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10/14/2016 WhyisOPECimportanttothepriceofcrudeoil?

MarketRealist

Akeyinvestor'sguidetothecrudeoilmarket 11

A key investor's guide to the crude oil market PART 1 OF 15

Thecrudeoilmarket:Anoverview
By Gordon Kristopher| Jan 15, 2015 2:42 pm EDT

Thecrudeoilmarket
Crudeoilpriceshavebeenonarollercoasterridein2014.WestTexasIntermediate(orWTI)
wastradingat$107perbarrelinJune2014,anditstradingnowat$45perbarrel.WTIcrude
oilhasdeclined~58%sincethemiddleofJune.Brentcrudeoilhasalsodeclined~69%from
midJune.Thishugedeclineincrudeoilpricesisnotunusual.Ithashappenedmultipletimes
inthepast.

Oilpricebenchmarks
WTIcrudeoilisthebenchmarkcrudeforUSoil.WTIispricedatCushing,Oklahoma,and
representsthereceivingpriceofoilproducersintheUnitedStates.WTIoilpricesdriveUSoil
producersmargins.

Brentcrudeoilisthebenchmarkofinternationalcrudeoilprice.Itrepresentsthereceiving
priceofinternationaloilproducers.Thesebenchmarkpricesarekeytotheprofitabilityof
energystocksforcompaniessuchasChesapeakeEnergy(CHK)andConchoResources
(CXO)withproductionbasedintheUnitedStates.Ontheotherhand,lowerBrentoilprices
impactthemarginsofcompaniessuchasExxonMobil(XOM)andChevronCorporation
(CVX)withsignificantproductionoverseas.ThesecompaniesarepartofenergyETFssuch
astheVanguardEnergyETF(VDE).

Whyinvestorsshouldreadthisseries

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Ifyoureacrudeoilinvestorandwanttoknowthekeyfactorsthatareimpactingoilpricesin
theshorttermandlongterm,thisserieswillhelpyouachievethatpurpose.

Theindicatorsdiscussedinthisseriesarehelpfultoinvestorswhowanttodetermine
whethertheindustrysfundamentaloutlookisfavorableornot.Bytheendoftheseries,
investorswillbeabletousetheseindicatorstogaugethecrudeoilpricemovementsinthe
shorttermandlongterm.

A key investor's guide to the crude oil market PART 1 OF 15

Thecrudeoilmarket:Anoverview
By Gordon Kristopher| Jan 15, 2015 2:42 pm EDT

Thecrudeoilmarket
Crudeoilpriceshavebeenonarollercoasterridein2014.WestTexasIntermediate(orWTI)
wastradingat$107perbarrelinJune2014,anditstradingnowat$45perbarrel.WTIcrude
oilhasdeclined~58%sincethemiddleofJune.Brentcrudeoilhasalsodeclined~69%from
midJune.Thishugedeclineincrudeoilpricesisnotunusual.Ithashappenedmultipletimes
inthepast.

Oilpricebenchmarks
WTIcrudeoilisthebenchmarkcrudeforUSoil.WTIispricedatCushing,Oklahoma,and
representsthereceivingpriceofoilproducersintheUnitedStates.WTIoilpricesdriveUSoil
producersmargins.

Brentcrudeoilisthebenchmarkofinternationalcrudeoilprice.Itrepresentsthereceiving
priceofinternationaloilproducers.Thesebenchmarkpricesarekeytotheprofitabilityof
energystocksforcompaniessuchasChesapeakeEnergy(CHK)andConchoResources

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(CXO)withproductionbasedintheUnitedStates.Ontheotherhand,lowerBrentoilprices
impactthemarginsofcompaniessuchasExxonMobil(XOM)andChevronCorporation
(CVX)withsignificantproductionoverseas.ThesecompaniesarepartofenergyETFssuch
astheVanguardEnergyETF(VDE).

Whyinvestorsshouldreadthisseries
Ifyoureacrudeoilinvestorandwanttoknowthekeyfactorsthatareimpactingoilpricesin
theshorttermandlongterm,thisserieswillhelpyouachievethatpurpose.

Theindicatorsdiscussedinthisseriesarehelpfultoinvestorswhowanttodetermine
whethertheindustrysfundamentaloutlookisfavorableornot.Bytheendoftheseries,
investorswillbeabletousetheseindicatorstogaugethecrudeoilpricemovementsinthe
shorttermandlongterm.

A key investor's guide to the crude oil market PART 2 OF 15

WhyisOPECimportanttothepriceof
crudeoil?
By Gordon Kristopher| Jan 15, 2015 2:42 pm EDT

Majorcrudeoilproducers
Thefirstthingpeopleneedtoknowaboutcrudeistheproducers.Themajorcrudeoil
producersthesedaysareRussia,SaudiArabia,andtheUnitedStates.Thetoptenoil
producingcountriesholdamarketshareof~64%ofcrudeoilproductionintheworld.

Thefallincrudeoilpricesimpactsalltheoilproducersinthesecountries.Crudeoilprices
directlyimpacttherevenueofUSoilproducerssuchasConocoPhillips(COP),Anadarko
Petroleum(APC),ApacheCorporation(APA),andPioneerNaturalResources(PXD).These
companiesareallpartofenergyETFssuchastheEnergySelectSectorSPDR(XLE).Crude
oilpricesalsoaffecttherevenueofSaudiAramco,SaudiArabiaslargestoilcompany,
GazprominRussia.

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10/14/2016 WhyisOPECimportanttothepriceofcrudeoil?MarketRealist

OrganizationofthePetroleumExportingCountries(orOPEC)
Iran,Iraq,Syria,Kuwait,SaudiArabia,Bahrain,Qatar,theUnitedArabEmirates(orUAE),
Oman,andYemenaremembersoftheOrganizationofthePetroleumExportingCountries
(orOPEC).OPECwasformedin1960.OPECcountriesproduce40%oftheworldscrude
oil.

Sevensisters
Between1940and1970,thefollowingsevenmajoroilcompaniesdominatedtheoilmarket:

1.AngloPersianOilCompany(nowBP)(BP)
2.GulfOil
3.StandardOilofCalifornia
4.Texaco(nowChevronCorporation)(CVX)
5.RoyalDutchShell
6.StandardOilofNewJersey(alsoknownasEsso)
7.StandardOilCompanyofNewYork(nowExxonMobil)(XOM)

Thesecompaniesareknownasthesevensisters.Theyoncecontrolled~85%oftheworlds
petroleumreserves.Thisgrouptriedtoeliminatecompetitorssotheycouldcontroltheworld
crudeoilmarket.SoOPECwasformedtounifyandcoordinatememberspetroleumpolicies
andensurethestabilityofoilmarketsinordertosecureanefficient,economic,andregular
supplyofpetroleumtocustomersaswellasasteadyincometoproducerswithafairreturn.

CountriesthatwerenotpartofOPECwerecallednonOPECcountries.Decliningpetroleum
reservesfornonOPECcountriesandthegrowinginfluenceofOPECledtothedeclineofthe
sevensisters.

SignificanceofOPEC
OPEChasbeengainingsteadypowerandinfluencingtheglobaloilmarketsincethe1970s
whenOPEChad~50%ofmarketshareinglobalcrudeoilproduction.Highmarketsharehas
alsogivenOPECthebargainingpowertopriceoilabovewhatpriceswouldbeinamore
competitivemarket.ThismeansOPEChastheabilitytoswaycrudeoilpricesbyincreasing
ordecreasingproduction.

IfOPEChasthepowertoswaypricesbycuttingproduction,whydidOPECdecidenottocut
production,whichsubsequentlyledtotherecentcollapseinthepriceofoil?

A key investor's guide to the crude oil market PART 3 OF 15

USSaudiArabiamarketsharerivalry:Its
impactonoilprices
By Gordon Kristopher| Jan 15, 2015 2:43 pm EDT

UScrudeoilproduction
OPECs(OrganizationofthePetroleumExportingCountries)shareoftheglobaloilmarket
hasfallenovertheyearsasnonOPECcountriessuchastheUnitedStatesandCanada
haveincreasedtheiroutput.Highoilpricesfrom2010to2013drovenonOPECcountriesto
developnewtechnologiesandlandtechniquessuchashorizontaldrillingandhydraulic

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fracturing.BytheendofDecember2014,theUnitedStateswasproducing9.127million
barrelsofcrudeoiladay,up~15%fromtheprioryear.

SaudiArabiasmarketsharedecline
Asdomesticproductionincreased,theUnitedStatesimportedlessoil.In4Q14,crudeoil
importsfromSaudiArabiadroppedto850,000barrelsaday.SaudiArabialost~50%ofits
UScustomerbase.

