Idle Musings On A Saturday Afternoon; RBN Energy's Prognostications For 2015 -- January 3, 2015; Updated EV Sales

Updates

January 4, 2015: Based on data points in the original post and, more importantly, some recent essays in Oil and Gas Investor, I feel very comfortable with how this (the current slump in oil prices) will end. 

The dominoes are beginning to fall. First, BP, Rosneft, Venezuela.

Two links:

BP, Rosneft in Financial Times.

BP is set to lose hundreds of millions of dollars in earnings and dividend income from Rosneft, Russia’s state-owned oil company, as a result of the plunge in crude prices and financial turmoil that has sent the rouble tumbling. City analysts are predicting that the 47 per cent slide in the rouble over the past three months will lead to a sizeable fourth-quarter loss for BP on its Rosneft stake. They expect that loss to be as much as $750m, the first of its kind in Russia for the UK energy major.

Ecuador in Yahoo!Finance:

Venezuelan President Nicolas Maduro begins a trip to China and OPEC member countries late Sunday in search of financial support as his country reels from falling oil prices and a tattered economy.

The South American oil giant confirmed Tuesday that it has entered recession, while annual inflation topped 63 percent, exacerbating the outlook for an economy already hit by global crashing oil prices and import shortages.

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Original Post 

This is not an investment site. Do not make any investment, financial, or relationship decisions based on what you read here. Following such sites as Seeking Alpha helps me understand the Bakken better and helps put the Bakken into perspective.

A reader sent me a link to an article over at Seeking Alpha suggesting that the slump in oil prices is temporary (I don't know if the author defined "temporary" but for most investors I would assume we are talking 6 - 12 months):

Ever since the November 27th (2014) OPEC meeting the price of oil has plunged by about 20% and many stocks are off by much, much more. The doomsayers and shorts are out in force now, emboldened by the weakness in this sector. There is a tremendous amount of negative sentiment towards oil now.

But this extreme level of negativity appears to be very overdone. It also seems to be based on psychology, forced margin call selling, panic selling and tax-loss selling. With all these factors, it's been a perfect storm that has brought some small-cap oil stocks back to levels not seen since the depths of the financial crisis. Back in 2009, oil plunged to the $40 range, but the U.S. and the global economy were in free fall and oil consumption was also falling. The factors that drove oil to collapse in 2009 like bank failures, financial system imploding, home prices collapsing, massive layoffs, and other negatives that just do not exist today.

That is why it does not make sense to be expecting oil to plunge back towards the lows seen in 2009. Furthermore, it is really important to realize that even when oil plunged in 2009, it rebounded very, very quickly (in spite of all the doomsayers back then).

That is another big factor to consider because since the global economy is significantly stronger now, it could rebound sooner than most investors realize. Here are a few more reasons why this is a buying opportunity as oil is not likely to go down much more and why it is not likely to stay down for very long.

Many, many comments, observations, where does one even begin?

My 30-second sound bites:

• the current slump in oil prices is not due to speculators, as Saudi would have us believe
• the current slump in oil prices is due to perceived supply-and-demand factors, not politics
• there are now two cartels: OPEC and the US
• Saudi Arabia is in a tough position
• Venezuela, Iran, and Russia are in very, very tough positions
• I don't buy the "global economy is slow" argument

First, the "I don't buy the global economy is slow argument." Pick two numbers, any two numbers, pick your number for how much oil the world is using in the current economy and how much oil it would use if the world economy was firing on all 8 cylinders (remember, the US GDP for 3Q14 was recently revised to an incredible -- an somewhat unbelievable -- 5%). So, write those two numbers on the piece of paper you have in front of you: a) current oil demand in this "slow global economy"; and, b) the demand for oil in an economy of your dreams. Note the delta (in percent).

On the other hand look at these numbers (and comment) with regard to oil production:

• OPEC's collective target is 30 million bopd (every OPEC country cheats if possible)
• Saudi historically around 9.0 million bopd
• Iraq exported 2.94 million barrels a day in December, the most since the 1980s
• Russian output rose 0.3 percent in December to a post-Soviet record of 10.667 million bopd
• the US at 9.12 bopd

Some comments behind those US numbers:

U.S. oil production averaged 9.12 million barrels a day in the week ended Dec. 26, according to the Energy Information Administration. Output increased to 9.14 million a day through Dec. 12, the most in weekly data that started in January 1983.

Crude inventories at Cushing, Oklahoma, the delivery point for WTI traded in New York, climbed 6.9 percent to 30.8 million in the week ended Dec. 26, EIA data showed. The gain left supplies at the highest level since February.

Compare the percentage increase in the production of crude oil in the past couple of years vs the increase in demand if the global economy starts firing on 8 cylinders. Actually, even "worse": compare the likely increase in oil production going forward.

