Plunging Oil Price Fear

48 Replies

I would like to hear from other investors in the Houston area about strategies and outlook for 2015 in this climate of of dropping oil prices.  I am fearful unfortunately and I am trying to fight it.


My elders are full of doom and gloom, citing the 80's disaster. I believe prices will rebound next year once reduced investment in development in estabilished fields and increased demand hits the market but that is just my guess.

What are y'all doing to protect yourself while still staying active? 

Hi Brandon

Alwasy buy right and you should be able to minimaz your risk in any market.

Your are making your money whem you are buying the property not selling it.

So if you know your number and you and buy a good deal at the beging even with the falling price of gas and oil you should be still on a good position.

Thank you and good luck.

Whoa whoa whoa....there is someone else on this board with the name Craven AND you are in Houston....@Brandon Cravens  

Anyhow, we are watching the markets closely and so are our lenders and bankers.  I don't think we are headed for another 80s ghost town scenario.

First, Houston got smart after the 80s and is much more diversified.  This does not mean we are immune to it, we are still heavy oil industry but in recent years Oil and gas job growth has ranked sixth in Houston since December 09.  

We are adding jobs like crazy, 85k in the 12 months since April 2014.  Down slightly from 2013.  With that job growth, and influx of new people comes demand for housing.  Our inventory currently sits at 2.7mo, our record low was 2.6mo.  We have stayed below 3 for quite some time (forget exactly how long).  Will we stay there as oil prices stay low. NO and that's ok.  If a stoic market is 6mo we have a ways to go.  This tells us we are still not building houses fast enough to keep up with demand.  We will catch up eventually, but there is still plenty of demand for houses.

We also have to consider why oil prices are low:

OPEC doesn't like Iran and Russia and Putin has been quite spunky lately.  The drop in oil prices has put Russia in a recession.  How long at reduced oil prices will it take to crush Russia?  Don't know, but OPECs has enough in the vaults to weather its own storm.

US as a country is energy neutral thanks to our fracking technology and various shale plays.

Fracking is expensive, small companies are going to sweating a bit.  When it costs 60bbl to get out of the ground and the market will only pay 45 we have a bit of a problem.  The small are just that...small.  Exxon has said hey are just find at 40bbl oil.  They have assets all over the world, and not all of them require fracking so they are much cheaper to extract.

Here are the rumors i have been hearing:

BP is planing a round of layoffs

Companies are taking a wait and see mentality

prices will only stay down for a year

prices will only stay down for 6mo

Our comapny saw this market correction coming from a long ways away.  Cheap money flooding the industry has inflated values and caused people to chase low return O&G assets.  This combined with our rocketship the last couples years, the writing has been on the walls.  

This is getting long so i want to wrap up.  Houston will see a slow down this year, we were expecting it before oil prices dropped, and frankly...i think its a good thing.  A city that historically appreciates at 4% cannot sustain 12%.  The oil being low will have downward pressure on that even further...but the way i see it...its an opportunity, not a sky is falling we are all going to die scenario.

Nice write up @Sam Craven  !  Where can I find the inventory numbers and how they are derived?

Good points Sam, I'll add it's more to perception. Oil consumption won't fall off, but at a lower price it may appear to be less demand, that influences investor decisions and trickles through the market. Oil heavy communities may think the sky is falling, but it's not. I'm in a very well diversified economic area, pretty well insulated from oil prices, so long as the don't go sky high! It's much like a tax relief, more disposable income for consumers.

Bet you'll see a spike in less efficient auto sales, the thinking of the day, do I buy this one that gets 27 mpg or the bigger job at 21 mpg, they look at the price at the pump and go to the bigger option.  

Prices will probably adjust before there is any significant impact to interest rates and housing, I'll guess 6 to 9 months prices will be back at $100-110 a barrel. Just a guess, I don't keep up with futures anymore, it is a manipulated market. :) 

I envy you in your well diversified market @Bill Gulley  I would be happy with $80-85 WTI in six months, $100 again would really relieve me. 

