February 25th 2015 – jfhotte.com
I’ve been a spectator of the latest oil price fluctuations. Like everyone else I try to look threw my crystal ball. I don’t know about you, but every day I read articles about oil, I study price action, I eat oil for breakfast. Bears and bulls have been fighting to predict the future for 3 months now. I’ve watched many interviews by Bloomberg, funds CEO or oil producers lately. There are many important facts that caught my attention.
In February the price of oil have been oscillating between 45$ and 55$.
Saudi Arabia, Iraq, Iran and OPEC countries have a big advantage when you look at cost of production by barrel. While Canada, Brazil and other important producers are really hurt with the price right now: 50$ February 25th 2015.
Countries that import oil will benefit from low barrel prices. Those countries are China, India, Asia and the Euro zone. The international production is increasing.Their respective import/export ratios are high. United States increased it’s shale production by 70%. Demand is increasing, but production is increasing more.
This is the first time in history that price of oil is brought down by an increase in production and not a decrease in demand by itself.
On the other side, countries like Brazil and Canada could have hard times figuring out what’s happening to them. Price needs to be over 70$ to be profitable for their energy companies.
Let’s compare the effect of low oil prices between different countries.
Production cost: 50$
The energy information administration announced in 2013 that 7,4 millions barrels per day of petroleum were produced.
First of all, the drop of 2014-2015 is provoked by supply. Production in United States skyrocketed and nothing seem to slow down with new projects around the country, in states like North Dakota, Texas and Alaska.
Those numbers in 2014 increased to 9 millions barrels per day of petroleum.
United States import more oil than they produce.
The United States imported approximately 9.9 million barrels per day (MMbbl/d) of petroleum in 2013 from about 80 countries.
Conclusion: As an importer, United States are benefiting from low oil prices, some analysts says this increase of production (who arguably started 3 years ago) was a strategic plan to push prices down. Lately, some analysts said this was an economic alliance between certain countries to sanction Russia for their political behaviours. Lower oil prices and the Ruble crisis (0.016USD) are hurting the economy of Vladimir Putin.
The Dow Jones and SP500 are at records numbers, no correction so far. Mrs. Yellen, the chairman of the FED is flexible on increasing interest rate soon. Lower importation/exportation ratio is a determining factor, also companies would save on expenses and benefit with lower prices. After the 2009 sub-prime crisis, strategists concluded that to stimulate employment and GPD, US would be better with a booming oil industry. Story does not tell how they succeeded to achieve this. Sure thing they could not control price by themselves, but they could increase supply.
Production cost: Around 20$
The energy information administration (EIA) are stating that Saudi Arabia are producing around 11,5 millions barrels per day. They are the second biggest exporter of oil to US after Canada. Those countries have been economic allies for a long time.
The king of oil and it’s industry said many times lately that they would not mind seeing the barrel at 30$. Saudi Arabia, the world’s largest producer, took aim at the problem of falling prices when it decided to defend its market share by cutting prices instead of production.
Conclusion: Saudi Arabia can live with low oil prices for a long time. 16% of the world’s proved oil reserves, is the largest exporter of total petroleum liquids in the world, and maintains the world’s largest crude oil production capacity. Traders have speculated that Saudis intention was to hurt any number of economic rivals including Russia, Iran or the U.S. emergent shale oil industry.
Production cost: 80$
The Canadian association of petroleum producers are stating that Canada are producing around 4 millions barrels per day.
Canada will probably be the country having the biggest problems in the industry. The government of Stephen Harper have been spending 30.8 billion on oil sands in 2013. You know the saying from Warren Buffett: « do not put all your eggs in one basket »? – Canada did the opposite.
Energy sector and oil sands represents a third of Alberta’s GDP. Oil and mining industry represents arguably 5%-20% of Canada’s GDP considering that employment in western canada is mostly sustained by oil production. Real estate, insurance and finance sectors also successful because of oil. It’s simple, 20% of TSX Toronto’s stock exchange is filled with energy stocks.
The mining and environmental cost of oil sands is incredibly high. It will take years and a lot of money to clean all the environmental damages. The only reason why Canada’s oil industry was booming is based on highly speculative prices; it’s economically wrong. The intrinsic/real value of oil is nowhere near 100$ a barrel if you analyse production/supply versus world demand. From 1980 to 1986, OPEC decreased oil production several times and nearly in half to maintain oil’s high prices and make money on futures and long positions.
I am not done with Canada yet.
Here is the nominal and real prices of oil given by the Energy Agency:
Considering oil prices have been manipulated on the market by long positions, futures and other toxic speculation since the creation of OPEC. We don’t see it in the graphic but nominal and real price spread was even higher when oil price was at 140$ a barrel.
Another problem that Canada will face is the emergence of a new competitor that will export more oil to the United States: Mexico.
Here is the composure of United States importations reported by the EIA. Canada 42%, Saudi Arabia 21%, Venezuela 12%, Mexico 6%.
The CEO of Black Rock Laurence D. Fink mentioned in an interview on Bloomberg that Mexico’s production might double in the next 1-2 years taking shares of the market. Mexico’s have a lower production cost than Canada and the exploration and prospections’s projects are important. Keystone pipeline failed, just yesterday Obama vetoed it.
Considering United States are increasing production, Mexico and other exporters are increasing production, I do not believe Canada will succeed.
Oil Sands – CAPP
|Capital Spending:||In situ, Mining and Upgrading:||$30.8 billion|
|Payments to the Province:||Provincial Royalties:||$4.4 billion|
To me oil prices will continue to go down in 2015, we might see 30$ a barrel if the world economy gets into another recession, production is not slowing down.
I believe Canada is the next big short. Shorts increased by 12% in the energy sector so far. Economists have been talking about a real estate bubble for years. Banks in Canada made huge loans to oil companies and their revenues are decreasing at an alarming rate. I believe everything looks bright right now on the balance sheets, but there is an important delayed reaction coming up. To me Canada’s future in the next 10 years is not bright.
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