When oil prices fall, motorists are on a high. However, this is not necessarily the case for everyone.
Oil companies are definitely not ecstatic over the current market situation, wherein a global oversupply or oil glut has already driven fuel prices to historic lows.
Industry analysts point out that the price of a barrel of oil has fallen more than 70 percent since June 2014. Clifford Krauss — national business correspondent for The New York Times — noted, “The cost of a barrel of oil has already sunk this year to levels not seen since 2003.”
Oil prices have hovered between $38 to $39 per barrel in the latter half of March. This is a significantly lower price range compared to the $90 to $100 per barrel pricing that was the norm over the last decade.
So what’s causing oil prices to slip? There are four big factors that have led to the oil glut scenario. They are the following:
1. More countries are pumping out oil. Krauss noted that “United States domestic oil production has nearly doubled over the last several years, pushing out oil imports that need to find another home.” The U.S. domestic stockpiles are at their highest level in more than 80 years. As such, he said, “Saudi, Nigerian, and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices.” Iran’s return to the international oil market and Russia’s continuing production has also contributed to the glut. In fact, Jonathan Barratt of Ayers Alliance in Sydney observed: “The likes of Russia and the likes of Iran… are cutting deals left right and centre just to get cash flow.” Bottomline: The oil market is flooded and everyone is swimming in it.
2. The world economy is weak. The economic downturn in China and the rest of the world in general have resulted in decreased demands for oil.
3. Motorists are going green. The trend in the motoring world right now is all about fuel-efficiency and so-called green innovations that seek to limit consumption. Naturally, there will be less demand for oil.
4. The energy sector is going for renewables. “As the markets for oil and coal continue to lose value, high-growth opportunities in the renewable energy sector will continue to gain interest,” wrote Philip Killeen on GreenBiz. Disillusioned investors in the conventional energy sector are now drawn to the profitability of renewables. They’re encouraged by research such as the one Bloomberg New Energy Finance presented at the 2016 United Nations Investor Summit on Climate Risk in January. The study had suggested that “renewable-based generation planned during the Paris talks presents a $12.1 trillion investment opportunity for private investors through 2040.”
The Biggest Losers
The effects of the oil price drop is evident.
The federal government is losing millions in revenue, as oil companies are now planning to hold back on production. “Just 30 companies showed up for a government auction of offshore oil and gas leases (in March 23 this year), plunking down $156 million in high bids for once-coveted territory in the central Gulf of Mexico. When the same auction was held three years ago against the backdrop of $92-per-barrel oil, the government’s take was nearly eight times larger: $1.2 billion,” reported Jennifer A. Dlouhy on Bloomberg.
Aside from the U.S., oil companies in other countries undertaking high-cost projects involving drilling in deep water or in the Arctic may have to downsize or temporarily freeze their operations. Companies who have borrowed heavily to finance their oil drilling operations are now in financial trouble.
Even rich countries such as Saudi Arabia and its Persian Gulf allies may suffer a loss of — as the International Monetary Fund estimated — about $300 billion this year because of the oil glut.
Seeking International Intervention
With oil prices not expected to increase any more, Venezuela, Ecuador, Iran, and Algeria have all sought help from the Organization of the Petroleum Exporting Countries (OPEC). They want OPEC’s member-countries to cut production to firm up prices. Indeed, on February 16, OPEC members Saudi Arabia, Venezuela, and Qatar, along with Russia, presented a plan to freeze output at current levels.
They are hopeful that things will be resolved in the April 17 meeting in Doha where OPEC and other major suppliers are expected to discuss the stipulations of the output freeze, which is aimed at bolstering prices.
Some analysts and traders, though, are not putting much faith in the OPEC’s intervention. With global inventories still getting beefed up, they feel that the the meeting is unlikely to do much to give oil prices a boost.
There have also been observations that Saudi Arabia, which is tagged as the de facto leader of OPEC, will let oil prices fall so high-cost producers will be out of business. Krauss highlighted the fact that Saudi Arabia “has avoided trying to manage the market through cuts, or even talking of them” and has instead “continued to ramp up production, even as prices dropped sharply.”
Still, all hope is not lost.
In an Investment Week feature, Jonathan Waghorn, co-manager of the Guinness Global Energy Fund, has predicted that oild prices may stabilize later this year. “Supply and demand convergence is coming and, all things being equal, demand will outpace supply in the second half of 2016. With little spare oil production capacity in the world at that time, the global oil inventory overhang will get worked off and oil prices will have to be stronger to incentivise investment in new production,” he said.
Waghorn based his optimistic prediction on the expected refinery downtime in the U.S. in the third quarter and the OPEC’s commitment to a production freeze.
Latest Update On Oil – Expected to Settle Between $45 and…
“Oil is going to a new price point because of the revolution in production,” said Bill Perkins, chief investment officer of energy-focused hedge fund firm Skylar Capital Management. Perkins believes the price of crude could fall as low as $45 a barrel. He is personally short, a bet that the price of the commodity will drop. He believes oil will settle between $45 and $80 a barrel in the next year.
“Companies are harnessing amazing new technology to destroy the traditional energy value chain,” Perkins said. “There’s a lot of money to be made on that.” “U.S. energy names remain a significant net exposure for equity long/short managers who added longs and cut shorts after October’s trough,” the report said. “If pressed, one could interpret this positioning as bullish for energy stocks.”
Andurand thinks crude might hit $50 a barrel within the half-moon of 2015 and so rebound to a high of $70 within the fourth quarter. He also said the oil market is oversupplied by between 1.5 and a couple of million barrels per day, given weak demand, low disruptions to produce and enhanced production by nations that do not belong to the Organization of the oil mercantilism Countries.