Shaleoilhasbeenavailablesincethe16thcentury,butthehighcostofextractionhalted
developmentforyears.ThepriceofOPECscrudewaslessthanthethehighcostofshale
extraction.However,thatallchangedwiththehighreservesofshaleoil,thehighpriceof
crudeoil,andtherecentadvancesintechnologiessuchashorizontaldrilling.Theseledto
highcrudeoilproductionintheUnitedStates.

SaudiArabiasstrategy
FastgrowingoilproductionintheUnitedStateshaseatenintoOPECsmarketshare.This
benefitedoilcompaniesworldwidebutnegativelyimpactedOPECnationssuchasSaudi
Arabiathathadalreadycutproduction.

Inordertoregainmarketshare,OPECdecidedtomaintainproductionoutput,whichnaturally
sentoilpricesfalling.

ThelowpriceofoilwillnegativelyimpacthighcostshaleoilproducersintheUnitedStates.
ThesecompaniesincludeLaredoPetroleum(LPI),WhitingPetroleum(WLL),andMarathon
OilCorporation(MRO).ThesecompaniesareallmajorpartsofenergyETFssuchasthe
EnergySelectSectorSPDR(XLE).TheUnitedStatesOilFund(USO)isdownby~56%,and
ProSharesUltracrudeoilETF(UCO)isdownby~81%fromJune2014.

SowhatdoesthepriceofoilhavetobeinorderforOPECtoregainmarketshare?

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10/14/2016 WhyisOPECimportanttothepriceofcrudeoil?MarketRealist

A key investor's guide to the crude oil market PART 4 OF 15

Whyisthebreakevenpriceofcrudeoilso
important?
By Gordon Kristopher| Jan 15, 2015 2:43 pm EDT

Whatsbreakevenprice?
KnowingthebreakevenpriceofcrudeoilisimportantwhentryingtofigureoutwhatOPEC
needsinordertoregainmarketshare.Thebreakevenpriceofcrudeoilincludesproduction
costs,exploringorfindingcosts,oilwelldevelopmentcosts,transportationcosts,andselling
andgeneraladministrationexpenses.Thechartbelowdescribesthebreakevenpricefor
crudeoil.

Breakevenpriceofvariousregions
Arecentlyconductedsurveyshowssomeinterestinginsightsintothebreakevencostof
producingcrudeoil.PetroleumextractionintheArcticregionshowsthehighestbreakeven
priceof$75perbarrel.Ontheotherhand,MiddleEasterncountrieshavethelowestpriceat
$27perbarrel.USshaleoilproducershaveabreakevenpriceof$65perbarrel.These
estimatesareaveragebreakevenprices.Thecostsmayvarydependingontheoilwelland
itslocation.

Breakevenpriceandoildecline
WTI(WestTexasIntermediate)crudeoiliscurrentlytradingat$45perbarrel.Brentcrudeoil
istradingat$46.4perbarrel.Thismassivepricedeclineinthelastsixmonthswillimpactoil
producerswithhighbreakevenprices.

ThemarginsofhighbreakevenpriceUSshaleoilproducerssuchasHalconResources
(HK),ContinentalResources(CLR),LaredoPetroleum(LPI),WhitingPetroleum(WLL),and
MarathonOilCorporation(MRO)willbeimpactedthemost.

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AslongascrudeoilpricesarearoundthebreakevenrangeofUSshaleoil,thenUSoil
productiongrowthwillbeslow.Productionwilllikelydeclineoverthelongterm,whichinturn
willhaveapositiveimpactonoilprices.

Willcrudeoilhitthelowestbreakevenpriceandmatchthe$27perbarrelmarkoftheMiddle
Easterncountries?Toanswerthat,wefirstneedtounderstandthevariousmethodsofcrude
recoveryandthecostsofextractingoilfromtheground.

A key investor's guide to the crude oil market PART 5 OF 15

Whyitsimportanttoknowthecrudeoil
extractionprocess
By Gordon Kristopher| Jan 15, 2015 2:44 pm EDT

Crudeoilextractionprocess
Beforelearningthecostscomponentsofcrudeoilextraction,letstakealookathow
producersextractcrudeoilfromtheground.

First,acrudeoilwelliscreatedbydrillingaholeintotheearthwithanoilrig.Asteelpipeis
placedinsidetheoilwellforstructuralstrength.Thenholesaremadeatthebottomofthe
wellsooilpassesthroughthebase.Collectionvalvesarefittedatthetop.Thesevalves
maintainpressurewhencrudeoilispumped.

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Theoilextractionprocessincludesthefollowingthreestages:primary,secondary,and
tertiary.

Primaryrecovery
Primaryrecoveryisthefirststageofcrudeoilextraction.Inthisstage,crudeoilflows
naturallyunderthebaseoftheoilrig.Thenaturalundergroundpressureintheoilwell
pushestheoiluptothesurface,oranartificialliftisusedtopumpcrudeoiltothesurface.
Thisstageallows~5%to~15%oftheoilinthereservoirtobeextracted.

Secondaryrecovery
Thenaturalflowofcrudeoilduetoundergroundpressurewilldiminishovertime.Soa
secondaryrecoveryisusedtoextractcrudeoilfromthewell.Inthismethod,thenaturalflow
ofoilisincreasedbyincreasingthereservoirpressure.Thisisaccomplishedbyinjecting
waterornaturalgasintothewell,whichdrivesthecrudeoiltothebasewheretheoilcanbe
pumped.Thisstageallows~35%to~45%oftheoilinthereservoirtobeextracted.

Tertiaryrecovery
Whencrudeoilextractionfromsecondaryrecoverybecomesimpossible,tertiaryrecoveryis
applied.Inthismethod,water,gas,andchemicalsareinjectedintothereservoirtoimprove
thenaturalflowofcrudeoil.Finally,crudeoilisextracted.Thisstageallows~5%to~15%of
theoilinthereservoirtobeextracted.

Whencrudeoilpricesarehigh,thismethodcanbeusedtoincreaseoilextraction,andvice
versa.Therecentdeclineinoilpricesimpactsthemarginsofoilproducers.Oilproducers
whoareusingtertiaryrecoverymethodstoextractcrudeoilareimpactedthemost.Someof
theUSshaleoilproducersincludeSouthwesternEnergy(SWN),ChesapeakeEnergy(CHK),
HalconResources(HK),ContinentalResources(CLR),andEOGResources(EOG).

Nowthatweknowsomethingabouttheextractionprocess,letstakealookattheproduction
costofcrudeoilanditsimplicationsonoilprices.Wellanalyzethisinthenextpartofthis
series.

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10/14/2016 WhyisOPECimportanttothepriceofcrudeoil?MarketRealist

A key investor's guide to the crude oil market PART 6 OF 15

Howdoestheproductioncostofcrudeoil
affectoilprices?
By Gordon Kristopher| Jan 15, 2015 2:45 pm EDT

Productioncostvsbreakevenprice
Thecostsrequiredtoliftcrudeoilandmaintainoilwells,equipment,andfacilitiesiscalled
productioncostorliftingcost.Thebreakevenpriceofcrudeoilincludesproductioncost,
exploringorfindingcost,oilwelldevelopmentcost,transportationcost,andsellingand
generaladministrationexpenses.

Implications
TheEIAs(EnergyInformationAdministration)2009reportshowstheproductioncostof
crudeoilwas~$12perbarrelfortheUnitedStatesand~$10perbarrelfortheMiddleEast.
Butrecentconsensussaysthesecostscouldrangefrom$20to$25perbarrel.ExxonMobil
(XOM)crudeoilproductioncostwas$12.72perbarrelin2013fromitsUSoilwells.
ContinentalResources(CLR)productioncostofcrudeoilwas$0.99perbarrelin2013from
itsSouthCentralOklahomaOilProvince.

Thisshowsoilcompaniescansustainproductionatcrudeoilpricesaslowas$20to$25
perbarrelexcludingtaxesandtransportationcostsfromexistingoilwells.Lowercrudeoil
pricesmayalsoleadtorenegotiationoftransportationcosts.Italsomakesitpossiblefor
crudeoiltofallbelowthelowestpricerangeUSshaleoilcompaniesneedtobreakevenand
maintainproductionintothefuture.

Oilpricerecovery

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Ofcourse,oilwellswithhighliftingcostsmayshutdown.Butoilpriceswilllikelyriseonly
whenUSoilproductionfalls.Lowoilpricespushoilcompaniestoreducespendingand
investmentsinnewprojects.SomeUSoilexplorationandproductioncompaniessuchas
ConocoPhillips(COP)announcedaspendingcutof$3billionfor2015.

ApacheCorporation(APA)planstoreduceitscapitalexpenditureby26%in2015compared
to2014.DenburyResources(DNR),RosettaResources(ROSE),andHalconResources
(HK)alsoreportedadeclineinspendingin2015comparedto2014.Thisshowsproduction
willdropinthelongterm.Thiswillleadtoasharpdropinsupply,andcrudeoilpriceswillrise
inthelongterm.

Sowhataresomeindicatorsinvestorsshouldknowthataffectoilpricesandtheoutlookfor
oilproduction?

