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JANUARY 28, 2015

Halliburton (HAL) President Jeff Miller recently provided investors with some unique insights into the oil market on the oil-field services company's fourth-quarter conference call. Here are his comments on supply, demand, and the history of oil market downturns, which offer a significant clue on when the market could turn around.


Miller began his comments by comparing the current oil demand forecast against potential supply:

Although oil demand growth expectations for 2015 have weakened, it is still growth. Demand is forecast to increase by an estimated 900,000 barrels per day. Keep in mind the steep decline curves are still at work. We estimate the average annual production decline rates for unconventionals in North America are in excess of 30%, and much higher in some areas. Depending on the ultimate trajectory of the rig count declines and the backlog of well completions, we believe that North America crude production could begin to respond during the back half of the year. Internationally, decline rates have become more pronounced in several key markets over the last couple of years. In areas like Angola, Norway, and Russia historical growth has given way to net production declines in the last year. While decline rates in markets like Mexico and India have actually accelerated.

That projected 900,000-barrel demand increase makes clear the world has not suddenly abstained from using oil. It might be using less than supply at the moment, but that moment could quickly pass as production peaks and then naturally falls. That process is already under way in a number of countries, and U.S. production could peak and begin to decline in the second half of the year.

This actually could be a big problem if oil companies underinvest in the years ahead, according to Miller.

. . . we believe that any sustained period of underinvestment due to reduced operator spending could lead to an increase in commodity prices. And this largely ignores the possibility of short-term disruptions due to geopolitical issues. So the long-term fundamentals of our business are still strong. But it is clear we are heading into an activity downturn.

It's quite possible a sustained period of low oil prices could eventually cause a price spike, as oil companies can't quickly ramp up production capacity to meet demand should it grow faster than forecasts currently predict.



News Features - Energy News

imports_domestic_petro_shares_demand-smallThe United States consumed 19.1 million barrels per day (MMbd) of petroleum products during 2010, making us the world's largest petroleum consumer. The United States was third in crude oil production at 5.5 MMbd. But crude oil alone does not constitute all U.S. petroleum supplies. Significant gains occur, because crude oil expands in the refining process, liquid fuel is captured in the processing of natural gas, and we have other sources of liquid fuel, including biofuels. These additional supplies totaled 4.2 MMbd in 2010.



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Oil dropped below $80 per barrel on Monday morning, with important implications for production and jobs.

The most important issue for the markets is oil that dips below $80. Today, Goldman Sachs cut its West Texas Intermediate Crude target to $75 from $90. The investment bank also cut Brent crude to $85 from $100.

A few weeks ago Citi put out a report noting that the "full-cycle" costs (land, infrastructure, well drilling and operating costs) for many new shale plays is in the $70 to $80 range. That means that we are entering the area where some new shale plays will become unfeasible.

This has a bigger impact than just lower oil gas prices. Obviously, a lower gas price is good news. The bad news is the potential impact this could have on the other side of the ledger: jobs. The shale oil boom has been a significant help for the jobs market in the United States. A reduction in new drilling could have a significant impact on the booming energy industry.


1) Seasonal traders on alert: the S&P 500 had its best week since January 2013 last week, as inflows combined with under-exposed hedge funds moved the markets up.

Traders are generally optimistic, since we are entering a seasonally strong period for several reasons: the November-December two-month period is seasonally strong, trade during the six days before midterm elections has been up 75 percent of the time in the eight elections in the last 32 years, and companies that halted or reduced buybacks in October return to the market in November.

2) Lots of international news:

Brazil's Bovespa is being hit hard as incumbent Dilma Rousseff won a hard-fought re-election battle; 51.6 percent of the vote went to her versus 48.4 for the challenger Aecio Neves. The Dilma victory was obviously not priced into the market.

Of the 24 European banks that failed the stress test, nine were Italian. Greece only had three, Cyprus also had three.

The Nikkei 225 was up 0.6 percent overnight after a Japanese government official said the government should consider delaying a planned sales tax increase. This would follow on the heels of a similar hike in April. 3) While everyone will be fixed on the Fed meeting this Wednesday, many are talking just as much about the first look at third quarter GDP on Thursday. Consensus is for a gain of 3.1 percent. It was 4.6 percent in the second quarter, so if the third quarter reading hits the consensus we will definitely be in a period of above-trend GDP growth.

4) How important is a 10-percent correction? Financial journalists obsessed about this last week as we got close to a 10-percent decline, but it may not be indicative of much at all. Steven Wieting, global chief investment strategist with Citi Private Bank, writing in Barron's this weekend, noted that "moderate asset price declines have more often been false warning signs."

He said fundamentals and stocks rarely part ways for long, and that corrections not associated with recession have been much shorter in duration. Since 1950, the U.S. stock market has seen 29 discrete declines of 10 percent or more, but only 10 recessions, Wieting notes.


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