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The Price of Oil Is About to Blow a Hole in Corporate Accounting

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Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#51

Post by ucha »

dynode wrote: post #47
URSpider94 wrote: post #44

Earlier quoted context omitted.

Public service message from someone who went down this road before: it's worth studying up on the futures market. In particular, there's a nasty little thing called "contango" that effectively makes your investment worth less and less every month that you hold it and oil prices don't go up. Think of it as a rental fee for the tanks where they keep the oil held by investors. The upshot is that you can lose money on oi…

Is investing in a company like exxon a good proxy for oil price?

No, it's not.

An integrated oil company like Exxon has activities that lose money when the price of oil goes down (drilling, exploitation) and others that make more (refining, retail). The price of oil dropped by about half during the past few months; Exxon barely budged.

A better proxy for oil price could be drillers (Diamond Offshore Drilling for example) but they're very far from perfect either. In general, it is very hard to track an asset which price is expected to be mean-reverting like the price of oil.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#52

Post by TheSpiceIsLife »

rcarrigan87 wrote: post #28

I bought some shares in an oil ETF a fews weeks ago my investment rationale was: 1. If the price stays low I win because my gas will be cheaper (essentially hedging my gas costs). If the price rises my cost at the pump will increase but will be offset some by gains on the ETF. 2. Geopolitical flares up typically drive oil prices higher. Low oil prices destabilize a lot of countries and increase the probability of the…

1. If the price stays low you've lost because that money could have been better invested elsewhere. You would have been better off putting that money in your fuel tank, which you'll have to do anyway.

> It's almost like low oil prices will inevitably lead to high oil prices.

Well, historically yes. It's almost like markets exhibit some cyclical behaviour. Good luck picking where to get on and off.

You don't need to rationalise a gamble, just call it was it is: a gamble not an investment. And that's okay. As a perfectly spherical rational actor with zero information-friction I've placed a few bets too.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#53

Post by monochromatic »

TTPrograms wrote: post #15
jerf wrote: post #9

Well, if the stock market reacts by savaging the prices of these companies, sounds to me like a fantastic long-term investment opportunity will be opening up. However large this may be, it's still a transient price drop with a lot of politics in it, and in the long term prices are still only going to go back up. Most of that oil in the ground is still going to be pumped up at much higher prices, and not all that many…

Current P/Book values for oil companies now seem to reflect that the market is pricing them with oil reserves at current prices, not reported prices. If it bumps lower around Q1 and Q2 as actual oil price filters into the books then that would be pretty irrational, and likely reflects opportunity.

> Current P/Book values for oil companies now seem to reflect that the market is pricing them with oil reserves at current prices, not reported prices.

One would hope so. The efficient market hypothesis may not be 100% true, but I'd be surprised if it were that far from true.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#54

Post by computator »

caseysoftware wrote: post #25
imaginenore wrote: post #14

Earlier quoted context omitted.

You don't know that. The world is really on the way of getting rid of oil. Electric cars, bioplastics, solar panels getting exponentially cheap. From my point of view the only thing that stops us all from switching to electric cars is the battery technology. When it comes to the industrial use of solar energy, we already have the technology of storing energy - flywheel (google Beacon Power).

Even if a perfect battery was introduced tomorrow it would still take at least 10 years before it made a serious dent in the car market. The Prius was introduced in the US in 2000 and it took about 11 years for them to sell the first million.[1] The vast majority of people don't buy a brand new car more than once or twice in their life. They simply don't have the money. The rest of the people buy a car used and drive…

> The vast majority of people don't buy a brand new car more than once or twice in their life.

The adage has been that "Americans buy, on average, a new car or truck every 3 or 4 years."[1] That's like a dozen new cars in a lifetime.

I was going to call bravo sierra on your assertion, but I decided to try a back-of-the-envelope calculation to check the plausibility:

Roughly 10 million cars are sold each year in the U.S., the U.S. has 230 million adults, and they'd likely buy their cars between ages 18 and 65 (a span of 47 years). That means each adult has a 1 in 23 chance (230M/10M) of buying a new car each year, so over a 47-year span they'd buy 47/23 = 2 new cars.

There could be all sorts of ways my calculation could be wrong, but it agrees surprisingly well with your claim.

I'm wondering now if the "new car every 3-4 years" is a myth propagated by auto makers.

