BlackPacific Capital


The Oil Saga- CapEx

Posted on 22 December, 2015 at 12:20
Weekly Market Assessment
How long is oil going to trade at these depressed levels? This of course is the million dollar question that everyone right now wants to know. However, there are certain ingredients that go into creating the oil market balance or imbalance that might help answer this question. One of the first topics I want to discuss is capital expenditures, which are funds used by a companies to acquire or upgrade physical assets such as property, or equipment. It is often used to undertake new projects or investments by the firm. In oil exploration and production the capital needed to find and extract the commodity requires a ridiculous amount of money. Capital spending is the lifeblood to drilling companies ability to continue on their quest to pull more oil out of the ground. Cutting this creates a huge problem in the short term and of course an even larger problem in the long term, as an oversupplied crude market becomes under-invested which leads to an under-supplied oil market.

So what has helped cause this flush of new capital into the energy sector? The monetary policies of the great Federal Reserve of course. It's low interest rate policies helped fuel the industry with what seemed like endless funding at low rates never before seen. This helped the well oiled drilling machines continue on their quest to find and drill new wells that were needed to replace declining production in legacy wells. This caused the crude market to become oversupplied by what has been termed the North American Shale Revolution.

This unconventional drilling known as fracking, brought to the market an additional 4 or so million barrels per day over the past 5 years. Coincidence that this correlates to the Feds Quantitative Easing program that started around the same time? Unconventional shale basins, also known as tight oil has lead the United States to become the third largest oil producer in the world! Yes, that is true and many still can't believe that. However, it has come at a cost as now the crude market has collapsed on itself and many companies are suffering because the cost to produce a barrel of oil is more than the actual price of a barrel in some locations.

So, just how oversupplied is the crude oil market? The current estimated supply is around 97.6 million barrels per day compared to current demand around 95.4 million barrels per day. Now, this is constantly changing and being revised, because it is extremely difficult to measure both numbers and explains why investing in this commodity is one of the most difficult. Some argue that the market is not flooded with oil and believe the oversupply is just around 500,000 barrels, while others believe it's closer to 2 million barrels. Market sentiment also plays a big part as markets overshoot to the downside as well as to the upside. Amazing to see what a half a million barrels to two million barrels can do to a market that once traded at $104 and now trades in the low $30's. Imagine if the markets got a hint we were under-supplied!       

[depicted in the chart above, you can see CapEx for the world's largest oil producers has been expanding... however, CapEx is about to fall off a cliff, when this happens, can you imagine what oil production will do...]

How can this excess crude be put back in balance? Well, take away the funding and cut capital expenditures (capex). Today, both of these levers have been pulled. Banks have begun to stop lending and companies have slashed their capex budgets by more than 25%. This of course is what creates a major problem for future much needed oil production and why current oil prices are unsustainable. 

The annual worldwide demand for oil is 34 billion barrels, this requires billions of dollars to maintain the constant demand. According to Rystad Energy, a Norway energy consultant states, "that while the oil industry worldwide needs to replace 34 billion barrels of crude annually--equal to current consumption--investment decisions for only 8 billion barrels were made in 2015." Wow! The OPEC cartel along with every major investment firm and analyst confirms that worldwide capex has been cut by $200 billion this year and it looks like another $115 billion will be cut in 2016. The almost full stop in spending is going to catch up with us. If future exploration and production projects don't come online to fill the decline in production, while demand remains robust, the current price of crude will have no choice but to rise to incentivize producers to put drilling rigs back to work!    

So who is cutting capex? Every oil related company is, from major integrated oil companies like Shell and Exxon Mobil to some of the smallest exploration and production companies, no one has been able to dodge this bullet.  They have no choice but to cut capex to protect their balance sheets. Energy investment bank, Tudor Pickering Holt & Co. recently said, "roughly 150 oil and gas projects have been delayed or cancelled globally over the last 18 months, jeopardizing a combined 13 million barrels per day of future oil production." They go on to say, "that the deferred projects--which exclude U.S. shale -- hold some 125 billion barrels of oil."  

