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Thread: $1.60 gas , lets go buy an SUV

  1. #1
    pain is temporary pride is forever
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    $1.60 gas , lets go buy an SUV

    I remember making a thread here many years ago about 5 dollar per gallon gasoline, which in hindsight is a bit silly. Crude benchmarks never reached that level from 2008 again, and at that time, US production was starting its ramp up which would famously become known as the shale revolution. Higher cost producers in the USA were able to extract far more product from oilwells. Where did they get the money to expand Exploration and Prouction? Simple, the low interest rate environment vis a vis ZIRP ( zero interest rate policy).

    Now comes the inevitable question on everyone's mind: will gas prices remain at these levels? the $30-$40 barrel benchmarks seem unsustainable. But backed by weakened foreign currency compared to the dollar, slowing economies like china...oil looks to remain below 100 for some time. The problem is supply, and there is too much of it - to the tune of 1.2 mbpd in excess when compared to a worldwide consumption of roughly 94.8 mbpd in 2016. We won't see 5 dollar gas for a long time. But, don't get used to sub $2.00 gas either. Here is why:

    (1) Company capital expenditures are getting slashed, and highly leveraged E&P companies are going to go bankrupt. Baker Hughes reports the number of oil rigs in the USA, and we stood at something like 1100 rigs in 2014, and are down to ~400 now. Interestingly enough, production has not fallen as much as one would expect - from 9.6 mbpd to 9.1 mbpd. (million barrels per day). What does this mean? The US producers are resilient folk. They won't go quietly into the night. However, many companies *have* provided guidance for 2016 where exploration and production expenditures will be less. The take away is that domestic production will decline...probably faster than the EIA (Energy Information Administration) forecasts. Domestic companies are staying afloat this year thanks to hedging some production and minimizing downside, but most won't achieve break even cash flow with 60 dollar oil.

    (2) These prices are unsustainable for Russia and all members of OPEC. Unlike our the US, members of OPEC must balance budgets using oil revenues. Russia's economy is inexorably tied to oil as well. These proceeds fund social programs in these countries, and any cutbacks in these programs will cause civil unrest. Saudi Arabia has had to cut into their financial reserves, and (while wealthy), will run out of money in due time. You can smell their desperation when they want to launch an IPO for the worlds largest Integrated oil company, Saudi Aramco ( 10 times the size of exxon mobil) in order to raise cash. But their problems pale to OPEC member Venezuala who are undergoing massive budget shortfalls, and 250%+ inflation. That country is sadly on the verge of collapse.

    Suadi Arabia plays the oil game very well. They are the low cost producer so they can ramp up or cut production to control costs. Look in 2008 when oil prices crashed after the recession. OPEC agreed to a production cut, and prices stabilized thereafter. So why don't they do it again? The answer is simple- the USA is now a significant producer. Since 2008, we have roughly doubled our production thanks to the shale revolution. The Saudi's are flooding the market to put us out of business, and retain their market share. However, I don't think their plan worked out as quickly as they wanted since we are still producing at a high clip. However, at these levels, production declines are inevitable. Also Saudi Arabia does not want to lose market share to their sworn enemies who just had their sanctions lifted...the Iranians. Iran wants to come online and reclaim about 0.5 mbpd more than their current production.

    Where are we at now: No one wants to cut production. Poorer participants *can't* cut production since they have financial obligations to meet. If Saudi Cuts, than someone like the US or worse yet Iran might grab market share. So on the 20th of this month and the 1st of April (Oil Fools day) , OPEC and non OPEC members are meeting to discuss a potential "freeze" of production. At best, everyone wants to sign up for a production freeze...but I suspect OPEC and non OPEC members will cheat on their quotas, or simply not agree much as Kuwait has.

    Will we have low gas prices forever? No. What people forget is that our entire economy's lifeblood is oil. Consider some simple facts. First, we are consuming more oil than ever before. Even with China's slowdown last year, demand increased last year something like 2.5-3%. Next, the supply side of the equation is roughly 1% more than demand, which are narrower margins than we saw in the 80s when we had persistent low oil prices. Consider that hundreds of billions of capex have been cut for finding and getting new oil, any shocks to the supply side of the equation will cause rapid increases of oil prices. large companies can't just make a huge well appear from thin air and make up for lost production should supply become the limiting constraint of the equation.

    So enjoy the low gas prices while they are here. I'll leave you with one last thought. Larger cars are being purchased again as if the nightmare of 2008 never happened. Gasoline demand is increasing and was roughly 9.4 mbpd last week when compared to the peak last summer of roughly 9.6 mbpd. In fact, it will be very likely that our gasoline demand will far exceed the amount during any year in the past 10 years. Now, gasoline demand isn't the entire picture, but couple one unknown into financial forecasts ( faster than expected demand growth as we have seen), and faster than expected production declines...and things could get interesting.