Going forward: Wood Mackenzie, December, 2014, forecast North America would increase production by 6 million bopd by 2020, much of it coming sooner than later, and almost all of it coming from the US.

In addition, all those deep-sea drilling projects begun over the years, are now coming on line. Much of that money has been sunk, and costs to get that oil to market make it very, very unlikely deep-sea oil coming on line now will be choked back.

Compare your two "demand" numbers (current demand in a slow global economy; oil demand in a vibrant global economy) with "supply": OPEC exceeding publicized quotas; Russia producing at new records; the US producing at new records on top of current global production.

[Addendum to original essay: wow, talk about the Red Queen effect. At $50-oil, Russia has to markedly increase production to maintain it's economy. We're talking survival here. Same with Venezuela.]

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From what little I know about the oil and gas industry, the business model seems to be pretty much "move it along." Produce it and use it. Unlike 21-year-old Scotch, oil does not improve with age. There isn't a lot of storage capacity. I haven't looked at the numbers in a long time but I think I recall the US had about a 25-day supply of oil (and I don't think that includes the Strategic Petroleum Reserve which I think is irrelevant to this discussion). Regular readers know that "Houston has a problem" (to paraphrase or quote RBN Energy, I forget) but I believe "Houston" has pretty much run out of storage capacity. (And that's without the Keystone XL.)

WTI is priced at Cushing, OK, and capacity there is problem. From above, remember this?

Crude inventories at Cushing, Oklahoma, the delivery point for WTI traded in New York, climbed 6.9 percent to 30.8 million in the week ended Dec. 26, EIA data showed. The gain left supplies at the highest level since February. 

But there is relief:

The new Seaway Twin pipeline is done and crude was delivered to Jones Creek in Texas on Dec. 21, Enterprise Products Partners said December 31, 2014. It more than doubles capacity from Cushing to the Gulf Coast.

Really? If that statement is accurate as written, it implies there is also the storage capacity along the Coast to handle all that crude. Reading RBN Energy doesn't support that implication, though I may have misread RBN Energy. We will know by this summer.

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Back to the SeekingAlpha article linked above, the four summary points.

• Oil is extremely oversold and due for a rebound.
• Oil consumption remains strong and is likely to increase thanks to cheaper prices.
• Historically oil rebounds quite quickly, especially when the U.S. and global economy are growing.
• Investors are overly negative on oil ever since the OPEC meeting, but production cuts could still be on the way. 

My 30-second comments with regard to each summary point.

1. Summary point at the article: oil is extremely oversold and due for a rebound. Comment: not based on current supply and demand numbers; not based on projected supply and demand numbers.

2. Summary point at the article: oil consumption remains strong and is likely to increase due to cheaper prices: Comment: I agree completely; doesn't change my comment to summary point #1.

3. Summary point at the article: historically oil rebounds quite quickly. Comment: What oil? OPEC, Brent, or WTI? I will use the WTI data as provided by EIA. "Rebounds quite quickly" is in the eye of the beholder. Except for the volatility between 2007 and 2009, in the big scheme of things, the price of oil seems to be remain in a trading range.

4a. Summary point at the article: investors are overly negative on oil ever since the OPEC meeting. Comment: anyone surprised?

4b. Summary point at the article: production cuts [by OPEC] could still be on the way. Comment: Saudi knows all members cheat on quotas; if there's a unilateral cut by Saudi Arabia, Iran, Iraq, Venezuela will take up the slack. Russia will cheer.

At the end of the day, this "bull" is depending on "production cuts could still be on the way." I don't see it in the cards. And if Saudi Arabia unilaterally cuts production, it will cut production unilaterally.

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Additional Thoughts

January 4, 2015: I think most folks are "talked out" (nothing more to write or say about "why" this is happening and if/when/how it will end). I think most folks, at least I am, are simply in the "watch and wait" -- I don't think anyone knows. What a quandary. If Saudi cuts production, "everyone" else will raise production to try to catch up, taking market share from Saudi Arabia. Gasoline conservations efforts will only make things worse, so there will be less emphasis on raising taxes at the pump; less interest in EVs; less interest in renewable energy (wind, solar). If there's enough cut back in oil and gas industry, and everything trickles back to companies that support oil and gas, one could imagine a real risk for recession. I would imagine the Fed can't easily raise rates; a lot of oil companies are maintaining/surviving simply because of "easy money" to keep them afloat. Gasoline will become much less expensive, but if one loses one's oil and gas job, he/she isn't going to be buying much gasoline. The Wall Street Journal is reporting:

U.S. oil and gas companies have been an engine of growth through much of an otherwise lackluster economic expansion, providing steady employment, solid wages and fierce competition for workers across wide swaths of the country.

