“My big takeaway is that oil prices are going to be lower than we thought for longer,” says Matt Insley of our energy team.
Matt’s just back from a shale energy conference in Denver, focused on the Bakken field in North Dakota and the Niobrara in Colorado. All the big players in those shale plays — Hess, Whiting, Oasis, Synergy — were there.
“One of the key points to my thesis,” says Matt, “comes from a question I asked Oasis Petroleum’s president, Taylor Reid. You see, Oasis, much like many other shale players, is looking to hedge or sell forward its future production.
“One of the biggest saving graces for the shale industry is the fact that shale players hedged production prior to oil’s big drop. Indeed, with prices hovering around $50 today, many producers are still benefiting from hedges that allow them to sell barrels at $20, $30, even $40 dollars higher than today’s price.”
So what price would Mr. Reid wish to lock in? He wouldn’t be specific. But he noted Oasis “used” to hedge at $80-90. Today, even $60 “is helpful.” Understandably, he doesn’t want to show his cards to his competitors.
“It’s not his exact answer that matters,” Matt explains. “This example gives us an important look behind the scenes in America’s shale patch.
“Whenever the price of oil starts to creep above the $60 mark (which may be soon), I bet we’re going to see continued pressure on prices. That’s because as soon as the price gets reasonably ‘helpful,’ shale companies will be clamoring to sell their production forward. And when they sell, oil prices will feel the pressure.”
Nor is that the only pressure point for oil prices…
“The cost to produce oil, across the board, is dropping,” Matt points out.
It’s not just that U.S. producers have been getting more efficient. “With a massive pullback in capital spending and a drop in the overall rig count,” he explains, “the cost for services is dropping rapidly.
“According to Jeff Knupp, a director at Tudor, Pickering, Holt & Co., a 10% reduction in service costs can lead to a $3-6 drop in the breakeven price for producers. Knupp commented further, saying breakeven prices are likely $15-20 lower than they were just a few months ago.
“I’m not saying that oil prices won’t go up from their current perch of $50/barrel. But there’s growing reason to believe that prices could stay stubbornly low for a lot longer than we’ve thought.”
We pressed Matt for specifics. He points out what he’s said for a long time: Many U.S. producers can still turn a profit at $50-60 a barrel. With that in mind, “let’s not be surprised if oil prices AVERAGE in the $50-60 range for the next 12-?? months.”
In the meantime, “these are tough days for oil patch workers,” says our resident oil field geologist Byron King.
What happened in Canada’s oil sands last month has already become known as the “St. Patrick’s Day massacre.” Talisman Energy cut 200 employees and contractors at its Calgary headquarters. A few blocks away, Nexen Energy — acquired recently by a Chinese firm — dropped 400 more.
“When oil prices tumble,” says Byron, “well-run companies scramble to save cash. That’s not a bad thing; it’s a good thing. Indeed, surviving a down cycle in the oil biz isn’t about sitting around the office wondering when prices will rebound. The fact is that companies that save cash are positioning to survive.”
Byron knows this well. He escaped the pink slips at the old Gulf Oil 30-odd years ago. But several of his colleagues did not.
“Cost cuts — layoffs — are about ensuring the company’s survival and protecting shareholder interests over the long haul. Good management teams look after people who own the company, called shareholders.”
“It’s all about the company’s bottom line,” he says. “That is, the oil industry is cyclical — a serious life lesson for workers, investors and government policymakers everywhere. Know it. Learn it. Live it. Cyclical.”
Byron recently sat in on a closed-door meeting in New York sponsored by Chevron (CVX). Said CEO John Watson, “We’ve seen this before. We’ve done this before. We know what to do.”
“Despite low oil prices,” says Byron, “Chevron will pump and sell more barrels this year than last, to raise cash. In fact, Chevron is moving toward producing over 3 million barrels of oil per day by 2017, making it one of the single largest sources of oil in the world. Meanwhile, Chevron is reducing capital expenditure. This means slowing many projects and funding less exploration drilling overall.”
Across four hours of discussions, Byron says he heard repeated emphasis on “maintaining and preserving” the dividend. “If Chevron needs more cash to cover dividends,” he says, “it’ll use its strong credit rating to borrow funds until oil prices recover.”
This morning, CVX sports a yield of 4.1%. Try getting that from a CD or even a 30-year Treasury bond.
U.S. markets are exhibiting a strange delayed reaction to the latest job numbers.
The government released them on Friday. But markets were closed for Good Friday. And the numbers delivered a nasty surprise to the downside: For the first time in over a year, the statisticians at the Bureau of Labor Statistics conjured fewer than 200,000 new jobs for a month — indeed, only 126,000 for March. February and January were revised down too.
More grim news is found in a number the statisticians can’t game. The labor force participation rate — that’s the percentage of the working-age population in the labor force — slipped to 62.7%. The number is back to 36-year lows reached last fall.
The official unemployment rate remains steady at 5.5%. The real-world rate — calculated by ShadowStats.com the way the government calculated it during the Carter administration — remains steady at 23.1%.
And so traders are assuming the Federal Reserve will hold off raising interest rates — maybe as late as December now. Every asset class — save the dollar — is being bid up…
- The major U.S. stock indexes are all in the green, the S&P 500 up two-thirds of a percent at 2,080
- Gold is up more than $20, to $1,223. Crude is up nearly 5% as we write, at $51.49
- Treasury prices are rising, sending yields tumbling further. At last check, a 10-year note yields 1.87%.