I work for a midstream company and we are starting to have lots of cost savings discussions and meetings already. 

@Sam Craven  Not sure where you got OPEC doesn't like Iran, Iran is a founding  member of OPEC.  If you meant Saudi Arabia then that is much more accurate.  The Saudis at times have increased or held steady oil production to harm the Iranians and they could be doing it now, but for what particular reason right now?  Unless of course our illustrious leader has suddenly become Machiavellian after multiple foreign policy debacles and convinced the Saudis to put some pressure on the Iranians, so they will actually negotiate nuclear issues rather than to pretend that they are.  

IMHO, the real reason is the huge increase of oil production in the U.S. (no I'm not being ethnocentric).  Neither Iran nor Russia has recently substantially increased oil production in their countries and they are unlikely to be able to do so.  This is due to limited technology, sanctions, and other issues such as permafrost in much of Siberia.  Occam's razor leads us back to the U.S.  as the most likely cause.  U.S. oil production went up 33% in two years' time, that is an insane amount in a country with a stable and long term history of oil production.  

However, the major drawback of this new production is its relatively high costs.  It costs substantially more when fracking and other new drilling technologies are involved than the technologies used by the Saudis.  

For whatever reason (a prolonged worldwide recession?) over the past few years while oil has been at ~$100 a barrel, the Saudis did not increase production enough to affect oil prices.  However, now they have decided that $60 a barrel an oil is acceptable.  There is no doubt this will play havoc with many of the US oil companies that get their oil from fracking.  Perhaps, they realize that causing oil companies to crash and burn after doing well at first, is a better strategy than simply nipping it at the bud. Besides they got a couple of more years of $100 oil out of it.  

Also I believe the Saudis realize that Moore's law will likely affect fracking at least to some extent and that the more oil that is produced using the new technologies, the less those new technologies will cost per barrel.  

Bottomline- The Saudis have decided to significantly reduce the price of oil.  What this means to the U.S. oil industry is unclear, but it is very unlikely to be a good thing at least in the short term.   Iran, Russia, Venezuela among others has been thrown under the bus.  The massive boom in spending on oil production in the US will also likely come to an end.  Yes there will be more fracking, but nothing like the massive expansion seen over the last few years.  To me at least, this is definitely not the time to be speculating in RE markets heavily driven by oil prices.  

I hope you are right that Houston and Texas as a whole are diversified enough to weather a long term major drop in oil prices unlike what happened in the 80s.  

Hi All ... just thinking about this when I saw this post! What about MIDLAND - ODESSA markets? Looking into those markets on the way to Dallas from Arizona and am seeing lots more on the market than in years past. 

Rents and values are higher than other Texas Markets - but toward what end with prices of oil down? Wall Street Journal spoke to this recently in an article stating the diversification debt to asset ratios of TX banks relating to oil - their perception was all (with only 1 exception) are diversified out of oil significantly to not be affected. 

Am interested in opinions ... have NOT done our underwriting analysis yet and have not yet visited the subject properties (planned visit early next week) ... so ... If you were a multifamily investor would you purchase in Midland/Odessa now?

Thank you in advance for considering ... toward some context ... a 25 unit built in 68 with an asking price of 83K per door, and another for 70K per unit both 100% occupied. Both reporting Pro-Forma numbers only on the offering memo.

@Cal C.    I dont claim to be a geopolitcal expert by any means, you may know more about Iran/OPEC relations than i do, but i do believe Iran is a potential target for OPEC based on its desire to be become a nuclear power.

Since i wrote that post Houston Area Realtors (the local MLS) published a story saying we are headed to more inventory.

As a house flipper, i say bring it on.  Its going to allow us to buy more houses.  I think the biggest impact this will have on our business will be what segment of the markets we will focus our acquisition strategies on. 

I have noticed an increase of price reductions, short sales and foreclosures in the last couple of weeks.  I have several houses that I will be looking at this week.