[1] http://www.cnbc.com/id/49504504

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#55

Post by caminante »

URSpider94 wrote: post #44
rcarrigan87 wrote: post #28

I bought some shares in an oil ETF a fews weeks ago my investment rationale was: 1. If the price stays low I win because my gas will be cheaper (essentially hedging my gas costs). If the price rises my cost at the pump will increase but will be offset some by gains on the ETF. 2. Geopolitical flares up typically drive oil prices higher. Low oil prices destabilize a lot of countries and increase the probability of the…

Public service message from someone who went down this road before: it's worth studying up on the futures market. In particular, there's a nasty little thing called "contango" that effectively makes your investment worth less and less every month that you hold it and oil prices don't go up. Think of it as a rental fee for the tanks where they keep the oil held by investors. The upshot is that you can lose money on oi…

With all due respect, you're jumbling a bunch of parameters w.r.t. contango, and its implications. Contango structure can exceed cost of carry even if crude oil prices stay flat. There are lots of dynamics, which you allude to.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#56

Post by caminante »

TheSpiceIsLife wrote: post #52
rcarrigan87 wrote: post #28

I bought some shares in an oil ETF a fews weeks ago my investment rationale was: 1. If the price stays low I win because my gas will be cheaper (essentially hedging my gas costs). If the price rises my cost at the pump will increase but will be offset some by gains on the ETF. 2. Geopolitical flares up typically drive oil prices higher. Low oil prices destabilize a lot of countries and increase the probability of the…

1. If the price stays low you've lost because that money could have been better invested elsewhere. You would have been better off putting that money in your fuel tank, which you'll have to do anyway. > It's almost like low oil prices will inevitably lead to high oil prices. Well, historically yes. It's almost like markets exhibit some cyclical behaviour. Good luck picking where to get on and off. You don't need to r…

If the price stays low, he still has the insurance feature of his position (limited downside risk if the price goes up) -- which he wouldn't have otherwise.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#57

Post by frandroid »

aaron_m04 wrote: post #3

Isn't the price being held at an unsustainably low price by OPEC? If so, then any accounting problems would be short lived. Once OPEC cuts supply, the prices will bounce back to ~$100/barrel, I would expect.

It's held at an unsustainly low price by OPEC, but not for OPEC... Saudis can sell oil at $20 per barrel if they feel like it. The pain they're causing Iran right now is probably not coincidental to the nearing of a nuclear deal that would lift the current sanctions and give the regime a lot of wings.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#58

Post by x0x0 »

tptacek wrote: post #31
x0x0 wrote: post #20

Earlier quoted context omitted.

You should look at the graph [1: the article, 2: a hotlink] labeled "Welcome to the Terrordome..." showing the prices of various oil sources vs solar over time. If the fantastic decline in solar prices continue, many oil sources will soon be not economical. And yes, I know there's storage problems and energy density problems for mobile vehicles, but oil is still a riskier bet than I think you portray. [1] http://www.…

This is pretty weak. The reason solar-power generation will increasingly dominate: it’s a technology, not a fuel. As such, efficiency increases and prices fall as time goes on. That's true of shale oil extraction as well. The corresponding chart conflates all natural gas extraction under the "Henry Hub" label, and all crude extraction under "Brent". Meanwhile, it tries to show an exponential price decline in solar by…

Here's solar back further:

http://io9.com/solar-powers-epic-price-drop-visualized-51044...

What we're meant to be comparing -- and I don't think that chart mean to lump all lng or all oil in together -- is that solar is now comparable to oil and/or lng in certain locations.

Oh, and I don't think anyone anticipates efficiency gains in shale oil extraction comparable to the ongoing efficiency increases in anything silicon related.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#59

Post by lancewiggs »

computator wrote: post #54
caseysoftware wrote: post #25

Earlier quoted context omitted.

Even if a perfect battery was introduced tomorrow it would still take at least 10 years before it made a serious dent in the car market. The Prius was introduced in the US in 2000 and it took about 11 years for them to sell the first million.[1] The vast majority of people don't buy a brand new car more than once or twice in their life. They simply don't have the money. The rest of the people buy a car used and drive…

> The vast majority of people don't buy a brand new car more than once or twice in their life. The adage has been that "Americans buy, on average, a new car or truck every 3 or 4 years."[1] That's like a dozen new cars in a lifetime. I was going to call bravo sierra on your assertion, but I decided to try a back-of-the-envelope calculation to check the plausibility: Roughly 10 million cars are sold each year in the U…

2nd hand cars? The 10m is just new cars right?

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#60

Post by smcl »

adventured wrote: post #24
aaron_m04 wrote: post #3

Isn't the price being held at an unsustainably low price by OPEC? If so, then any accounting problems would be short lived. Once OPEC cuts supply, the prices will bounce back to ~$100/barrel, I would expect.

It isn't only OPEC. The US dollar shaved at least 20%+ off the price of oil, and likely instigated this crash (the world was swimming in oversupply of oil for quite some time before the crash). The US dollar began skyrocketing, due to the end of QE, at exactly the same time oil began crashing. Not a coincidence, given oil is priced in dollars and the US dollar is on its greatest one year run in decades. Look at July…

Can you help me get my head around the USD chart? In my head it only makes sense to value one currency vs another (i.e. the USD to GBP exchange rate) so seeing one chart which simply plots "USD" over time is a bit tough to wrap my head around.
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