“OPEC is not the swing producer anymore. U.S. shale oil producers are, but will take more time to react to prices than OPEC—it is a game changer that will lead to more volatile prices and bigger price ranges,” he added.
Morgan Stanley aforesaid the worth would wish to fall as low as $35 or $40 a barrel to prevent production and rebalance provides.
Still, the bank noted that the worth can doubtless rise eventually.
“Oversupply is probably going exaggerated and therefore the market is also content regarding side risks,” the report aforesaid.
Investing in Energy Markets Part 2: Oil, Gas and Energy
It’s no secret that the energy industry is very profitable, with oil and gas making up 80% of the market.
Thus, these two resources attract the most people. They are the best energy investment resources due to high demand and wide range of options. However, with energy scares fresh in our recent memory and the climate change movement greatly affecting energy policy, new alternatives are constantly being sought.
Everything that we do requires some type of energy. As a result, the price of energy affects the going rate for other commodities as well. When the price of oil increases, the price of transporting goods goes up as well.
That is why the cost of milk fluctuates and why your favorite imported coffee beans are more expensive than Folgers. Factors that contribute to these prices include geopolitics and natural disasters, but can never truly be accounted for in full. That is one of the underlying points to understand and accept about energy markets. Something can always go wrong. Typically, it doesn’t, but when it does things can get hairy and fast.
TYPES OF ENERGY SECTORS: That could affect your Household
Nuclear Nuclear power actually produces 1/10th of the world’s power, without emitting carbon. The United States and China have roughly 75% of the world’s nuclear plants with India and Russia also tapping into the market.
“Green” and renewable energy companies You can invest in different companies that place an emphasis on renewable resources by using the stock market. This option is optimal for investors who like the idea of green technology but do not now want to run the risk of investing in developing companies directly. This market has always been tricky from an investment perspective due to volatility. If you have an appetite for risk, however, this is a good place to look.
Modern Energy (solar, wind, geothermal, transportation, efficiency) Modern energy is made up of three major components or categories. They are wind, solar and biomass. The renewable sector is expanding at a rapid rate. We have witnessed a steady employment increase in the energy sector since 2011 with no end in sight. All types of investors and speculators are flocking to the natural resource markets in attempts to get out ahead of the renewable energy trend that could be the way of the future.
Big Oil In 2010, the world market for oil witnessed an incredible increase of 32%, to over $2,100 billion. According to estimations of oil segment professionals, the market’s value will hit $2,683 billion in 2015. The competitiveness of the global market of the crude oil is explained by its limited resources and mankind’s insatiable appetite for growth. This factor should not be disregarded easily. Our desire for more explains the majority of the energy marketplace.
Gas sector The market of natural gas reached $18.5 billion by the end of 2011. Demand for gas has recovered to match and surpass pre-recession levels. The US prices for gas are half of those in Asian countries and the EU. Gas demand decreased 3% in 2009, but at present is on the rise.
Electricity Buying the stock of electricity companies is the preferred way of entering this marketplace. The majority of the participation in electricity markets, however, takes place in the futures markets. Since power companies are constantly projecting and calibrating their loads, the futures market is the only place where investors with this sort of risk profile will feel that they belong.
Coal Many non-coal energy sectors directly depend on the performance of coal because burning coal has been proven to produce enough energy to support high demand. Due to recent regulations in the US by the Environmental Protection Agency, coal has taken a minor hit, but until a massive, institutionalized adoption of newer technology, it is highly unlikely coal will be going anywhere for the foreseeable future. In other words, coal is very much a barometer for this market. Though it is unlikely to happen any time soon, a massive dip in coal production would likely signal the emergence of a new viable energy source.
Hydro Hydropower energy is still very limited but there has been over $75 billion in investments pledged to R&D before the year 2020. There are some companies worth checking into, but for now this is very much a long term play.
Energy Funds These funds are established with companies related to the energy field. Be aware that some energy funds are more successful than others and produce a higher return than others. Often times, the energy funds are established to diversify various portfolios and minimize risk.
Oil Prices Surge As OPEC Members Agree To Cut Production
The Organization of the Petroleum Exporting Countries (OPEC) took its first action in years to cut production on Wednesday in hopes of lifting oil prices. How big a cut did the cartel agree to? Will it really make a difference?
OPEC Members Agree To Cut Oil Production
Oil had its biggest day in more than five months as prices rose 5.3 percent. This action came after OPEC members agreed they could limit oil production – in November. While there are a lot of maybes, this is a big step forward for oil. But will it actually work?
While OPEC members agreed at a meeting Wednesday in Algeria that a production cut is needed to lift oil prices, plans for the supply cut won’t be finalized until November. Barrel output will go from 33.25 million barrels per day to 32.5-33 million barrels per day. A lot can go wrong between now and November, but for now investors love the news.
Many analysts, however, are not as optimistic.
This isn’t the first time this year OPEC has tried to cut oil supply. The committee met in April, but talks fell apart when Iran would not join the talks. In addition to that, all the OPEC countries compete against each other and the U.S. for market share. Several OPEC members, Iran, Libya, and Nigeria, all want to increase oil supply. Throw into the mix the political tensions of the group and this agreement seems very delicate.
Yet, there is a positive feeling about “this time”. Members are hoping that things are more conducive to getting a deal done. Many of the largest producers are close to maxing out capacity, so lowering output slightly wouldn’t be too much of a stretch. Additionally, Saudi Arabia and Iran are feeling pressure domestically from the drop in oil prices, and thus be willing to put aside differences to improve their finances.
Wonder why OPEC needs to cut production? Check the news here with CNNMoney!
For now, trading oil is a smart play. Exxon Mobil Corp. (XOM) rose 4.40% on the news. Chevron Corp. (CVX) rose 3.20%. Energy companies and oil shares will go up until november, and then take their cues based on that meeting.
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