The dollar index has settled back to 96.4. The index’s major component, the euro, is back above $1.10.
“We’re still in a buy-the-dips market,” says Jonas Elmerraji of our trading desk — fully aware he runs the risk of sounding like a broken record.
“As you can see from this weekly chart,” he says, “we’re still very much in the long-term uptrend that we’ve been watching for the last several years.
“And with shares hovering right above trendline support,” Jonas concludes, “the risk/reward is looking pretty good right now.”
In honor of tonight’s NCAA men’s basketball championship, we take note of an entrepreneurial spirit who’s been squashed by a giant lumbering bureaucracy.
The essential background: As they continued to advance during March Madness, members of the Wisconsin Badgers became fascinated with the work of stenographers and their machines — quickly and accurately reproducing every word they said during their many press appearances.
Soon, forward Nigel Hayes started having fun with the stenographers — throwing out long and complicated words, wondering if he could stump them.
An enterprising soul at the UW Bookstore in Madison turned the words into a timely T-shirt… and put in an order for 200 of them.
And then bookstore management thought better of it.
Contraband!
The NCAA’s bogus “amateurism” rules forbid the sale of merchandise with a player’s name or likeness on them.
Never mind that neither Hayes’ name nor likeness is found anywhere on the shirt. Never mind the UW Bookstore is a third-party vendor not affiliated with the university. Just the whiff of a hint of a suggestion that the shirt might run afoul of NCAA rules put a stop to sales.
As explained by Madison’s WISC-TV, “A bookstore spokesperson said they talked with the university about pulling the T-shirts, but they did not talk with the NCAA. They also said the NCAA did not contact about the shirts, they pulled them because they didn’t want to break any NCAA rules.”
“People who bought the shirt do not have to return them,” the TV station adds. Whew.
Postscript: There’s no keeping a good idea down. We see the shirts for sale this morning from no fewer than four eBay sellers. We’re guessing someone’s still making new ones, else they wouldn’t be going for only $15-20 apiece. On, Wisconsin!
“Let’s stop calling the oil price drop a tax advantage for consumers and call it what it is,” writes a reader — echoing recent comments in The 5 by both Jim Rickards and Chris Mayer.
“It is the drop in cash flow from one part of the economy that is not being spent by another part of the economy. Taking out of the calculation imports and exports, spending on energy in the U.S. is a zero-sum game. Let’s have talking heads call it what it is instead of a tax cut. It is a recession, depression, slowdown, wreck, crash or whatever noun you want to use to describe what is happening to those who make money from the energy industry as investors or employees.
“I would also be willing to bet a large libation of your choice that if it could be calculated accurately (which means not by government standards) that the federal government is going to see a drop in income tax revenues because of the drop in oil prices, and not see a net increase from the consumer. Consumers don’t pay additional income taxes on what they don’t spend at the pump.”
“I have a short rebuttal to those who believe only the government can provide effective public service,” a reader writes — carrying on our property tax debate well into a second week.
“Name me ONE government public service entity that has ever made money, or is at least breaking even.
- U.S. Postal Service (must be subsidized)
- Amtrak (must be subsidized)
- Medicare (people were taxed to pay for it; now it is considered an ‘entitlement’)
- Social Security (expected to run out of money in the next 10-12 years)
- Welfare (continuously in the red)
- Education loans (allowed defaults, reduced qualifications. Result: reduced number and amount of loans)
- Residential mortgages (Fannie Mae — nothing more need be said).”
“OK, now that the would-be libertarians have jumped into the property tax topic with their usual propaganda, let’s all rub our eyes in wonder and try for a little reality,” a reader ripostes.
“No, I’m not a fan of Big Government, and to quash some of the knee-jerk blather that would otherwise ensue, I am very far from being a ‘liberal.’ But in truth, there are some things that government can do better. I could talk about the Tennessee Valley Authority and rural electrification, Hoover Dam or our beautiful freeway system, but I think some of those previously commenting on the topic would be more comfortable if I jumped back 150 years or so. Therefore:
“Up until time of the American Civil War (or the War Between the States, if you prefer), house fires were generally put out by private clubs or community ‘gangs,’ whose prompt response was encouraged by the rewards offered by private insurance companies. What often happened, particularly in urban areas like New York City, was that by the time rival clubs finished brawling over the right to claim first arrival, the property in question would have burned to the ground, often along with whatever had been on each side of it.
“Staying in the past (where some of the recent commenters would apparently think they’d like to live — too bad their view of it isn’t accurate), during the aforementioned Civil War, most states in the Confederacy had differing railroad gauges (width between the tracks), which meant that troops and supplies had to be offloaded and reloaded when crossing state lines. Union forces (and civilians and materials) had no such problem, because all of the rail lines in the North were the same gauge. Robert E. Lee was a great general who worked wonders with the situation he had, but this variability of railroad gauges was one more factor working against him.
“So sorry, would-be libertarians, there are some things that government can do better than private enterprise. Meanwhile, I do say that the questions and considerations you would pose have value, but they might earn more respect asked BEFORE the infrastructure was built. I would also suggest that a deeper study of history would help to improve your proposals and politics, to include: John Locke and social contract theory and also why the writers of the U.S. Constitution included a ‘promote the general welfare’ clause.”
The 5: Heh… There’s a bumper sticker for that…
Best regards,
Dave Gonigam
The 5 Min. Forecast