Well, whoever doesn't like whoever, I'm lov'n it, filled up, $1.87 a gal! Now, I do remember buying for a quarter a gal, anyone remember gas wars at the stations? I doubt it's going to last that long, the sky isn't falling......yet. :) 

Originally posted by @Bill Gulley :

 Now, I do remember buying for a quarter a gal, anyone remember gas wars at the stations? 

I remember my mom handing me a five gallon gas can, and a dollar, then reminding me to bring back her change AND her S&H Green Stamps...

@Brandon Cravens   $100 oil and im done with real estate! but i donno if that will happen  in the next 2 years. 

I think $70's and maybe $80 is reasonable for oil in 2015.... and I cant wait! take a step back and ask ourselves, would we bet that gas will NOT go back up to $3/gallon? I know I wouldnt take that bet, however I more then gladly take the bet that it will..... so thats what im doing via the market :)

There is way too much money in the oil industry for prices to stay down here very long.  Although, I'd love the 2 dollar gas for the next 3 years.  Just is'nt gonna happen.

@Lisa Knudson  I was looking in Midland/Odessa 2 years ago.  When I realized how difficult it was going to be to get a loan there, I knew there was concern about the market.  When I saw MF properties with gross revenues increasing 12% each year for three years in a row, was concerned about sustainability.  I won't invest in those markets until I see a massive correction.  I do know several investors that got out of that market with massive capital gains.

@Sam Craven  

Just to add some fact/opinions to your post above. 

BP already cut jobs as well as HESS. Normally, non-technical jobs are ones that go out of the doors first. I heard BP also offers package for their engineers to leave voluntary. 

CVX has their hiring freeze. Some operations that doesn't make economic sense like has been putting on hold. They have to move their people around to minimize the job cut. 

COP cut their CAPEX by 20% for 2015.

Companies above are what we call "operation" which is basically the owner of the oil wells. When you see the operation companies doesn't do well, those service companies like Halliburton and Schlumberger will normally do worst. 

I have many friends in the industry in different companies. We all stated some concerns. Some are worried more than others. 

Overall, I believe everything will be in a much slower pace for 2015 for at least the first 6 months. 

I don't think we can speak much on who is behind the lower oil price, why they are doing this and how long it will last. I am very certain that it's way too complicate than Russia, Iran, or fracking industry. 

Houston will probably take this hit harder than others. I think it will definitely present some opportunities similar to 2008 - 2010 somewhat though. 

Originally posted by @Isaac Essex :

@Brandon Cravens  $100 oil and im done with real estate! but i donno if that will happen  in the next 2 years. 

I think $70's and maybe $80 is reasonable for oil in 2015.... and I cant wait! take a step back and ask ourselves, would we bet that gas will NOT go back up to $3/gallon? I know I wouldnt take that bet, however I more then gladly take the bet that it will..... so thats what im doing via the market :)

 Good point Isaac. 

Originally posted by @Nate Paoinchantara :

@Sam Craven  

Just to add some fact/opinions to your post above. 

BP already cut jobs as well as HESS. Normally, non-technical jobs are ones that go out of the doors first. I heard BP also offers package for their engineers to leave voluntary. 

CVX has their hiring freeze. Some operations that doesn't make economic sense like has been putting on hold. They have to move their people around to minimize the job cut. 

COP cut their CAPEX by 20% for 2015.

Companies above are what we call "operation" which is basically the owner of the oil wells. When you see the operation companies doesn't do well, those service companies like Halliburton and Schlumberger will normally do worst. 

I have many friends in the industry in different companies. We all stated some concerns. Some are worried more than others. 

Overall, I believe everything will be in a much slower pace for 2015 for at least the first 6 months. 

I don't think we can speak much on who is behind the lower oil price, why they are doing this and how long it will last. I am very certain that it's way too complicate than Russia, Iran, or fracking industry. 

Houston will probably take this hit harder than others. I think it will definitely present some opportunities similar to 2008 - 2010 somewhat though. 