When the decision is made to reduce capital spending, then the obvious assumption is that production will be negatively affected. When and if the crude market becomes under supplied, it takes drilling rigs in the U.S around 4 months from the time the drill bit breaks the ground to the time oil starts flowing to the surface and in other regions it could take months or years to green-light a drilling project. The lag time between bringing oil to the market could become worse the longer we stay at these depressed levels. So it's not like turning on a switch and voila, excess oil in the tank. The scary part that makes it worse, is when fear enters the market that prices are going to rise, consumers react by what many industry watchers call "topping off the tank" occurs and the already under-supplied market becomes even more under-supplied. A vicious cycle that is only cured through rising oil prices!    

Will 2016 be the year oil recovers? Some industry watchers and even corporate CEO's are sounding the alarm bell saying, "in a few years there's a good chance the demand-supply ratio once again will be out of whack -but this time there will be too much demand for too little crude." This is not the first time we have been trading at prices this low and sooner rather than later the decisions the oil industry has been forced to make today are going to come back and haunt us tomorrow.           

 Making the Watchlist: Below are the stocks that I will be looking at over the coming months.  I will provide the the current stock price and why I am watching them. I will comment on them as I continue to keep an eye on them.  You will be able to see and follow their growth and/or decline. Chart links may be attached.          

See What I'm Trading:You can now view all my real-time trades by following this link, BlackPacific Capital1. This new site shows my trades, in real time the minute they are bought and sold. Below you can also click on the stock symbols, trade strategy or prices which will lead you to this new site. The site offers a full risk/return profile and video detailing the strategy of the trade. Note: When looking at the option positions every contract equals 100 shares.    

BlackPacific Capital has created three funds. The first is the Total Return Fund and the other is the Growth Fund. Both of these funds will be compared against the S&P 500. Both will hold a total of no more than five companies each. The Total Return Fund is a low turnover fund where every holding must have a dividend and be undervalued to its peers. The growth fund is made up of momentum high growth stocks where the turnover rate is much higher. Below are their Weekly and Year to Date returns. For more information and to see the holdings in each fund click here
New holdings and liquidated positions: I have added BHP Billiton and Hess Corporation to the Energy Fund. I opened the BHP position at $24.25, while locking in a dividend yield at 10% and Hess Corp at $47.25 while locking in a dividend yield at 2%.         

S&P 500 Return 
Week: -0.039%
Year to Date: -1.62%

Year to Date: -4.34%

Week: 1.47%
Year to Date: 13.41%

Year to Date:-7.41%

Categories: Weekly Market Assessment

Post a Comment


Oops, you forgot something.


The words you entered did not match the given text. Please try again.