A key investor's guide to the crude oil market PART 7 OF 15

Whyinvestorsshouldtrackcrudeoil
inventorylevels
By Gordon Kristopher| Jan 15, 2015 2:46 pm EDT

Crudeoilinventory
TheU.S.EnergyInformationAdministration(orEIA)reportscrudeoilinventorylevelsevery
weekonWednesday.Thisreportalsoincludesinventoriesofrefinedproductsofcrudeoil
suchasgasolineanddistillate.Inventoriesincreasewhendemandisloweranddecrease
whendemandishigherthansuppliesfortheweek.

OECDcrudeoilinventory

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OECD(OrganizationforEconomicCooperationandDevelopment)generallyrepresents
developedeconomies.ThenonOECDcountriesaregenerallydevelopingeconomies.The
OECDcommercialinventorywas2.55billionbarrelsattheendof2013,equivalenttoroughly
55daysofconsumption.TheEIA(EnergyInformationAdministration)estimatesOECDoil
inventorieswillriseto2.64billionbarrelsin2014and2.71billionbarrelsin2015,resultingin
anincreaseininventories.

Whatinvestorsshouldtrack
InvestorsshouldtrackUSandOECDcrudeoilinventorylevels.Whencrudeoilinventories
increasemorethanexpected,itimplieseithergreatersupplyorweakerdemand,whichare
bothnegativeforcrudeoilprices.Ontheotherhand,whencrudeoilinventorylevels
increaselessthanexpected,itimplieseitherweakersupplyorgreaterdemand,whichis
positiveforcrudeoilprices.

ThedifferencebetweenactualandexpectedchangesinUScrudeoilinventorylevelsaffects
crudepricesand,inturn,revenuesandearningsofmajorcompaniessuchasContinental
Resources(CLR),WhitingPetroleum(WLL),ChevronCorporation(CVX),andBP(BP).
ThesecompaniesareallmajorpartsofenergyETFssuchastheEnergySelectSector
SPDR(XLE).

Crudeoilinventoriesarealsoaffectedbyseasonalfactors.Demandincreasesduringwinters
innortherncountries.Thesecountriesrequiremoreoilforheating,whichimpactsoilprices.
Buttheseasonalityfactordidnthavemuchimpactonoilpricesin2014duetothe
oversupplyofoilinthemarket.

Investorsshouldfollowyearoveryearinventoriestogaugetheseasonalimpactincrudeoil
pricemovements.VisitourOilandGasInventoriespagetoknowmore.

Nowletslookatrigcounts.Whyisitimportantforinvestorstoknowboutrigcounts?Read
thenextpartofthisseriestofindout.

A key investor's guide to the crude oil market PART 8 OF 15

Whyenergyinvestorsshouldwatchrig
counts
By Gordon Kristopher| Jan 15, 2015 2:46 pm EDT

Rigcounts
Rigcountsarethemeasureofthenumberofactivedrillingsforoilandgas.BakerHughes,
anoilfieldservicescompany,reportsrigcountsweekly.Anincreaseinrigcountisan
importantbarometerofoilandgasproducersconfidenceindrillingactivity.Oilcompanies
involvedinthedrillingactivityareChevronCorporation(CVX)andHessCorporation(HES).
BotharepartoftheEnergySelectSectorSPDRETF(XLE).

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Rigcountsandcrudeoil
TheUSoilrigcounthasbeendecliningfromthepeakinOctober2014of1609to1499in
December.ThemonthofDecembersawaconsistentdeclineindrillingactivity.Sincethe
beginningof2014,thenumberofoilrigsinoperationincreasedby121,or~8%.

Therigcountstartedtodropwithconcernsofdecliningcrudeoilprices.Crudeoilprices
havefallen~53%in2014.Ifoilpricescontinuethedownwardtrend,drillerswillhavelow
marginstodrill.Oilpricesbelowtheproductioncostcouldevencausesomeoilproducersto
stopoperations.Productionmightdropinthelongterm,andsupplywilldeclineinthelong
termThiswillhaveapositiveimpactonoilprices.

OilproducingcompaniessuchasLaredoPetroleum(LPI),WhitingPetroleum(WLL),and
MarathonOilCorporation(MRO)workinsomeoftheunconventionalshaleoilmarkets,so
theyhavehighoperatingcosts.

Whatinvestorsshouldwatch
Investorswhofollowrigcountswillseethatwhenrigcountsincrease,oilcompaniesare
spendingmoreondrillingactivity.Thisisapositiveforoilcompanies.Theyexpectoilpriceto
rise.Fallingrigcounts,ontheotherhand,showthatoilproducersareconcerned.Thisisa
negativeforoilcompaniesandindicatesthatoilpricesareexpectedtobelowinthemedium
term.

InvestorsshouldalsoknowthattheUSdollarimpactsoilprices.Wellcoverthisinthenext
partofthisseries.

A key investor's guide to the crude oil market PART 9 OF 15

http://marketrealist.com/2015/01/opecimportantpricecrudeoil/ 12/40
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HowthestrengtheningUSdollaris
impactingcrudeoilprices
By Gordon Kristopher| Jan 15, 2015 2:47 pm EDT

SignificanceoftheUSdollar
TheUSdollarplaysamajorroleinthepricemovementsofcommoditiessuchasgoldand
crudeoil.Ascommoditiestradeglobally,oftenusingtheUSdollarasamedium,price
movementsintheUSdollarhaveimportantconsequences.AweakerUSdollarisoften
positiveforcrudeoilproducers.AnappreciatingorstrengtheningUSdollarisoftenviewedas
negative.

YoucanseetherelationshipbetweentheUSdollarandcrudeoilintheabovechart.Crude
oildeclinesasthedollarrises.Thisdeclineinthepriceofoilimpactstheprofitabilityofoil
companiessuchasChevronCorporation(CVX),ExxonMobil(XOM),BP(BP),and
PetroChina(PTR).TheUnitedStatesOilETF(USO)isdownby~20%fromNovember
highs.

USeconomyandthedollar
EconomicactivityintheUnitedStatesin2014reflectsafasterrecoveryandshows
improvementinemployment,thehousingmarket,andfinancialconditions.Thishasledtoa
strengtheningoftheUSdollar.SincecrudeoilisUSdollardenominated,therisingdollar
indicatesafallinthevalueofoilrelativetotheUSdollar.

TheUSdollarisexpectedtostrengthenfurtherin2015duetogrowingeconomicconditions
intheUnitedStates.TheFederalReserveislikelytoincreaseinterestratesin2015.Central
banksinJapan,Europe,andChinawillprobablyreduceinterestratesin2015.Pumping
liquidityintotheeconomyislikelytowideninterestratedifferentials.SotheUnitedStateswill
beanattractiveinvestmentopportunity.ThiswillleadtofurtherstrengtheningoftheUS
dollar.

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AnappreciatingUSdollarwillcontinuetoputdownwardpressureoncrudeoilprices,causing
troublefortheenergysector(XLE).Loweroilpriceswillalsoimpactshaleoilproducerssuch
asLaredoPetroleum(LPI),WhitingPetroleum(WLL),andMarathonOilCorporation(MRO).

Whatsnext?Letslookatthegeopoliticaltensions.

A key investor's guide to the crude oil market PART 10 OF 15

Mustknow:Geopoliticaltensionsimpact
oilprices
By Gordon Kristopher| Jan 15, 2015 2:47 pm EDT

Theimpactofgeopoliticaltensions
Geopoliticaltensionsimpactcrudeoilprices.Politicalunrestaffectsproductionandreduces
supply.Theconsensusofashortageofoilsupplyleadstoanincreaseinoilprices.Anoil
priceincreasedirectlyimpactstheprofitabilityofoilproducerssuchasChesapeakeEnergy
(CHK),ConchoResources(CXO),BP(BP),ExxonMobil(XOM)andMarathonOil
Corporation(MRO).

Whatshappenedinthepast?
DuringtheGulfWarthatbeganin1990,WTI(WestTexasIntermediate)andBrentcrudeoil
pricesdoubledinthebeginningof1990anddropped~30%bytheendofthatyear.The
UnitedStatesinvadedIraqin2003.Duringthiswar,Brentcrudeoilroseby7%andthen
declinedby12%bytheendofthewar.

Thesegeopoliticaltensionsledtosupplydisruptions,whichincreasedglobalcrudeoil
prices.IntheGulfWar,supplydroppedby~7%,andintheIraqWar,supplydroppedby~3%.
The2013MiddleEasttensionsdidnthavemuchimpactonoilpricesduetoincreased
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productionintheUnitedStates.

