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4 Key Signs Low Oil Prices Are Here To Stay

By Ellen R. Wald, Ph.D.CommoditiesJul 30, 2015 12:01AM ET
www.investing.com/analysis/low-oil-prices-are-here-to-stay:-4-key-signs-259913
4 Key Signs Low Oil Prices Are Here To Stay
By Ellen R. Wald, Ph.D.   |  Jul 30, 2015 12:01AM ET
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Though the price of oil managed to climb back to $60 a barrel from a low of $40, it has now fallen back under $50. Will oil prices recover as quickly this time around? Four key financial and economic factors indicate that a recovery is not in the cards anytime soon.

1. Job Cuts: Energy firms like Halliburton (NYSE:HAL), Baker Hughes (NYSE:BHI), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) are announcing layoffs and making plans for jobs cuts later this fall. Idling wells, postponing projects, and laying off contract site workers are all appropriate responses to a short-term drop – and firms made these cuts almost immediately after OPEC’s decision to cut prices in November 2014. This time around, however, the layoffs are hitting geologists, engineers, and corporate headquarters, meaning cuts are hitting the strategic and long term plans of the company. Chevron plans on eliminating 1,500 jobs worldwide along with an additional 600 contractor positions. Oil service companies Halliburton and Baker Hughes recently announced that they actually cut double the number of jobs they had previously anticipated cutting, and ConocoPhillips plans to lay off personnel this fall. These are not just signs of a temporary scale-down in operations but rather serious corporate belt-tightening designed to cut costs for the long term.

2. Iranian Oil: The ink on the nuclear deal is barely dry, but stored Iranian oil has already left the Persian Gulf for African customers. Although Iran’s oil industry will take significant investment and time to return to full export capacity, the expectation of growing Iranian oil exports on top of an already overwhelmed market will continue to depress oil prices, especially from speculation. Even if American oil production continues its incremental decline, the constant trickle of news about foreign investment in Iran’s oil industry will keep speculator oil prices depressed well past Iran’s planned oil and gas investment showcase in December, 2015.

3. Loans and Credit Lines: Wall Street banks are pressuring oil companies to raise more equity or make serious changes to free up additional cash now, all in anticipation of the biannual reevaluation of credit lines and loans coming in October 2015. Even large firms like Chesapeake Energy (NYSE:CHK) must face up to this reality. Chesapeake recently announced it would eliminate its annual dividend. This move freed up $240 million but also sent share prices tumbling to 12 year lows. This kind of pressure from banks is a significant departure and indicates that those controlling the purse strings don’t have much confidence in oil prices generating profits for oil companies.

4. Saudi Arabian Refineries: This oil giant does not seem to care what the price of oil is. It just keeps on pumping, selling, and more importantly, refining away. Saudi crude oil production rates remain at record levels, but the real sign that low oil prices are here to stay is the growth of Saudi Arabia’s domestic refining sector. Rather than simply export all that low priced crude oil at low market value, Saudi Arabia is keeping significant amounts of its expanded crude production at home to refine into gasoline, diesel, and petrochemicals – all at its new facilities inside the Kingdom. Cheap oil is a boon for the refining industry, and Saudi Arabia is now well positioned to take advantage of that. Given the extent of its investment in downstream facilities, the Kingdom views refining as a long-term moneymaker.

4 Key Signs Low Oil Prices Are Here To Stay
 

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4 Key Signs Low Oil Prices Are Here To Stay

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Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. Jul 30, 2015 1:20PM ET
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Adding to the job cuts are Shell (planning to cut 6500) and Cenovus, Canada's second largest independent oil producer (300 jobs AND cutting its quarterly dividend by 40 cents/share) and
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Ruben MF De Poortere
Ruben MF De Poortere Jul 30, 2015 4:01AM ET
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4 Sings the current oil price is too low, and will bounce back to $80 or even $100 a barrel.. . - The current price is the result of a war for market share between oil producers. They are hurt badly but accept this pain in the hope it will give them bigger returns later. However, someone will need to blink first and cut production, the current price is hurting producers too much.. - Iran is only a small producer. Moreover, the cost for pumping Iranian oil is higher than for saudi Arabia who is also hurt by current prices.. - Altough there is currently little growth in demand, demand for oil isn't decreasing much either. Oil is still needed badly by the world economy.. - America is one of the key players who started this war for market share in the first place. Oil is also way too cheap for American producers. Also, America has many shale oil wells, but these wells have less reserves than the bigger Saudi - Arabia Wells, making American oil more expensive.
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