Energy & Commodities

The Shale Delusion: Why The Party’s Over For U.S. Tight Oil

Posted by OilPrice.com

on Thursday, 17 September 2015 14:30

The party is over for tight oil.

Despite brash statements by U.S. producers and misleading analysis by Raymond James, low oil prices are killing tight oil companies.

Reports this week from IEA and EIA paint a bleak picture for oil prices as the world production surplus continues.

EIA said that U.S. production will fall by 1 million barrels per day over the next year and that, “expected crude oil production declines from May 2015 through mid-2016 are largely attributable to unattractive economic returns.”

IEA made the point more strongly.

“..the latest price rout could stop US growth in its tracks.”

In other words, outside of the very best areas of the Eagle Ford, Bakken and Permian, the tight oil party is over because companies will lose money at forecasted oil prices for the next year.

Global Supply and Demand Fundamentals Continue to Worsen

IEA data shows that the current second-quarter 2015 production surplus of 2.6 million barrels per day is the greatest since the oil-price collapse began in 2014 (Figure 1).

38943 a
Figure 1. World liquids production surplus or deficit by quarter. Source: IEA and Labyrinth Consulting Services, Inc.

EIA monthly data for August also indicates a 2.6 million barrel per day production surplus, an increase of 270,000 barrels per day compared to July (Figure 2).

38943 b

Figure 2. World liquids production, consumption and relative surplus or deficit by month. Source: EIA and Labyrinth Consulting Services, Inc.

It further suggests that the August production surplus is because of both a production (supply) increase of 85,000 barrels per day and a consumption (demand) decrease of 182,000 barrels per day compared to July.

The world oil demand growth picture is discouraging despite an increase in U.S. gasoline consumption (Figure 3).

38943 c

Figure 3. World liquids demand growth. Source: EIA and Labyrinth Consulting Services, Inc.

World liquids year-over-year demand growth has fallen by almost half from 2.3 percent in September 2014 to 1.2 percent in August 2015. This is part of overall weak demand in a global economy that has been severely weakened by debt.

The news from both IEA and EIA is, of course, terrible for those hoping for an increase in oil prices.

U.S. production has fallen 510,000 barrels of crude oil per day since April 2015 while OPEC production has increased 1.2 million barrels per day since the beginning of the year (Figure 4). U.S. production increases in the first quarter of 2015 were partly because of an oil-price rally that ended badly this summer, and because of new projects coming on-line in the Gulf of Mexico.

38943 d
Figure 4. OPEC and U.S. crude oil production. Source: EIA and Labyrinth Consulting Services, Inc.

It appears that OPEC is winning the contest with U.S. tight oil producers to see which can continue to over-produce oil at low prices. IEA ended its September Oil Monthly Report saying,”On the face of it, the Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, “inefficient” production.”

In other words, tight oil and oil sands production.

With Iran poised in early 2016 to add almost as much oil as the amount of the U.S. production decline to date, the outlook for tight oil producers could not be worse. And yet, the sell-side analysts and investment bank research groups continue to chant the refrain of logic-defying hope for tight oil producers in the face of crushingly low oil prices.

Party On, Dude!

This week, Raymond James joined the chorus with its bewildering “id=james.halloran@pnc.com&;source=mail”>Energy Stat: U.S. Operators’ Response to Low Oil Prices? Get More Efficient!”

The message is all about rig productivity and drilling efficiencies. I showed in my post last weekthat these measures are nothing but red herrings to distract from the unavoidable truth that all tight oil companies are losing money at current oil prices.

I would like to say that Raymond James is simply repeating the shop-worn and illogical cliché that “We’re losing money but making it up on volume” but it’s much worse than that.

There is no mention of money in the report. There is not a single dollar sign ($) in the text or figures nor are there are there any costs, prices or cash flows mentioned. That seems odd since Raymond James is, after all, a financial advisory company.

Raymond James presents 30-day IP (initial production rate) data to show that everything is fine and getting better in the tight oil patch.

Really guys? Is that why oil companies are laying off staff, cutting budgets and selling assets?

Besides, everyone knows that IPs are a practically meaningless predictor of EUR or profitability, and something that producers often manipulate to create press releases in order to satisfy investors.

Nonetheless, they forecast “2015 to be a banner year for both oil/gas well productivity gains.” Interesting but irrelevant since it’s going to be an atrocious year for profits.

Here is my table from last week’s post for the best of the tight oil companies in the best parts of the plays.

