Get used to $60 oil, because this ride is just beginning.
The biggest news this week clearly revolved around the OPEC and non-OPEC meeting that
took place in Vienna.
The question at hand was simple: Will the group agree to extend production cuts, and for
To be fair, we knew the production cut deal would be extended. It’s no secret that low oil prices have devastated OPEC members, who saw revenues crash over the last few years:
OPEC’s net oil export revenues fell to $433 billion in 2016 — representing 15% year-overyear
decline and a 12-year low. And as you can see above, Saudi Arabia shouldered the brunt of the cut (as it should). Member countries like Venezuela have been utterly decimated, and it’s now only a matter of
time before the Maduro government topples. I personally think it’ll happen any day now, but we’ll see how long he can hold on before the coup takes place.
Before we get too far ahead of ourselves, keep in mind that given the cuts OPEC has made, any output loss from Venezuela could easily be picked up by the bigger members. Of course, we can’t help but wonder if this wasn’t part of the Saudi plan when it started its oil price war back in the summer of 2014.
Now, this week’s decision was huge. OPEC and Russia agreed to extend the production cut deal through the end of 2018, and we can expect the group review these cuts again in June. This deal alone will give us some price stability going forward. And with WTI trading slightly under $60 per barrel, we may even see prices start testing $70 per barrel early next year.
The only rub, however, is that this is pretty much what everyone was expecting them to do.
In other words, I believe this decision is baked into current prices.
The wild card here is the United States.
So far, tight oil production in the lower-48 states rebounded sharply in 2017, jumping 7.4%
between January and August. The fear is that higher prices will spur even more activity by
U.S. producers and throw a wrench into the works again.
Two weeks ago, the EIA’s Drilling Productivity Report projected that tight oil production in
seven key oil-producing regions will increase in December, averaging 6.17 million barrels
For the record, this would account for roughly two-thirds of total U.S. output!
According to the EIA, U.S. production is expected increase from here on out, then level off
between 10 and 11 million barrels per day through 2040.
Thing is, it turns out that the EIA’s projections may be a little too optimistic from the start.
As Bloomberg reported this morning, a study out of MIT is calling the EIA’s projections into
question. One researcher noted that the EIA is miscalculated the productivity of individual
wells, which were expected to continue increasing due to technology improvements.
In fact, they believe the EIA has overestimated U.S. production from new wells by more
than 10% in 2020, with things getting worse after that as producers are forced to move
further away from a play’s sweet spots.
This, of course, is bullish for prices, especially if producers fail to live up to expectations and
demand remains strong.
Jericho Oil (TSX-V: JCO) (OTC MKT: JROOF)
When we last caught up with Jericho, the company’s STACK joint venture was looking to
add more acreage in the oil window of the Anadarko Basin STACK play in Oklahoma.
A few weeks ago, the company closed an acquisition for 76 acres (100% held-byproduction)
in the area. In the same press release, Jericho also announced it voluntarily reduced its borrowing base from US$12 million to US$10 million.
If you recall, we established our initial position back in early September, as shares started
moving higher after the company closed an acquisition that morning for approximately 9,400
net surface acres in the STACK play.
Shares have been holding steady since, as oil traders waited for the OPEC and Russia to
make their decision on extending its cuts.
However, I don’t expect this stock to be trading under our buy limit of $0.90 for much longer
if WTI starts marching toward $70 per barrel.
Not only does it have a solid liquidity position currently, but the company is operating in an
area where the break-even is less than $40 per barrel.
Once shares surpass our our buy limit, we’ll re-evaluate our position.