Key for Investors: There’s Still Hope for Crude Oil



Energy firms with the most additions by hedge funds in 1Q15

Independent firms, like ConocoPhillips (COP), and integrated firms, like ExxonMobil (XOM) and Chevron (CVX), have posted weekly losses. Pipeline and oilfield services firms like, Kinder Morgan (KMI) and Schlumberger (SLB), also posted losses. Together, these firms form 45% of the Energy Select Sector SPDR Fund (XLE).

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Iran’s intention to expand crude exports could take time

According to Goldman Sachs and a few other major investment banks, it could still take some time for Iran’s plan to export more crude oil to materialize. With the country attempting to revive older oil wells, enhancing exports by 50% could take an extra 500,000 bpd (barrels per day) of production. This is expected to take between six and 12 months.

Fall in capital spending could lead to realignment of oil supply

Several oil producers have been restricting their capital spending on exploration or drilling activity. With time, a cut in capital spending would result in reductions in crude oil supplies. The non-OPEC (Organization of the Petroleum Exporting Countries) supply is expected to shrink in 2016.

Lowered drilling activity

As we explained in Credit Default Swaps as Insurance against Junk Bond Market Crash, US energy companies borrowed heavily. They used the junk bond market to finance hydraulic fracking operations. However, this occurred when crude oil prices were above the $100 per barrel level. This resulted in an economically viable business model. Loans by banks to drillers were secured by the firms’ reserves. With dwindling drilling activity, firms might see rising consolidations as the weaker ones lose out on financing options. This could cause the US crude oil output to tighten.


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