- Saudi Arabia, fighting a three-front oil war
- Making money even if oil prices go lower: Matt Insley reports from the Colorado shale patch
- If the stock market is up, why has it been so hard to make money this year?
- A marketing guru’s comeuppance… the challenges of house flipping you don’t see on reality TV… an employer with plenty of positions to fill… and more!
On the day you sit down for your Thanksgiving feast next week, OPEC oil ministers will sit down in Vienna to figure out what they’ll do about oil prices at four-year lows.
As we write this morning, a barrel of West Texas Intermediate is resting near $75… thanks to a consensus among Saudi Arabian princes that cutting production would only cut into their global market share.
From a high on June 20 near $108, crude has slipped 30%.
“New pricing realities of oil could make or break your investment portfolio over the next few years,” says our resident oil field geologist Byron King. He’s been focused of late on three elements driving the new reality of oil pricing.
“All three,” he says, “have to do with Saudi Arabia.”
“First, OPEC has lost much of its traditional production discipline,” says Byron.
“Since 1973, OPEC reps have met twice a year to assign production quotas to member-nations. Over the decades, each nation pretty much stuck to the numbers.”
Sure, members would cheat now and then, pumping extra oil and banking extra cash. “Still, cheating never broke the back of overall OPEC oil pricing goals. Until now. Today, both Venezuela and Iran are dramatically overproducing and exporting oil. Iraq is coming back as a major oil exporter and shipping every barrel it can move to terminals, despite ongoing war in parts of that nation. Libya is surprising markets too, with oil exports approaching a million barrels per day.
“Old-fashioned OPEC production quota discipline is dead. Anymore, the only way to reduce overall OPEC output is for Saudi Arabia to take a hard hit and significantly cut back exports — which isn’t going to happen, as we learned in the past month or so.”
“Second, Russia has become an oil export power in Asia,” says Byron, “due to a major new oil conduit.
“It’s called the Eastern Siberia-Pacific Ocean pipeline (ESPO), and it moves oil from — as the name implies — the Siberian fields of Russia to the Pacific basin. Now Russia can guarantee large volumes of oil under long-term contracts to Asian buyers. This new market reality threatens longtime Saudi markets in the region.”
“Finally, there’s U.S.-Canadian fracking,” Byron reminds us. “Just in the U.S., we’ve seen over 3.5 million ‘new’ barrels per day come online in the past six years. Every barrel has displaced a barrel of imported oil, meaning that Saudi Arabia has lost well over a million barrels per day of its former American market.
“Meanwhile, oil from other nations — Nigeria, Angola, Algeria and more — has also lost U.S. markets, and that oil now must find new buyers elsewhere across the globe.
“Recently, Saudi Arabia lowered prices for what’s left of its oil destined for U.S. terminals in an effort to maintain U.S. market share. In essence, Saudi Arabia is testing the economics of the U.S.-Canadian fracking industry, as well as Canadian oil sands product.”
Result: “Saudi Arabia is waging a three-front war,” says Byron, “which any military scholar will tell you is next to insane.”
But the Saudi princes have little choice in the matter: “Saudi Arabia lacks the ability to control output of other OPEC nations and faces strong competition for traditional markets from new oil supply out of both Russia and the U.S.
“For now, Saudi Arabia, apparently, has chosen to bite the proverbial bullet and sell its oil at relatively low prices to retain market share. As bad as that is, there’s the distinct future possibility that an oil ‘glut’ from other locales could force oil prices down even further.”
The essential takeaway is one we can’t repeat enough: Many U.S. producers will bank ample profit even if oil prices sink below $60.
“In the U.S.,” says Byron, “reports from the front lines of fracking are sanguine, but far from panicky.”
The Wall Street Journal affirms what he’s hearing from his extensive contacts: “Companies drilling for oil across the U.S. are starting to cut their expansion plans for next year, but say they aren’t dialing back existing production.”
Chalk it up to American innovation: In the Eagle Ford Shale of Texas, the number of rigs has fallen the last two years. But total production has exploded as drilling techniques have become more sophisticated. “Since mid-2013 the gains have really been from getting more out of each well,” Energy Department analyst Sam Gorgen tells the McClatchy newspaper chain.
“The point is simple: Keep costs low and make profitable wells,” says Matt Insley of our energy team.
Matt’s just back from a visit to the Niobrara Shale region in northeast Colorado — part of a larger area he calls the “baby Bakken” — the Denver-Julesburg Basin.
Outside, it was only 16 degrees. “But the Niobrara Shale, some 7,500 feet below the surface, rings the register at some 250 degrees,” says Matt.
“New wells coming online are producing an average of over 400 barrels of oil per day. You can see in the chart below there’s been a steady increase in productivity per well (the brown line) — signifying that drillers are continuing to crack the code of this formation.”
Now… that 400 barrels a day is less than the 550 or so that come out of the Eagle Ford and the Bakken. But Matt says there’s a huge difference: “When you add in the fact that Colorado wells are much less expensive to drill — nearly half the price — you’ll start to realize just how stunning this play is.
“With some rough back-of-the-envelope math, well-run Colorado drillers can get about 80% of the production of a Bakken or Eagle Ford well, for about half the cost (around $4 million per well, compared with $7-8 million).”
