The imminent decision by OPEC to either cut production or maintain its current strategy of maximizing market share is certain to have a material impact on short-term oil and energy share prices. Whatever the outcome of today's meeting, this brief report aims to address what we believe are the key supply aspects underpinning 2017-18 fundamentals, whatever OPEC chooses to do. Our aim is to assist longterm investors with making sense of the implications of whatever supply strategy OPEC ultimately decides to pursue. Whatever strategy OPEC decides upon, the short-term nature of any production cuts and the long-term problem for oil prices that is U.S. shale means our bearish $55/barrel West Texas Intermediate, or WTI, long-term price outlook will not be changing.
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He is looking at the big mouth shale operators like Harold Hamm, you know the guy who sold all his hedges so he could divorce his wife. We know they have all been selling future production at $50, I assume with the "encouragement" of the bankers. Well if this guy is correct and the deal gets us to $70 in July (not unreasonable given $60 last year), then the shale guys are going to be eating 15 to 20 a barrel on their hedges. That should put a lot of extra buying into the market.
I can't unequivacally say that's false for crude but it definitely would be for Natural Gas. With the evolution of Dodd-Frank, and due to previous hedging cash flow disasters, most producers now hedge directly with the banks on their revolving credit lines. As such they are never out of pocket the cash for underwater hedges, it just counts against their revolvers. They learnt that lesson the hard way.
In my opinion, if we do get to $60, never mind $70 the US will drown in crude oil as the shale plays all ramp production.
Well the point he was making is when we hit peak summer demand there are a lot of contracts out there in that 50 to 55 range so the odds of them being losers have gone up big time. So a lot of deceisons are going to get made this winter, do we sell it at less than market or do we borrow from the bank to buy back our contracts. It seems reasonable that some will be buying back. At the same time I would guess that the refiners and airlines are going to be upping their own hedging if it looks like the cuts stick. And really, if OPEC Russia and Brazil see the light that they make more by producing less then this thing makes sense short term.
I still think it is part of the Saudi long game to do what ever it takes to move price before the Aramco IPO next year. After all that cash trades hands they will be able to punish the crap out of who ever cheats on their quotas.
Morning Star article was decent. The point they are missing is that shale is down roughly 10% from peak output. But the current activity is concentrated in the lowest cost areas. So I just don't see how they can duplicate record output with such a reduced acreage where they can afford to drill.
I will bet that this deal and the reaction to it will cause a big spike in the media commentary and bring a bunch of long only amatures into the market who will be plucked clean by the pro's at least a couple of times between now and July.
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I understand but after the last 2 years I don't think there is a bank out there that is loaning shale producers money so that they can unwind underwater hedges. In fact I think the opposite will be true. There will be a lot more hedging done.
Refiners are long crack spreads not short crude. Airlines I agree but as we know they are often more worried about locking in unfavorable prices that put them at a disadvantage than they are interested in getting an advantage. If your an airline you should have been buying before now.
Agree also, but that's often been the case but rarely holds true. Also as long as there is a replacement barrel out there, the strategy fails. Can shale replace any OPEC cut?
FWIW Morningstar are a data provider rather than an independent analyst. I only posted it as I thought it was an interesting perspective.
Agree as well with the exception of the July part.
There is an oil version of VIX and I assume a bunch of other derivatives. I posted the comment as I thought it may keep some lambs away from the slaughter, as in a real pro saying stay away from price, just look at volatility.
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