    My prediction is that oil stays in the 30-40 dollar range for a bit in 2016 We might hit 60$ oil by the end of the year. Where we go after that depends on so much, I won't bother to try reading into a crystal ball. I think driving this summer will be cheap! Hoorah!

    I hope you all enjoyed the 5 year anniversary of the 5 dollar gas thread. Lets get a discussion going!
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  2. #2
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    Re: $1.60 gas , lets go buy an SUV

    $2.099 and $1.999 on my way home from work today. It was as low as $1.429 in my area shortly before. Crude is climbing back up from its low, reflecting at the pump, and that's probably for the best as it has been creating a drag on the economy.
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    Re: $1.60 gas , lets go buy an SUV

    Quote Originally Posted by St. Clown View Post
    $2.099 and $1.999 on my way home from work today. It was as low as $1.429 in my area shortly before. Crude is climbing back up from its low, reflecting at the pump, and that's probably for the best as it has been creating a drag on the economy.
    Refiners go offline at certain times for maintinance in anticipation of the summer driving months. So inventories get drawn down more, prices start to go up. As you probably have noticed, gas prices and oil prices don't correlate 1 to 1. Oil prices have declined 70%, and gas is something like 50%. Refiners effect this spread, which is why buffett likes these types of businesses. He got a large stake in phillips 66 PSX not to long ago.

    One more thing before I go to bed: answering the questions from the first thread!

    1-When gas hits 5 dollars, will major business sectors see contraction? How fast? Will it effect our short term economic growth?

    One would think it could erode corporate earnings, but higher oil prices did not. In fact, it seems as if easy money lending and loose monetary policy kept us afloat after 2009. However, I would expect to see lower oil prices increase earnings of companies which are sensitive to higher commodity prices. I wonder if people are spending more? Last I heard, the Xmas season was not the best year for consumer spending..

    2- Will the over priced DJIA correct itself leading to investor panic? I suspect prices will come down to normal levels.

    5 years from that statement. If you had invested in an index fund that tracks the S&P 500, you'd be doing well. Interestingly enough, the major indicies have not gone up since quantitative easing stopped. I think we are going through that correction right now..

    3- How will you deal with it? Have you already?

    I still drive the same car and live about 3 miles from work. Life is good. If oil goes up, than my holdings will appreciate greatly, as I have invested in good fundamental oil companies at low prices. even 50-60 dollar oil will be awesome.
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    Quote Originally Posted by St. Clown View Post
    $2.099 and $1.999 on my way home from work today. It was as low as $1.429 in my area shortly before. Crude is climbing back up from its low, reflecting at the pump, and that's probably for the best as it has been creating a drag on the economy.
    It's following crude, wink wink, 100 of ships full of crude are still off shore with no place to get rid of it

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    Re: $1.60 gas , lets go buy an SUV

    What's really interesting to note- there are a lot of market pressures to increase the fuel economy of cars, rather significantly.

    Which means that even with an increase of drivers, there's a possibility that the marketplace for gas will stagnate or go down.

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    Re: $1.60 gas , lets go buy an SUV

    Yes, rig count is down (1100 to 400), but if you know anything about those rigs from the start of the shale boom to today ... Here's the simple answer: It used to take a rig 6 weeks to drill out a well. Now that's down to 2 weeks. That info is from the president of the ND Petroleum Council.

    More importantly, why is there an oil glut? Two words: Saudi. Arabia.

    The Saudis were/are terrified of a nuclear Iran. The Saudis can't go head-to-head with the Iranians in a shooting war. So the Saudis use the weapon they do have: oil. Economic warfare. Don't believe me, believe them: Saudis Slash Oil Prices to 'Block' Iranian Nuclear Weapon

    ... numerous statements by Saudi leaders noting that oil prices can be used to punish Iran for supporting Syrian President Bashar al-Assad and for developing its nuclear program, ...
    Summary of the concept:

    • Saudis open the spigot to drop world oil prices thus hurting Iran's economy (and its ability to build a nuclear weapon).
    • Collateral damage is Russia (need oil at $70 for Siberian shale to prop up their economy), but Saudi is OK with that because Russia is giving Iran nuclear tech.
    • Additional collateral damage is US (Eagle Ford and Bakken shale), but Saudi is OK with that too because Saudi expects the US to deal with such matters and the US isn't doing it.


    What's the more recent counter move?