[Ed. note: As impressive as Matt’s findings are out in Colorado, it was at a conference in Houston that he made his most lucrative discovery all year. What he learned there offers the potential to triple your money in a mere two months. “It’s a once-per-generation moneymaking opportunity,” he says… as he shows you when you click here.]
The Dow Jones industrials and the S&P 500 are reaching for records again today. As we write, the Dow is about 25 points away from 17,700… and the S&P is two points away from 2,050.
Gold raced past $1,200 overnight and has settled back for the moment to $1,195.
The big economic number of the morning is wholesale prices — up 0.2% in October. The “expert consensus” was expecting a modest drop. The year-over-year increase works out to 1.5%. With a number like that, the Federal Reserve will be in no hurry to raise interest rates next year.
Meanwhile, the housing market index from the National Association of Home Builders has jumped four points, to 58 — one of the best readings all year. We mention this for two reasons: One, it’s an early read on how the economy is doing so far in November. And two, it affirms the bullish outlook for the homebuilders Jonas Elmerraji shared with us yesterday.
“2014 has been a deceptively tough year to make money in the stock market,” says Jonas, who’s back with us today.
True, the S&P is up 10% on the year. But within the index, Jonas finds some intriguing nuggets. “For instance, did you know that a full third of the S&P is actually down on the year? That’s right — pick any big S&P 500 stock at random and you had a 1-in-3 chance of actually losing money.
“Move over to the Russell 2000 small-cap index and the performance gap is even more noticeable. Even though the Russell 2000 is up on the year, more than half of the individual stocks in the index have lost value since January.”
That’s because both of those indexes are weighted by market cap. “In other words,” Jonas explains, “if some of the larger companies in the S&P or the Russell do well, they can make overall market performance look better than it is.”
For sure: More than one-third of the S&P’s gains come from a mere 10 stocks.
Meanwhile, Jonas has done nicely picking winners in the small-cap space: If you’d put an equal amount of money into each name in the Penny Stock Fortunes portfolio, you’d be up 25%. Not a subscriber? You can remedy that here.
“We are marketing a hamster talking to people,” says Sprint CEO Marcelo Claure. “That’s very hard to sell.”
And with that, Sprint’s chief marketing officer Jeff Hallock is looking for a job. Actually, the press release says his departure is “voluntary” and “based on a personal decision.”
But ever since Claure came on board as CEO in August, the proverbial writing has been on the wall. For it was Hallock who inflicted Sprint’s “framily” campaign on the world, described thus by The Consumerist:
“Anyone who champions an ad campaign that features: a talking hamster voiced by Andrew Dice Clay; a French-speaking Girl Scout; a jerky, lanky goth named Gord-on; and the sadly wasted comedic talents of Judy Greer — and then tries to introduce the term ‘framily’ into the lexicon — does not deserve to be a top executive at a major wireless provider.”
Why yes, that would be hard to sell…CEO Claure has figured out what those of us who sell our wares via direct marketing have known for ages: Goofy stuff might bring you attention, but even if it’s the good kind of attention — and it wasn’t with the “framily” campaign — the prospective customer is no more likely to buy. (Have you ever bought anything on the basis of a Super Bowl commercial?)
Sprint’s ads now play up cheap data plans. Customer benefit — what a concept.
“I have bought and sold real estate for a long time,” a reader writes after we took on house flipping in yesterday’s episode, “and the 30-50%-plus profit is not what you walk away from the table with.
“I talk to many people who want to do this, and they do the usual purchase-plus-fix-up costs and then think they are going to sell the house for the highest price in the neighborhood.
“Two things: It never sells for that much unless you are willing to wait a long time — which, in the long run, prevents you from making more money — and almost everyone forgets to include the closing costs at settlement, consisting of commissions, various taxes and assistance with closing costs for the purchaser, which always amount to the maximum they are allowed to take by the mortgage company. I always budget 10% of the selling price, and if it’s less, great.
“People experienced in this field will tell you it’s much more profitable to sell it quick, which usually means a lower price, and therefore, you can do more units each year.
“A word of caution for everyone: The hedge funds spent billions of dollars buying assets from the Federal Reserve back in 2010, with a condition they could not sell them for five years. Most of these properties will start to come back to the market starting next year.
“I would assume they will sell them gradually for the next several years, but it will increase the supply, and they bought these things at the bottom of the market and at prices you and I could never get, which gives them a lot of room to adjust prices.”
“In case your readers are looking for a ‘cool’ job,” a sharp-eyed reader writes, “there are opportunities at this ‘crazy smart’ place.”
The reader then sends us a link to the NSA. “They are now in the top 15 employers for computer science majors,” he points out.
The 5: And they start ’em young: Here in the NSA’s backyard — Baltimore is less than 20 miles from NSA headquarters in Fort Meade — they’re reaching into high school.
Minimum age: 15. Minimum commitment: 20 hours a week. You even get sick leave and paid federal holidays…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Next Monday is the day Jim Rickards has set aside for his next online Q&A, open only to Agora Financial readers.
Jim will have an urgent update on the Nov. 30 Swiss gold referendum and other pressing matters in the run-up to the next financial crisis he’s convinced is inevitable. And he’ll field your questions, too.
Rickards’ Strategic Intelligence readers already have access to this event. If you’d like access, here’s where to go.