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Business/Finance See other Business/Finance Articles Title: Yawning While Yemen Burns “The Crisis in Yemen Intensifies as Houthi Fighters Push Deeper Into Aden,” reports Time this morning. *Yawn*... *stretch*... *sip coffee*... “Too often we get caught up in the headlines” explained Jim Rickards in this morning’s live Strategic Intelligence briefing. Your editor double-times as managing editor for Mr. Rickards in addition to our Reckoning duties. Given the media’s hoopla about happenings in the Middle East, we thought an apt topic for this month’s SI webinar with Jim was Yemen Burns: An Oil Contagion Update. The stage has been set in these pages. We’ve camped out on the sidelines, covering our eyes but peeking now and then at the slow implosion of the fracking sector as the price of oil has languished in the $40-60 range. You already know that story. We wanted to get Jim’s thoughts on the impact, if any, of fighting in Yemen on his oil contagion thesis. For background, here are some facts we’ve already covered in these pages... •Yemeni oil production sunk to 130,000 barrels per day in 2014 -- less than a third of its peak in 2001 -- due to disruptions and a lack of investment. To make matters more lame, Yemen is the world’s 37th largest oil producer. Needless to say, Yemen isn’t making or breaking the global crude oil price •Perhaps more troubling are the two so-called “choke points” -- waterways that oil tankers use to bring crude to the global marketplace. The one of interest to us today is the Bab-el-Mandeb, also known as the “Gate of Tears.” Nearly 7% of all the crude carried by tanker ship around the world passes through Bab-el-Mandeb. “We go online or we pick up the paper and it says, ‘Al-Houthi rebels take the airport in Aden.’” continued Mr. Rickards this morning. Somehow, we don’t have to be an expert on tribal warfare and the Arabian Peninsula to know that that doesn’t sound like good news. “Then, the next day you wake up, and it’s ‘Al-Qaida affiliate bombs oil terminal in Libya.’ “But rather than being a pinball bounced around flipper to flipper… we need to step back and put this in a broader context to see what’s going on. “Some of the dynamics in the Middle East have been going on for 1,500 years,” Rickards stressed. “We’re not talking about something in the Obama administration. We’re talking about something that goes back to the seventh century. And they haven’t really changed in the whole time, so they may not change now. I would expect this instability to continue… I would expect more bad days… more bad headlines… Oil will be volatile partly for that reason… “What you should expect is that oil will trade somewhere in the $40-60 range for a long time. Meaning this year and into next year. Because that’s low enough to kill the frackers but not so low that it hurts Saudi Arabia more than necessary.” Saudi Arabia is the swing producer -- they have low enough marginal costs to extract oil at much lower prices than American frackers. “At $60 a barrel” explains Jim, “they’re still profitable. In fact, their budget is in a surplus.” “So I wouldn't be betting on $20 oil… but I would not be betting on $80 oil, either.” $80 is the number Jim offers up as the price frackers need to drill a new well profitably. As for the wells American frackers have already drilled -- the cost to bring oil out of the ground is much lower. “They’ve got all this debt” Jim goes on. “The estimates vary, but at the low end, it’s $2.5 trillion. At the high end, it’s $5 trillion. Take your pick. We’re talking about multitrillion-dollar junk bond issuance to build all of this infrastructure in the first place. So if I’ve got all of this money and I’ve got all these wells and now the price comes down, I might not drill the next well, but I’m going to drill the one I’ve got, because I want the cash flow at any price to pay my bills.” “In the short run,” Rickards concludes, “the frackers are pumping as much as possible to cover their principal and interest payments on the debt they have. That oil is cheap. But they’re not drilling new wells… the rig counts are going down… they’re shutting down production. So the transition from high output to low output doesn’t happen overnight. It could take years.” This has resulted in a massive oil glut. The Wall Street Journal took those facts and leaned forward last night with the headline “Big Oil Companies Brace for Weak Quarter After the Fall in Prices.” “It’s going to be ugly,” Jason Gammel, an analyst at Jefferies, told the paper. “It’s going to be a really bad quarter.” In other news… these energy trends -- coupled with the ongoing currency wars -- offer opportunities to the north. Jim has more for you if you read on... Cheers, Peter Coyne The Daily Reckoning Poster Comment: I agree. Post Comment Private Reply Ignore Thread
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