Now, after a roughly 50% plunge in oil prices, exploration and production companies are cutting capital budgets, service companies are weighing layoffs and nonenergy firms that popped up to support the industry are bracing for a protracted slowdown. One company caught in the industry downturn is Hercules Offshore Inc. The Houston-based firm is laying off 324 employees, roughly 15% of its workforce, because oil companies aren’t renewing contracts for its offshore drilling rigs in the Gulf of Mexico while crude prices are depressed.

“It’s been breathtaking,” said Jim Noe, executive vice president of Hercules, which was founded in 2004. “We’ve never seen this glut of supply and dislocation in oil markets. So we’re not surprised to see a significant decline in demand for our services.”

Lower oil prices are still expected to provide an overall boost to the U.S. economy. Consumers are spending less on gasoline and more at retailers and restaurants, while many companies are benefiting from cheaper costs for energy and raw materials—giving a boost to hiring outside the energy sector. Money that would have gone to imported oil—the U.S. remains a net importer—will remain at home.

The U.S. Energy Information Administration said the average U.S. household is expected to spend about $550 less on gasoline next year than in 2014. And HSBC expects lower gasoline prices will boost consumer spending enough to add 0.4 percentage point to the U.S. growth rate for gross domestic product next year, a sizable bump for an economy that has struggled to sustain momentum.

The Minneapolis Star and Tribune suggests North Dakota will feel the pain.

Later, 5:50 p.m. January 3, 2015: in an earlier post, it was noted back in November, 2014, when Saudi Arabia/OPEC made the decision not to cut production in light of the oil glut/dropping price of oil, that analysts said one million bopd had to be taken out of production to bring prices back to $75 to $100 range. I opined that one million would not be enough; I suggested two million bopd would have to be taken out of production. I suggested that it would be easy to see a million come out of production in the US, including 250,000 from the Bakken. Going through the above numbers, not only is one million bopd NOT coming out of production, but Russia, Saudi, and non-Saudi OPEC are increasing their production. If Bakken production drops by 250,000 bopd it will be more than offset by Russia, Saudi, and non-Saudi OPEC. Add in the production coming from deep-sea oil wells now coming on line, and it's hard to see how the glut will be curtailed. From a financial point of view, many operators in the US will cut production, but Russia, Saudi, non-Saudi OPEC have no choice but to continue maximizing production, and of course, as noted above, oil coming from new deep-sea oil wells will not be curtailed.

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RBN Energy's Top Ten Prognostications

RBN Energy has posted five of their top ten prognostications for 2015. In their first post, #10 through #6 top prognostications. RBN Energy's top five prognostications should come out Monday. Those top five should be quite exciting, considering the five already presented:

#10: Crude prices won't rebound or recover any time soon. Welcome to the new normal.

#9: US crude oil production won't decline any time soon.

#8: Gas processing has a problem. When the economics for gas processing evaporate (so to speak), processing becomes a cost of doing business, no longer a revenue enhancing opportunity.  Whether the pain goes to the processor or producer depends on how the processing contracts between the parties are structured.  But one way or the other, someone will be experiencing that pain.

#7: Ethane-only petrochemical crackers have a problem. It seemed like a good idea at the time.  Build a petrochemical cracker to produce ethylene from cheap ethane, and keep capital costs low by designing only for a single feedstock. It certainly made sense with ethane cheap relative to other NGL feedstocks like propane, butane, and natural gasoline.  Well guess what.  Back in November, with NGL prices falling with crude oil prices, the margin for running propane in a typical Gulf Coast ethylene cracker nudged above ethane. In early December, butane moved above ethane. Then earlier this week, for the first time since 2011, the margin for running natural gasoline was better than ethane.

#6: Marcellus gas still has a problem.

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EVs -- Another Interesting Story To Follow in 2015

Earlier this year it was reported that the Toyota Prius lost the distinction of being the #1 car sold in California. 

The Toyota Prius, the first mass-produced hybrid car and a model that has become synonymous with the technology, has been the best-selling auto in California since 2012. But in the first three months of this year, it was overtaken by Honda and faces an uncertain future with competitors touting newer and flashier models.

Helped in part by Honda's new hybrid version, the automaker's dealers sold 15,611 Accord sedans between January and March, nearly 300 cars more than Prius dealers delivered to California buyers, according to the California New Car Dealers Association.

Link here for EV sales in the US, November, total to date for 2014 (US data only except for Tesla):

• Nissan Leaf: 2,687; 27,098
• Chevrolet Volt: 1,336; 17,315
• Tesla Model S: 1,200; 13,000 (worldwide)
• Toyota Prius PHV: 451; 12,772
• Ford Fusion Energi: 752; 10,761

None of the other 17 makes and models sold more than 10,000 units in 2014 through November.