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Monday, April 20, 2015

What I'm watching in the oil markets, and what you should too.(Part one)

People are often asking me where I think oil prices are going, and what factors I'm watching out in the markets. I guess sometimes some want to build evidence on where oil prices are going because of a vested interest, or they're simply concerned with provincial finances.

...and right they should be on the last point...

It's obvious that right from "day one", we made the mistake of simply relying on revenues gained from the sales of crude oil off our shores. It's easy to say we got lazy over economy building because we had lots of cash in the coffers. This year will prove our folly over over our dependence on the price of oil, rather than the "traditional way" of building a sustainable economy.

Even easier to say that all was misdirected in the past and that not enough was invested in our future here. Either point has validity and each point may itself be wrong.

Either way, "dependence" on oil money has gotten us into some troubles with really no one answer on how to get ourselves out of the situation we now find ourselves in. If we are to get out of the situation, we're still going to have to depend on the growth of our oil sector to do it. That, my friends, is not an easy sell, although it is a sale that can be made...IF prices remain where they are today.

Let me explain:

Factor 1
A lot has been said of the effect that smaller oil companies have made on US domestic production. Some may argue with validity that "small oil" can't keep it's head out of the water without prices being higher. With the parking of drilling rigs, it seems that their case may have some valid evidence to back the fact that $55 US would be a "boil over" point to where frackers may explore and produce to overall US domestic production again, and with Brent oil prices now starting to push $63 US a barrel and West Texas Intermediate producing sales at $50 US, we may again be on the edge of seeing smaller producers re-entering the markets. Important factor to watch is the US rig count. Published pretty much on a weekly basis, watching this number start to show stability will probably coincide with oil prices that will also do the same.

Any increase in the overall rig count will, in all likelihood, start to show another drop in WTI prices, thus dragging down Brent prices again.

Factor 2:
US demand: First, for gasoline may increase the value of some oil, but in all likelihood affect gasoline spot prices first. While refiners are making a fortune right now with oil at present levels, those profits in this sector start to diminish with increasing crude oil acquisition costs. Either way, with prices somewhat lower, any company that is fully immersed in the oil industry, from the initial search to the final product, becomes a winner under the present market conditions. I don't believe that "Big Oil" even wants to see prices high, if they can make it financially further down the food chain! Summarily, demand for both gasoline and distillate products remains tepid at best, and that's not going to be a real motivator to bring prices up.

Factor 3:
Conservation efforts/Consumer outcry: While arguments for global warming persist with a lot of evidence to back it up, even more disconcerting for increasing oil prices has been conservation efforts. Don't ever doubt that consumer outcry has also been a positive motivating factor in the efforts behind conservation and protection of the environment as well! The simple fact is that, not so long ago, consumers were upset with higher oil and gasoline prices, and that spurred on efforts of government to answer back for their constituents. Consumers wanted relief and protection from higher energy costs that influenced decision-making. has had a huge effect on world consumption of oil products, and will continue to do so in the future. Witness higher automotive mileage claims and home retrofit programs worldwide, and locally, look no further to the supposed reasoning and the justifications around the Muskrat Falls hydro-electricity project.

In part two, I'll have more factors that I use in everyday life to balance my reasonings behind energy costs, and what I watch to determine further direction in oil prices. If you have any comments, feel free to drop me a line!

I will be back tomorrow night with the final numbers for this week's price adjustments!

Regards for now!

George Murphy
Twitter @GeorgeMurphyMHA

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