| Friday, October 17, 2014 | Issue #2398 | |
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3 Things You Must Know
About Oil Prices Sean Brodrick, Resource Strategist, The Oxford Club
 Oil prices recently dropped to four-year lows. You can bet there are Texas oil men shaking in their 10-gallon hats right now, wondering if oil will go to $80... $75... or lower.
The short-term action in oil prices is hard to predict. But here are three things you must know when you're making plans for your own energy investments.
Fact No. 1: The Saudis will keep pumping as prices go lower.
You may remember that in the 1980s, oil slumped from $35 a barrel to below $10. At the time, Saudi Arabia kept up a relentless though doomed defense of prices, cutting its own production from 10 million barrels a day to less than 2.5 million barrels a day.
It just didn't work. Other OPEC producers, desperate for cash, stepped in and pumped more.
This time around, Saudi Arabia is putting other OPEC members on notice that it's fine with lower oil prices - for years!
Yep. Saudi Arabia has been saying in private meetings that it would accept oil prices at around $80 per barrel, and it doesn't mind if that goes on for a long time.
And it's not just the Saudis. The oil minister of Kuwait, Ali al-Omair, said he doesn't see oil prices bottoming until around $76 per barrel.
You see, Saudi Arabia's cost of production is very low... averaging about $25 per barrel. You know who needs high oil prices? Countries like Venezuela and Iran, who use oil wealth to fund social programs. Likewise, Russia has high extraction costs.
Venezuela has already called for an emergency meeting to defend $100 oil. We can see how the Saudis are hurrying to that meeting... not!
OPEC meets in late November, and maybe we'll see some action at that meeting. But don't hold your breath. The Saudis know they just have to outlast international competitors, who will have to stop pumping long before the Saudis do.
Fact No. 2: Global production becomes vulnerable at $80 per barrel.
A new monthly report from the International Energy Agency (IEA) puts the line in the sand for oil prices at $80 per barrel. At that price, 2.8% of global production - 2.6 million barrels per day - becomes uneconomic.
Some of the highest production costs are in the Canadian oil sands. About 25% of Canadian oil sands projects would be in the red at $80 per barrel, the IEA says.
And there are other vulnerable oil plays around the world. Those include Russia, Britain, onshore China and offshore Nigeria.
One real point of vulnerability is deepwater crude production.
"Some 8% of deepwater crude oil production requires a breakeven of $80 per barrel or higher... totaling some 1.05 million barrels per day, or 1.1% of liquid production," the report said.
More than 80% of deepwater projects are based in Brazil and the U.S. Gulf of Mexico.
Fact No. 3: The U.S. is less vulnerable than you might think.
Sure, some shale plays are high-cost. But most aren't. IEA Chief Maria van der Hoeven says only a tiny minority of U.S. shale oil production would be affected by the slump in prices.
"Some 98% of crude oil and condensates from the United States have a breakeven price of below $80 and 82% had a breakeven price of $60 or lower," she said recently.
You know what that means? Many companies are being sold like their oil fields are on fire. But they are in much better shape than the price action would have you believe.
How You Can Play This
The sell-off in energy stocks is extreme. On a percentage basis, these shares have plunged far more than during the sell-off we saw in 2008, when the price of crude fell much more dramatically - from $145 per barrel to $36.
Why the bear feeding frenzy? Probably some hedge funds got caught on the wrong side of the energy trade, and they are liquidating everything.
Meanwhile, these are companies with real earnings, real assets and enough cash to make Daddy Warbucks envious. Heck, if nothing else, oil companies can use that cash to buy up their own stock. And they probably will.
So what you should be doing is making your own buy list. Look for the best stocks contained in the Energy Select Sector SPDR (NYSE: XLE) and the SPDR Oil & Gas Exploration & Production ETF (NYSE: XOP). If you do your research, you'll be able to winnow out the real dogs from the babies thrown out with the bathwater.
The shopping spree in the bargain bin is coming sooner than later. Be ready for it, and be ready to buy with both hands.
Good investing,
Sean
P.S. Speaking of things to buy at a discount, I recently discovered one energy company that's found a way to create gasoline... without using a drop of oil. This should be impossible. And the implications for this company, and its lucky investors, are staggering. To learn more, click here. | |
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One stock inside the Energy Select ETF boosted its dividend by an eye-popping 40% this year, but it's trading right now at a big discount, and David Fessler is all over it. Readers of Investment U's premium edition are learning about it today. Find out how to join them by clicking here. | |
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