38943 e
Table 1. First half (H1) 2015 cost per barrel of oil equivalent summary for Pioneer, EOG and Continental. Source: Company SEC filings and Labyrinth Consulting Services, Inc.

EOG, Pioneer and Continental lost between $10 and $24 per barrel in the first half of 2015 but Raymond James says, “Never mind and party on, Dude!”

This report by Raymond James is both misleading and clearly out-of-touch with the price and investment environment that the International Energy Agency and the Energy Information Administration describe.

Conclusions

ExxonMobil CEO Rex Tillerson summarized the situation this week in an interview with Energy Intelligence:

“It [tight oil] will compete. Will all of it compete at all pricing? No.”

For the next year or so, tight oil wells will not be commercial except in the best parts of the best plays. Tight oil companies will lose money. For the most part, the efficiency gains are behind us.

Until market fundamentals of supply and demand come into balance, prices will remain low. Goldman Sachs predicted yesterday that U.S. oil prices through the first quarter of 2016 will be “low enough to discourage investment in new oil production and shrink the global glut of crude.”

Clearly for now, the party is over for tight oil.

By Art Berman for Oilprice.com

Why the U.S. Dollar Is Getting Stronger – and How to Play It

Posted by David Zeiler - Money Morning

on Thursday, 17 September 2015 14:25

The year-long rally in the U.S. dollar has slowed, but it’s far from over.

From July 2014 to March of this year, the U.S. Dollar Index (DXY) has soared by 25%. Since then, it has pulled back slightly. But the forces that drove the U.S dollar higher remain in place and will intensify in the months ahead.

US-dollarThat means investors can expect a stronger U.S. dollar against most foreign currencies, including the euro, the Japanese yen, the Australian dollar, and the Mexican peso.

It matters because the value of the U.S. dollar holds a pivotal spot in the world of investing.

“The U.S. dollar is the oxygen of the global economy. Everyone takes it for granted, but it determines the value of every financial instrument in the world – stocks, bonds, commodities, real estate, art, collectibles, you name it,” said Money Morning Global Credit Strategist Michael Lewitt.

Why a Strong U.S. Dollar Matters

Specifically, the strong U.S. dollar is the main reason that prices for commodities like oil, copper, and aluminum are down. Because commodities are priced in dollars, a more valuable dollar buys more of them for less money.

The rising U.S. dollar has also hurt the earnings of U.S. corporations with significant overseas businesses. The strong U.S. dollar makes U.S. exports more expensive.

Finally, the strong U.S. dollar has made life miserable for emerging markets. Governments and companies borrowed a lot of money denominated in dollars, Lewitt said. A stronger dollar makes those debts more expensive to repay.

So how can we be so sure the U.S. dollar will keep rising?

Simple, Lewitt said. While the U.S. Federal Reserve has spent the past year winding down its quantitative easing policy, other major central banks – particularly the European Central bank (ECB) and the Bank of Japan (BOJ) – have ramped up their monetary easing.

Such QE policies weaken currencies.

But the Fed is now going against this global tide. Regardless of whether it raises interest rates this week, it has signaled its intent to do so this year or early in 2016.

“Even if the Fed doesn’t move, the ECB and Bank of Japan are committed to further weakening their currencies. That means further dollar strength can be expected,” said Lewitt.

And that’s going to be tough on several currencies in particular…

The Euro, Yen, and Peso Have All Slipped Against the U.S. Dollar

Here’s what the U.S. dollar is doing against some key currencies:

