With most traders back in their chairs this morning for the first time in 2015… crude is sliding. Again.
Brent crude, the global benchmark, is below $55 a barrel for the first time since May 2009. West Texas Intermediate, the U.S. benchmark, is below $51. [Update: Below $50. That’s a first since April 2009.]
No, there’s no obvious catalyst — other than Iraq, OPEC’s No. 2 producer, announcing plans to boost its oil exports to a record this month.
It’s in this dicey environment that we introduce a gutsy forecast — a return to $100 oil before year-end 2015.
“There’s a shocking statistic you need to know about U.S. oil,” says Jody Chudley, the newest contributor to our energy team. Mr. Chudley is a veteran of the oil sector… and he’s been closely involved in the U.S. shale space the last five years.
“Fact is,” he explains, “one U.S. producer may have just let the cat out of the bag during their 2015 guidance announcement.”
To be clear, “I don’t know how low the price of oil will ultimately go in the near future, but I do know that the seeds for an oil price recovery are already being planted by North American shale producers. These companies are dramatically slashing their capital spending plans for 2015, and I believe that the impact on production will surprise the markets.
“I believe that the key to understanding the 2015 oil market can be found in the 2015 guidance just released by Oasis Petroleum (OAS),” says Jody.
OAS is one of the great shale success stories — growing production from 10,000 barrels a day in 2011 to 45,000 in 2014. But with oil prices down so far so fast, the company’s share price has been crushed 80% since last summer.
Last month, Oasis announced its 2015 capital spending plan and guidance. “The decrease in spending year on year was eye-popping,” Jody explains.
“In 2014, Oasis spent $1.43 billion drilling wells and bringing production onstream. In 2015, that number is going be cut almost in half, down to $750-850 million.
“Instead of growing production at a rate of 50% per year, Oasis is projecting 5-10% growth in 2015.”
Two things to keep in mind here: First, most of that growth will be “front-loaded” into the first part of the year. OAS has 10 rigs running now. That will be down to six by March.
Second, ordinary oil wells can keep going and going for decades before production starts to decline slowly and steadily. But shale wells have a much steeper and faster “decline rate”: In the lifetime of a typical shale well, 30% of its output comes in the first year alone.
Result: “We could very well see a peak in production during the end of Q2 in 2015,” says Jody. “As the year goes on, existing production will decline faster than new production comes online.”
Jody’s done some back-of-the-envelope math and concluded Oasis’ production by year-end 2015 will be back to levels seen in the second half of last year.
Now… figure the rest of the U.S. shale industry follows suit.
“At the end of the second quarter of 2014,” says Jody, “U.S. oil production was 8.4 million barrels per day. In the first week of December 2014, that production rose to 9.1 million barrels.
“If the entire domestic shale industry follows Oasis’ lead and starts declining in the second half of the year down to mid-2014 levels, we would be looking at about 8.4 million barrels per day, which is 700,000 barrels lower than where we are currently.
“That is a huge, unexpected difference,” says Jody.
Unexpected for this reason: All the “authoritative” projections for 2015 — from OPEC, the U.S. Energy Department and the International Energy Agency — forecast U.S. production will grow up to 1.5 million barrels per day.
Explains Jody: “If U.S. production were to drop by 700,000 barrels per day, instead of growing, the oil market would have almost 2 million barrels per day less supply than is currently expected by most market participants.”
Jody cautions us his numbers are rough guesses. It’s the trend he urges us to pay heed to: “Shale producers are responding immediately, and in a big way, to this oil price decline.
“And if there is one indisputable fact about shale production, it’s that with its very high rate of production decline, a decrease in drilling will quickly show up in the production numbers.
“The seeds for an oil price recovery have been planted.”
Consider yourself on notice.
In the meantime, the major U.S. stock indexes are sliding along with oil today, and energy shares are leading the way.
At last check, the S&P 500 is down 1.4%, to 2,029. Small caps are holding up better, the Russell 2000 down less than two-thirds of a percent, to 1,191.
Hot money is flowing into bonds, sending yields down; a 10-year Treasury note yields a hair over 2% now. Gold is up modestly, knocking on the door of $1,200 yet again.
In the currency markets, the euro slid overnight to a nine-year low near $1.18. As we write, it’s recovered back above $1.19.
“The Federal Reserve is in trouble,” says Jonas Elmerraji of our trading desk.
Last week, Jonas ventured in this space that the S&P 500 would notch a seventh straight year of gains in 2015 — a percentage in the high single digits — based on several decades of market history. Today, he’s back with another supporting factor.
“Looking back over the last six years,” says Jonas, “Fed stimulus has been a major driver of this stock market rally.
“Since the financial crisis of 2008, they’ve been using inflation as a gauge for whether or not stimulus is necessary. When inflation falls below their threshold, they pump a bunch of money in the system. Their motivation is to avoid the economic perils of deflation.
“And they’ve used one particular chart like clockwork:
We’ve shared this chart periodically since the spring of 2012: Fed statisticians run a formula involving the rate on Treasury Inflation-Protected Securities (TIPS)… and then try to guess where investors believe inflation will be five years down the road.
Yes, it sounds ridiculous — the Fed guessing about the guesses of investors — but that’s not the point…
“Every time this gauge falls below 2.2%, they’ve announced a major stimulus program,” says Jonas.
It fell below that threshold in October. “It’s currently the lowest we’ve seen since Janet Yellen’s term as Fed chief started. In fact, it’s the lowest we’ve seen since 2008.
