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IWG MCRO THAL

After several months of declining oil prices we are gradually approaching a break-even between supply and demand. Whilst that statement about supply and demand seem at odds with the current in balance and storage volumes, there are several factors to take into account: 1) the enormous reduction in E&P expenditure, 2) the decline in USA shale oil production, 3) the increasing geopolitical risks in the Middle East; does the execution of Sheikh Nimr al-Nimr by Saudia Arabia lead to an interruption in Saudi oil exports as the Sunni v Shia spill over from a contest between proxies to direct armed conflict between Iran and Saudi Arabia.

Latest news is that $80 per barrel will be the 'new normal' later this year.

Saudi Arabia alert to potential terrorist attack on oil installation: https://uk.news.yahoo.com/saudi-arabia-alert-over-possible-oil-mall-attack-075437846.html

Latest developments: USA shale rig numbers continue to decline, The majors are failing to replace the oil they extract anything like 100% reserve replacements, Investment in E&P is reducing, Supplies in storage continue to expand. However all this is short-term noise against the background of the proxy was being fought between Saudia Arabia and Iran as, across the Middle East, they back opposing factions in the Muslim v Muslin battles. http://news.antiwar.com/2015/03/23/yemen-combatants-court-international-allies-for-proxy-war/ http://middleeast.about.com/od/iran/tp/Iran-And-Saudi-Arabia-Middle-East-Cold-War.htm

Several 'experts' have attempted to argue that oil will stay cheap for several years; presumably the same 'experts' who didn't see coming the great drop from $100 per barrel. So what is the current state of play? The CE of OPEC has stated that the bottom line in the price may have been reached. Oil majors, and not so major companies, are slashing exploration and development expenditure. The number of active rigs in the USA shale arena are reducing - remember a drill in shale produces most of its lifetime oil in its first six months so without continual drilling the total shale output reduces pretty quickly. The world is still dependent on oil with the surplus of supply over demand not that great. On the other side, reserves are at high levels and some producers are capable of increasing output quickly. So what are the geopolitical risks? Extremist threats to production in Nigeria, North Africa and the Middle East. Further sanctions on Russia. Overall the recent increase in the barrel price maybe no more than 'noise'. In the medium term the reduction in investment in exploration and development will lead to tighter supplies, whilst demand continues to climb.

Already the pips are starting to squeak: https://uk.news.yahoo.com/saudi-dig-reserves-2015-budget-134850025--finance.html

Interesting report from Interactive Investor: http://www.iii.co.uk/articles/213192/oil-services-slump-throws-bargains

The consensus seems to be that the price of oil is in a downward spiral. Well the contrary view is: The Saudis are seeking to 'kill' oversupply by leaving their taps open - their production cost is $5 to $6 per barrel. The fracking output in the USA will rapidly decline over the next 12 months - franked wells produce some 80% of their oil in the first 6months, requiring extensive drilling of new wells to keep up output. Numerous fracking companies will be unable to meet the cost of new wells and will wind-down. Billions of dollars of debt in the fracking arena will be written-off causing distress amongst its owners and making them very wary of future fracking investments. The major oil companies will reduce capital expenditure; this is already happening. The market for oil will not disappear so as supply reduces the price per barrel will rise The Saudis will maintain their market share at a barrel price well above today's levels. Those exploration companies who survive the current price reduction will subsequently become M&A targets as the majors seek to replenish their reserves.