A "Flood" of new oil..........

[GRG55]

Re: A "Flood" of new oil : Be Careful What You Wish For

no harm, no foul.

my guess is that you're right. what i'm suggesting is to look at the exchange rate historically and see if, in fact, there's some information there. it would be interesting to look at grg's "rule" retrospectively to see if in fact there has been an implicit assumption about the $us value of the stock, even though the "rule" was expressed in loonies.

looking at su's chart in $us says that the same rule, buy at 28 [but in u.s. dollars] would have worked quite well over the last decade. so i guess i'm asking grg55 a question here: is the loonie's exchange rate distorting his judgement on the "value" of su at current prices?

Probably is.

The $28 excursions are the bottom of the range AFTER the secular rise last decade when oil came off its multi-decade decline and '99/'01 double bottom. During most of that time the Loonie had been close to par with the US$, so adjusting the figure using the current exchange rate makes some sense.

I would venture a guess it is NYSE buying that is setting the price for SU and Toronto is merely following based on whatever the currency exchange value is. Canadian large cap and pension funds have to hold stocks like SU because there just aren't that many companies to choose from in Canada.

However, I see no reason that SU couldn't range back down to CAD $28 or even lower in the foreseeable future.

And I must say I didn't expect my somewhat offhand figure to generate nearly this much discussion.

[jk]

Re: A "Flood" of new oil : Be Careful What You Wish For

Apologies didn't mean to insult you, I know you know. However I just assumed GRG bought it at 28 CAD irrespective of the USD exchange rate as I'm sure he's aware currencies are convertible too.

no harm, no foul.

my guess is that you're right. what i'm suggesting is to look at the exchange rate historically and see if, in fact, there's some information there. it would be interesting to look at grg's "rule" retrospectively to see if in fact there has been an implicit assumption about the $us value of the stock, even though the "rule" was expressed in loonies.

looking at su's chart in $us says that the same rule, buy at 28 [but in u.s. dollars] would have worked quite well over the last decade. so i guess i'm asking grg55 a question here: is the loonie's exchange rate distorting his judgement on the "value" of su at current prices?

[llanlad2]

Re: A "Flood" of new oil : Be Careful What You Wish For

i know that currencies are convertible, and i can do the multiplication.

grg said he had a price level he used as a buy point, priced in loonies. we don't know what the us/cad exchange rate was when grg made that his buy point, nor what it was when he executed his buy trades in the past. if the exchange rate was approx 1:1 at those times, the fact that the loonie is now down against the dollar would matter in assessing the trade.

Apologies didn't mean to insult you, I know you know. However I just assumed GRG bought it at 28 CAD irrespective of the USD exchange rate as I'm sure he's aware currencies are convertible too.

[jk]

Re: A "Flood" of new oil : Be Careful What You Wish For

It makes no difference. The share price takes it into account. eg if 1 usd bought 2 loonies then the Canadian stock price will be double the US price.

i know that currencies are convertible, and i can do the multiplication.

grg said he had a price level he used as a buy point, priced in loonies. we don't know what the us/cad exchange rate was when grg made that his buy point, nor what it was when he executed his buy trades in the past. if the exchange rate was approx 1:1 at those times, the fact that the loonie is now down against the dollar would matter in assessing the trade.

[llanlad2]

Re: A "Flood" of new oil : Be Careful What You Wish For

is it worth looking at su in $us instead of loonies, given the exchange rate variation? is $us su is now 27 and change, it's lowest level since '05 except for the extraordinary dip during the crash of '09.

It makes no difference. The share price takes it into account. eg if 1 usd bought 2 loonies then the Canadian stock price will be double the US price.

[jk]

Re: A "Flood" of new oil : Be Careful What You Wish For

To be honest Raz, I don't know.

I use Suncor's Toronto listing as one indicator, and historically any time it falls below CAD $28 I usually buy it. Right now it's still at CAD $32, despite the carnage and SU's exposure to higher cost oil sands. That's interesting to me and causes me to pause for now.

The services sector is probably early in the adjustment to the capital cycle. Up here in Canada I expect the services side will have a reasonable winter of activity, but once everything shuts down for spring breakup the activity will likely not return to current levels next summer. That's when things could start to get really interesting.

Down south there isn't the seasonal influence, and the rig count is still robust. I know there was a headline about the drop in oil rigs last week, but as usual if one gets past the sensational attention grabbing headline, one would be able to discern that of the reduction of 28 land rigs (from 1848 to 1820 total), 24 of them were in Texas, and almost all of those (-20) were in the West Texas Permian. The Lower 48 land rig count is still 117 rigs ahead of this week last year, including an increase of 2 more rigs drilling for gas, and many companies won't start new drills they cannot TD before the Christmas/New Year break.