“But the Fed is trying to avoid announcing another round of quantitative easing. They’re trying anything to ‘wish’ inflation back to their target levels. It’s not working.
“At some point, the Fed is going to need to announce some kind of stimulus package to reverse the trajectory on that chart.
“And it makes the uptrend in stocks look likely to stay alive this year.”
From the “what could possibly go wrong” department, we have a 4% down payment on a $400,000 home.
Strictly speaking, it’s not a down payment. “Instead of requiring a down payment,” says the Los Angeles Times, “banks allow borrowers to use their money to pay interest upfront, often called ‘buying down’ the rate” for a 15-year term.
The paper profiles a couple ponying up $16,000 — the equivalent of a 4% down payment on a $400k property — to buy down their rate to 0.5%.
“In little more than three years of monthly payments,” the Times explains, “the couple will have more than 20% equity in the home, assuming the property value stays the same.”
Heh… that’s quite an assumption. Never mind the assumption that the couple’s incomes will remain sufficient to support the higher monthly payments.
This scheme was hatched by scholars at the right-leaning American Enterprise Institute, with the enthusiastic support of the left-leaning Neighborhood Assistance Corp. of America.
Bank of America and Citibank are supplying $13 billion in subsidies for these mortgages; doing so helps them comply with the Community Reinvestment Act, the infamous law that contributed to the 2000s housing bubble. But hey, if it makes homes in expensive markets like southern California more “affordable,” it’s all good, right?
We can’t wait to see how the financial wizards at BofA and Citi figure out how securitize this stuff…
“I am not sure that I correctly read your comments concerning whether Sony was hacked or not,” a reader writes. “But if you think that they were not, you have your head up your ass.”
[Huh? Oh, this should be good…]
“Most of our military and commercial technology has already been taken without our companies even knowing it. Foreign government-supported hacking is so sophisticated that they can get into company computer systems, freely roam through files and copy back to them what is of interest without the targeted company even knowing it. Most likely, any Fortune 500 company that has valuable technical or commercial information has already been hacked. Only a few are even aware that it has happened. And that was only because they were alerted externally.
“You may think that you have nothing to worry about. All I can say is that if you are hacked by a foreign government-sponsored hacking group, you will never know it unless they want to embarrass you. You may sleep well at night thinking you are secure. I sure would not.”
The 5: As Aaron Rodgers would say, R-E-L-A-X. We were having a little fun the day after Christmas.
We’ve been on the cybersecurity beat here at The 5 for two years now. It’s a growing and investable field.
The disturbing thing about the Sony case is, as cybersecurity expert Bruce Schneier writes today in The Atlantic, “we still don’t know who’s behind any of it.
“The FBI said in December that North Korea attacked Sony. I and others have serious doubts. There’s countervailing evidence to suggest that the culprit may have been a Sony insider or perhaps Russian nationals.”
For that matter, we also don’t know who took down North Korea’s Internet. “It could have been an act of retaliation by the U.S. government, but it could just as well have been an ordinary DDoS attack.”
The result is a future in which “we’re going to see an even greater blurring of traditional lines between police, military and private actions as technology broadly distributes attack capabilities across a variety of actors.”
“Congratulations,” writes a Swiss reader, “for telling the truth about Washington’s attitude and goals in the Ukraine. Virtually no one is talking about that, to the exception perhaps of LEAP, based in France. Your analysis merits to be spread as widely as possible.
“However, I would not take the liberty of sharing it without your formal approval, since it comes from a paying subscription and thus might be copyrighted.
“Mind you, Europeans are perhaps a (ever so) little less brainwashed and or gullible than the public on your side.
“I always enjoy reading The 5 for the concise and valuable content it offers.”
The 5: Feel free to share, and thanks.
“It is starting to look more and more that the biggest war-hungry government on the planet is the Good Old US of A,” writes a British reader, also reacting to our “wild card” issue last Friday.
“While Putin cannot go on causing problems, the answer is diplomacy, not war. We have seen the mess that your neocons have created, and yet they have not learned any lessons. At this time, all the nations that have a problem with the Islamist jihadis should be cooperating, not fighting each other.”
The 5: Putin was the first foreign leader to call the White House to express sympathy after the Sept. 11 attacks. The White House returned the favor a year later by withdrawing from the 1972 Anti-Ballistic Missile Treaty…
“Wow! That was a great pic of those Ukrainian neo-Nazis!” writes a reader from the western suburbs of Chicago.
“Only thing missing were the pitchforks and Gene Wilder and Marty Feldman from Young Frankenstein leading the march while singing the famous NSDAP Horst Wessel lied (basically, the song that was the I Dream of Jeannie or Beverly Hillbillies theme song for Nazis).
“Oh, wait. Sorry. I looked closer at the pic and did notice Wilder and Feldman were, in fact, there, over on the right in the far back, barely visible. In fact, I’m sure I even saw one of Obama’s warmongers there, mixed in among the crowd — the same guy from Young Frankenstein who had gotten the ‘Do Not Use This Brain! Abnormal’ transplant.”
The 5: You’re joking, but when the street protests were getting cranked up in late 2013, the State Department’s Victoria Nuland (of “F*** the EU” fame) was handing out cookies to the demonstrators. Sen. John McCain showed up in Kiev to lend his support too. That was only months after McCain was in Syria palling around with the Northern Storm Brigade, who previously killed U.S. troops in Iraq. Good times…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. In case you were busy with holiday doings and missed our note last week…
If you believe wealth must come with effort… you must absolutely, positively NOT click on this link. If you click anyway and you’re offended, it’s your own fault.