 There is absolutely no question that oil is falling because the Saudis have decided to maintain their current level of production.  On 28 Nov, they announced this at an OPEC meeting and oil fell 9% in 24 hours.  The debate is over why the Saudis are taking a stand now to protect their market share.  

If there's going to be another real estate recession, then we should be ready with cash to take advantage of another round cheap foreclosures and rent them long term.

Cash is always king. 

Here's an article about the 1982 - 1987 oil and gas bust in Houston:

Oil Busts Houston To 'Loan Scar' State City Seeks Industrial Diversity For Climb Back Into The Saddle

August 2, 1987|By John J. Glisch of The Sentinel Staff

HOUSTON — Not far from the granite skyscrapers simmering in the haze of downtown Houston, the dreams of thousands of Texans have ended in bulldozed fields overgrown with weeds and wild summer grass.

The site was supposed to have been a massive subdivision, one of hundreds that sprang up overnight when the oil industry boomed during the 1970s and early 1980s, sending this sprawling, get-rich-quick city on a seemingly endless joy ride.

But the ride has long since ended, the victim of a depressed oil market that has ravaged Houston's oil-addicted economy and left vacant lots and ''For Sale'' signs as visible scars of how quickly the good times turned bad in the nation's fourth-largest city.

''You can go anywhere and see the problems,'' said Brian Binash, an unemployed home builder, as he drove past abandoned houses and shopping centers that never welcomed one customer. ''You can see $2 million homes foreclosed and $50,000 homes foreclosed. Nothing escaped.''

Five years after its troubles began, Houston still is struggling to survive its worst economic crisis since the Great Depression. Unemployment remains high; gleaming office towers stand vacant; and that bragging Texans do so well has quieted noticeably.

The swiftness and depth of the downturn has humbled this city of 3.1 million as residents grapple with a land of opportunity that has turned into a Boot Hill of unemployment and bankruptcies.

''The shocks of the last four or five years have led Houstonians to see themselves not as gods or recession-proof,'' said David Murray, a political science professor at the University of Houston who is probing the city's mood in opinion polls. ''That has pretty much been pounded out of them, and the pain will leave lasting effects.''

Tracing Houston's economic slide is not difficult. It began in 1982, when the price of Texas crude oil began to dip because of the worldwide oil glut. By late 1985, oil remained a respectable $29 a barrel but nosedived to $9 a barrel in about three months, a stretch of time that has since been dubbed ''The 90 Days That Shook Texas.''

As the oil market went under it took much of Houston with it. A vast shock wave rumbled through the community. Only now are some optimists speculating that the worst finally is behind.

''The economic hemorrhaging of Houston is over, and it appears we've bottomed out,'' said Nat Eisenberg, an economist who publishes a monthly newsletter about Houston's financial health. ''But I think it's going to be a very wide bottom.''

The bottom also seems to be very deep.

Houston's unemployment rate is 9.5 percent, compared to 6.1 percent nationally, a reflection of the 210,000 jobs lost since the downturn began. Included are oil company executives and bank presidents as well as burly oil- rig workers and busboys.

New housing starts also remain low, reaching 7,000 this year through July compared to 38,000 annually during the late 1970s.

Meanwhile, property foreclosures are averaging 2,000 a month, and bankruptcies soared to more 15,221 petitions filed in the U.S. Federal Bankruptcy Court here during 1986, a jarring contrast to the 3,196 filed in 1980. This year, 8,218 more have been filed.

Some mornings it's not unusual to see dozens of forlorn residents standing outside the doors of the downtown federal building, waiting to formally surrender their property.

''It's leveling off, but that's like saying the patient's temperature is 107 degrees,'' said bankruptcy court Clerk Jesse Clark. ''Somebody has said we're the only people in Houston anymore with long lines.''

In another arena, nine banks and one savings and loan association failed this year when oil and real estate loans went sour. The recent sale of Texas Commerce Bank, which had a long and proud local history, also stunned financial experts, including one who equated it with ''selling the Alamo.''