In Canada the gas drilling rig count is 26% higher than it was this week last year - that's how powerful a declining exchange rate can be!

is it worth looking at su in $us instead of loonies, given the exchange rate variation? is $us su is now 27 and change, it's lowest level since '05 except for the extraordinary dip during the crash of '09.

[GRG55]

Re: A "Flood" of new oil : Be Careful What You Wish For

It's never good to depend on one source of income and oil prices will be low in the medium term.

Perhaps a good opportunity to diversify into technology and look East instead? By 2025, the Chinese consumer goods market alone will be larger than the US AND EU combined - in fact today China already buys more smartphones than the EU and US combined. And we've not even considered India's rise.

This shift to the East is as inevitable as global warming.

I'd be interested in just one true example of a resource dependent nation that was able to truly diversify its economy away from that dependence. I am not aware of any. My definition is an economy previously dependent on commodities where resource extraction is replaced with something else as the largest source of tax revenue for government. Not even Norway has been able to come close to achieving that.

"Diversifying" into petrochemicals, heavy equipment manufacturing, overheated real estate construction, retailing of luxury goods, and all other such delusional nonsense driven by high wages during the commodity price boom doesn't count as diversification (although the tripe emitted by local politicians and business "leaders" during the boom would wish to have you believe otherwise).

Venezuela is already a ward of the Chinese government. Russia is well on its way in the same direction. The Chinese are patient; when it takes more than 15 years to agree on price for a gas supply contract with Russia it is pretty clear who is dependent on whom. Putin overplayed his hand and Europe will now become permanently less dependent on Russian energy with time. Russia has no hope of diversifying from its extraordinarily high dependence on resources; it can't even effectively compete with China to sell arms to the world.

[jk]

Re: A "Flood" of new oil..........

deleted

[touchring]

Re: A "Flood" of new oil : Be Careful What You Wish For

In Canada the gas drilling rig count is 26% higher than it was this week last year - that's how powerful a declining exchange rate can be!

Interesting. Gas stocks such as RRC, EQT and CHK have been dropping along with oil prices. I wonder if they are a better bet given that gas is not affected by the current political game played with oil?

[don]

Re: A "Flood" of new oil : Be Careful What You Wish For

Deutsche Bank weighs in:

The Great 2014 Oil Shock - Aftermath

The fall in the price of oil – down more than 40% since June – is a textbook macroeconomic “shock”. Stripping it down to its most fundamental level, a fall in the price of oil predistributes real income from oil producers to oil consumers. Money oil consumers would have exchanged with oil producers for the stuff, can instead be put towards other purchases or savings. At the global level it means less spent on oil imports for oil importing nations and less income from oil exports for oil exporting nations. To put some rough numbers around this, US average net imports of oil and the like has averaged 5.2m barrels per day in 2014, thus the fall in the oil price by $43 since late June is saving the US economy about $224m a day on its net oil transactions and costing its oil trade partners the same amount. This is after accounting for the dramatic fall in US net oil imports driven in part by the country’s shale boom.




Therefore if oil prices stay where they currently are this appears to be a meaningful headwind for the big oil consuming nations. The biggest net oil importers in 2013 were (1) the US, (2) China, (3) Japan and (4) India. Major exporters will suffer. Probably the most prominent current example of an economy that will struggle to cope with the fall in the oil price is Russia, which in 2013 was the world’s second largest net exporter of oil. As we’ve already discussed, estimates suggest that at oil prices below $90 the Russian economy will go into recession and DB estimates the government will fail to balance its budget at $100 (Figure 133). At current levels none of the major oil exporters will be able to balance their budgets next year.







Overall, most estimates suggest that a fall in the oil price is a net positive for the total world economy. According to the IMF’s Tom Helbling, “a 10% change in the oil price is associated with around a 0.2% change in global GDP” (The Economist) as oil consumers are greater spend-thrifts than oil producers. Given those estimates the current fall of more than 40% should add about +0.8% to global GDP growth.

With so much of the global growth story resting on US shoulders next year the fall in the price of oil should help, although not as much as it used to given the USA’s shale boom. The EU should also gain given its $500bn of energy imports in 2013. However the drop in the price of oil might prove a mixed blessing given that sharp drops in the oil price will weigh on inflation (Figure 134) and another negative headwind to inflation (in any form) is not something the euro area really needs or wants currently with CPI running at just +0.4% YoY. On the other hand the drop in inflation pressures should be a boon for a number of EM economies whose central banks may otherwise have had to hike rates in the face of rising inflation even as their growth rates remained tepid.

It’s also important to remember that whilst oil is an important global commodity it is rare for it alone to drive global economic outcomes. The halving of global oil prices in 2008 didn’t prevent many of the world’s oil importing economies from suffering severe recessions and as Figure 135 shows there is no easy nor automatic relationship between falling oil prices and rising US growth. The environment within which the oil price change occurs is important. Indeed if the current drop in the price of oil is being driven by expectations of falling demand driven by expectations of a slowdown in global growth it’s possible that the drop in the oil price is at best going to partially cushion the global economy from a slowdown rather then drive it to higher growth rates.




