oil pipeline

IEA Projects Global Oil Demand to Increase by 1.4 MB/Day for 2019

The International Energy Agency (IEA) announced last week that they expect global oil demand will rise by 1.4 million barrels per day in 2019.  Global oil demand Q4 2018 rose by 1.4 mb/d year-on-year setting up 2019 for continued global rise in demand. Most of the expected rise in 2019 demand will be from the United States, China and India which together account for 1.19 mb/d of the 1.4 mb/d 2019 forecast rise.

Global supply declined in January 2019 by 1.4 mb/d partially due to Venezuela supply cuts and sanctions. World wide oil prices rose in January 2019 with prices expected to continue to rise as the northern hemisphere moves into the high demand season the spring and summer.




Crude oil quality is another issue affecting the markets, particularly those with the supply of heavy , sour oil, which is used for diluents and blending. Venezuela typically produces heavy oil and global prices are expected to witness further rise while heavy oil supply declines. At the moment, no indication the Saudi’s will raise production to meet this shortfall. Overall, demand will remain firm for 2019 with US and it’s producers leading the way to meet this continued rise in global demand.

$100 bills

Oil and Gas Direct Participation Partnerships Considered Best Investment with Huge Tax Deductions

Investors’ participation in oil and gas partnerships has reached a multi-year high in 2018 primarily due to a sustained rise in prices, but also due to capitalizing on large deductions in the year of the investment. Considered one of the top tax-advantaged investments, oil and gas partnerships not only offer large deductions but also provide the opportunity to receive tax-advantaged investment income.
However, the investment has to be made by December 31st for the investor to receive the tax benefit in the year of investment. The investor should consult their tax advisor to determine their tax liability for the current year and the characterization of the income that caused the liability: passive or non-passive income. Investors should consider their risk tolerance for such a tax-advantaged and illiquid investments though with deductions up to 100% of their investment, investors can easily offset the risk thru tax savings.
Lawmakers in our effort to achieve energy independence added to the Internal Revenue Code incentives to make drilling for oil and gas a very favorable taxable event with such an investment very tax-favored – intangible drilling costs, a functional allocation exception to the passive loss rules, alternative minimum tax, and the depletion allowance leading the way.
Intangible Drilling Cost
When wells are drilled, the costs associated with the drilling are divided into two types: tangible and intangible. Tangible costs are defined as a salvageable part of the drilling costs and are depreciated over seven years. Intangible costs are the remainder of the costs incurred to drill and complete a well. Such costs include, but are not limited to: labor, chemicals, grease, fuel, supplies, and other necessary costs for drilling a well and preparing it for production. Based upon the drilling program, the intangible drilling cost may range from 70-85% of the total cost to drill and complete a well.
Functional  Allocation
The amount of tangible and intangible drilling costs allocated to investors is based upon each drilling program. In some programs, the investor may receive 100% of the intangible drilling costs and no tangible costs. In other programs, the investor may receive 80-90% of the IDC’s and an allocation of the tangible drilling costs. The drilling programs do this based upon partnership accounting that allows a disproportionate allocation of revenue and expenses between partners. The Internal Revenue Code requires the allocation to withstand an economic viability test that requires a value to be traded for equal value.
Deductibility of Intangible Drilling Cost
When the investor decides which drilling program to invest in, he receives an allocation of IDC’s – for example 80, 90, or 100%. At this point the investor has options as to when to deduct the IDC’s. An investor may deduct 100% of the allocated IDC’s in the year of investment. Or, the investor may choose to amortize the deduction over 60 months, or may elect to deduct part of the IDC’s in the year of investment and capitalize and deduct the remaining IDC’s over a 60 month period. As you can see, there is great flexibility for the investor. The drilling partner’s obligation is to start, or spud, all the wells within 90 days following the end of the year of investment. This makes the IDC’s deductible in the year of investment. At this stage we have touched on intangible drilling costs, functional allocation, and timing of the deduction.
A quick example may help: cost to drill and complete a well, $1,000,000. Amount of cost that are intangible: 85%. Total intangible drilling cost: $850,000. IDC’s allocated to investors: 100%. Total IDC’s allocated to investors: $850,000.
Exception to Passive Loss Rules 
An investment in a drilling partnership would typically be in the form of a limited partnership. This would be considered passive activity in that the investor does not materially participate in the operations in a substantial manner. Accordingly, this investment would only be deductible against passive income. However, there is a major exception to the passive loss rules. By holding an oil and gas working interest in an entity that does not limit liability (general partner) during the drilling and completion phases, the investor may take the IDC deduction against non-passive income (earned or portfolio income). This exception to the passive law rules opens up huge opportunities to reduce non-passive taxable income. In most programs investors who elect to be a general partner are converted to a limited partner when all the wells have been completed, as determined by being placed into production. However, if the investor has passive income they can elect limited partner status and receive the benefit of the IDC deduction against their passive income. Hence, you can have your cake and eat it, too!
Alternative Minimum Tax
One of the major questions I receive is how AMT figures into the IDC deduction. By regulation, IDC deductions are not tax-preference items. However, if an investor reduces Alternative Minimum Taxable Income (AMTI) by more than 40%, AMT will be triggered. If the investor elects to amortize their IDC deduction over 5 years, none of this will be considered excess IDC’s. When an investment is made in a drilling partnership the investor must monitor his AMTI. The 2018 Tax Cuts and Jobs Act did make some changes with the AMT exemption and threshold amounts.
Depletion Amounts 
When the wells the investor owns begin profitably producing, the investor will receive income from the wells. This income will be partially sheltered with a depletion allowance. The current depletion percentage is 15%. Accordingly, for each $1,000 an investor receives, $150 would be tax-free.
Invest in Oil and Gas Partnerships
As you can see, an investment in an oil and gas drilling partnership is a very tax-advantaged investment. Additionally, with global production nearing peak levels while global demand continues to rise, its a mathematical certainty that unless production output dramatically increases, the world will soon witness a global oil shortfall with prices reaching levels not seen since 2008 when oil reached $147 per barrel. The tax benefits generated by a direct participation in oil and/or natural gas are substantial. The immediate deduction of the intangible drilling costs or IDCs is very significant, and by taking this up front deduction, the risk capital is effectively subsidized by the government by reducing the participant’s federal, and possibly state income tax. Each individual participant of course, should consult with their tax advisor.

