How Are You Thinking Bout The Drop In Oil Prices?

[shhughes1116]

It is funny that you mention that...we American's are pretty good at starting wars and blowing s**t up when we need a positive jumpstart for our military-industrial complex or a quick way to boost world-wide oil demand (you would not believe the amount of gasoline that an M1A2 tank guzzles on a daily basis when driving around the desert).   

 

Sorry for the sarcasm, but, in general, I find it a bit silly how much Americans berate the Russians for what they do, yet we Americans have a pretty rich history of nation-building and war-mongering. 

 

For what it is worth, I am a conservative and come from a family where there has been a substantial amount of service to our Armed Forces, both in the past and in the current period.

 

Do tanks really run on gasoline? I've always assumed they ran on diesel, like large industrial engines. It would certainly be more efficient...

 

The gas turbine engine is quiet.

 

You are correct, historically most tanks have run on diesel engines.  However, M1A2 uses a gas turbine rather than a diesel engine...can run on Diesel #1, Diesel #2, JP-4, JP-8, kerosene, and even marine diesel if you are in a pinch.  United States has typically fueled their Abrams with JP-8...gets a whopping 0.6 miles to the gallon, so a typical armored division uses ~600,000 gallons of JP-8 per day when deployed to the field for combat.  Imagine what that does to the market for refined products!

 

ERICOPOLY is right on the money about the noise level...M1A1 was known as Whispering Death when they ran it through trials.   

 

Sorry to hijack this thread with irrelevant chatter...I'll stop now.

[petec]

You should read The Coldest Winter.  That will make you feel relatively better.

 

Relatively being the operative word.  That's a hell of a book, and puts things in perspective.

[petec]

I've been thinking about the drop in oil prices and here's my two cents...

 

1-World demand for oil isn't in a rapid decline and longer-term demand is increasing

2-New US production has added enough supply to upset global supply/demand

3-Current oil price decline is due to global over-supply

4-OPEC countries will cut production - Why 'give away' valuable reserves and they need the income

5-The global economy will strengthen from the oil price drop

6-Prices will return to $100/bbl < 3 years

7-Situation has created lots of opportunities up and down the risk scale from majors to Russian equities

 

I have been nibbling on - OIL - iPath S&P GSCI Crude Oil TR ETN - Risky for many reasons (ETN unsecured,etc), but a very small position highly correlated to WTI price

 

 

 

 

I don't think #4 is right.  OPEC gained pricing power in 1971 when the Texas Railroad Commission instructed US producers to produce at 100% (meaning there was no spare capacity in the US, which had been the swing producer).

 

OPEC abused that power in the 1970's and the high prices thus created allowed the development of new, high cost resources in the North Sea and Alaska (in particular).  Users also got more efficient.

 

By the early 1980s the market was heading for oversupply and so OPEC started cutting to keep the price up.  Except most of them didn't, because it pays an individual country to overproduce vs. quota so long as the whole cartel is cutting.

 

So basically Saudi cut.  And cut.  And cut.  And then thought: why are we doing this?  All that's happening is everyone else is getting rich and more high priced supply is being developed.  So in 1986 they flooded the market, and we got 15 years of cheap oil.

 

The Saudis who are in charge now are old.  They remember.  And today OPEC is a much smaller percentage of world oil supply so their influence is smaller.  If they cut, all that would happen is efficiency would continue to rise, supply would continue to rise, and OPEC would eventually end up producing very little of their incredible asset. 

 

(And in time, when we move to other technologies to supply our energy, they'd look at all that now-useless oil still in the ground and think: bugger.  As Al Naimi has said, the stone age did not end for a lack of stones and the oil age will not end for a lack of oil.)

 

The only sane thing a low cost producer can do is produce flat out, keeping prices fair and demand high and other producers out of the market.  Ask Potash Corp how the other strategy works out ;)

 

That's not to say OPEC won't occasionally cut if politics briefly rules over common sense.  But they won't, in the long term, hold the price of oil above the market price because they know it's stupid and won't work.

[CorpRaider]

CorpRaider,

 

I've seen chatter about CRC lately on Twitter. What are your thoughts on the opportunity?

 

Anyway, as I was saying, it should run from $5 to $6.30 on high volume over the next couple of days.  :o

[frommi]

http://www.valuewalk.com/2014/12/jim-chanos-says-2014-better-year-short-sellers/

 

Chanos has an interesting bet running, he is short oil majors and long oil, because one of those is mispriced. Makes sense in my view.

[yadayada]

@pete, good post. But I think the high oil price in the 80's was much more artificial then it was in the past decade because OPEC had such an iron grip. Usage has skyrocketed, just check out china's growth in oil usage. Rest of asia will follow I think.

 

The US uses less oil every year actually. But costs have skyrocketed. Opec does not have nearly the same power now, so I doubt we will see a long period of cheap oil now. At some point there are no 90m barrels of oil a year available for 50-60$. the highest cost guys set the price in the end.

 

What everyone is forgetting is that current oil wells have a CASH break even cost of like 30$ or maybe 40$. For example, Suncor. But if you include capex , that is closer to 60-70$.

 

So if current wells run dry , they need oil at like 80$ to drill new wells to make it economically feasable. That is why SA is not at all in a hurry to cut. They know if prices stay depressed for a year or so, north america will be very hesistant to aggressively invest in new wells. They want close to 100$ oil. They sacrifice now, and get more stable high oil prices later. They are smart guys. A lot of other opec countries are quite short sighted in this regard.

 

So yeah for maybe a few years those shale fields pump out cheap oil, but if price stays depressed, those 9m barrels, or however much it is of US oil, will partially go away.

 

 

[bmichaud]

Lol of course it should corpraider - is it ever any other way?

[ni-co]

http://www.valuewalk.com/2014/12/jim-chanos-says-2014-better-year-short-sellers/

 

Chanos has an interesting bet running, he is short oil majors and long oil, because one of those is mispriced. Makes sense in my view.

 

Sounds like a very reasonable thing to do.

[kilroy04]

http://www.bloombergview.com/articles/2014-12-21/ready-for-20-oil?cmpid=yhoo

 

Gary Shilling - the cash cost of pumping the cheapest oil - once the well is producing is as low as $10-20/b.

[shhughes1116]

Got

http://www.bloombergview.com/articles/2014-12-21/ready-for-20-oil?cmpid=yhoo

 

Gary Shilling - the cash cost of pumping the cheapest oil - once the well is producing is as low as $10-20/b.

http://www.bloombergview.com/articles/2014-12-21/ready-for-20-oil?cmpid=yhoo

 

Gary Shilling - the cash cost of pumping the cheapest oil - once the well is producing is as low as $10-20/b.

http://www.bloombergview.com/articles/2014-12-21/ready-for-20-oil?cmpid=yhoo

 

Gary Shilling - the cash cost of pumping the cheapest oil - once the well is producing is as low as $10-20/b.

 

The cash cost is misleading when comparing different types of production.  Gotta take into account the cost of the maintenance capex necessary to sustain production at current levels.  If you include that, then the cost of shale wells go up a bit given the high initial production and relatively steep decline rate.  This contrasts with Saudi production, where cash costs are cheap and maintenance capex is low due to low decline rate and the characteristics of that particular oil basin.

[CorpRaider]

I find it difficult to believe that oil can continue to crater in the face of 5% US GDP growth (that's the 3Q print). 

[Liberty]

http://aswathdamodaran.blogspot.ca/2014/12/the-oil-price-shock-primary-secondary.html