[Breaking News] What a Mess January 10, 2016

Rachel Gearhart: Hello, and welcome to a very special edition of Market Wake-Up Call. I'm Managing Editor Rachel Gearhart. Usually our format is with Host Steve McDonald, but today we woke up and China's stock market was imploding once again. So, the topic today: the Chinese and oil prices and where we're going from here. What a mess. We decided we needed to give our energy guru, Dave Fessler, a call, to tell us how concerned we really should be over this. Dave, welcome. I'm glad I'm not on the other end of this interview today. Dave Fessler: Hi, Rachel. I'm glad to be here. So I suppose you want to talk about oil. Rachel Gearhart: Yeah, I think it's going to be a hot topic this year. So, so far, China has suspended its trading twice this week. Oil prices are down in the low $30s. Should we expect this trend to continue through 2016? Dave Fessler:  Prices are reacting to what we've seen in China over the past couple of days. The oil pricing story is really more about supply and demand and Saudi Arabia. Unfortunately, what started out as a rift just between the Saudis and the Iranians has now turned into a much bigger regional snub of the Iranians by Saudi Arabia, Bahrain, Sudan and the United Arab Emirates. And once Saudi Arabia beheaded a prominent Shiite Muslim cleric, it became a Shiite-Sunni conflict. And oil is caught in the middle, and crude prices have just have been in a downdraft. Today oil's trading at $32.34 a barrel the last time I looked, and that's the lowest price since 2003. And interestingly, it's the average price that oil has traded at for the last 100 years. Rachel Gearhart: It's hard to believe that it's been that low. All right, so the EIA is forecasting oil in the mid-$50s for 2016. Goldman Sachs is saying the $20s. It's a pretty big range. Where do you see oil ending up this year? Dave Fessler: Well, Rachel, I think prices could even exceed EIA estimates, and you know me, I'm a bit of a contrarian. And I think they could end up at $75 a barrel. Now, in the short term, I think we'll see the death of OPEC in the not-too-distant future. The tension between the Saudis and Iranians makes any deal between the two of them on production cuts just very unlikely. The Saudis themselves are going to have to cut back on production. They're currently on this unsustainable financial path, borrowing more and more money every year because they just can't make enough from the sale of oil. They're now selling bonds for the first time since 2007. And as you can imagine, the drop in revenue from oil is making their budget deficit larger every year. For 2015, the kingdom's budget deficit was $107 billion, and that was with oil accounting for 81% of its revenues. Now, just imagine what it's going to be like this year with oil at current levels. Sooner or later, the Saudis are just going to have to cave in and cut production. Let's step back and look at the global picture for oil. Right now, we have a 2.2 million barrel per day oversupply, okay, and that's contributing to the low prices. Iran is likely going to add another 600,000 barrels a day to that later this year when sanctions against it are finally lifted. That means we'll have an oversupply of 2.8 million barrels a day. However, there are several other important components to the oil equation. The first is the increase in demand. The International Energy Agency predicts 2016 global demand for crude is going to increase by 1.2 million barrels a day. The second part of the equation is well depletion. Global depletion rates for all oil wells average about 5% to 7% per year. Global production is currently about 95 million barrels per day. The last part of the equation is the elimination of U.S. stripper wells. Rachel Gearhart: Now, can you explain really quickly what stripper wells are for our Members? David Fessler: Sure. Stripper wells are wells that produce fewer than 15 barrels of oil per day. That's not a lot of oil. However, there are thousands of these little wells out there all over the U.S. But together, they equal about 750,000 barrels of oil production per day. It's not an insignificant amount. Now, they need oil priced at $50 a barrel and above to operate, and that's basically the electricity to run the pumps and so forth. So I expect all of them to be shut down in the very near future with oil prices where they are. Now, all of a sudden, we have demand outstripping supply. That's going to send oil prices much higher. I think that could happen by the end of this year or early next. Rachel Gearhart: All right, $75 oil. I like it. I'm sure a lot of oil producers will like that as well. Now, I know you'll be talking about this more at the Investment U Conference in April, but are energy and commodity stocks the best buy since 2009? Dave Fessler: Well, clearly cheap oil prices are going to mean cheap oil - cheap gas and diesel for a while - and gas-guzzling SUVs are, of course, making a comeback. And it's hard to get Americans interested in alternative fuels when all they see are cheap gas prices. What will get them interested are electric vehicles that are cost-competitive, even with gas at $1.50 to $2 a gallon. That's going to happen in the next couple of years due to the continual drop in the cost of batteries. Congress recently extended the 30% solar investment tax credit through 2019. That's going to make solar and energy storage an attractive pair for the foreseeable future. My prediction is that cheap battery storage, combined with electric vehicles and solar power, are going to completely disrupt the energy markets for both transportation and electric power generation over the next few years. Then you can wave goodbye to OPEC. Rachel Gearhart: Well, I know that your colleague Sean Brodrick has been talking about the collapse of OPEC, and I know that you have been talking a lot in Energy & Resources Digest and in Oxford Resource Explorer about electric vehicles and battery storage. Thanks so much for being with us today, Dave. Dave Fessler: My pleasure, Rachel. It was nice talking with you. Rachel Gearhart: That's all from us here at Market Wake-Up Call. Next week, you'll hear from Steve McDonald and Alex Green. Take care and have a lovely weekend. [End of Audio]