Why Oil Prices Are At 52 Week Lows and 3 Stocks Hit Hard - Stocks in the News

West Texas Intermediate crude slumped further into a bear market from signs of global slow-down.   The U.S. crude slumped about 2.5% to $83.59 a barrel, the lowest since July 2012.   Barclays just revised their price forecast Brent Crude Oil for fourth quarter of 2014 downwards to $93 per barrel from $106/bbl and 2015 forecasts to $96/bbl from $107/bbl levels.   The oil-shale boom which started back in 2008 could be a typical example of a boom and bust, and could suggest that further declines are ahead for oil prices.  

Oil-Shale Boom

Arguably, the current oil-shale boom started back in 2008 in a small town in North Dakota, called Williston.    On the western edge of North Dakota, 2 miles underground lays a deposit of crude oil the size of West Virginia called the Bakken. With the invention of hydro-fracking and horizontal drilling, this has allowed oil companies to access oil at a reasonable price that they could not have before, which helps explain the increase in domestic oil production.   In fact, according to the U.S  Energy Information Administration (EIA),  The U.S. total exports of refined petroleum products increased by 77% from 08’-14’. 

About 40,000 oil wells exist within the Bakken Formation resulting in exponentially increasing productivity of oil production, which some could say are unsustainable.   It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency. Iraq could do the same with 60 wells. 

From 2008 to 2013, TOTAL oil supply in the U.S. increased from 8.5 Million barrels per day to 12.5 Million barrels per day, a jump of about 46%.  U.S. oil output increased to 8.88 million barrels a day last week, the most since March 1986, according to the EIA. Crude inventories in the world’s biggest oil consumer increased by 5 million barrels to 361.7 million in the week to Oct. 3 according to the EIA on Oct. 8.  With a higher production cost of a major factor of the boom such as oil fracking, prices will continue to drop until productivity of oil-fracking goes down.  

OPEC Output

The Organization of the Petroleum Exporting Countries (OPEC) increased output by 402,000 barrels a day in September to 30.47 million, the group said in its monthly oil market report. It was the biggest monthly gain since November 2011 and the largest production in more than a year. The organization predicted demand will accelerate in the next few months.
 
 
 
As you can see from the graph above, OPEC production helped produce the oil boom starting January 2009 and has been on a recent bull run in 2014.

Brent oil for November slid 98 cents to $89.07 a barrel on the London-based ICE Futures Europe exchange. It is positioned to continue a loss for the third week in a row. The European benchmark crude traded at a premium of $4.83 to WTI, compared with $2.57 on Oct. 3.

Higher Costs

Re-Fracking production costs are relatively higher than conventional method production costs.  Also, since there is a much more limited supply of Shale Oil, the output drops faster than production from conventional methods.   
Environment America wrote an article back in 2012 listing the costs of Fracking and a few are listed below:

Drinking water contamination – Fracking brings with it the potential for spills, blowouts and well failures that contaminate groundwater supplies.

Health problems – Toxic substances in fracking fluid and wastewater – as well as air pollution from trucks, equipment and the wells themselves – have been linked to a variety of negative health effects.

Natural resources impacts – Fracking converts rural and natural areas into industrial zones, replacing forest and farm land with well pads, roads, pipelines and other infrastructure, and damaging precious natural resources…etc

Oil Drillers are achieving to maintain the pace of the unprecedented 39 percent gain in U.S. oil production since the end of 2011. The biggest challenge for the mission of U.S. energy self-sufficiency depends on an easy credit system and oil prices high enough to cover well costs. Even with crude above $100 a barrel, shale producers are spending money faster than they make it. 

With oil prices hitting record lows, creditors will become worried and might create strategies to hedge against volatile oil prices for the future, which will only put oil producers between a rock and a hard place.

Sell Off From Fracking Companies

Below we look at a few fracking companies which have been hit by the trend. We have three stocks and their returns for the week of Oct.5, 2014 to Oct.10 2014 below:

Encana Corp: (ECA) -6.07%

North Atlantic Driling: (NADL) -7.36%

Superior Energy: (SPN) -12.40%

 
Bottom Line

The current business model of the growth of the production of shale oil which inevitably benefited the U.S. in oil production is an unsustainable business model that has to be fixed as soon as possible.  If this rate of growth of oil production continues, oil prices will continue to drop, creating downward pressure on creditors, in turn impacting the oil drillers.  This wheel of over exuberant oil drillers and creditors should think of sustainability of energy independence as a function of production growth, and consider that the recent drop in price is at least partially a result of their own success.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
SUPERIOR ENERGY (SPN): Free Stock Analysis Report
 
NORTH ATL DRILG (NADL): Free Stock Analysis Report
 
ENCANA CORP (ECA): Free Stock Analysis Report
 
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