowest interest rates in history, and extremely loose credit policies across the world, we’re still sinking.
Political leaders know this, as do business leaders, and oil barons. They don’t formulate their opinions by watching the evening news, they have the hard data, and that hard data is obviously telling them there’s trouble, or they wouldn’t be desperately pulling every monetary lever with greater and greater strength.
With this backdrop we return to OPEC, which has decided there’s no use in cutting production, since demand is falling more and more every year. They would only watch their market share dwindle, even more than it already is.
The solution? A price war against high cost producers like shale, tarsands, Russia, and Iran, to name a few. With Saudi Arabia’s estimated $5 per barrel cost of production, they’re pretty confident they’ll be standing longer than their competitors, whose average price is a minimum of $70 per barrel. Much is made of the few wells in the US that produce for $40 or less, but these are an insignificant percentage of overall shale production.
This last few weeks has seen investors rush into energy stocks,as if oil had just gained $30 per barrel, when in fact it’s languishing at around $55. These investors clearly don’t understand the nature of this war, nor are they aware of fundamentals such as production expectations for 2015, which will increase further, putting even more pressure on the price.
What’s more concerning is this war won’t be as lopsided as some presume. Shale producers are now big businesses, with vast resources and advanced technology. They’re reducing their cost of production continually, and advancing in every area. You can bet they don’t intend to roll over and die, they’re going to fight.
Then we have Russia, a state controlled, state supported industry. Russia has close to 400 billion in reserves and has a very low debt ratio compared to pretty much every nation, especially western nations. They can put up an even bigger fight than the shale producers. Oil is their lifeblood, Russia will go to war before watching their oil revenues disappear.
This is not to discount the other players in this war, like Canadian tarsands, Nigeria, Brazil, and many more, but if there are casualties, they will certainly be among them.
Very soon you’re going to see companies, nations, and people with their backs against the wall, and that’s when the fur will fly. Already there are rumors of producers increasing production, realizing that today’s price may be the best price they see for a long time. This will only intensify the problem and speed up the casualties.
Add to this the oil industry secret, that the real price of oil is negotiated between parties and rarely resembles the stated market price. You can safely assume that tarsands and shale producers aren’t even getting $10 less than the stated price,so when you hear analyst reports saying XYZ company is still ok because oil is $3 higher than their cost of production, know that XYZ company is already losing money.
We’re now coming to the end of the denial phase among producers and early 2015 will see decision makers forced to deal with reality, though they loathe to do so.
It is not an overstatement to say we are witnessing a war, and it has barely begun. Damage is being inflicted on all sides, but has yet to be revealed publicly. It soon will, and when it does, not only will the blood flow among producers, but investors, who have foolishly assumed this battle is over, before it has barely begun.
Portfolios are heavy with energy companies, not just producers, but the huge services industry which has sprung up around them. Almost all of these companies has already lost double digits on their share price, and big oil has shed over a trillion in market cap. Our investors at Financial Advisors Vancouver have dodged this bullet because we don’t wait to see if oil is coming back before cutting losses. Talk to us if you haven’t been so fortunate, Financial Advisor Vancouver will make sure this is the last time your assets take a hit.