RussiaandUkraine
TherecentgeopoliticaltensionsbetweenRussiaandUkrainemayslowdowntheRussian
economy.ToknowmoreabouttheRussiaUkrainecrisis,visittheMarketRealistseriesWhy
theRussiaUkrainecrisiscouldaffectenergyinvestments.Usually,thiskindofpoliticalunrest
disruptsproduction.Suppliesdecline,thusimpactingcrudeoilprices.Butaglutincrudeoil
supplycouldmeanthatpoliticaltensionsintheneartermmaynotimpactoilprices.

Continuefollowingthisseriestoknowmoreaboutcrudeoildemand,theeconomiccrisis,and
theimplicationsforoilprices.

A key investor's guide to the crude oil market PART 11 OF 15

Howaneconomiccrisisaffectsthepriceof
crudeoil
By Gordon Kristopher| Jan 15, 2015 2:48 pm EDT

Economiccrisisandoilprices
Oiloversupplyhasbeenthekeydriverofoilpricesrecentlyandislikelytodominate.
However,investorsshouldknowthateconomicgrowthalsoplaysanimportantrole.When
economicgrowthslows,consumerdemanddeclines.Thishasanegativeimpactoncrudeoil
pricemovements.

EconomicgrowthdirectlyimpactsinternationaloilproducingcompaniessuchasExxonMobil
(XOM)andChevronCorporation(CVX).ItalsoimpactsUSoilproducerssuchas
ChesapeakeEnergy(CHK)andConchoResources(CXO).Thesecompaniesarepartof
ETFssuchastheVanguardEnergyETF(VDE).

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Majoreconomiccrisesinthepast
TheGreatDepressioninthe1930sisconsideredthemotherofallfinancialcrises.Itlasted
foralmosttenyears.SomeotherfinancialcrisesincludetheAsianfinancialcrisisof1997,
the2000recession,andthe2008globalfinancialcrisis,whichisconsideredoneofthe
greatestfinancialcrisessincetheGreatDepression.

Thecommonfactorduringaneconomiccrisisisthateconomicgrowthslowsdown.
Demanddeclines,whichhasanegativeimpactonoilprices.Duringthe2008financialcrisis,
crudeoilpricesdeclinedfromthepeakof$147perbarrelto$32perbarrel.

Thecurrentsituation
TheEuropeaneconomyisstillintheshadowofthe2008financialcrisis.Ithashighdebts
andhighunemployment.ThereareconcernsthatEuropeandJapan,thefourthlargest
consumerofcrudeoil,mightenterarecession.

Russiaseconomicgrowthisalsofragile.Itsthefifthlargestconsumerofcrudeoil.Russia
couldpossiblyenterarecessionin2015.

Investorsshouldfollowglobalgrowthanddemandindicators.Wellcoverthoseindicators
andhowtheyimpactoilpricesinthenextpartofthisseries.

A key investor's guide to the crude oil market PART 12 OF 15

Whyworldeconomicgrowthimpacts
crudeoilprices
By Gordon Kristopher| Jan 15, 2015 2:49 pm EDT

Worldeconomicgrowthin2014
Worldeconomicgrowthin2014wasweakandisstillrecoveringataslowpace.Economic
growtharoundtheworldisuneven.

Europehadsloweconomicrecoveryin2014duetoahighdebtburdenandlowinvestments.
EconomicactivityintheUnitedStatesreflectsfasterrecoveryandshowsimprovementin
employment,thehousingmarket,andfinancialconditionsin2014.Japansgrowthdropped
inthesecondhalfof2014duetoanincreaseintheconsumptiontax.Intheemerging
markets,Chinaseconomicgrowthsloweddownduetoeconomictransitions.However,other
AsianeconomiessuchasIndiaareexpectedtohaverobustgrowth.

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InternationalMonetaryFundforecastsglobalgrowthin2015
TheInternationalMonetaryFund(orIMF)initsrecentreportestimatesthattheworld
economywillgrowat3.3%in2014and3.8%in2015.Itexpectsin2015thatgrowthin
developedeconomieswillbedrivenbycountriessuchastheUnitedStates.Developing
countrieswillcontributethemajorshareofglobalgrowthin2015,whichisexpectedtogrow
at4.4%in2014and5%in2015.

Russiaisexpectedtogrowat0.2%in2014and0.5%in2015owingtogeopolitical
tensionsandhighdebt.FallingcrudeoilpriceswillalsoimpactRussiasgrowth.

LatinAmericaisexpectedtogrowat1.3%in2014duetothedropinexportsanddomestic
issues.Itsexpectedtogrowby2.2%in2015.EconomicgrowthinMiddleEasternandNorth
Africancountriesisexpectedtobefragile.Itsexpectedtogrowat2.7%in2014and3.9%in
2015.Thegrowthisdrivenbyimprovedsecurityconditionsandexternaldemandofoil.

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OECDglobalgrowthin2015
TheabovechartshowsOECDs(OrganizationforEconomicCooperationandDevelopment)
GDP(grossdomesticproduct)forecastformajorcountriesin2015and2016.Thisispositive
forthecrudeoilmarket.Itshowsdemandwillincreaseinthelongterm,andhigherdemand
willsupporthighercrudeoilpricesinthelongterm.TheOECDisagroupof34countries
formedin1961foreconomicprogressandworldtrade.Thisreportestimatesworldeconomy
willstrengthenin2016comparedto2015.

Astrongereconomywillboostconsumption,andthedemandforcrudeoilwillincrease.This
willleadtohighercrudeoilpricesinthelongterm.Inthenearterm,oilpriceswillbeona
downwardtrendduetoanoilglut.Aswesawearlier,lowercrudeoilpriceswillleadtolow
investmentsinnewoilprojects.Thereisalsoadeclineindrillingofnewoilrigs.Thiswillall
leadtoadeclineinproductionandwillmeanalowersupplyinthelongterm.Inturn,thiswill
contributetohighercrudeoilpricesinthelongterm.

Theriseincrudeoilpriceswillincreasethemarginsofcrudeoilcompaniessuchas
ChevronCorporation(CVX),ExxonMobil(XOM),BP(BP),CenovusEnergy(CVE),and
PetroChina(PTR).TheUnitedStatesOilETF(USO)isalsodownby~56%frommidJune
2014.

Investorsneedtoknowwhowilldrivetheconsumptionofcrudeoil.Welldiscussthisinthe
nextpartoftheseries.

A key investor's guide to the crude oil market PART 13 OF 15

Whowilldrivecrudeoilconsumption?
By Gordon Kristopher| Jan 15, 2015 2:49 pm EDT

http://marketrealist.com/2015/01/opecimportantpricecrudeoil/ 18/40
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Majorcrudeoilimporters
TheworldslargestimportersofoilincludeJapan,India,China,otherAsiaPacificcountries,
theUnitedStates,andEuropeancountries.

ChinaandIndiaaremajorcrudeoilimporters.Chinasaves$2.2billiononevery1%dropin
crudeoil.Adeclineof$30perbarrelofcrudeoilmeansasavingsof$40billionforIndia.The
dropincrudeoilpriceswilldecreaseinflationandimprovethefiscaldeficitandcurrent
accountbalance.Thiswillboosteconomicgrowthinthesecountries.

Investortakeaway
Aswesawinthepreviouspartofthisseries,globalgrowthin2015and2016willbedriven
byChina,India,theUnitedStatesandAsiaPacificcountries.Currentlowercrudeoilprices
andgrowthfromthesecountrieswilldrivecrudeoilconsumptioninthelongterm.

Themajorityofcrudeoilthesecountriesimportisusedfortransportationandindustrialuse.
Thedemandfortransportationandindustriesaredrivenbyeconomicandmanufacturing
activities.

InvestorscanfollowindicatorssuchasthePurchasingManagersIndex(PMI)andthe
unemploymentratesinthesecountries.Sincetransportationisasignificantoiluser,auto
salesalsoinfluenceoildemand.Investorscanfollowmonetarypolicychangesthatimpact
growthinthesecountries.Thus,crudeoildemandaswellascrudeoilpriceswillincreasein
thelongterm.

RisingoilpricesaffecttheprofitabilityofoilcompaniessuchasChesapeakeEnergy(CHK),
ConchoResources(CXO),ExxonMobil(XOM),BP(BP),andPetroChina(PTR).

Readthenextpartofthisseriestoknowwhethercrudeoilwillhit$32perbarrelintheshort
term.

http://marketrealist.com/2015/01/opecimportantpricecrudeoil/ 19/40
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A key investor's guide to the crude oil market PART 14 OF 15

WillWTIcrudeoilhit$32perbarrel?
By Gordon Kristopher| Jan 15, 2015 2:50 pm EDT

Crudeoilexperiencesmassivedecline
WTI(WestTexasIntermediate)crudeoilhasdeclined~58%sinceJune2014.Thisdecline
hasimpactedoilcompaniesandETFsthemost.OilproducerssuchasOasisPetroleum
(OAS)fell~72%fromtheJune2014highs.Oilfieldequipmentandservicescompaniessuch
asWeatherfordInternational(WFT)declined~54%.