Also importantly for investors, falling oil prices will not affect all areas of economies equally, even in those economies that should benefit at an aggregate level. As our US credit strategy team wrote recently, energy companies make up the largest single sector component of the US HY market at 16% (US HY DM Index) and so the falling oil price may prove a negative for the US HY credit market. Our US team added that if the WTI price fell to $60/bbl this would push the whole US HY energy sector into distress, with around 1/3rd of US energy Bs/CCCs forced to restructure, implying a 15% default rate for overall US HY energy which would contribute 2.5% to the broad US HY default rate. This could be a sizeable enough shock to cause concern throughout the rest of the US HY market.

There is no doubt that the fall in the price of oil in 2014 has been a significant economic shock. Most estimates suggest that this should add to global growth, weigh on global inflation and most likely have varied but oil-specific asset price implications (EM oil producing nations and US HY weakness stand out); however it is likely that growth tailwinds from this year’s fall in oil prices will not be the main story for investors in 2015.

[santafe2]

Re: A "Flood" of new oil : Be Careful What You Wish For

This shift to the East is as inevitable as global warming.

OK, you did not go there...there are a million analogies, most without a flame thrower attached.

I want to offer a hat tip to GRG, that was one hell of a call. Your brother should buy the bottle and I hope he served the first round.

It really is amazing how some things never change. American innovation and the American system are really designed to optimize the production of any commodity as long as there are buyers. Apparently the major costs have been expended and it's the over enthusiastic bond holders that will be left holding the flaming bag while the explorers drain every dime possible. Hats off to them as well, who knew they could create such a glut. Anything worth doing in the US is worth overdoing.

I'll be interested to see if this is sharp drop or a long slog through one of the last marches through peak cheap traditional energy.

[touchring]

Re: A "Flood" of new oil : Be Careful What You Wish For

How does giving up ones major source of income help, when one is already near bankrupt? This sounds like Saddam's "set fire to the oilfields" stand ;-)
R.

It's never good to depend on one source of income and oil prices will be low in the medium term.

Perhaps a good opportunity to diversify into technology and look East instead? By 2025, the Chinese consumer goods market alone will be larger than the US AND EU combined - in fact today China already buys more smartphones than the EU and US combined. And we've not even considered India's rise.

This shift to the East is as inevitable as global warming.

[GRG55]

Re: A "Flood" of new oil : Be Careful What You Wish For

GRG55, is it too early to begin buying some of the Big Boys, like Conoco (COP) or Chevron (CVX)?
I also want to re-purchase Vermillion (VET) as I sold it at 60.

I do believe it might be early to buy into most of the oil service stocks like Schlumberger.

I'm a big boy when it comes to taking personal responsibility for my own actions, so I won't hold you accountable for your opinion.

To be honest Raz, I don't know.

I use Suncor's Toronto listing as one indicator, and historically any time it falls below CAD $28 I usually buy it. Right now it's still at CAD $32, despite the carnage and SU's exposure to higher cost oil sands. That's interesting to me and causes me to pause for now.

The services sector is probably early in the adjustment to the capital cycle. Up here in Canada I expect the services side will have a reasonable winter of activity, but once everything shuts down for spring breakup the activity will likely not return to current levels next summer. That's when things could start to get really interesting.

Down south there isn't the seasonal influence, and the rig count is still robust. I know there was a headline about the drop in oil rigs last week, but as usual if one gets past the sensational attention grabbing headline, one would be able to discern that of the reduction of 28 land rigs (from 1848 to 1820 total), 24 of them were in Texas, and almost all of those (-20) were in the West Texas Permian. The Lower 48 land rig count is still 117 rigs ahead of this week last year, including an increase of 2 more rigs drilling for gas, and many companies won't start new drills they cannot TD before the Christmas/New Year break.

In Canada the gas drilling rig count is 26% higher than it was this week last year - that's how powerful a declining exchange rate can be!

[Raz]

Re: A "Flood" of new oil : Be Careful What You Wish For

GRG55, is it too early to begin buying some of the Big Boys, like Conoco (COP) or Chevron (CVX)?
I also want to re-purchase Vermillion (VET) as I sold it at 60.

I do believe it might be early to buy into most of the oil service stocks like Schlumberger.

I'm a big boy when it comes to taking personal responsibility for my own actions, so I won't hold you accountable for your opinion.

[GRG55]

Re: A "Flood" of new oil : Be Careful What You Wish For

Playing the devil's advocate, if I were Putin, I would announce to boost production, dump the market, and let all hell break lose. Let the price of oil crash to $30.

How does giving up ones major source of income help, when one is already near bankrupt? This sounds like Saddam's "set fire to the oilfields" stand ;-)
R.