As oil prices tried to bounce back from a five year low oil companies and OPEC try to adjust to low oil prices. BP (BP) earnings kick offed the big oil earnings season and they could have been worse. The company reported profits of $3 billion down from $3.7 billion from a year ago.
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Costs from the Gulf Oil spill and its challenges from its sanctions on its 19.75% stake in Russian oil giant Rosneft hurt but U.S. refining helped out as cheap shale and Canadian oil helped their refining margins and profit.
Still while oil earnings season is here the season that has really begun is prediction season. I was reminded of that when Futures Magazine contacted me for my outlook for oil in 2015. They sent me my predictions from last year and I thought that what I said a year ago really is what is happening now in energy and what will be important as we head into the New Year.
Futures printed in its November Issue in 2013 that "One of the more positive stories of 2013 was the speed at which U.S. energy production grew, which could make energies one of the more interesting sectors to watch in 2014. "We are in a new era of lower energy prices," declares Phil Flynn, senior energy analyst at The Price Futures Group. "What is happening in the United States in terms of production is historic. It is game changing and it is changing the energy universe as we know it."
The shale gas and oil production in the United States is putting downward pressure on prices, which only may have been scratched in 2013 because of concerns over Middle East production. "It has been a choppy ride because of Hurricane Sandy and other [geopolitical] issues. But [with] the increase in oil production and the increase in capacity from many of our refiners, we are going to see prices go down. Near term, he expects crude oil to test $88 a barrel, and if there is a mild winter, he believes it can test or even fall below $80."
Well we did not have a mild winter and risks to supply kept prices elevated yet as the year went on we hit the $88 target and we did fall below $80. It took almost a year but the reason behind the prediction is the reason that I believe that oil will go in the 70's in the coming year. OPEC producers and Non-OPEC producers will keep the market well supplied. We should get some economic benefit from the lower price and that should provide some support for the market.
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I also spoke of the impact on the dollar by saying that "increased domestic energy production should be positive for the dollar. "It changes the dollar flows. Instead of dollars running out to other countries for importing oil, more of those dollars are going to stay home. The more dollars you have at home, probably the faster you are to remove stimulus; it should eventually make the dollar stronger," Flynn says."
For natural gas I could almost repeat what I said in 2013 for 2014. I Told Futures magazine that '"Natural gas is almost like two different markets — the long-term market and the short-term market," Flynn says. "The short-term market obviously is going to be dependent on weather. Right now natural gas is under pressure. The long-term picture for nat gas — 5-10 years — we are near a historic low."
Flynn says just as high prices cure high prices, low prices cure low prices; as the shale revolution has brought down gas prices and eventually will bring down crude oil prices, low prices are creating increased demand — particularly internationally — for natural gas. There also has been a move by big transportation firms to move, ala T. Boone Pickens, to natural gas for fuel. "Fed Ex is changing all its short-duty trucks to natural gas. Warren Buffet is looking into running Burlington Northern [freight] on natural gas," Flynn says, noting the railroad is the biggest consumer of diesel fuel after the U.S. Navy.
Meanwhile, Europe wants an alternative to its main natural gas supplier, Russia, which likes to bully its neighbors. And Japan has increased energy needs with reductions in its nuclear energy output. "Russia is threatening the Ukraine, Japan is begging us to step it up," Flynn says. "Japan and Europe want us to export natural gas. Natural gas last winter was going for as much as $20 in China."
Becoming a natural gas exporter will require the United States to ramp up liquefied natural gas (LNG) facilities, but with price differentials where they are, it should happen quickly. "We were paying $3 or $4 over here. With that kind of discrepancy market forces won't let that continue forever," Flynn says. "If you ever get below $3 again, it is going to be a major long-term buy. Shorter term, it looks like $3.35. Over the next two years the demand for natural gas is going to explode, similar to oil prices in the late 1990s. What happened is the demand for that cheap product exploded and then before you knew it we had a major bull market."
An interesting natural play may be its long-term price curve. "The curve is relatively flat, which to me is amazing," Flynn says. "If I were a big corporation and I could lock in September 2020 natural gas, I would be jumping all over it (see "Hitting the curve," below)." The June 2017 natural gas contract at the beginning of November was at $3.90, the May 2020 contract was at $4.50. Natural gas always has been a domestic market, but with the huge price discrepancies overseas that demand should push prices higher out on the curve when transportation is worked out. "If I were a natural-gas-dependent corporation, I would be locking in these prices for a long time," Flynn says.
Big Movers overnight! Grains are soaring led by soybeans and meal. Exports of beans hit a record for the eighth week in a row and meal demand is strong as well. There are some fears that the drought in Brazil could limit the size of the soybean crop and reports by some U.S. farmers that the yields are not as big as some have expected.
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