''That was a surprise around the country,'' Houston banking analyst Sandy Flannagan said. ''It was an indication that things might have been worse than presumed in Texas.''

If all that isn't bad enough, even the Houston Oilers of the National Football League have threatened to leave town unless a financially strapped city hall coughs up enough money to renovate the 22-year-old Astrodome.

Although many of those caught in Houston's economic vise grip have loaded their cars and moved on, thousands have stayed, if only because they are too broke to leave.

Those so-called ''new poor'' still are flooding government programs and social agencies, looking for help. One telephone hotline received more than 13,000 calls last year from people seeking information about a job, a hot meal and a place to spend the night.

''A lot of my clients had high-paying jobs and now have no jobs or jobs that can't make ends meet,'' said Esmerelda Cervantes, a social worker for Catholic Social Services. ''A lot of them had been working with their companies 10 or 15 years and can't find any other jobs.

''Before, anyone could get a job,'' she said. ''Now it's hard to just get a job as a store clerk.''

However, Houston is trying its best to fight back.

Three years ago, the city formed an economic development commission geared toward luring new industry and diversifying its oil-dependent economy.

The strategy involves using two key city assets -- Johnson Space Center and the vast Texas Medical Center complex -- as magnets to attract high- technology businesses in aerospace and medicine.

There have been some fledgling signs of success, including the recently announced move by Grumman Aerospace of 4,000 workers from its Long Island, N.Y., plant.

The medical complex, known worldwide for its cancer and heart research, also has begun paying early dividends.

''The medical-services sector has shown considerably more rapid growth than other jobs in general,'' said C. A. Kasdorf, research manager for the Houston Chamber of Commerce.

The availability of cheap and plentiful office space, plus a large labor pool, also recently have led to a surprising growth in the number of new small businesses.

Ironically, the downturn also lessened traffic on the city's notoriously jammed freeways and is allowing officials to catch up on much-needed road construction projects.

Yet even those involved in the diversification effort admit that it could take two decades before enough industries plant their roots and help wean the city off its oil dependency.

Until then, many Houstonians say they will hang tough in the belief that their city eventually will rebound and provide the opportunities that drew them to it in the first place.

''I get a very strong feeling that this is a learning experience for Houston, that it's going to help in the long run,'' said Charles Garza, president of T.P. Realty Group. A transplant from nearby San Antonio, he said, ''People came to Houston with a positive attitude, and I think we'll pull ourselves out of it.''

SOURCE: Orlando Sentinel, (1990). Oil Busts Houston To 'Loan Scar' State City Seeks Industrial Diversity For Climb Back Into The Saddle. [online] Available at: http://articles.orlandosentinel.com/1987-08-02/news/0180430050_1_houston-crude-oil-began-oil-market [Accessed 14 Jan. 2015].

@John T.  

That is depressing :-(

Three people of my 17 member team were laid off on Monday. I heard as many as one hundred were throughout the building.

I am a oil/gas investor.  

I can tell you that the energy boom has attracted a lot of small operations that not only chasing some great returns at $100 a barrel, but there is also an outdated tax incentive that is incredibly attractive.   Add in low interest rates and there was a bubble building in the market.   

With the new fracking and geological technology getting oil out of the ground is easier and quicker then ever.  The federal Government allows you to write off up to 80% of your investment in the first year.  This was to incentives oil drilling when it was much harder to get it out of the ground.  Now it is just icing on the cake.   Imagine getting 25% of your invest back the first in the form of lower taxes.   At $85 a barrel I was making 15% return plus a one time tax bonus.  Now at $50 a barrel I will make maybe 8% this year(still not bad).  But you can see why people at $100/bbl would be using the low interest rates to leverage up their earnings.  That is when this gets scary, because much like the housing/credit bubble, no one ever thought about prices dropping.    Some investors that took out debt to pay for their investment will be losing money or busting and drilling companies that did the same will be hurting as well.    

Hopefully the price drop wont destroy the US drilling boom (and towns around them), but just bring a little rational thinking to it.  

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