IntegratedoilcompaniesandETFsusuallyperformbetterbecauseoftheirdiversified
operationsorholdings.ChevronCorporation(CVX)andtheEnergySelectSectorSPDR
(XLE)lost~27%and~19%,respectively,duringthisperiod.TheUnitedStatesOilETF
(USO)isalsodownby~56%frommidJune2014.

KeysupportlevelofWTIcrudeoil
Inthepreviouspartofthisseries,welookedatthefundamentaldriversthatimpactcrudeoil
prices.Nowwellusethechartstofindthekeysupportlevelofcrudeoil.Toknowmoreabout
chartingandtechnicalanalysis,visitourtechnicalanalysispage.

OnJanuary13,2015,crudeoilwastradingat$45.91perbarrel.Ithassupportat$42to
$44.Thenextsupportbandis$40to$42ifanybearishnewstriggersfurther.Thencrudeoil
willdroptothenextsupportlevelof$35to$37.Ifcrudeoilcontinuesitsdowntrend,its
possiblethatcrudeoilmighthit$32perbarrel,thepriceofcrudeoilin2008beforetheglobal
financialcrisis.Thisisthefastestdeclineofcrudeoilsincethat2008crash.

IfWTIcrudeoilpricestrytobreakabovethe$52to$55levelagain,therewillbealotof
resistance.Strongfundamentaldriverssuchasalargedeclineinsupplywoulddrivecrude
priceshigher.

http://marketrealist.com/2015/01/opecimportantpricecrudeoil/ 20/40
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Duetothecurrentoilglutandaweakdemand,investorscanexpectcrudeoilpricestolikely
remainonadownwardtrend.

ReadthenextpartofthisseriestoknowmoreaboutoilETFs.

Thisarticledescribedthedatewhencrudeoilwastradingat$45.19perbarrelasJanuary
13,2014,whenitwasoriginallypublished.ThedatehassincebeencorrectedtoJanuary,13,
2015.Weregrettheerror.

A key investor's guide to the crude oil market PART 15 OF 15

KeyoilETFsseesignificantdeclinesince
June
By Gordon Kristopher| Jan 15, 2015 2:50 pm EDT

OilETFs
Aninvestmentfundtradedonthestockexchangeiscalledanexchangetradedfund(or
ETF).AnETFholdsassetslikecommodities,stocks,andbonds.Ittradeslikeastock.Most
ETFstrackabondindexorstockindex.TheoilETFconsistsofoilcompanystocksorfutures
contractsforvariousoils,gases,andpetroleumbasedfuels.

CrudeoilseffectonoilETFs
Themassivedeclineincrudeoilpricesinthesecondhalfof2014hasledtocollateral
damageforkeyoilETFs.MostoilETFsaredownandtradingatdiscounts.Theabovechart
showsthekeyoilETFstolookforin2015.

OneofthemostimportantETFsistheUnitedStatesOilFund(USO)withanaverage
volumeof16millionshares.ItsthelargestcrudeoilETFwith$1,016millioninassets.Ithas
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declined~56%sincethemiddleofJune2014.ThisETFconsistsofderivativecontractsfor
variousoils,gases,andpetroleumbasedfuels.

PowerSharesDBOilETF(DBO)hasassetsof$280million.Ithasdeclined~56%sincethe
middleofJune2014.ProSharesUltraDJUBSCrudeOil(UCO)isthesecondlargestoilETF
withassetsof$490millionandanaveragevolumeof5.4millionshares.Ithasdeclined
~81%sincethemiddleofJune2014.BothoftheseETFsconsistofWTIcrudeoilandits
derivatives.

VanEckVectorsUnconventionalOil&GasETF(FRAK)consistsofcompaniesinvolvedin
unconventionaloilandgasexploration,development,andextraction.Ithas$62millionin
assets.ThisETFhasdeclined~44%sincethemiddleofJune2014.TheEnergySelect
SectorSPDR(XLE)hasalsodeclined~27%sincethemiddleofJune2014.

A key investor's guide to the crude oil market PART 3 OF 15

USSaudiArabiamarketsharerivalry:Its
impactonoilprices
By Gordon Kristopher| Jan 15, 2015 2:43 pm EDT

UScrudeoilproduction
OPECs(OrganizationofthePetroleumExportingCountries)shareoftheglobaloilmarket
hasfallenovertheyearsasnonOPECcountriessuchastheUnitedStatesandCanada
haveincreasedtheiroutput.Highoilpricesfrom2010to2013drovenonOPECcountriesto
developnewtechnologiesandlandtechniquessuchashorizontaldrillingandhydraulic
fracturing.BytheendofDecember2014,theUnitedStateswasproducing9.127million
barrelsofcrudeoiladay,up~15%fromtheprioryear.

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SaudiArabiasmarketsharedecline
Asdomesticproductionincreased,theUnitedStatesimportedlessoil.In4Q14,crudeoil
importsfromSaudiArabiadroppedto850,000barrelsaday.SaudiArabialost~50%ofits
UScustomerbase.

Shaleoilhasbeenavailablesincethe16thcentury,butthehighcostofextractionhalted
developmentforyears.ThepriceofOPECscrudewaslessthanthethehighcostofshale
extraction.However,thatallchangedwiththehighreservesofshaleoil,thehighpriceof
crudeoil,andtherecentadvancesintechnologiessuchashorizontaldrilling.Theseledto
highcrudeoilproductionintheUnitedStates.

SaudiArabiasstrategy
FastgrowingoilproductionintheUnitedStateshaseatenintoOPECsmarketshare.This
benefitedoilcompaniesworldwidebutnegativelyimpactedOPECnationssuchasSaudi
Arabiathathadalreadycutproduction.

Inordertoregainmarketshare,OPECdecidedtomaintainproductionoutput,whichnaturally
sentoilpricesfalling.

ThelowpriceofoilwillnegativelyimpacthighcostshaleoilproducersintheUnitedStates.
ThesecompaniesincludeLaredoPetroleum(LPI),WhitingPetroleum(WLL),andMarathon
OilCorporation(MRO).ThesecompaniesareallmajorpartsofenergyETFssuchasthe
EnergySelectSectorSPDR(XLE).TheUnitedStatesOilFund(USO)isdownby~56%,and
ProSharesUltracrudeoilETF(UCO)isdownby~81%fromJune2014.

SowhatdoesthepriceofoilhavetobeinorderforOPECtoregainmarketshare?

A key investor's guide to the crude oil market PART 4 OF 15

Whyisthebreakevenpriceofcrudeoilso
important?
By Gordon Kristopher| Jan 15, 2015 2:43 pm EDT

Whatsbreakevenprice?
KnowingthebreakevenpriceofcrudeoilisimportantwhentryingtofigureoutwhatOPEC
needsinordertoregainmarketshare.Thebreakevenpriceofcrudeoilincludesproduction
costs,exploringorfindingcosts,oilwelldevelopmentcosts,transportationcosts,andselling
andgeneraladministrationexpenses.Thechartbelowdescribesthebreakevenpricefor
crudeoil.

http://marketrealist.com/2015/01/opecimportantpricecrudeoil/ 23/40
10/14/2016 WhyisOPECimportanttothepriceofcrudeoil?MarketRealist

Breakevenpriceofvariousregions
Arecentlyconductedsurveyshowssomeinterestinginsightsintothebreakevencostof
producingcrudeoil.PetroleumextractionintheArcticregionshowsthehighestbreakeven
priceof$75perbarrel.Ontheotherhand,MiddleEasterncountrieshavethelowestpriceat
$27perbarrel.USshaleoilproducershaveabreakevenpriceof$65perbarrel.These
estimatesareaveragebreakevenprices.Thecostsmayvarydependingontheoilwelland
itslocation.

Breakevenpriceandoildecline
WTI(WestTexasIntermediate)crudeoiliscurrentlytradingat$45perbarrel.Brentcrudeoil
istradingat$46.4perbarrel.Thismassivepricedeclineinthelastsixmonthswillimpactoil
producerswithhighbreakevenprices.

ThemarginsofhighbreakevenpriceUSshaleoilproducerssuchasHalconResources
(HK),ContinentalResources(CLR),LaredoPetroleum(LPI),WhitingPetroleum(WLL),and
MarathonOilCorporation(MRO)willbeimpactedthemost.

AslongascrudeoilpricesarearoundthebreakevenrangeofUSshaleoil,thenUSoil
productiongrowthwillbeslow.Productionwilllikelydeclineoverthelongterm,whichinturn
willhaveapositiveimpactonoilprices.

Willcrudeoilhitthelowestbreakevenpriceandmatchthe$27perbarrelmarkoftheMiddle
Easterncountries?Toanswerthat,wefirstneedtounderstandthevariousmethodsofcrude
recoveryandthecostsofextractingoilfromtheground.

