OGI_030315OilPriceCrunch

Third Party Research
March 3, 2015
Coming Oil Price “Crunch”
eResearch Corporation is pleased to provide an article from Oil & Energy Investor, featuring
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http://oilandenergyinvestor.com/2015/02/massive-crunch-means-higher-oil-prices/
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The Coming Oil Price “Crunch” Means Profits For Smart Investors
by DR. KENT MOORS | FEBRUARY 24 , 2015
Even as oil prices inch upward over time, a dynamic of their current levels will boost them even
higher. That may take some time, but I can recommend some stocks that will generate returns in the
meantime, until the oil price rise spurs some capital gains in the majors and E&P companies. The
consequence of lower prices is called the "reserve crunch." And it means that oil prices will inevitably
increase.
Oil Majors Stop Topping Up Reserves
Faced with significantly lower oil prices, the majors are less eager to replenish their oil reserves. In
fact, Royal Dutch Shell Plc. recently reported that it had replaced just 25% of its 2014 production.
That is just 300 million barrels of new reserves to replace 1.2 billion barrels of production.
Now you know why I call it a "crunch." It is yet another sign of shrinking future production. Other
operators, large and small, have begun to issue similar statements.
In today's environment of surpluses, it is hardly surprising that oil companies are dialing back their
forward production. After all, there is very little reason to continue producing excessive amounts of
crude if it is merely going to depress the price. However, this is the kind of crunch that promises to
have a big impact on both crude oil prices and stock valuations.
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Oil Prices: The Impact of Falling Reserves
Of course, the impact of the crunch on oil prices is obvious and easy to understand. Any uptick in
demand will result in a disproportionate rise in prices for oil futures contracts – especially as rates of
replenishment fall.
As for its impact on stock valuations, it's actually the “booked reserves” – oil in the ground and
readily extractable – that influences what investors will pay for a stock. Companies do not drill for
new oil simply to add to the product flow for the refining of oil products. They also drill to add to their
booked reserves, boosting their share price in the process.
Typically, the more reserves a company has, the more it can command in the stock market.
Conversely, falling reserves usually depress the price.
You might think that in times of excess supply, the reserves on a company's books may be less of
an advantage. But that is just not the case this time. Why? Because demand is not dropping. That is
especially true during this time of year.
Once again, it is useful to remember that today's low prices were caused by too much supply, not
too little demand. It is the demand side of this equation that will keep oil prices from falling much
further. In fact, this is the period when we begin to see a run up of prices in advance of the primary
driving season.
For instance, take a look what is happening with gasoline prices. While West Texas Intermediate
(WTI) has climbed nearly 11% over the past month, futures prices for RBOB ("Reformulated
Blendstock for Oxygenate Blending," the gasoline futures contract traded on the NYMEX) have
raced ahead by more than 25%.
The continuing conflict in Libya has closed Sarir, the nation's largest oil field. That follows earlier
interruptions of the primary pipelines, along with other port and production facilities. As a result,
Brent has spiked again in London, given the more direct influence MENA (Middle East North Africa)
events have on the European market.
Higher Oil Prices Ahead
Against this volatile backdrop, the overall condition of global reserves places an even greater
pressure on oil prices. It is true, WTI can rely on more secure U.S. reserves. But, on the other hand,
Brent is very sensitive to the availability of worldwide reserves.
Remember, Brent is used as the benchmark for far more actual oil consignments internationally than
WTI. The increasing lack of reserves outside the United States, therefore, is likely to result in the
expansion of the Brent-WTI spread. This pricing difference has favored Brent for all trading sessions
except three since the middle of August 2010. The reserve crunch means that spread will now be
increasing again.
Several years ago, declining reserves would have been ammunition for the "Peak Oil" crowd that
was always quick to point out the signs that we were running out of crude.
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Today, falling reserve figures have morphed into something quite different. Yes, oil is a finite
resource. But the advent of huge (and increasing) reserves of extractable unconventional oil (shale,
tight, oil sands, ultra-heavy) found in regions across the globe has significantly muted the "sky is
falling" approach to crude. This has become an issue of new price ranges, but not one where $200 a
barrel is in the offing. The reserve replenishment situation will be rebalanced along with supply and
demand. But with one caveat…
As the reserve crunch worsens, it will introduce another factor that will help to put a floor under oil
prices. It will take the market longer to address the falling reserve balance, especially going into a
period of heavier use.
That, combined with continuing geopolitical uncertainty (now a market staple, not an outlier or
exception to the rule), produces one overriding conclusion: Despite ample options on the supply
side, oil prices are stabilizing and will continue to move up.
While the turnaround in oil stock fortunes might be delayed, a solid "play" in the interim would be to
focus on stocks with secure dividends to boost returns until they inevitably rally. BP Plc., Royal
Dutch Shell, and Chevron Corp. are three that regularly pay dividends and could all bridge the gap
while their discounted stock prices rebound.
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BW: See Dr. Moors’ bio on the next page.
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Dr. Kent F. Moors is an internationally recognized expert in global risk management, oil/natural gas policy
and finance, cross-border capital flows, emerging market economic and fiscal development, political, financial
and market risk assessment. He is the executive managing partner of Risk Management Associates
International LLP (RMAI), a full-service, global-management-consulting and executive training firm. Moors
has been an advisor to the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish
governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s
served as a consultant to private companies, financial institutions and law firms in 25 countries and has
appeared more than 1,400 times as a featured radio-and-television commentator in North America, Europe and
Russia, appearing on ABC, BBC, Bloomberg TV, CBS, CNN, NBC, Russian RTV and regularly on Fox
Business Network.
A professor in the Graduate Center for Social and Public Policy at Duquesne University, where he also directs
the Energy Policy Research Group, Moors has developed international educational programs and he runs
training sessions for multiple U.S. government agencies. And until recent revisions in U.S. policy, Dr. Moors
was slated to be the deputy director of the Iraq Reconstruction Management Office (IRMO) in Baghdad.
Moors is a contributing editor to the two current leading post-Soviet oil and natural gas publications (Russian
Petroleum Investor and Caspian Investor), monthly digests in Middle Eastern and Eurasian market
developments, as well as six previous analytical series targeting post-Soviet and emerging markets. He also
directs WorldTrade Executive‘s Russian and Caspian Basin Special Projects Division. The effort brings
together specialists from North America, Europe, the former Soviet Union and Central Asia in an integrated
electronic network allowing rapid response to global energy and financial developments.
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