Price of Oil

Off Topic Politics & World Issues
41

[quote]on edge wrote:
Heavy losses in the energy sector ----> Selling from winning sectors to cover losses ---->More selling to cover more losses etc.[/quote]

The winning sectors are more productive (satisfy consumers better) so it would not probably happen this way. The winners buy the most productive parts of the losers and sell everything else to bidders.

Prices are just signals to market actors. Sometimes when prices are artificially lowered or raised (by mandate or fiat) it can cause disturbances to investors and employment in the short term. The sectors with the most risk to exposure are those sectors most regulated and gifted cheap credit: education, financials, energy, etc.

42

[quote]Dr. Pangloss wrote:

[quote]on edge wrote:
Doc, can you see this leading to a downward economic spiral on the other hand?
[/quote]
No. Energy only makes up ~9% of the S&P. There will be heavy (and have been) heavy losses within the energy sector, but certainly no systemic contagion effect.

Edit: my comment above refers to both the stock market as well as the broader economy. Oil is an input in nearly every good. The benefit to consumers will far outweigh the damage to specific energy companies.

That’s not how professionals trade (although I’m not saying it hasn’t been done). You get out of your losers and keep your winners. Selling winners and keeping losers is amateur-hour; if I caught any of my guys doing that we’d have a very frank discussion about their future in the business.
[/quote]

If people are heavily leveraged in the energy sector wouldn’t they have to sell winners to cover?

43

[quote]on edge wrote:
If people are heavily leveraged in the energy sector wouldn’t they have to sell winners to cover?[/quote]

No, they would keep winners because they are actually earning an income.

They could use their revenues to pay employees, pay down debts, and reinvest.

It does not make sense to sell off businesses that are earning more than their liabilities.

44

[quote]jjackkrash wrote:

[quote]Brett620 wrote:
Although it’s expensive, fracking with improved techniques and technology could make it profitable even if oil gets to $25/barrel some analysts say. So production will increase regardless of what OPEC does. [/quote]

I think this is right, at least in the short to medium term. I’ve read conflicting reports as to actual recoverable reserves in fracking, however. It may get pretty cheap to pull out at least until it runs out; the question is how long do the reserves last as tech gets better. [/quote]

See this: Zerohedge

Fracking is the “technology” and the US oil boom was due to investment in the shale oil sector.

The writing is literally on the wall for a lot of these companies, and they can’t pay their bills with the current cost of oil. Sure there are probably some winners still in there, with some savings and alternate revenue so they can shutter up until it’s profitable again, but a lot of jobs were created by this boom that will now be lost. Some investors will be hurting as well.

…and for all relevant purposes OPEC no longer exists.

45

[quote]on edge wrote:

If people are heavily leveraged in the energy sector wouldn’t they have to sell winners to cover?[/quote]

Not necessarily.

  1. They may have adequate liquidity to cover the move against their position, or
  2. They can simply get out of the losing position.

Selling your winning positions to fund your losers is what amateurs do. It’s not what professionals do, it’s not how they became professionals to begin with.

Much like Carlin reduced the 10 Commandments to 2, all the rules of trading can be distilled down to:

  1. Get out of your losers, and
  2. Let your winners run.
46

Energy making up 9% of the S&P is staggering. I’m sure every 401k owns Exxon.

47

[quote]Brett620 wrote:
Energy making up 9% of the S&P is staggering. I’m sure every 401k owns Exxon. [/quote]

Here’s a chart showing the sector weightings. As energy shares have dropped, the sector weight of energy has moved from almost %11 in mid-2014 to %9 currently.

48

[quote]Dr. Pangloss wrote:

  1. Get out of your losers, and
  2. Let your winners run.
    [/quote]

Just out of curiosity, what metrics do you employ? Not merely stock price…?

49

[quote]theuofh wrote:

[quote]jjackkrash wrote:

[quote]Brett620 wrote:
Although it’s expensive, fracking with improved techniques and technology could make it profitable even if oil gets to $25/barrel some analysts say. So production will increase regardless of what OPEC does. [/quote]

I think this is right, at least in the short to medium term. I’ve read conflicting reports as to actual recoverable reserves in fracking, however. It may get pretty cheap to pull out at least until it runs out; the question is how long do the reserves last as tech gets better. [/quote]

See this: Zerohedge

Fracking is the “technology” and the US oil boom was due to investment in the shale oil sector.

The writing is literally on the wall for a lot of these companies, and they can’t pay their bills with the current cost of oil. Sure there are probably some winners still in there, with some savings and alternate revenue so they can shutter up until it’s profitable again, but a lot of jobs were created by this boom that will now be lost. Some investors will be hurting as well.

