Autumn Post

Hello Everyone,

This is about falling oil prices and the oil industry.

The International Energy Agency has warned that the current slump in oil prices will hold back investment and could create shortages in the future as overall energy demand is forecast to grow by 37% in the next 25 years. Fatih Birol (chief economist, IEA), speaking at the IEA’s annual World Energy Outlook, said that there were already signs of a 10% cut in US spending by oil companies as a result of the slump in oil prices there to $80 per barrel (Slump in Oil Prices, Terry Macalister, 11/12/14).  On 11/14/14, Russian President Putin, asked if it was possible for the world to face a potential catastrophic drop in oil prices, he replied, “such a scenario is entirely possible and we admit it”. Brent crude, the grade traders look at the for pricing has collapsed in to a bear market as leading members of OPEC resisted calls to cut production and US output climbed to the highest level in 3 decades because of the shale boom. Brent is heading for its 8th weekly decline after sliding below $80 for the first time in 4 years. Futures were at $78.29 a barrel in London today (11/14/14), down 6.1% this week and 29% this year (Kravchenko & Meyers, “Russia braces for catastrophic drop in oil prices”,, 11/14/14).  Jim Cramer is not all that pessimistic as he stated, “Sometimes it is gut wrenching to watch and read the coverage of the oil patch now that oil is coming down. It is frustrating because the pundits commenting on it are new to the game and seem to have no idea of the gradations, the shales, the budgets, and the way these companies are run” (11/11/14). These companies have different strategies. The ‘majors’ (Like Exxon Mobil and Chevron) have drilling budgets that can’t be switched on a dime. They need to be thinking of production growth in 2019, at least a 5 year plan. On the other hand the major independents, the really lean, well-run companies that we know as EOG, Concho, Anadarko, Apache and Noble, are fabulously run by very smart people who really have their pulse on the huge shale in this country. They are nimble and for most part do not have worldwide ambitions (Jim Cramer, Trading Oil Stocks, 11/11/14). Recent earning calls show that oil companies who are in to hedging (commodity prices) are doing good job of managing their finances. Oil companies with high Debt/Equity ratios might have a problem in the future. Drop in oil prices is good for the general economy as it is seen as a tax cut and it is especially good for the freight side as well as the retailers.

Have a Great Day!