Lower oil prices are no reason to panic

Intelligent Investor

Independent Financial Research

Lower oil prices are no reason to panic. Shale oil production from the US is challenging the status quo. Like iron ore, plenty of supply has been added. Unlike iron ore, almost all of it is high cost production that is now under stress. The best solution to low prices is low prices and we expect that, within the next 12 months, supply will exit oil markets and stabilize prices. Plenty of US shale output simply isn't economic at current prices. Shale incurs total costs of between US$70-80 a barrel. We expect oil prices to eventually settle somewhere in this range but, with a lot of producers using hedging, that could take time. It isn't just oil prices influencing supply, zero interest rates play a role. The entire shale oil industry depends on the availability of cheap money. A change in credit conditions could dramatically alter the economics of shale oil. That's not to say that the entire industry is a bubble, but it is more fragile than traditional output and its dominance has been overstated. (VIEW LINK)


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Independent Financial Research

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