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I was interviewed by Justin last week on advfn podcast show Thursday 8th January regarding the debate we had over whats next for crude oil and where to invest.
My inital thoughts remain at a $40 dollar floor based on technical and fundermental analysis. Not only is this the fastest oil slump since 2008 but out ways even the gold slump. However the global economy is not as bad as 2008, granted its not brillant but i have not seen any banks going bust or financial collapse. As a contrarian investor when a vital commodity like oil falls over 50% in six months its normally way oversold.
In fact we are seeing the reduction of US shale production which needs $80 a barrel all in costs including debt borrowings and seeing the biggest fall in rig counts since 1991. Do not be fooled with the $42 well cost of production and the significant capex reductions by BP, Shell and Premier Oil to name but a few leading to a long term bull market in 2016.
I can only wonder how the US Gulf of Mexico offshore plays at $75 breakeven or Tar Sands in Canada at $85 are keeping the lights on let alone the North Sea Producers at $60 breakeven a barrel.
New data has shown tanker rate charges have increased from $10,000 to $85,000 a day holding oil mainly from the far east because they know in nine months time the oil price will be back to inital $80 range.
Furthermore i was speaking only the other day to a senior trader in oil mentioning the oil shorts have reduced and longs increased. Is this the bottom ? Its difficult to say but believe by the end of the 1st quarter the price will have bottomed. I do not see $20 a barrel oil.
This is backed up the flow of money into oil exchange traded funds. When you would have expected a decrease as was the case for gold in 2013 a tell tail sign of the bottoming arriving in the near term. I would add in December 2013 Gold bottomed on technicals the same is happening to oil.
The irony is the bigger the fall in oil below $70 marginal rate and the faster it happens the faster it will turn around, remember its a $200 billion sitmulus on global growth a giant tax cut injection. So when the dust settles there may be an interesting surprise before OPECS next key meeting in July.
So who do we invest in now ? Simple hedged plays that can withstand this new environment even if oil remains at $40 a barrel for six months.
I am keen on the Falklands for example Rockhopper Exploration (LSE:RKH) or low cost onshore Falcon Oil & Gas (LSE:FOG) that have the cash, significant news events, prospects and emotion to drive the price forwards in 2015 even in a slumping downturn.
While the North Sea producers have been slumping by 60% Rockhopper only fallen 12% in the last few months a clear sign of strength which i will be detailing in another article with increasing trader activity come rig departure from South Africa. However a good North Sea play would be Ithaca Energy (LSE:IAE) with 6,300 hedged at $102 a barrel till mid 2016 and breakeven $20 a barrel plus non hedged production $52 all in costs very low indeed.
Another way to look at it for example oil in the Falklands has a breakeven of $35 a barrel thats 26% of oil costs compared to the North Sea 62%. Onshore plays also have a low breakeven sub $30 a barrel take Falcon Oil & Gas future drilling campaign in Australia spring 2015.
By using this knowledge to your advantage you can buy like Chrisoil and miss 90% of higher leveraged oil companies in the sector with high well breakeven and losses.
Until the next time more rambling from the castle can be seen @ chrisoil
http://www.chrisoil.blogspot.co.uk