…and for all relevant purposes OPEC no longer exists.[/quote]

From what I’ve read oil needs to be around $80-90 a barrel to make U.S. exploration and acquisition profitable, but that existing N.D. and Texas operations can be profitable to as low as $30. So a long term glut might crush the industry, but its not clear that in the short term a glut will have lasting effects. And, in any event, the oil is not going anywhere and can be found and pulled out when prices go back up. I don’t really have that big of the problem letting the Saudi’s burn through their reserves when prices are low.

50

[quote]LIFTICVSMAXIMVS wrote:

[quote]Dr. Pangloss wrote:

  1. Get out of your losers, and
  2. Let your winners run.
    [/quote]

Just out of curiosity, what metrics do you employ? Not merely stock price…?[/quote]

Depends on the trade.

There may be a time component - I expect for XYZ to hit $80 by June 1. If it doesn’t, I’ll exit the trade on that date.

There may be a price component - I expect XYZ to hit $80. When it does, I’ll exit the trade.

The might be a multi-factorial trigger - As long as the 10 year is under %2 and the euro is under 125, I’ll be long XYZ.

There might be a discrete event - If unemployment comes in under %6.7, I’ll be long XYZ.

The may be cyclical issues that are a combination of time and discrete events - You see this in FX around tax remittance time, corporations with operations in Mexico may start buying pesos immediately before their tax payments are do. I might get long a week before in anticipation.

The above list are some of the criteria I use to get into a trade or out of a winner.

Getting out of losers tends to be more straightforward, albeit much more painful.

  1. XYZ didn’t do what I though it would by a certain date or upon a certain triggering event, or
  2. Losses have exceeded some predetermined percentage of my account, or
  3. Losses have exceeded some predetermined dollar value, or
  4. My back starts spasming for no reason and I can’t focus when my kids are telling me about their day.

Number 4 is highly scientific and boasts nearly %100 accuracy.

51

[quote]jjackkrash wrote:

I don’t really have that big of the problem letting the Saudi’s burn through their reserves when prices are low.

[/quote]

I’m OK with it as well and looking forward to them being broke and friendless.

I’ve seen various theories speculating that Saudi Arabia’s reserves are declining. Either they are bluffing now, have some plan B options, or have a vast amount of oil left. The rulers are approaching senility currently, so I’m not going to pick among those options.

52

[quote]Dr. Pangloss wrote:
4) My back starts spasming for no reason and I can’t focus when my kids are telling me about their day.

Number 4 is highly scientific and boasts nearly %100 accuracy.
[/quote]

haha! At least not “squishy guts”.

Thanks.

53

[quote]Dr. Pangloss wrote:

[quote]Brett620 wrote:
Energy making up 9% of the S&P is staggering. I’m sure every 401k owns Exxon. [/quote]

Here’s a chart showing the sector weightings. As energy shares have dropped, the sector weight of energy has moved from almost %11 in mid-2014 to %9 currently.
[/quote]

Do you know offhand what % heathcare was before the ACA?

54

709×255 82 KB

[quote]Brett620 wrote:
Do you know offhand what % heathcare was before the ACA?[/quote]

Keep in mind this is sector weighting of the S&P 500, not spending as a percentage of GDP.

55

This is a great set of charts as well.

56

[quote]theuofh wrote:

[quote]jjackkrash wrote:

I don’t really have that big of the problem letting the Saudi’s burn through their reserves when prices are low.

[/quote]

I’m OK with it as well and looking forward to them being broke and friendless.

I’ve seen various theories speculating that Saudi Arabia’s reserves are declining. Either they are bluffing now, have some plan B options, or have a vast amount of oil left. The rulers are approaching senility currently, so I’m not going to pick among those options.
[/quote]

Saudi Arabia have the second largest proven reserves on earth with over 267 billion barrels a year in reserves.

57

[quote]SexMachine wrote:

[quote]theuofh wrote:

[quote]jjackkrash wrote:

I don’t really have that big of the problem letting the Saudi’s burn through their reserves when prices are low.

[/quote]

I’m OK with it as well and looking forward to them being broke and friendless.

I’ve seen various theories speculating that Saudi Arabia’s reserves are declining. Either they are bluffing now, have some plan B options, or have a vast amount of oil left. The rulers are approaching senility currently, so I’m not going to pick among those options.
[/quote]

Saudi Arabia have the second largest proven reserves on earth with over 267 billion barrels a year in reserves.
[/quote]

I don’t trust state generated statistics, especially regarding something as big as oil reserves. It’s something that should be played close to the chest to the point of releasing disinformation.