    Russia moving south, effectively supporting Iran and what Iran may do to jack oil prices, namely threaten the Straits of Hormuz (as Saudi oil needs the Straits of Hormuz open).

    The Russians and Iranians need oil at $70+ or their whole economies tank and if it doesn't go back there soon they'll take stronger action.
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    Re: $1.60 gas , lets go buy an SUV

    Don't forget Canada. I would imagine that at least one of the talks in DC this weekend will revolve around tbe price of oil.

  8. #8
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    Re: $1.60 gas , lets go buy an SUV

    Quote Originally Posted by alfablue View Post
    What's really interesting to note- there are a lot of market pressures to increase the fuel economy of cars, rather significantly.

    Which means that even with an increase of drivers, there's a possibility that the marketplace for gas will stagnate or go down.
    I heard an interesting piece about the tradeoff between consumption growth and efficiency increases in India. Despite efficiency increases in car engines, (which have a larger effect there than here), the demand for refined products has increased regardless.

    And the data from the EIA ( which looks at stocks) suggests that gasoline consumption is not currently stagnant but rather increasing. Last week, larger than expected draws was reported. I believe That demand for driving is already at 2007 highs, which is the highest its been since that time. I think this is, in part, what has caused benchmarks to increase in price.

    More importantly, why is there an oil glut? Two words: Saudi. Arabia.

    Great post. You clearly have your ear to the ground on this subject. I just heard today that Iran doesn't want to participate in the freeze until they are at higher levels than today. However, their oil isn't flooding the market as expected and production is increasing slower than forecast. We will have to wait and see how this plays out.

    Bottom line, I'd expect to see gas prices increase in the coming weeks. Im not sure the fundamentals have worked themselves out, so oil might not stay at elevated levels if they go much about 40 or 50$. I still am betting on the long term that the oil upside is higher than where it is now, although unlikely 100 unless a major supply shortfall occurs and everyone produces at capacity..
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    Re: $1.60 gas , lets go buy an SUV

    bump.

    Gas has gone up $0.40 here in the last 10 days or so to $2.69. Howzit by you??

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    Re: $1.60 gas , lets go buy an SUV

    Quote Originally Posted by joecct View Post
    bump.

    Gas has gone up $0.40 here in the last 10 days or so to $2.69. Howzit by you??
    Jumped from about $2.25 to $2.45 in my hood. Specifically, it's a nickel or so more expensive next door compared to 2-3 miles north or south, due to my ZIP Code. Truth.
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    Quote Originally Posted by Brenthoven View Post
    Jumped from about $2.25 to $2.45 in my hood. Specifically, it's a nickel or so more expensive next door compared to 2-3 miles north or south, due to my ZIP Code. Truth.
    Gas in my neighborhood went from $2.55 to $2.63. not a big jump.

  12. #12
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    Re: $1.60 gas , lets go buy an SUV

    Last Tuesday I paid $2.17. Saturday at the same gas station - $2.77.

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    Re: $1.60 gas , lets go buy an SUV

    $1.06831/gal here today
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    Re: $1.60 gas , lets go buy an SUV

    Quote Originally Posted by joecct View Post
    bump.

    Gas has gone up $0.40 here in the last 10 days or so to $2.69. Howzit by you??
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    Re: $1.60 gas , lets go buy an SUV

    Quote Originally Posted by joecct View Post
    bump.

    Gas has gone up $0.40 here in the last 10 days or so to $2.69. Howzit by you??
    About the same.
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    Quote Originally Posted by FlagDUDE08 View Post
    About the same.
    Just paid $2.99 in PA. Gone are the days when PA gas was cheaper then NY. Paid 20 cents more...

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    Re: $1.60 gas , lets go buy an SUV

    2.59 at every station near me except for one station in Richie Rich Great Falls at 2.91?!
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    Re: $1.60 gas , lets go buy an SUV

    Quote Originally Posted by joecct View Post
    bump.

    Gas has gone up $0.40 here in the last 10 days or so to $2.69. Howzit by you??
    Where I'm at in Colorado, it jumped from 2.27 two weeks ago to 2.54 yesterday. Not too bad, and the person I was speaking with (read: Gas Station owner) was thinking that it might go up maybe another dime or so more, and then gradually come back to the 2.25-2.30 range where it had been for about the previous 2-3 months.
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    Quote Originally Posted by PrezdeJohnson09 View Post
    Just paid $2.99 in PA. Gone are the days when PA gas was cheaper then NY. Paid 20 cents more...
    Crazy taxes in PA now

  20. #20
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    Re: $1.60 gas , lets go buy an SUV

    Quote Originally Posted by mookie1995 View Post
    $1.06831/gal here today
    A comfortable 65 degrees here today.
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