Monday, March 28, 2016

"...the oil markets are still wildly volatile."

What are rising gas prices really telling us?

by GS Early

While gas prices continue to rise, and the markets follow suit, there still remain some serious issues regarding oil prices. And if the markets are following oil prices, there may be a rude awakening in the near future.

The biggest headline statistic for U.S. production came out recently and noted that the U.S. rig count is the lowest it has been since 1949. That’s a stunning number.

Now some say it’s a good thing that the U.S. isn’t pumping its reserves since we’ll have them for later. Might as well use up all the Saudi oil first.

Another line of reasoning goes that shutting down U.S. supply helps raise the price of oil since there’s less oil to buy. The problem is, it’s not like turning off a spigot. Each rig has workers and each company has bank notes and lines of credit because oil exploration and production is very cash intensive. And prices are still so low that it’s not even cost-effective for most E&P firms to pump oil or prospect for oil.

It’s like preparing a barbecue for 100 people and only 30 show up. Sure, you have plenty of food for leftovers, but given the time and expense of making the food, losing 70 percent of your guests is not a good thing.

That’s what is happening now. The Saudis are pumping like crazy to keep oil cheap so that their regional nemesis Iran can’t get a decent price for its oil and Iraqi oil also has a hard time being profitable. It also is trying to shut down the U.S. energy patch. And its strategy is working.

There’s no way to put lipstick on this pig. Even if prices rise another 20 percent from here, it’s not going to do any good for U.S. production or anyone else. And the other more disturbing reality is, demand for oil isn’t growing fast enough anywhere in the world to keep prices rising.

And it’s not just the U.S. energy industry that’s having troubles. Akers is a Norwegian firm that drills in the Brent North Sea as well as other places around the globe. It has cut 20 percent of its sub-sea division (basically its offshore operations) in the past year.

The mainstream media will tell you that Russia is playing nice in Syria, but the truth is Russia has pulled its troops out of Syria for the most part because it can’t afford the war. Commodity prices are just too low.

And in the U.S., one of the U.S. oil patch’s top E&P companies is teetering on filing Chapter 11. Linn Energy (LINE) was a domestic energy darling just three years ago, trading around $40 a share. Now, it’s trading at 57 cents a share.

As an MLP, LINE was throwing off a great dividend as well. That left a long time ago.

There is also another story about four firms that were drilling in the Permian Basin that owe their workers $1.6 million in back pay.

And there have been plenty of analysts that predict 30 percent to 50 percent of the current E&P companies won’t be around in two years – and that’s not because of mergers. It’s because of bankruptcies.

The point is, the oil markets are still wildly volatile.

There’s talk now that OPEC may freeze production in April, which will help rally oil and the markets. But don’t believe it.

There are plenty of emerging opportunities in the energy patch, but right now it’s like trying to catch a falling knife. Don’t do it. There will be plenty of time to take advantage of oil’s rise, so trying to time it is going to get you trouble.

For now, keep your powder dry and wait for a real opportunity to move in once the sector has washed out the weak and the strong begin rising.


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