A key investor's guide to the crude oil market PART 5 OF 15

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Whyitsimportanttoknowthecrudeoil
extractionprocess
By Gordon Kristopher| Jan 15, 2015 2:44 pm EDT

Crudeoilextractionprocess
Beforelearningthecostscomponentsofcrudeoilextraction,letstakealookathow
producersextractcrudeoilfromtheground.

First,acrudeoilwelliscreatedbydrillingaholeintotheearthwithanoilrig.Asteelpipeis
placedinsidetheoilwellforstructuralstrength.Thenholesaremadeatthebottomofthe
wellsooilpassesthroughthebase.Collectionvalvesarefittedatthetop.Thesevalves
maintainpressurewhencrudeoilispumped.

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Theoilextractionprocessincludesthefollowingthreestages:primary,secondary,and
tertiary.

Primaryrecovery
Primaryrecoveryisthefirststageofcrudeoilextraction.Inthisstage,crudeoilflows
naturallyunderthebaseoftheoilrig.Thenaturalundergroundpressureintheoilwell
pushestheoiluptothesurface,oranartificialliftisusedtopumpcrudeoiltothesurface.
Thisstageallows~5%to~15%oftheoilinthereservoirtobeextracted.

Secondaryrecovery
Thenaturalflowofcrudeoilduetoundergroundpressurewilldiminishovertime.Soa
secondaryrecoveryisusedtoextractcrudeoilfromthewell.Inthismethod,thenaturalflow
ofoilisincreasedbyincreasingthereservoirpressure.Thisisaccomplishedbyinjecting
waterornaturalgasintothewell,whichdrivesthecrudeoiltothebasewheretheoilcanbe
pumped.Thisstageallows~35%to~45%oftheoilinthereservoirtobeextracted.

Tertiaryrecovery
Whencrudeoilextractionfromsecondaryrecoverybecomesimpossible,tertiaryrecoveryis
applied.Inthismethod,water,gas,andchemicalsareinjectedintothereservoirtoimprove
thenaturalflowofcrudeoil.Finally,crudeoilisextracted.Thisstageallows~5%to~15%of
theoilinthereservoirtobeextracted.

Whencrudeoilpricesarehigh,thismethodcanbeusedtoincreaseoilextraction,andvice
versa.Therecentdeclineinoilpricesimpactsthemarginsofoilproducers.Oilproducers
whoareusingtertiaryrecoverymethodstoextractcrudeoilareimpactedthemost.Someof
theUSshaleoilproducersincludeSouthwesternEnergy(SWN),ChesapeakeEnergy(CHK),
HalconResources(HK),ContinentalResources(CLR),andEOGResources(EOG).

Nowthatweknowsomethingabouttheextractionprocess,letstakealookattheproduction
costofcrudeoilanditsimplicationsonoilprices.Wellanalyzethisinthenextpartofthis
series.

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A key investor's guide to the crude oil market PART 6 OF 15

Howdoestheproductioncostofcrudeoil
affectoilprices?
By Gordon Kristopher| Jan 15, 2015 2:45 pm EDT

Productioncostvsbreakevenprice
Thecostsrequiredtoliftcrudeoilandmaintainoilwells,equipment,andfacilitiesiscalled
productioncostorliftingcost.Thebreakevenpriceofcrudeoilincludesproductioncost,
exploringorfindingcost,oilwelldevelopmentcost,transportationcost,andsellingand
generaladministrationexpenses.

Implications
TheEIAs(EnergyInformationAdministration)2009reportshowstheproductioncostof
crudeoilwas~$12perbarrelfortheUnitedStatesand~$10perbarrelfortheMiddleEast.
Butrecentconsensussaysthesecostscouldrangefrom$20to$25perbarrel.ExxonMobil
(XOM)crudeoilproductioncostwas$12.72perbarrelin2013fromitsUSoilwells.
ContinentalResources(CLR)productioncostofcrudeoilwas$0.99perbarrelin2013from
itsSouthCentralOklahomaOilProvince.

Thisshowsoilcompaniescansustainproductionatcrudeoilpricesaslowas$20to$25
perbarrelexcludingtaxesandtransportationcostsfromexistingoilwells.Lowercrudeoil
pricesmayalsoleadtorenegotiationoftransportationcosts.Italsomakesitpossiblefor
crudeoiltofallbelowthelowestpricerangeUSshaleoilcompaniesneedtobreakevenand
maintainproductionintothefuture.

Oilpricerecovery

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Ofcourse,oilwellswithhighliftingcostsmayshutdown.Butoilpriceswilllikelyriseonly
whenUSoilproductionfalls.Lowoilpricespushoilcompaniestoreducespendingand
investmentsinnewprojects.SomeUSoilexplorationandproductioncompaniessuchas
ConocoPhillips(COP)announcedaspendingcutof$3billionfor2015.

ApacheCorporation(APA)planstoreduceitscapitalexpenditureby26%in2015compared
to2014.DenburyResources(DNR),RosettaResources(ROSE),andHalconResources
(HK)alsoreportedadeclineinspendingin2015comparedto2014.Thisshowsproduction
willdropinthelongterm.Thiswillleadtoasharpdropinsupply,andcrudeoilpriceswillrise
inthelongterm.

Sowhataresomeindicatorsinvestorsshouldknowthataffectoilpricesandtheoutlookfor
oilproduction?

A key investor's guide to the crude oil market PART 7 OF 15

Whyinvestorsshouldtrackcrudeoil
inventorylevels
By Gordon Kristopher| Jan 15, 2015 2:46 pm EDT

Crudeoilinventory
TheU.S.EnergyInformationAdministration(orEIA)reportscrudeoilinventorylevelsevery
weekonWednesday.Thisreportalsoincludesinventoriesofrefinedproductsofcrudeoil
suchasgasolineanddistillate.Inventoriesincreasewhendemandisloweranddecrease
whendemandishigherthansuppliesfortheweek.

OECDcrudeoilinventory

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OECD(OrganizationforEconomicCooperationandDevelopment)generallyrepresents
developedeconomies.ThenonOECDcountriesaregenerallydevelopingeconomies.The
OECDcommercialinventorywas2.55billionbarrelsattheendof2013,equivalenttoroughly
55daysofconsumption.TheEIA(EnergyInformationAdministration)estimatesOECDoil
inventorieswillriseto2.64billionbarrelsin2014and2.71billionbarrelsin2015,resultingin
anincreaseininventories.

Whatinvestorsshouldtrack
InvestorsshouldtrackUSandOECDcrudeoilinventorylevels.Whencrudeoilinventories
increasemorethanexpected,itimplieseithergreatersupplyorweakerdemand,whichare
bothnegativeforcrudeoilprices.Ontheotherhand,whencrudeoilinventorylevels
increaselessthanexpected,itimplieseitherweakersupplyorgreaterdemand,whichis
positiveforcrudeoilprices.

ThedifferencebetweenactualandexpectedchangesinUScrudeoilinventorylevelsaffects
crudepricesand,inturn,revenuesandearningsofmajorcompaniessuchasContinental
Resources(CLR),WhitingPetroleum(WLL),ChevronCorporation(CVX),andBP(BP).
ThesecompaniesareallmajorpartsofenergyETFssuchastheEnergySelectSector
SPDR(XLE).

Crudeoilinventoriesarealsoaffectedbyseasonalfactors.Demandincreasesduringwinters
innortherncountries.Thesecountriesrequiremoreoilforheating,whichimpactsoilprices.
Buttheseasonalityfactordidnthavemuchimpactonoilpricesin2014duetothe
oversupplyofoilinthemarket.

Investorsshouldfollowyearoveryearinventoriestogaugetheseasonalimpactincrudeoil
pricemovements.VisitourOilandGasInventoriespagetoknowmore.

Nowletslookatrigcounts.Whyisitimportantforinvestorstoknowboutrigcounts?Read
thenextpartofthisseriestofindout.

A key investor's guide to the crude oil market PART 8 OF 15

Whyenergyinvestorsshouldwatchrig
counts
By Gordon Kristopher| Jan 15, 2015 2:46 pm EDT

Rigcounts
Rigcountsarethemeasureofthenumberofactivedrillingsforoilandgas.BakerHughes,
anoilfieldservicescompany,reportsrigcountsweekly.Anincreaseinrigcountisan
importantbarometerofoilandgasproducersconfidenceindrillingactivity.Oilcompanies
involvedinthedrillingactivityareChevronCorporation(CVX)andHessCorporation(HES).
BotharepartoftheEnergySelectSectorSPDRETF(XLE).

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Rigcountsandcrudeoil
TheUSoilrigcounthasbeendecliningfromthepeakinOctober2014of1609to1499in
December.ThemonthofDecembersawaconsistentdeclineindrillingactivity.Sincethe
beginningof2014,thenumberofoilrigsinoperationincreasedby121,or~8%.

