The downside of the downside in Oil

by Laura Ehrenberg-Chesler on December 11, 2014

in Economic Indicators,Energy,Geopolitical

This morning Ed Yardeni had an interesting analysis of the downside of the recent and precipitous drop in oil prices. 1) OPEC losing market share. According to Bloomberg, OPEC yesterday lowered its production projection for 2015 by about 300,000 barrels a day, to 28.9mbd. That’s about 1.2mbd less than the group’s 12 members pumped during November, and the 30mbd target they reaffirmed at a meeting in Vienna on November 27. According to the Bloomberg article, “Prices now are below what 10 out of OPEC’s 12 members need for their annual budgets to break even… Kuwait and Qatar are the exceptions. Saudi Arabia, OPEC’s biggest member, has $742.4 billion of reserve assets, data from the country’s monetary agency show.” (2) Capital spending getting slashed. The 12/8 FT reported that “ConocoPhillips has become the first major oil and gas company to detail cuts to its capital spending plans following the steep fall in crude prices since June, by revealing that it will spend about 20 per cent less next year than in 2014.” Conoco had previously projected that its average capital spend would be about $16 billion per year through to 2017. But it now plans a capex budget of just $13.5 billion for 2015. The company plans to cut back on US shale oil and gas exploration. Nick Raich, our good friend and proprietor of The Earnings Scout, tells us he calculates that almost 40% of S&P 500 capital spending in 2014 came from companies in the S&P 500 Energy sector, with ExxonMobil and Chevron being #1 and #2 in the entire S&P 500. Further, nine out of the top 20 S&P 500 capital spenders were Energy companies. (3) Industry analysts slashing estimates. On Tuesday, Joe and I reviewed the sharp declines in the Net Earnings Revisions Indexes of the S&P 500 Energy sector. Here are November’s readings again: Integrated Oil & Gas (-45.6%), Oil & Gas Exploration & Production (-43.5), Energy sector (-36.2), Oil & Gas Equipment & Services (-34.8), Oil & Gas Drilling (-31.6), Oil & Gas Storage & Transportation (-12.6), and Oil & Gas Refining & Marketing (1.0). Industry analysts have cut their 2015 estimates for the sector by 19.4% over the past 10 weeks through the beginning of December, resulting in an expected earnings decline of 9.5% for 2015. (4) Plenty of stockpiles. Meanwhile, US crude oil stocks (excluding the SPR) totaled $380.8 million barrels during the first week of December, a record for this time of the year. (5) War by other means. In the 12/8 Morning Briefing, I noted that the Saudis might have decided to start the price war in early October after Iran in effect took over Yemen, which has a 1,700 km border with Saudi Arabia. FT columnist David Gardner wrote a 12/9 article titled, “For Saudi Arabia, plunging oil prices are a political weapon.” He observed: “Wahhabi Saudi Arabia’s visceral hatred of the Shia–as well as its rivalry with the Persian and Shia Islamic Republic for hegemony in the Gulf and the Levant–should be

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factored into the oil price equation. Riyadh, sitting on foreign exchange reserves of more than $750bn, can ride out lower oil revenues. Iran, which needs the price to be twice the current level to make ends meet, is hemorrhaging. Already economically hobbled by sanctions, Tehran is by some estimates spending $1.5bn a month supporting its allies in Syria and Iraq.”      

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