58

[quote]theuofh wrote:

[quote]SexMachine wrote:

[quote]theuofh wrote:

[quote]jjackkrash wrote:

I don’t really have that big of the problem letting the Saudi’s burn through their reserves when prices are low.

[/quote]

I’m OK with it as well and looking forward to them being broke and friendless.

I’ve seen various theories speculating that Saudi Arabia’s reserves are declining. Either they are bluffing now, have some plan B options, or have a vast amount of oil left. The rulers are approaching senility currently, so I’m not going to pick among those options.
[/quote]

Saudi Arabia have the second largest proven reserves on earth with over 267 billion barrels a year in reserves.
[/quote]

I don’t trust state generated statistics, especially regarding something as big as oil reserves. It’s something that should be played close to the chest to the point of releasing disinformation.
[/quote]

They also gain profit from increased demand and leverage in diplomacy when they choke off supplies like they did during the 73 embargo. Russia is in a good position energy wise and with good prospects in Central Asia and Iran.

59

[quote]theuofh wrote:

[quote]beachguy498 wrote:
Well, so far the US isn’t blinking and I pass one station every day and the price drops maybe 3x a day. The Saudis could probably still make money at $15 a barrel.[/quote]

No the Saudi’s are running a record deficit. This is a major move on their part.

As to the US shale oil, I’m not quite sure that is the dynamic that is going on. The Saudi’s have historical been one of the US’s great allies, but that dynamic seems to be changing now that China is their best customer. Some have speculated that this our further collaboration with them in order to punish Russia for the Crimea situation, as they are suffering the most from it. I’ve yet to see anybody come out with a definitive analysis of this situation.

Also, the money saved per family is not much. Think about it in basic terms, depending on what car you drive, you are basically getting an extra $400-800 money not spent on gas. The Obamacare “not tax” eats this up, not to mention unaccounted for food inflation (ground beef is at like $4/lb) and wages are stagnant. It sounds good, but when you run the numbers it’s not much.

Also, the price of diesel hasn’t budged much at all, which is what would help the transport and real sectors of the economy, not consumer spending which I think is a fudged number considering the debt load of many households which functioning businesses can’t run.

I’ve seen analysis before that oil would have to be near $400 per barrel to break American economy. That’s like $10-12 a gallon for gas, which is close to what Canadians pay. [/quote]

The Saudi’s have the world’s 3rd largest foreign currency and gold reserves, at a population of under 30 million. So that really diminishes the effect of their deficit. They do need to eventually make more money though b/c they have grand ambitions of turning themselves into a functioning country (as opposed to some rich elite who hire western professionals and engineers for high-skilled work, and poor south Asians to do the labor, while the rest of the population is subsidized by the elite).

My opinion is they do want to hurt a few specific members of OPEC as well as punish the American petroleum industry, and our willing to run a deficit for now. Can’t stand them, but can’t blame them for not being the country to step up and take it in the ass to the benefit of their competition.

I agree with most of your post, though. I do want to point out that from what I’ve seen wholesale diesel prices at both the rack and trading hubs have been dropping a lot. I’m too lazy to compare percentages with retail gasoline but there’s been a marked decrease in diesel prices across the country. BUT retail diesel has not dropped much (although it has) relative to retail gas and wholesale diesel. But retail diesel prices aren’t all that important compared to wholesale diesel.

60

[quote]SexMachine wrote:

[quote]theuofh wrote:

[quote]jjackkrash wrote:

I don’t really have that big of the problem letting the Saudi’s burn through their reserves when prices are low.

[/quote]

I’m OK with it as well and looking forward to them being broke and friendless.

I’ve seen various theories speculating that Saudi Arabia’s reserves are declining. Either they are bluffing now, have some plan B options, or have a vast amount of oil left. The rulers are approaching senility currently, so I’m not going to pick among those options.
[/quote]

Saudi Arabia have the second largest proven reserves on earth with over 267 billion barrels a year in reserves.
[/quote]

Not debating the point that the Saudi’s have a fuckton of easily extracted oil, but it’s important to note that countries like Saudi keep reserve information under lock and key.

Not like the USA or Canada where we have several organizations monitoring reserve levels on an annual basis as well as laws for energy companies to provide sensitive data to the government for tracking purposes. Our notion of Saudi reserve levels and cost of production is just a guess and the Saudi’s have every reason in the world to want people to believe their reserves are larger than what’s actually in the ground.