Whether RIG goes up or down is not so much about RIG. RIG's problems were already built in to the share price many months ago. RIG's trouble now is all about the price of oil and distillery products, which is in turn about the supply and demand.
Other companies in oil services are holding all things considered so the real problem is in the preception of the offshore drilling market. But these only rumors... there is no real evidence that offshore is going to become a lost market. Rather, there is plenty of news that offshore drilling is turning up. RIG is even expect to beat earning this next quarter. Offshore rigs are working and dayrates are not dropping through the floor. Bedies, offshore is where the huge oil deposits will be found. Offshore Alaska, Easteran United States, Anartic Ocean area, off Africa. All around the world, the big prize is offshore.
Fracking also faces a huge envrionmental fight that worries the majors. No one wants fracking near their fresh water supplies. Who the hell wants to drink a class of benzene? What is the environmental damage over the next 100 years. Do want frackers operating in your back yard? Hell no, and neither does anyone else.
The crude supply has increased in the US because, unknown to most stock traders, shale producers had participated in a large hedge scheme that guaranteed them $90 per barrel. The hedge bet both sides of WTI at $90 and could not lose. These companies keep on producing even when WTI hit $42 because the price did not matter. The end results were that the stored crude in the US reached the highest level in 80 years. This hedge is gone in 2 months. Those producers that didn't join the hedge are now facing foreclosure, with no buyers looking to take over their equipment. This has put a stake through the hearts of the bankers that back shale production. This is what OPEC wants--put the frackers out of business.
Those that did hedge kept on drilling because they had money and dayrates were cheap. All this changes in 2 months when the hedges expire. Now what they goona do? What's gonna happen with no hedge if oils re-test $42? Onshore production will drop like a stone at the same time
OPEC announced that they would hold productions at higher levels in the face of decreasing demand due to a worldwide recession. This move was supposed to guarantee that they would hold onto market share. This was the big lie sold to the world. The truth is that there is no such thing as market share in the oil business, just like there is no such thing as market share in the gold trading business. Both crude and gold are graded and priced accordingly. Whoever offers the best price on a particular grade gets the business. Crude is a little different in that it must be shipped by tankers or pipeline to the chosen refinery and then to market. Whoever has the right grade and can deliver to the refinery for the lowest prices gets the business. No one has their own market share -- its all about grade and delivered price.
OPEC has propped up prices by cutting production during low demand periods ever since OPEC began. The only reason to form OPEC in the first place was to control the volatility in crude prices so their members could plan their drilling strategies. What they have done has handed oil the responsibility to stabilizing prices to the shale producers. They screwed themselves. They will never be able to control production or prices again without running crude to $20 barrel and giving away several trillion dollars which they don't have. Besides, $20 crude would be a disaster that OPEC countries could never afford. OPEC has only one choice and that is to secretly lower production.
The original OPEC decision to allow supply to exceed demand had three purposes:
(1) If crude stayed at $120, the world economy could never come out of its deep recession.
(2) Alternative energy would gain a much stronger foothold, especially natural gas, and put crude and OPEC out of business forever.
(3) OPEC, especially the Saudis, want to slow the advance of alternate energy until (a) they sell all the crude they can, (b) develop their natural gas production, and build GIGANTIC solar power fields in their sunbaked deserts. The idea is to export electricity they generate during the day with solar and at night with gas-fired generators.
Electricity generated by solar and natural gas is the future. But the future will have to wait at least 20 years until 2035 before crude goes the way of coal. Natural gas is the best fuel but it is too cheap right now and too costly to ship to
Until the recession ends and the world economy heats up, the sweet price for both consumers and producers is $60 to $65 barrel. This can happen really fast if OPEC and shale producers both agree to limit production. This agreement must happen if they are to survive. The alternative is $20 crude which kills everyone.
In the meantime, alternative energy sources can move ahead at a slow pace and everybody will make money.
More later...
