• Three Critical Investment Issues For The Current Oil And Gas Market

    The precipitous fall in global crude oil prices over the past nine months has led oil and gas companies as well as investors to strategically appraise their operations and portfolios respectively. While oil and gas companies have been restructuring ― paring capital expenditure, divesting assets, laying off staff, deferring or cancelling projects, etc ― investors have been mulling over stocks for value optimization. At present, there is some disconnect between oil and gas company stocks and global crude oil prices: for example, a recent Financial Post report shows that stocks on the Standard and Poor’s/TSX Energy Sector Index are priced at an all-time high of 65 times expected earnings (more than double those for their United States peers); and according to World Oil (3/25/2015):

    Since Dec. 15, stock values in an index of 20 U.S. producers have bounced back an average 7%, even as oil fell another 15% to $47.51/bbl on Tuesday.

    With global oil prices key to such appraisals, three critical issues will most probably define oil and gas investment in the near term:

    1. Oil Supply

    The recent oil price slip has been driven in the main by a surplus in global production of, and a weak global demand for the commodity; the greater proportion of this surplus derives from unconventionals in the United States (shale) and Canada (oil sands). Many shale operators in the United States hedged their production and this has led to continued output in spite of the slide in oil prices. In Canada, the Canadian Association of Petroleum Producers, CAPP, expects oil sands production for 2015 to exceed that of 2014.

    Weekly U.S. Ending Crude Oil Stocks In the United States, after ten consecutive weeks of stock buildup, estimates of the current oil imbalance (excess of output over consumption) stand at between one and two million barrels per day, most of which is being put away in storage facilities; but with stock levels testing the capacities of these storage facilities, the imminent shutdown of refineries for spring maintenance will further increase that oil imbalance, exerting further downward pressures on oil prices.

    2. Availability of Capital

    According to a report by Pricewaterhouse Coopers, during the seven years to 2012, unit capital productivity Continue reading  Post ID 295

  • Why Crude Oil Price Rebound May Be Slow

    Global crude oil prices have fallen rather steeply over the past six months. The international benchmark Brent plunged from US$109.07 per barrel (bbl) on 02 June 2014 to US$51.08/bbl on 05 January 2015, and the West Texas Intermediate, WTI, from US$103.07/bbl to US$50.05/bbl over the same period (Figure 1).

    Brent, WTI PricesThe impact on producing companies and countries is becoming severe and current concerns are about the depth and duration of that price decline. Some analysts have cited the fairly rapid rebound of oil prices after the spike of 2008 in their expectation of a quick rebound from the current slump. Such expectations however, may be misplaced. The oil price shock of 2008 had very little to do with market fundamentals; in 2008, prices rifled higher even while the market was well-supplied, peaking by the middle of the year and then crashing by three quarters by the end of that year. Prices more than doubled about six months later. Continue reading  Post ID 284

  • Effects of Falling Crude Oil Prices Begin to Bite

    Global crude oil prices, driven largely by weak demand and oversupply, have plummeted since the beginning of the year, reaching five-year lows just a few days ago. The marginal increase in supply has come primarily from unconventional producers in the United States (shale) and Canada (oil sands).Figure 1. Crude Oil Prices - WTI, Brent (Spot, FOB)

    The decline was exacerbated by the resolution at a meeting last month (driven in the main by Gulf States) of the Organization of the Petroleum Exporting Countries, OPEC, not to reduce supply. While OPEC has maintained supply within a narrow band around 30 million barrels per day for a few years, unconventional oil producers largely account for the 6 million barrel-per-day increase in global supply that contributed to the current glut; and in a stroke aimed at punishing the (higher-cost) unconventional producers, the government of the United Arab Emirates, recently revealed that OPEC would not reduce production even if prices declined to US$40 per barrel.

    In this sheikh-versus-shale staredown of sorts, the fallout has been reverberating. Continue reading  Post ID 268