  • The U.S. Dollar-Euro Pair (USD-EUR): A year ago, the euro was worth $1.30; now it’s down to $1.12. The euro’s downward trend got a push from the ECB’s first QE program in January. Several big banks, including Barclays Plc. (NYSE ADR: BCS) and Bank of America Corp. (NYSE: BAC) have forecast the euro will drop to parity with the U.S. dollar by the end of the year and will fall below the $1 level in 2016.
  • The U.S. Dollar-Yen Pair (USD-JPY): As recently as October 2012, $1 was worth 80 Japanese yen. Now $1 is worth more than 120 Japanese yen. That’s a 50% change in three years. The BOJ’s determination to further weaken the yen is expected to drop it to 130 against the U.S. dollar by the end of 2016 and 140 by the end of 2017.
  • The U.S. Dollar-Yuan Pair (USD-CNY): The Chinese government shocked the world in August when it loosened some of its controls on the yuan, causing it to plunge 2.1% in a day. The Chinese yuan is down 2.6% against the dollar for the year. According to a CNNMoney survey of economists, the Chinese yuan will fall another 2.8% against the U.S. dollar by the end of 2015 and further still in 2016.
  • The U.S. Dollar-Peso Pair (USD-MXN): The Mexican peso is down more than 21% against the U.S. dollar over the past 12 months. The Mexican peso has been slammed by the big drop in oil prices, forcing the Mexican central bank to sell U.S. dollars to try to prop up its currency. But here the worst is over. Forecasts call for the Mexican peso to stabilize then gain a little ground back from the U.S. dollar in 2016.
  • The U.S. Dollar-Australian Dollar Pair (USD-AUD): The Australian dollar has been hit by that nation’s exposure to a slowing Chinese economy as well as the plunge in commodity prices. The Aussie dollar is down about 22% against the U.S. dollar over the past year. It’s currently at about $0.71 to USD $1. ANZ Research predicts the Aussie dollar will slip a bit further – possibly as low as $0.60 – before recovering back into the low $0.70 range next year.

What Investors Can Do About the Strong U.S. Dollar

While a rising U.S. dollar will continue to cause problems for some, it also represents an opportunity for those who know how to play it.

“Investors can profit from the dollar rally by investing in dollars and selling short euros and yen,” Lewitt said.

He suggests three ETFs:

  • Buy the ProShares DB US Dollar Bullish ETF (NYSE Arca: UUP), which closely tracks the exposures in the DXY. This ETF rises when the dollar rises.
  • Buy the ProShares Short Euro ETF (NYSE Arca: EUFX). This ETF rises when the euro falls.
  • Sell short the Guggenheim Currency Shares Japanese Yen Trust ETF (NYSE Arca: FXY). This short position will rise in value as the yen weakens.
  • Buy the ProShares Short MSCI Emerging Markets ETF (NYSE Arca: EUM) to profit from continued weakness in emerging markets. This ETF rises when emerging markets stocks weaken.

Someday, of course, the U.S. dollar will collapse from the weight of the $18.4 trillion U.S. national debt and the more than $4 trillion the Fed added to its balance sheet through several bouts of QE.

But for now, it’s time to profit from a stronger U.S. dollar.

The Bottom Line: The U.S. dollar has grown much stronger over the past year – and will continue to do so as foreign central banks ease monetary policy while the U.S. Federal Reserve tightens. Knowing that the dollar will rise, now is the time for investors to position themselves to profit.

Stock Trading Alert: More Optimism Ahead Of Fed’s Rate Decision Release

Posted by Paul Rejczak - Sunshine Profits

on Thursday, 17 September 2015 14:19

Originally published on September 17, 2015, 6:54 AM:

Briefly: In our opinion, no speculative positions are justified

Our intraday outlook is neutral, and our short-term outlook is neutral:

Intraday outlook (next 24 hours): neutral
Short-term outlook (next 1-2 weeks): neutral
Medium-term outlook (next 1-3 months): bearish
Long-term outlook (next year): bullish

The main U.S. stock market indexes gained between 0.5% and 0.9% on Wednesday, as investors awaited today’s FOMC Rate Decision announcement. The S&P 500 index retraced some of its late August sell-off, however, it remains below the level of 2,000. The nearest important level of resistance is at 1,980–2,000. On the other hand, support level is at 1,950, and the next support level is at 1,900-1,920. There have been no confirmed positive signals so far. It still looks like an upward correction within a downtrend:

38942 a
Larger Image

Expectations before the opening of today’s trading session are slightly negative, with index futures currently down 0.1-0.2%. The European stock market indexes have been mixed so far. Investors will now wait for some economic data announcements: Initial Claims, Housing Starts, Building Permits at 8:30 a.m., Philadelphia Fed number at 10:00 a.m., FOMC Rate Decision release at 2:00 p.m. The S&P 500 futures contract (CFD) trades within an intraday consolidation following recent move up. The nearest important level of resistance is at 1,990-2,000, and support level is at 1,970-1,980, as the 15-minute chart shows:

38942 b
Larger Image

The technology Nasdaq 100 futures contract (CFD) trades within a similar intraday consolidation. The nearest important resistance level is at 4,380-4,400, and support level is at 4,350, among others, as we can see on the 15-minute chart:

38942 c
Larger Image

Concluding, the broad stock market remains within a short-term uptrend following late August sell-off. However, there have been no confirmed positive signals so far. It looks like an upward correction within a medium-term downtrend. We prefer to be out of the market, avoiding low risk/reward ratio trades. We will let you know when we think it is safe to get back in the market.

