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Prepared by Phil Flynn

(December 19, 2014) Get Prepared For $40 Oil

Oil fails to hold a rally as Russian president Vladimir Putin says get ready for $40 a barrel oil and oil traders did. Putin in his marathon press conference yesterday that left many wondering what is less stable, Putin or the Russian economy?  The President stayed defiant against the West as the Russian economy continues to crumble all around him.  Putin claimed that the economic problems in Russia are not his fault , it is because those guys in the West keep giving him grief. He said that sanctions accounted for at least 25 percent of the ruble's fall even though Russia's failure to ease its overwhelming dependence on oil and gas exports was also to blame. Putin claimed the West's pressure on Russia  “is not about Crimea, the West wants our skins hanging on the wall. Sometimes I think, maybe they'll let the bear eat berries and honey in the forest, maybe they will leave it in peace. ”Maybe our dear bear should sit quietly, not chase piglets and just eat berries and honey. The west wants to turn the Russian bear into “taxidermy.” “Maybe then he will be left alone?” “They won't give up because they will always try to chain him,” Putin said. “And as soon as they chain him, they'll rip out its teeth and claws, and the dear bear won't be needed anymore .Once they've taken out his claws and his fangs, then the bear will become a stuffed animal , the issue is not Crimea. The issue is that we are protecting our sovereignty and our right to exist."

You almost have to feel sorry for him. Kind of pathetic. So pathetic , French President Francois Hollande is suggest ing that maybe Europe should ease up on Russian sanctions before Vladimir really goes off the deep end. After his speech it seemed that any sense of stability in the ruble or the Russian economy will not be chasing any piglets anytime soon. They may not even be able to afford berries and honey. Auto makers are pulling out of Russia or suspending sales because they fear the collapses of the ruble is another sign that the Russian turmoil will spread outside of Russia.  General Motors Co. and Audi suspended sales. 

OPEC , in the meantime , is keeping up the pressure on Russia and every other oil producer in the world. The Financial Times reports that “Options that give investors the right to buy insurance against bond defaults have exploded in popularity this year as asset managers and hedge funds seek to affordably offset the risk of a big blow-up in credit. Trading volumes of the instruments - known as credit index options or swaptions - have jumped 148 per cent in the past 12 months, with about $1.4tn of the instruments exchanging hands in 2014 compared with $573bn in 2013." Of course the reason is that we are seeing a lot of stress in the highly leveraged energy space. 

Zachary Toliver , of Shale Plays Media , wrote “With oil prices nearly slashed in half from earlier 2014 prices, analysts are predicting that up to 550 drilling rigs will remain out of commission over the next few months. ” Signs of a slowdown have rolled in quickly since last November when members of the Organization of the Petroleum Exporting Countries (OPEC) refused to cut any of their oil and gas production. Reuters reported that in Houston, Texas, the first oil industry layoffs have been announced. Also, realtors there are predicting a sharp decline of up to 12 percent in home sales next year.

Additionally, companies in the West Texas Permian Basin have begun the process of “cold stacking” their rigs. This is a process by which a production company releases or stops drilling operations for their leased rigs. Recently, oil companies cut 20 rigs in the Permian fields and well permits in the Eagle ford fell nearly 30 percent in November.

 Fuel Fix , w rote that some private producers “believe that there will be more than 500 rigs idling in the next 60 days.” This means more than a quarter of active U.S. rigs will be off the market soon.

Well the good news of course gas prices! Bloomberg reported that “U.S. drivers are paying less than $2.50 a gallon at the pump for the first time in more than five years.  Retail gasoline prices slipped to an average $2.47 7 a gallon last night, data from the Heathrow, Florida-based motoring group AAA showed. That's down from this year's peak of $3.696 in April, and the first time the average has dipped below $2.50 since October 2009. The AAA projects prices will drop to between $2.25 and $2.40 a gallon by New Year's Day, making for the cheapest holiday gasoline since 2008, Michael Green, a Washington-based spokesman for the motoring group, said in an e-mail.

Crudes failure was key but we held the lower end of range! Be on guard for a sharp recovery rally put then get ready to sell into it!

December 19, 2014
Phil Flynn
 pflynn@pricegroup.com
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