19 Dec How Long Will Oil Remain at Current Levels?
Stocks surged again on a dovish Fed as the US Central Bank and US data is making up for bad news in other parts of the world. Oil resumed its sell off and energy was a market laggard. As widely known, the energy issues have been crushed and according to Bloomberg the S & P 500 energy index is down 27% from its June high. The valuation of this index is now trading at a 40% discount as compared to the entire index, the greatest discount since at least 2000 Bloomberg writes.
How long will oil remain at current levels? Yesterday a British government official stated if oil remains at current prices, the British oil industry would collapse. Similar comments were made concerning North Sea production.
Conversely, Bloomberg reports US energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets. Goldman writes energy firms are trimming 2015 budgets to cope with lowest crude prices in five years and are shifting their focus to their most prolific, lowest cost fields, extracting more with enhanced technology at lower costs.
Bloomberg writes because of sunk costs and enhanced technology, operating costs for already drilled and fracked wells are $25 or less. Wow! In fact, Tom Petrie, Chairman of Petrie Partners who advises countries such as the US and Saudi Arabia about energy issues stated the average cost to operate a well in most of the US is about $20/barrel. In fact Exxon reports that it spends $12.72/barrel to extract a barrel of oil in the US.
Could we argue if the above data is remotely accurate OPEC’s month old bet that American drillers would be crushed has been a bust and is backfiring on perhaps the producers who can least afford such a drop?
Many times I have written to always expect the unexpected where life is stranger than fiction. Today’s oil bust and subsequently America’s purported cost of oil production and the possible normalization of relations with Cuba are two events I don’t think anyone suggested even as little as four months ago.
What will happen today? The economic calendar is sparse thus suggesting trading will be dictated by headlines.
Last night the foreign markets were mixed. London was up 0.44%, Paris down 0.24% and Frankfurt down 0.38%. Japan was up 2.39% and Hang Sang up 1.25%.
The Dow should open nominally higher. The 10-year is unchanged at 2.21%.