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Why Energy Investors Are Hoping Saudi Arabia And Iran's Oil Price Forecasts Are Dead Wrong
Yesterday, when Saudi Arabia revealed its "draconian" 2016 budget, boosting gasoline prices by 40%, while trimming welfare programs after forecasting a collapse in oil revenue (even while allocating the biggest part of government spending in next year’s budget to defense and security) Bloomberg reported that "the kingdom’s 2016 budget is probably based on crude prices of about $29 a barrel, according Riyadh-based Jadwa Investment Co."
Shortly thereafter Iran's Petroleum Minister Bijan Zangeneh said that the Iran 2016-2017 budget assumes an average oil price of $40 dollars per barrel. "There have been efforts to suggest in the budget the closest and most possible price for oil, though the market is usually in fluctuations," Zangeneh was quoted as saying by the local IRNA news agency.
The reality is that nobody knows where oil prices will be in the coming year, especially if the supply glut persists, something which prompted BMO to warn that unless there are dramatic changes in the supply picture, oil prices could collapse as low as $20 in the short-term. "Fundamentally there is simply too much oil" the Canadian bank summarized simply.
But now that price expectations have been significantly reset lower to account for an OPEC which will likely continue to exceed its 30 million barrel per day target, one group's implied oil price estimate stands out: that of energy investors.
Here is what BMO says is the oil price discount into current equity valuation.
At current prices we estimate that valuations for the oil and gas group reflect an implied Brent crude oil price in the range of $65-70/bbl while natural gas leveraged companies reflect a Henry Hub natural gas price in the range of $3.00/Mcf.
We have shown before that this is a problem for energy stock valuations which, while not as extreme as they have been in recent months, still discount energy earnings doubling over the near term with a 26x forward P/E, nearly double the recent historical average.
As the company-level chart further shows, not a single company's valuation is "fair" at current oil prices. In fact, should oil persists below $40, every single company in BMO's universe is overvalued.
In discussing the future of energy company valuations, BMO adds that "while these generally represent attractive levels compared to our longer-term commodity price expectations we see a higher likelihood of weaker crude oil prices over the next six months which would take valuations lower."
So why are energy multiples so persistently high? The answer is simple: equity investors are basing their investment thesis on the oil price corrections of 1998-1999 and 2008-2009, when likewise, multiples spiked only to retrace, following a rise in oil prices. BMO next explains how current equity valuations compare to prior downturns:
Based on the oil price corrections in 1998-99 and 2008-09, it appears that consensus estimates and valuation multiples have not fully adjusted, which suggests valuations could be overstated. Chart 37 illustrates the tight relationship between consensus earnings estimates and oil prices over the 1994-2000 period. As you would expect, consensus earnings multiples adjusted to compensate for sharp changes in oil prices, expanding during falling oil prices and shrinking during rising oil prices.
Consensus earnings and P/E multiples largely followed a similar pattern over the 2005-2011 period and oil price correction in 2008-09.
The bank's conclusion: "as shown in Chart 41, consensus earnings are being rapidly adjusted for the sharp reduction in current oil prices and future expectations while valuation multiples have expanded. To us this suggests that there is downside to group valuations."
What the above - and recent analyses on the topic - suggests is that, paradoxically, the best outcome for energy equity investors is for there to be a sharp, sudden spike lower in oil prices, one which would result in a shock to the system, and quickly take out the most inefficient corporate and sovereign operators, in the process removing much of the dreaded supply overhang.
Alternatively, the worst case is the continued slow burn in oil prices lower, which will achieve the same outcome however over a far more stretched-out time frame, while punishing even the best run oil producers whose liquidity (or FX) reserves will be vastly more depleted by the time the mass defaults take place. Over that time, both earnings and multiples will collapse and the result will be a far more extended energy price bear market, together with the now daily sharp "this time it's the bottom" short squeezes.
And the biggest irony, the longer stock prices remain elevated, the longer even the more troubled companies can stay solvent by selling first bonds, then when that market shuts down, selling equity to other naive investors, perpetuating the cash bleed until finally in a Lehman-like event, there is a dramatic repricing of all asset classes. The only difference is that when Lehamn filed, it was the bonds that went from nearly par to 8 cents overnight. With energy companies it will be the equity tranche that has an identical repricing.
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It will be $35-40 average oil price(Brent) in 2016, russian, iranian and saudi budgets are on that prices.
If ruthless speculation were outlawed (and vehmently enforced)... even the commodity oil would have a stability to it and these roller-coaster price fluctuations would not occur. Of course, before this can happen, we have to first get rid of the eternal tribal manipulators en masse.
Speculators supply liquidity to the market. What is the value of an asset that no one wants to buy?
I think not. We will break below $20 in 2016. Gartman is bullish crude. That is all anyone needs to know.
Lately>>> It's been pretty funny watching all those alcoholic, red-faced peons, catching "falling knives" on CNBS aka Blowhorn every day...
Correct...or lower. The Saudi's will not relent until they have destroyed at least 2/3 of the shale companies in the U.S. and put the fear of Allah in the banks so they won't invest in the rest. Which means we are going to go balls out in production until the very end to keep what little is left alive.
Russia is going to continue to win in Syria which will further piss off the camel fuckers in Arab land. And the Iranians are going to go balls out to make up for lost time.
Not to mention weak demand. Yep....weak oil for a while.