Therigcountstartedtodropwithconcernsofdecliningcrudeoilprices.Crudeoilprices
havefallen~53%in2014.Ifoilpricescontinuethedownwardtrend,drillerswillhavelow
marginstodrill.Oilpricesbelowtheproductioncostcouldevencausesomeoilproducersto
stopoperations.Productionmightdropinthelongterm,andsupplywilldeclineinthelong
termThiswillhaveapositiveimpactonoilprices.

OilproducingcompaniessuchasLaredoPetroleum(LPI),WhitingPetroleum(WLL),and
MarathonOilCorporation(MRO)workinsomeoftheunconventionalshaleoilmarkets,so
theyhavehighoperatingcosts.

Whatinvestorsshouldwatch
Investorswhofollowrigcountswillseethatwhenrigcountsincrease,oilcompaniesare
spendingmoreondrillingactivity.Thisisapositiveforoilcompanies.Theyexpectoilpriceto
rise.Fallingrigcounts,ontheotherhand,showthatoilproducersareconcerned.Thisisa
negativeforoilcompaniesandindicatesthatoilpricesareexpectedtobelowinthemedium
term.

InvestorsshouldalsoknowthattheUSdollarimpactsoilprices.Wellcoverthisinthenext
partofthisseries.

A key investor's guide to the crude oil market PART 9 OF 15

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HowthestrengtheningUSdollaris
impactingcrudeoilprices
By Gordon Kristopher| Jan 15, 2015 2:47 pm EDT

SignificanceoftheUSdollar
TheUSdollarplaysamajorroleinthepricemovementsofcommoditiessuchasgoldand
crudeoil.Ascommoditiestradeglobally,oftenusingtheUSdollarasamedium,price
movementsintheUSdollarhaveimportantconsequences.AweakerUSdollarisoften
positiveforcrudeoilproducers.AnappreciatingorstrengtheningUSdollarisoftenviewedas
negative.

YoucanseetherelationshipbetweentheUSdollarandcrudeoilintheabovechart.Crude
oildeclinesasthedollarrises.Thisdeclineinthepriceofoilimpactstheprofitabilityofoil
companiessuchasChevronCorporation(CVX),ExxonMobil(XOM),BP(BP),and
PetroChina(PTR).TheUnitedStatesOilETF(USO)isdownby~20%fromNovember
highs.

USeconomyandthedollar
EconomicactivityintheUnitedStatesin2014reflectsafasterrecoveryandshows
improvementinemployment,thehousingmarket,andfinancialconditions.Thishasledtoa
strengtheningoftheUSdollar.SincecrudeoilisUSdollardenominated,therisingdollar
indicatesafallinthevalueofoilrelativetotheUSdollar.

TheUSdollarisexpectedtostrengthenfurtherin2015duetogrowingeconomicconditions
intheUnitedStates.TheFederalReserveislikelytoincreaseinterestratesin2015.Central
banksinJapan,Europe,andChinawillprobablyreduceinterestratesin2015.Pumping
liquidityintotheeconomyislikelytowideninterestratedifferentials.SotheUnitedStateswill
beanattractiveinvestmentopportunity.ThiswillleadtofurtherstrengtheningoftheUS
dollar.

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AnappreciatingUSdollarwillcontinuetoputdownwardpressureoncrudeoilprices,causing
troublefortheenergysector(XLE).Loweroilpriceswillalsoimpactshaleoilproducerssuch
asLaredoPetroleum(LPI),WhitingPetroleum(WLL),andMarathonOilCorporation(MRO).

Whatsnext?Letslookatthegeopoliticaltensions.

A key investor's guide to the crude oil market PART 10 OF 15

Mustknow:Geopoliticaltensionsimpact
oilprices
By Gordon Kristopher| Jan 15, 2015 2:47 pm EDT

Theimpactofgeopoliticaltensions
Geopoliticaltensionsimpactcrudeoilprices.Politicalunrestaffectsproductionandreduces
supply.Theconsensusofashortageofoilsupplyleadstoanincreaseinoilprices.Anoil
priceincreasedirectlyimpactstheprofitabilityofoilproducerssuchasChesapeakeEnergy
(CHK),ConchoResources(CXO),BP(BP),ExxonMobil(XOM)andMarathonOil
Corporation(MRO).

Whatshappenedinthepast?
DuringtheGulfWarthatbeganin1990,WTI(WestTexasIntermediate)andBrentcrudeoil
pricesdoubledinthebeginningof1990anddropped~30%bytheendofthatyear.The
UnitedStatesinvadedIraqin2003.Duringthiswar,Brentcrudeoilroseby7%andthen
declinedby12%bytheendofthewar.

Thesegeopoliticaltensionsledtosupplydisruptions,whichincreasedglobalcrudeoil
prices.IntheGulfWar,supplydroppedby~7%,andintheIraqWar,supplydroppedby~3%.
The2013MiddleEasttensionsdidnthavemuchimpactonoilpricesduetoincreased
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productionintheUnitedStates.

RussiaandUkraine
TherecentgeopoliticaltensionsbetweenRussiaandUkrainemayslowdowntheRussian
economy.ToknowmoreabouttheRussiaUkrainecrisis,visittheMarketRealistseriesWhy
theRussiaUkrainecrisiscouldaffectenergyinvestments.Usually,thiskindofpoliticalunrest
disruptsproduction.Suppliesdecline,thusimpactingcrudeoilprices.Butaglutincrudeoil
supplycouldmeanthatpoliticaltensionsintheneartermmaynotimpactoilprices.

Continuefollowingthisseriestoknowmoreaboutcrudeoildemand,theeconomiccrisis,and
theimplicationsforoilprices.

A key investor's guide to the crude oil market PART 11 OF 15

Howaneconomiccrisisaffectsthepriceof
crudeoil
By Gordon Kristopher| Jan 15, 2015 2:48 pm EDT

Economiccrisisandoilprices
Oiloversupplyhasbeenthekeydriverofoilpricesrecentlyandislikelytodominate.
However,investorsshouldknowthateconomicgrowthalsoplaysanimportantrole.When
economicgrowthslows,consumerdemanddeclines.Thishasanegativeimpactoncrudeoil
pricemovements.

EconomicgrowthdirectlyimpactsinternationaloilproducingcompaniessuchasExxonMobil
(XOM)andChevronCorporation(CVX).ItalsoimpactsUSoilproducerssuchas
ChesapeakeEnergy(CHK)andConchoResources(CXO).Thesecompaniesarepartof
ETFssuchastheVanguardEnergyETF(VDE).

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Majoreconomiccrisesinthepast
TheGreatDepressioninthe1930sisconsideredthemotherofallfinancialcrises.Itlasted
foralmosttenyears.SomeotherfinancialcrisesincludetheAsianfinancialcrisisof1997,
the2000recession,andthe2008globalfinancialcrisis,whichisconsideredoneofthe
greatestfinancialcrisessincetheGreatDepression.

Thecommonfactorduringaneconomiccrisisisthateconomicgrowthslowsdown.
Demanddeclines,whichhasanegativeimpactonoilprices.Duringthe2008financialcrisis,
crudeoilpricesdeclinedfromthepeakof$147perbarrelto$32perbarrel.

Thecurrentsituation
TheEuropeaneconomyisstillintheshadowofthe2008financialcrisis.Ithashighdebts
andhighunemployment.ThereareconcernsthatEuropeandJapan,thefourthlargest
consumerofcrudeoil,mightenterarecession.

Russiaseconomicgrowthisalsofragile.Itsthefifthlargestconsumerofcrudeoil.Russia
couldpossiblyenterarecessionin2015.

Investorsshouldfollowglobalgrowthanddemandindicators.Wellcoverthoseindicators
andhowtheyimpactoilpricesinthenextpartofthisseries.

A key investor's guide to the crude oil market PART 12 OF 15

Whyworldeconomicgrowthimpacts
crudeoilprices
By Gordon Kristopher| Jan 15, 2015 2:49 pm EDT

Worldeconomicgrowthin2014
Worldeconomicgrowthin2014wasweakandisstillrecoveringataslowpace.Economic
growtharoundtheworldisuneven.

Europehadsloweconomicrecoveryin2014duetoahighdebtburdenandlowinvestments.
EconomicactivityintheUnitedStatesreflectsfasterrecoveryandshowsimprovementin
employment,thehousingmarket,andfinancialconditionsin2014.Japansgrowthdropped
inthesecondhalfof2014duetoanincreaseintheconsumptiontax.Intheemerging
markets,Chinaseconomicgrowthsloweddownduetoeconomictransitions.However,other
AsianeconomiessuchasIndiaareexpectedtohaverobustgrowth.

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InternationalMonetaryFundforecastsglobalgrowthin2015
TheInternationalMonetaryFund(orIMF)initsrecentreportestimatesthattheworld
economywillgrowat3.3%in2014and3.8%in2015.Itexpectsin2015thatgrowthin
developedeconomieswillbedrivenbycountriessuchastheUnitedStates.Developing
countrieswillcontributethemajorshareofglobalgrowthin2015,whichisexpectedtogrow
at4.4%in2014and5%in2015.