Thank you.

The Worst-Case Scenario For The Fed

Posted by Eric Parnell

on Thursday, 17 September 2015 14:12

UnknownSummary

The Fed is considering raising interest rates this week.

The Fed desperately wants to raise interest rates, not because the economy is so strong but so that they can have a policy buffer in preparation for the next recession.

But after too many years of waiting and coddling the markets, they are now very late in seeking to make such a move.

A misstep on Thursday could effectively close the window on their ability to raise rates going forward.

…..continue reading HERE

Jim Rogers on Timeless Investing Strategies You Can Use to Profit Today

Posted by Jim Rogers via Nick Giambruno

on Wednesday, 16 September 2015 18:41

Screen Shot 2015-09-16 at 11.37.02 AMRecently I spoke with Jim Rogers about the most important investment lessons he has learned over the years.

Jim is a legendary investor and true international man. He’s always ahead of the game. Jim made a bundle by investing in commodities in the 1990s when they were out of favor with Wall Street. He’s also made large profits investing in crisis markets.

Jim and I spoke about timeless strategies that are truly essential to being a successful investor.

You won’t want to miss this fascinating discussion, which you’ll find below.

Nick Giambruno: You’ve said that many times throughout history, conventional wisdom gets shattered. What are some widely held beliefs that will be shattered in the next 10 years?

Jim Rogers: That’s a very good question. Well, for one thing, I know bond markets are at all-time highs almost in every country in the world. Interest rates have never been so low. Everybody is convinced that bonds are a good thing to invest in. Otherwise, they wouldn’t be at all-time highs.

I’m sure that 10 years from now, we are all going to look back and say, how could people have even been investing in bonds with negative yields? How could that possibly have been happening? But at the moment, everybody assumes it’s okay, and it’s the normal and natural thing to do. Ten years from now, we’re going to look back and say, gosh, how could we ever have done something so foolish?

So one of the things I do is I look to see – when everybody’s convinced that X is correct – I look to see, well maybe X isn’t correct. So when I find unanimity of a view, I look to see, maybe it’s not right. And it usually isn’t right, by the way. I have learned that from experiences and from lots of reading.

Nick: How does an investor deal with being accurate but early?

Jim: Oh, that’s the story of my life. I’ve always been accurate but early.

If I’m convinced something is going to happen or if I should make an investment, I have learned that I should wait for awhile, because maybe it is too early. And it usually is too early.

I try to discipline myself to wait longer or to put in orders below the market and let the market come to me. But even then, sometimes I’m still too early.

Nick: How did studying history help you in investing?

Jim: Well, the main thing it taught me was that everything is always changing.

If you go back and look at before the First World War, nobody could ever have conceived in 1910 that Germany and Britain would be slaughtering millions of people four years later. Yet it happened.

No matter what we think today, no matter what it is, it is not going to be true in 15 years. I assure you. You pick any year in history, and look at what everybody was convinced was correct and then look 15 years later, and you’d be shocked and astonished. Look at 1920, 15 years later. Look at 1930, 15 years later. Any year you want to pick – 1900, 1990, 2000. Pick any year and I assure you, 15 years later everything is going to be different. I guess that’s the first thing I learned from the study of history.

Nick: What mistakes do empires always make?

Jim: They get overextended. They think they’re smarter than everybody else. They think they cannot make mistakes, and even if they are making mistakes they are so powerful they think that they can correct the mistakes. And then they become overextended. Usually they become overextended financially, militarily, geopolitically, in every way.

Nick: Is the US repeating those same mistakes?

Jim: Well, the US is the largest debtor nation in the history of the world now, and the debts are going higher and higher. The people in the US think it doesn’t matter that we’ve got all these debts and there’s no problem. People in the US don’t think that it’s a problem that we’ve got troops in over 100 countries around the world. I mean, when Rome got overextended militarily, it paid the price. Spain and many other countries have had this problem. Maybe it’s not a problem. Maybe America can have troops in 200 countries around the world and it won’t matter, but America has certainly gotten itself overextended in many ways.

Nick: Do you think wealth and power will continue to move East?

