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The oil and gas industry wasn’t given much of a respite following the unofficial ending to the holiday season. Oil prices continued their plunge on Monday, January 5, 2015, with West Texas Intermediate (WTI) and Brent prices closing at $49.78 and $53.12, respectively. The sub-$4.00 differential first appeared in December 2014. The last time the market saw a sub-$4.00 differential was January of 2012.

Industry veterans are confident in oil’s price recovery and believe the value will return to pre-price war levels of around $100, most recently seen in August. Since then, the WTI value has dropped by roughly 50%. T. Boone Pickens has spoken out numerous times on the price rebound, most recently reiterating his belief that oil will climb back to the $90 to $100 per barrel range within the next 12 to 18 months. “Can you believe the United States has this many resources?” he said during an interview with Fox Business News. The industry giant says the price will likely continue to decline through the first quarter of 2015 and possibly into the second quarter due to a rise in inventories. However, he believes the inventory will begin to decline in the second half of the year, leading to a boost in oil prices.

Harold Hamm, Chief Executive Officer of Continental Resources (ticker: CLR), told Bloomberg back in October that he believes prices will settle in the $90 to $100 range. Hamm, who owns 68% of the company, made a bold move in by eliminating CLR’s hedges, a sign of confidence that prices will recover sooner than later.

Bearish Agency Reports

Source: Forbes

Source: Forbes

The Energy Information Administration (EIA) and International Energy Agency (IEA) have produced bearish near-term oil forecasts to reflect the oversupplied oil market. The IEA still expects demand growth in 2015, but reduced its total growth projection to 900 MBOPD from 1,130 MBOPD in its Oil Market Report for December. The inventory report lines up with Pickens’ view, saying: “Based on current projections of still relatively weak demand growth and robust supply, global oil inventories would notionally build by close to 300 MMBO in H1’15 in the absence of disruption, shut-ins or cut in OPEC production. If half of this took place in the OECD, stocks there would approach 2,900 MMBO and possibly bump against storage capacity limits. The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt.”

The EIA slashed 2015 prices for WTI and Brent to $62.75 and $68.08, respectively, in the Short Term Energy Outlook for December 2014. The prices are well below the respective projections of $78.00 and $83.00 in November, and even further below projections of $95.00 and $101.00 in the October issue. The overall difference between October and December is a price slash of approximately 34%, but are still more than $10.00 higher than average trading prices for the month of December. The EIA’s next Short-Term Energy Outlook is scheduled for release on January 13. WTI prices dropped by more than $2 when the last report was issued on December 12.

The Hedging Scene

Stephen Schork, Founder and Editor of the Schork Report, told CNBC that crude oil hedging floors of $30 traded 46,000 contracts in the last two weeks, meaning E&Ps are confident the price is going much lower. “We don’t know how much lower we can go, but I certainly wouldn’t want to be buying in at this level,” he said. Schork added that open interest on a $40 floor for February increased by more than 400% “in the last few weeks,” which implies some of the market believes oil will drop below $40 by January 20 – the date February contracts are set in stone.

“We’re at the stupid range,” Schork said. “It’s similar to 2008 when we knew oil at $120, $130 and $140 made no sense, but high prices became the reason for higher prices. It’s the same thing in reverse.”

Saudi Arabia not Interested in Production Cuts

Saudi Arabia has made it clear that production volumes will not be trimmed. Comments from Ali al-Naimi, the country’s energy minister, have evolved sharply since November, when he said: “We want stable oil markets and steady prices, because this is good for producers, consumers and investors… Talk of a price war is a sign of misunderstanding — deliberate or otherwise — and has no basis in reality. Saudi Aramco prices oil according to sound marketing procedures — no more, no less.”

In December, his comments were much more direct and stark. “[It is] not in the interest of OPEC producers to cut their production, whatever the price is,” he said at a conference in Abu Dhabi. He also mentioned oil “may not” trade at $100 again. Qatar National Bank Group said it does not expect to see oil at the $100 level in the next five years.

Saudi Arabia has more than $800 billion in cash reserves, but the price cut will still affect wages and subsidy programs, says  Chris Faulkner, Chief Executive Officer of Breitling Energy (ticker: BECC).  “Their deficit right now is going to run $50 billion by the end of the year,” he said to CNBC, adding that other OPEC members like Venezuela will likely default on their debt in 2015. “At the end of the day, [the Saudis] can’t just bleed out money forever.”

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.