The crash in oil prices has an obvious winner – consumers. All over the world, people are celebrating the New Year and cheaper energy prices.
The price of gasoline is approaching a bargain basement $1.50 per gallon in parts of Oklahoma. Nationwide, prices should fall to around $2 in the early part of 2015, and the average family will pocket more than $1,000 in extra cash as a result.
Businesses like airlines and other transportation companies will see a massive windfall in profits, too, and just about every company that has a power bill will see some type of relief.
But who are the losers in all this? The answer may shock you…
Keep Your Ear to the Ground
Most of the hubbub is focusing on how the U.S. and international oil companies are faring through this energy meltdown – pointing to any drop in production or profits as the beginning of the end. Those companies will lose money or report lower profits, to be sure, but they aren’t the biggest losers…
By far, the oil-producing countries that rely on the sale of oil to fund their governments and their regimes will be hurt the most by the low oil prices.
That’s why smart investors should start looking for “tip-offs” to guide their next moves and maybe start accumulating shares.
Take, for example, Comstock Resources (CRK). The company announced last week that it would stop drilling in the Tuscaloosa Marine Shale and relocate rigs from the Eagle Ford region to the Haynesville shale region.
What Comstock is saying with this move is that the costs associated with the two regions aren’t compatible with the current level of oil prices. As an investor, you should look at your holdings and make sure you’re not heavy in either region, unless your company got in extremely early and was able to buy property on the cheap.
Halcon Resources (HK) announced that it was also pulling out of the Tuscaloosa region, which straddles Mississippi and Louisiana, to focus on operations in Texas and North Dakota.
And late last week, one of the fastest-growing poster children for the shale revolution, Continental Resources (CLR), announced that it would cut its 2015 drilling budget by 41%. But despite this, Continental’s production is still slated to increase by 20% in 2015, down just a bit from the earlier projections of 29%.
You see, what many investors fail to realize is that drilling companies, especially those that aren’t overextended, can shut down or refocus operations in order to preserve capital and become more efficient producers.
Buckling Is Inevitable
At $100 per barrel, no one really paid much attention to the cost side of the equation because it was much lower than the selling price, regardless of the location. It’s different today.
But unless oil prices drop to the $40 level and stay there, the current price collapse is much more detrimental to countries like Venezuela, Libya, Nigeria, and Russia, which are solely reliant on oil sales.
Those countries can’t afford to shut down their operations. They must sell at any price just for cash. And that puts all of those economies on a collision course with a reality that will force them to put upward pressure on prices by reducing supply.
If the richest members of OPEC won’t do it, the poorer members will be forced to by virtue of threatening the survival of the ruling parties.
U.S.-based companies will also contribute in their own way by reducing drilling, as I mentioned above.
Meanwhile, lower prices will stimulate consumption and that will sop up any excess supply. Oil prices may stay here or fall a little more, but over time they’ll be forced higher as the real losers will have no choice but to push them.
And “the chase” continues,