Russiaisexpectedtogrowat0.2%in2014and0.5%in2015owingtogeopolitical
tensionsandhighdebt.FallingcrudeoilpriceswillalsoimpactRussiasgrowth.

LatinAmericaisexpectedtogrowat1.3%in2014duetothedropinexportsanddomestic
issues.Itsexpectedtogrowby2.2%in2015.EconomicgrowthinMiddleEasternandNorth
Africancountriesisexpectedtobefragile.Itsexpectedtogrowat2.7%in2014and3.9%in
2015.Thegrowthisdrivenbyimprovedsecurityconditionsandexternaldemandofoil.

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OECDglobalgrowthin2015
TheabovechartshowsOECDs(OrganizationforEconomicCooperationandDevelopment)
GDP(grossdomesticproduct)forecastformajorcountriesin2015and2016.Thisispositive
forthecrudeoilmarket.Itshowsdemandwillincreaseinthelongterm,andhigherdemand
willsupporthighercrudeoilpricesinthelongterm.TheOECDisagroupof34countries
formedin1961foreconomicprogressandworldtrade.Thisreportestimatesworldeconomy
willstrengthenin2016comparedto2015.

Astrongereconomywillboostconsumption,andthedemandforcrudeoilwillincrease.This
willleadtohighercrudeoilpricesinthelongterm.Inthenearterm,oilpriceswillbeona
downwardtrendduetoanoilglut.Aswesawearlier,lowercrudeoilpriceswillleadtolow
investmentsinnewoilprojects.Thereisalsoadeclineindrillingofnewoilrigs.Thiswillall
leadtoadeclineinproductionandwillmeanalowersupplyinthelongterm.Inturn,thiswill
contributetohighercrudeoilpricesinthelongterm.

Theriseincrudeoilpriceswillincreasethemarginsofcrudeoilcompaniessuchas
ChevronCorporation(CVX),ExxonMobil(XOM),BP(BP),CenovusEnergy(CVE),and
PetroChina(PTR).TheUnitedStatesOilETF(USO)isalsodownby~56%frommidJune
2014.

Investorsneedtoknowwhowilldrivetheconsumptionofcrudeoil.Welldiscussthisinthe
nextpartoftheseries.

A key investor's guide to the crude oil market PART 13 OF 15

Whowilldrivecrudeoilconsumption?
By Gordon Kristopher| Jan 15, 2015 2:49 pm EDT

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Majorcrudeoilimporters
TheworldslargestimportersofoilincludeJapan,India,China,otherAsiaPacificcountries,
theUnitedStates,andEuropeancountries.

ChinaandIndiaaremajorcrudeoilimporters.Chinasaves$2.2billiononevery1%dropin
crudeoil.Adeclineof$30perbarrelofcrudeoilmeansasavingsof$40billionforIndia.The
dropincrudeoilpriceswilldecreaseinflationandimprovethefiscaldeficitandcurrent
accountbalance.Thiswillboosteconomicgrowthinthesecountries.

Investortakeaway
Aswesawinthepreviouspartofthisseries,globalgrowthin2015and2016willbedriven
byChina,India,theUnitedStatesandAsiaPacificcountries.Currentlowercrudeoilprices
andgrowthfromthesecountrieswilldrivecrudeoilconsumptioninthelongterm.

Themajorityofcrudeoilthesecountriesimportisusedfortransportationandindustrialuse.
Thedemandfortransportationandindustriesaredrivenbyeconomicandmanufacturing
activities.

InvestorscanfollowindicatorssuchasthePurchasingManagersIndex(PMI)andthe
unemploymentratesinthesecountries.Sincetransportationisasignificantoiluser,auto
salesalsoinfluenceoildemand.Investorscanfollowmonetarypolicychangesthatimpact
growthinthesecountries.Thus,crudeoildemandaswellascrudeoilpriceswillincreasein
thelongterm.

RisingoilpricesaffecttheprofitabilityofoilcompaniessuchasChesapeakeEnergy(CHK),
ConchoResources(CXO),ExxonMobil(XOM),BP(BP),andPetroChina(PTR).

Readthenextpartofthisseriestoknowwhethercrudeoilwillhit$32perbarrelintheshort
term.

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A key investor's guide to the crude oil market PART 14 OF 15

WillWTIcrudeoilhit$32perbarrel?
By Gordon Kristopher| Jan 15, 2015 2:50 pm EDT

Crudeoilexperiencesmassivedecline
WTI(WestTexasIntermediate)crudeoilhasdeclined~58%sinceJune2014.Thisdecline
hasimpactedoilcompaniesandETFsthemost.OilproducerssuchasOasisPetroleum
(OAS)fell~72%fromtheJune2014highs.Oilfieldequipmentandservicescompaniessuch
asWeatherfordInternational(WFT)declined~54%.

IntegratedoilcompaniesandETFsusuallyperformbetterbecauseoftheirdiversified
operationsorholdings.ChevronCorporation(CVX)andtheEnergySelectSectorSPDR
(XLE)lost~27%and~19%,respectively,duringthisperiod.TheUnitedStatesOilETF
(USO)isalsodownby~56%frommidJune2014.

KeysupportlevelofWTIcrudeoil
Inthepreviouspartofthisseries,welookedatthefundamentaldriversthatimpactcrudeoil
prices.Nowwellusethechartstofindthekeysupportlevelofcrudeoil.Toknowmoreabout
chartingandtechnicalanalysis,visitourtechnicalanalysispage.

OnJanuary13,2015,crudeoilwastradingat$45.91perbarrel.Ithassupportat$42to
$44.Thenextsupportbandis$40to$42ifanybearishnewstriggersfurther.Thencrudeoil
willdroptothenextsupportlevelof$35to$37.Ifcrudeoilcontinuesitsdowntrend,its
possiblethatcrudeoilmighthit$32perbarrel,thepriceofcrudeoilin2008beforetheglobal
financialcrisis.Thisisthefastestdeclineofcrudeoilsincethat2008crash.

IfWTIcrudeoilpricestrytobreakabovethe$52to$55levelagain,therewillbealotof
resistance.Strongfundamentaldriverssuchasalargedeclineinsupplywoulddrivecrude
priceshigher.

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Duetothecurrentoilglutandaweakdemand,investorscanexpectcrudeoilpricestolikely
remainonadownwardtrend.

ReadthenextpartofthisseriestoknowmoreaboutoilETFs.

Thisarticledescribedthedatewhencrudeoilwastradingat$45.19perbarrelasJanuary
13,2014,whenitwasoriginallypublished.ThedatehassincebeencorrectedtoJanuary,13,
2015.Weregrettheerror.

A key investor's guide to the crude oil market PART 15 OF 15

KeyoilETFsseesignificantdeclinesince
June
By Gordon Kristopher| Jan 15, 2015 2:50 pm EDT

OilETFs
Aninvestmentfundtradedonthestockexchangeiscalledanexchangetradedfund(or
ETF).AnETFholdsassetslikecommodities,stocks,andbonds.Ittradeslikeastock.Most
ETFstrackabondindexorstockindex.TheoilETFconsistsofoilcompanystocksorfutures
contractsforvariousoils,gases,andpetroleumbasedfuels.

CrudeoilseffectonoilETFs
Themassivedeclineincrudeoilpricesinthesecondhalfof2014hasledtocollateral
damageforkeyoilETFs.MostoilETFsaredownandtradingatdiscounts.Theabovechart
showsthekeyoilETFstolookforin2015.

OneofthemostimportantETFsistheUnitedStatesOilFund(USO)withanaverage
volumeof16millionshares.ItsthelargestcrudeoilETFwith$1,016millioninassets.Ithas
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declined~56%sincethemiddleofJune2014.ThisETFconsistsofderivativecontractsfor
variousoils,gases,andpetroleumbasedfuels.

PowerSharesDBOilETF(DBO)hasassetsof$280million.Ithasdeclined~56%sincethe
middleofJune2014.ProSharesUltraDJUBSCrudeOil(UCO)isthesecondlargestoilETF
withassetsof$490millionandanaveragevolumeof5.4millionshares.Ithasdeclined
~81%sincethemiddleofJune2014.BothoftheseETFsconsistofWTIcrudeoilandits
derivatives.

VanEckVectorsUnconventionalOil&GasETF(FRAK)consistsofcompaniesinvolvedin
unconventionaloilandgasexploration,development,andextraction.Ithas$62millionin
assets.ThisETFhasdeclined~44%sincethemiddleofJune2014.TheEnergySelect
SectorSPDR(XLE)hasalsodeclined~27%sincethemiddleofJune2014.

The Realist Discussions 11 Comments


11Comments

2013MarketRealist,Inc.

The Realist Discussions 11 Comments


11Comments

2013MarketRealist,Inc.

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