We have spent my entire life kissing Saudi ass in order to not offend and to keep that oil flowing. Now the Saudis are a liability. It would be "very convenient" if some entity would drop a nuclear weapon or two on the Saudi oil structure - and Mecca while you are at it. Oil back to $100 and 5,000 fewer Saudi "princes" running around sponsoring their terrorism, spreading their STDs, and in general making the lives of other less happy.
Fuck energy! You will lose your shirt and underpants 'investing' in it!
And Trust in GOD, we don't want to see any naked ZH'ers! Grooooooss!
What are underpants?
Oh, wait. Did I give away too much?
Also, look at this, decemebr 2014:
LONDON (MarketWatch) -- The International Energy Agency on Friday cut its 2015 forecast for global oil demand growth by 230,000 barrels per day, to 900,000 barrels a day, citing lower expectations from oil-exporting countries.
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IEA december 2015:
The resulting annual growth of 1.8 mb/d for 2015 is led by China, the United States, India and – somewhat surprisingly – Europe.
http://www.iea.org/newsroomandevents/news/2015/december/iea-releases-oil...
Why nobody call bullshit on their predictions? They underestimated nearly 100% on demand side. You think it is accident? No, sir, it is not, political reasons, like it is not that USA import more oil in december 2015 than year ago but somehow storage is so full by EIA. So why more import(even light crude) if storage so full?
Fuck charts, [ they're worthless]. Charts are my hobby... I Just BTFATH @ GMT -5 <>3:30 p.m. every Tuesday and Thursday.
I really love to buy worthless 300+% p/E tech. stocks 48-72 hours before Nonfarm Payrolls, and Fed Meetings.
Saudi crude price war backfired:
" Hikes petrol prices by 40% at the pump
After $98bn budget deficit announcement,
world's leading oil producer to privatize state corps and slash subsidies."
http://www.aljazeera.com/news/2015/12/saudi-arabia-hikes-petrol-prices-40-pump-151228154350415.html
Petro dollars might have already grown even scarcer than we outsiders realized .
Oil prices were besides the manipulation and cartel, connected to the huge amounts of money released by the QE's.
Now there is hardly any liquidity and world trade is at it's lowest in 30 years (refer BDI ).
The debt in the system is too huge and life must come a full circle.
if you figure an average of $70/barrel, then with new fracking technology deployed, it means we now have twice the supply previously available. So that tops out prices at $35/barrel where they are now and probably prices in the 20's for a certain period. The real issue right now is demand as everyone is just full of oil AND products.
40% increase in the price per liter of gasoline in Saudi Arabia while the price of oil is in the toilet. You think your average camel fucker is going to stand for that? They behead people there for much less than that.
Here's to the beheadings of the SA royals. I will drink to that tonight.
Price can drop to ZERO right now for all I care.
The good news... There's always room at the top, of the corporate debt heap, and it will give you some control over central banking policies. ;-)
In terms of the Bakken, where I live, and as I have explained on ZH before, it's like this: the hottest place in the Bakken will produce 150k the first year, 30k the second and 12k barrels the third year; 192,000 barrels. Let's just say 200k. The current "efiiciency" cost to drill and complete a well is $7.5 million. Divide 200k barrels in to $7.5 million= $37.50 cost per barrel. It then costs on average $8.50/barrel to produce the well (hauling salt water, pump maintenance, etc etc etc). So your direct costs are $46/barrel at the wellhead. Add $8/barrel in outgoing freight costs (to the Gulf) so you are now at $54/fob Houston. In North Dakota there is a 6% production tax plus a 5% extraction tax....lets just say 10% gov. tax. The royalty owner gets 1/6 or nearly 17%. So, together lets say 37%. So then: at $85 wti, the Bakken operator will receive (.63 x $85/barrel) ...$53.55. WTI will have to be $85 JUST TO BREAK EVEN. . . . . . . I was in Williston this morning and it is turning in to a ghost town. There was actually (only half)joking talk of turning the empty man camps in to Syrian refugee centers.
10% + 17% = 27%, not 37%
So WTI needs to be only $74 for breakeven.
Still, not good for Williston.
yes, 27%...I had intended to add 10% for company overhead but failed to stick that sentence in there. One can debate the costs of "management" , up or down, but it isn't free that's for sure.
Is it at least worthwhile going there again, we're a 100 miles north, and used to enjoy heading down there for the weekend. Not for the last 5 yrs. Every douchebag you could find in one city that used to be a friendly family town.
... if we use solar power and ethanol as a guide ... breakeven doesnt matter once the government "subsidies" get passed by lobbyists and congress. sadly.
Sorry guys, the price is entirely dependent on politics.
It would only take the bribing of a few of these "mujahideen" (i.e. mercenaries) to get them to blow up a tank or two at Ras Tanura or Ras Laffan. Should be pretty easy for people who have been trained by the Turks/NATO/CIA. After that, the price could go back over $100 within hours. Frankly, I am a bit surprised some of Wall Street's "brightest" have not already done so. Just think what a killing could be made on the futures?
Who is in charge of the means of production? Who is in charge of paying someone in a currency that isn't total dogshit for oil? That is to say, someone's cartel can't do jack shit with Roubles.
Buyer and seller. K. Little eggy weg and sperm donor. There is so much fucking oil that you would puke.
Oil tell the woild oi sez, pinching his moustache (e.e. cummings rip off).
Fuck is it with you people and oil? They make that shit like water, same as FRN currency.
Fracking is a write down. Like the House of Saud's mothers. I want my moustache taxes! I want my sunglasses taxes from these cankers!
The main pillar of support are the dividends. At some point, unless oil really does go back to the 60-70 dollar/barrel range, those will be cut at some point for most of the oil companies.