Jim: Wealth and power are moving East now, and that is going to continue. That’s because of historic reasons. There’s little doubt in my mind that China is going to be the next great country in the world. Most people are still skeptical of that. Most people know something is happening in China. They don’t really quite understand the full historic significance of what is happening in China including many Chinese.

Nick: You mentioned in your most recent book, Street Smarts, about the lesson you learned when Nixon closed the gold window in 1971. At the time you were long Japan and short the US, and you just got killed. Can you tell us the lessons you learned from that experience?

Jim: That was a perfect example of what I’m talking about. Even if you have it right, or you think you have it right, something can always come along and change that, especially with politicians.

Politicians play by different rules from the rest of us. They just change the rules. Mr. Nixon just changed the rules because he was having a serious problem, and he thought America was having a serious problem. And when they changed the rules against all logic or against history, something is going to give. If you are on the wrong side, you are the one who is going to give, and I’ve learned that.

Nick: Any other investing lessons you’d like to mention?

Jim: Well, when you see on the front page of the newspaper that there’s a disaster – natural disaster, economic, any kind of a disaster – just pick up the newspaper and think, now wait a minute, everybody’s panicked right now. The blasting headlines are that the world is coming to an end. Stop and think, is the world really coming to an end? Is this industry going to survive? Is this country going to survive? Is this market going to survive? Because normally it is going to survive.

If you can just first stop and have that thought process, then you can think it through. Let’s say that these headlines are wrong. “What should I do?” You are probably going to be a successful investor.

Be prepared for the fact that you are probably going to be early. If you can figure out how to spot the exact bottom and the exact turn, please call me.

Nick: This is exactly what Doug Casey and I do in our Crisis Speculator publication (click here for more details).

Shifting gears now, you’ve also said that Harvard and other universities could go bankrupt. Why do you think that?

Jim: Well, first of all, some of the American universities have a very, very high cost structure. It’s astonishing.

Let’s pick on Ivy League. I went to an Ivy League school, so I can pick on them a little bit. They have a high cost structure. They think that what they know is correct and that people will always pay higher and higher prices.

To go to Princeton for four years now is probably going to cost you $300,000 in the end when you figure out the tuition, room and board, books, beer, travel, and everything else.

It’s extraordinarily expensive to go to these places. Now what Princeton would tell you – and I didn’t go to Princeton but that’s why I’m picking on them – what Princeton would say is, yeah, but it’s better education. But I’m not sure it’s better education.

I know that many of the things that they teach in Ivy League schools these days are absurd and totally wrong. It’s conventional wisdom run amuck, so it’s not necessarily better what you learn at those places. If you go to the right universities, and you learn the wrong things, it’s going to cost you in the end.

Then they say, yes, but it’s a brand, it’s a label that’s good. Sure, it’s a label, it’s a very expensive label, but it’s going to take a lot more than that to make you successful. Just because your grandmother gives you a Cadillac, which is a good brand, it’s not going to make you successful at finding dates, or having a good job or anything else. You have to produce on your own.

Throughout history you’ve had many institutions that have been world famous and top of the line. They’ve disappeared. It doesn’t mean Harvard can’t too. I didn’t go to Harvard, so I shouldn’t pick on any of these places that I didn’t go to. So we’ll see. I’m skeptical of all of them.

Nick: Why do universities and governments embrace Keynesian economics? Why do they hate Austrian economics?

Jim: That’s a good question. Keynes himself, at the end, didn’t embrace what is now known as Keynesian economics. Keynes would probably be an Austrian now, because at the end of his life, he came to understand that some of the stuff was being misused.

The main reason people like Keynesian economics is because they think they can be powerful. They can change things. “I’m a smart guy. I went to an Ivy League school, therefore I know what’s best. And if I say it’s best, let’s do it, and it will make things better.” That’s essentially what Keynesianism is now.

The market is a lot smarter than all of us, and I wish we would all learn that. It always has been and it always will be.

Nick: Thanks for your time, Jim.

Jim: My pleasure.

Editor’s Note: Jim Rogers told us about the importance of looking past the news that frightens others away. It’s the key to finding deep-value investment opportunities that can make you enormous profits.

It’s one of the world’s greatest wealth-creation secrets.

It’s been used by Warren Buffett, Doug Casey, John Templeton, Baron Rothschild, and many other successful investors. It’s a strategy that you can use too.

It’s exactly these kinds of opportunities we cover in Crisis Speculator. Click here for more details.

 

The article was originally published at internationalman.com.

test-php-789