Reply Nifty Future
9:09 on 20 January, 2016 
Very knowledgeable post. I gain knowledge from this post. This post explains the full theory of oil. Thank you for sharing knowledge post. Please keep updating!!!!!
12:05 on 12 October, 2017 
Seems you are doing everything in a very systematic way. It is really very good actually. Every word of this blog is so good that I have read this blog of yours twice at one time.So it was a well chosen sentence, and I like it very much.
Reply Roger
18:09 on 29 May, 2018 
Really valuable and inspirational info you have shared with us. I would like to appreciate you for such type of worthy post. Keep doing useful job.
electrician services in miami
Reply Nicholas Chan
9:45 on 8 August, 2018 
Very well written article, you have work hard in research before writing this post which is the reason it is so informative and easy to understand.
Ground Reinforcement Mesh
Reply Spencer Hyde
10:30 on 8 August, 2018 
You have done complete research before writing this post.I have visited many websites but unable to find content of such quality.
rubber matting
Reply hanryleo
10:53 on 8 August, 2018 
I am very impressed by this website. The information you share about the tactical investment management is very informative and useful. I read the post you share about the the oil saga is very impressive. Thanks for sharing this all. Keep sharing
tarpaulin sheet for sale in uk
14:11 on 6 February, 2019 
ia dan pujilahKami berbicara lama sekali. Ternyata Dasha tidak terini ke 20
Supplier plat besi hitam
Toko besi wf
Toko besi wf
Toko stainless steel
Agen besi cnp
undangan pernikahan akrilik
Supplier Wiremesh
Jual Plat Kapal Besi baja
Toko plat besi hitam
Pabrik besi beton Sni Ulir Polos polos ulir
Agen besi wf
Agen besi wf
Toko atap spandek
undangan pernikahan bentuk tas
Supplier Besi Pipa Baja Schedule 80
Harga Plat Kapal Besi baja
Agen plat besi hitam
Pabrik besi beton sii
Pabrik besi wf
Pabrik besi wf
Toko baja ringan
Pabrik besi hollow
Toko besi Wf Baja
undangan pernikahan online
Supplier Besi Pipa Baja Schedule 40
Pabrik Plat Kapal Besi baja
Pabrik plat besi hitam
Pabrik besi beton psi Ulir Polos
Distributor besi hollow
Distributor besi hollow
Toko bondek
Toko bondek
undangan pernikahan modern
Supplier Pipa Besi Hitam Medium
Distributor Wiremesh Besi baja
Distributor plat kapal besi baja
Pabrik besi beton perwira
Harga besi hollow
Harga besi hollow
Toko Plat kapal besi baja bki krakatau steel
Toko wiremesh
undangan pernikahan unik dan murah
Supplier Besi Wf
Supplier Wiremesh Besi baja
Harga plat kapal besi baja
Pabrik besi beton PAS
Jual Jaket Parka
Jaket Parka
undangan pernikahan kalender
undangan pernikahan bahasa inggris islam
undangan pernikahan islami
undangan pernikahan unik dan murah
undangan pernikahan modern
undangan pernikahan online
undangan pernikahan
undangan pernikahan amplop surat
undangan pernikahan simple
undangan pernikahan murah
undangan pernikahan unik
undangan pernikahan artis
undangan pernikahan modern
undangan pernikahan artis
undangan pernikahan arab
undangan pernikahan
undangan pernikahan
Pabrik Welded Beam
Pabrik Welded Beam
Jual atap spandek
Reply v
12:27 on 26 April, 2019 
Reply eassy on time
13:02 on 1 May, 2019 
Nifty Future says...
Very knowledgeable post. I gain knowledge from this post. This post explains the full theory of oil. Thank you for sharing knowledge post. Please keep updating!!!!!

Oil has different variations when it comes to cooking and for running a vehicle. There are times that the hike or an increase on the price of oil was being implemented. Unlike for the oil that we use in cooking, it just stays on its normal price. But since oil that is more popular were being used and discussed, let us focus on it. I am not a user of fuel because I do not have a car or even a motorcycle. I am just commuting, but seeing the drivers who used oil for their vehicles, I am very sad for them because they are the only one who suffers a lot from the hike.
Reply cheap minibus coach hire
4:56 on 2 October, 2019 
I was very lucky to be there in 2014 when the Tower of London had a major art installation which filled the area with 888,246 red poppies to mark the 100 year anniversary since the first day of Britain's involvement in the First World War. It was quite a spectacular sight! drayton manor minibus hire
liverpool to manchester minibus hire
minibus hire ipswich
local minibus hire
cheap minibus coach hire
coach hire peterborough
minibus hire barnsley
Reply webstagram
4:01 on 18 October, 2019 
I really enjoyed reading. It is not every day that I have the possibility to see something like this..See more information about top hashtag on instagram, go with home webstagram
Reply Useless Websites
7:26 on 12 February, 2020 
The Oil Saga- CapEx Useless Websites
Reply Call girls in dwarka
7:46 on 13 March, 2020 
Each client is different, and we tailor dates to your requirements. Each date is perfectly planned and prepared. Attention to detail is what matters in a competitive environment, and what we will eventually be judged by in the end. Every Call Girls Service Gurgaon listed on Muskan, Shipra, Mumbai is as eager as we are to give our clients a perfect time, an unforgettable experience that will longer in the memory like an aphrodisiac for years to come. An experience that they wish to re-live over and over again. We believe that this mindset, providing the best service, featuring the best independent Escorts and eventually building up close relationships with our clients make us best call girls service Gurgaon are today. A leading and truly Elite International call girls service in Gurgaon Agency. An call girls service in Gurgaon that is full of breath-taking ladies and gentleman.

Let fantasy become a reality for your night or afternoon; our escorts are experts at seduction. A world of sophisticated erotic pleasure, of the most exotic women, is right at your fingertips, so browse and enjoy. At Muskan, we introduce you to Gurgaon’s most exciting and seductive Female Escorts. Exclusive ladies who love to be admired and pride themselves on being a great Companion who knows how to behave with a gentleman. We do not limit ourselves to beautiful young girls but also list Mature British Escorts, elegant Oriental Escorts, experienced European or fun Brazilian ladies.

Call girls in gurgaon

Call girls in dwarka

Call girls in Rishikesh

Call girls in Dehradun

Call girls in gurgaon

High profile Call girls in gurgaon

Call girls in Gurgaon

Call girls in sikanderpur/

Call girls in Delhi

call girls in agra

Call girls in haridwar

Call girls in Noida

call girls in Mumbai
Reply small tattoos
8:49 on 4 April, 2020 
small tattoos small tattoos
Reply curry 8
9:11 on 25 August, 2021 
I wanted to compose a brief word so as to say thanks to you for those fabulous guidelines you are giving at this website. My prolonged internet investigation has at the end been rewarded with useful concept to exchange with my classmates and friends. I 'd admit that we readers are unquestionably endowed to be in a really good community with many perfect people with insightful suggestions. I feel very much fortunate to have used the weblog and look forward to so many more awesome minutes reading here. Thanks once again for a lot of things.
curry 8
Reply kyrie 6
9:11 on 25 August, 2021 
I have to express my appreciation to you for bailing me out of this particular problem. Just after checking throughout the the web and coming across opinions which were not beneficial, I thought my life was gone. Existing minus the solutions to the problems you have fixed through your entire short post is a critical case, as well as the kind which might have negatively affected my career if I hadn't discovered your blog. Your own personal understanding and kindness in handling every aspect was excellent. I don't know what I would have done if I hadn't come upon such a subject like this. I am able to at this moment look forward to my future. Thanks for your time so much for this skilled and sensible help. I won't think twice to endorse your blog to any individual who would need support about this situation.
kyrie 6
Reply curry 7
9:11 on 25 August, 2021 
I truly wanted to send a quick remark to thank you for those superb tips and tricks you are posting at this site. My particularly long internet lookup has finally been honored with useful details to talk about with my contacts. I would assert that we visitors actually are unequivocally fortunate to live in a perfect website with so many lovely individuals with interesting things. I feel rather fortunate to have encountered your webpage and look forward to so many more exciting minutes reading here. Thank you once more for a lot of things.
curry 7
Reply kyrie shoes
9:11 on 25 August, 2021 
My wife and i ended up being absolutely peaceful that Peter managed to finish off his web research through the entire precious recommendations he discovered out of your site. It's not at all simplistic to simply choose to be releasing solutions which usually the others may have been trying to sell. And we also understand we have got the writer to give thanks to for this. These explanations you have made, the simple web site menu, the relationships you will make it possible to promote - it is all fabulous, and it's really aiding our son in addition to us believe that that situation is thrilling, which is certainly pretty serious. Thank you for the whole thing!
kyrie shoes
Reply kd13
9:11 on 25 August, 2021 
I needed to compose you a little note just to say thank you as before for the breathtaking secrets you have provided in this article. It is certainly wonderfully generous with people like you to present unreservedly all many of us would have distributed for an e book to make some dough for their own end, especially now that you might well have tried it in case you desired. The pointers additionally worked to become good way to understand that the rest have a similar fervor really like mine to know whole lot more regarding this matter. I know there are many more enjoyable times ahead for many who look into your blog.
Reply supreme clothing
9:11 on 25 August, 2021 
I precisely needed to thank you so much all over again. I'm not certain the things that I would have carried out without the type of tricks provided by you relating to such a area. It was actually a real daunting setting in my circumstances, nevertheless observing a new specialized manner you handled the issue made me to jump with joy. Now i am happier for the advice and in addition trust you are aware of a great job you were doing teaching other individuals with the aid of your web site. Most likely you have never got to know all of us.
supreme clothing