DISCLAIMER: Viper Capital Partners LLC, is not a Tax Advisor, CPA, or Tax Attorney and is not certified to give any tax advice. The information on this page is for educational purposes only. Individuals should consult their own tax professional for advice. Viper Capital Partners LLC offers no professional tax advice.

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desk filled with laptop and charts

Crude Oil Setting Up for Dramatic Upside Breakout

Crude oil setting up for upside breakout of huge multi-year consolidation pattern which dates back to 2003. Similar but smaller patterns occurred in 2011 which resulted in the 2014 downside break and subsequent decline in prices of $79, reaching a low of $25.75 in 2016 and again an even smaller pattern in 2017 which witnessed the 2018 upside break and $36 rally to 77.06, just a few cents above the 76.63 target I called for in my 2018 forecast.

These patterns always occur after a trending market and always proceed a breakout.

There is a very reliable and direct correlation between the duration of the consolidation pattern and the length and momentum of the subsequent breakout.

For example, the 2011-2014 pattern resulted in a breakout price move of $79, whereas the 2016-2017 much smaller pattern resulted in a modest $36 price move.

I have been trading these patterns with 100% accuracy for almost 30 years and formulated very specific mathematical calculations and rules to accurately forecast the timing of these breakouts along with their all-important price targets. For example, Spot Gold and the British Pound were both in a similar patterns back in 2011 and my analysis at that time  https://www.fxlivetrader.com/forecast-for-2011-eurusd-gbpusd-spot-gold/  accurately predicted gold to rally from $680 to $1,904. The actual high was $1,920, just $16 higher than the price target I predicted months earlier.

Crude oil is in the final stages of a 20-year developing pattern that will witness an explosive and dramatic price move supported by high volume futures trading and global oil demand. And unlike the dramatic rise and fall in oil prices witnessed in 2008, this go around will witness a steady and sustained rise in prices fueled by emerging market demand to grow their rapidly developing and advancing economies. As a result of this unprecedented demand, oil producers worldwide will not be able to keep up with demand as recovery, refinery and delivery capabilities will all reach maximum utilization. Oil prices will steadily rise as oil will remain the dominant energy source well into 2050.

As to price targets, please take a minute to watch my short 15-minute video at the link below.

Copy and paste link to your browser to view.

Crude Oil 2019 Outlook


Crude Oil Set to Breakout of 20 Year Pattern



oil investors' meeting

IEA Warns Producers Now Is The Time To Invest

Tuesday, November 13, 2018-The International Energy Agency (IEA) today warned that global oil shortage in the 2020’s decade is a very high probability and now is the time for producers to invest.

IEA forecast calls for an increase in daily global demand by 7.5 million barrels per day between 2017 and 2025.

IEA stated ” without any future capital investment into existing fields or new fields, current sources of supply (including conventional crude oil, natural gas liquids, tight oil, extra-heavy oil and bitumen, processing gains etc.) would drop by over 45 mb/d over this period.” In other words, existing fields will witness a  “natural decline” in supply as this supply decline would create a shortage at current demand levels. Added to this scenario, the dramatic shift in increasing demand by developing economies,( 80% of the global economies are developing), and the shortfall in supply would be even greater. IEA further states ” doubling of current capital investment in new fields is now required to cure this forecast in global oil shortage.”

Regions at greatest risk of shortage would be the Asia-Pacific region with supply shortages already beginning to surface. See Chart below.
bar graph

The United States is the world’s leading oil and natural gas producer followed by Saudi Arabia and Russia. The United Sates has averaged 10.7 million barrels of oil per day in 2018 with peak production at 11.8 mb/d. Failure to meet this global natural decline shortfall would mean that some of the supply-demand “gap” would remain and another source would need to step into the breach. The most likely candidate to do so would likely be for US operators to increase tight liquids production at a much faster rate than is projected. In this case, US tight liquids production would need to grow by an additional 6 mb/d between now and 2025. Total growth in US tight liquids between 2018 and 2025 would therefore be around 11 mb/d: roughly equivalent to adding another “Russia” to the global oil balance over the next 7 years. Sounds impossible and why IEA is warning producers and their partners that NOW is the time to invest.

aerial view of the world

Oil Forecast To Remain The Leading Provider of Energy Into 2050

West Texas Intermediate (WTI) reached a multi year high earlier this month at $77.06, not since Oct 2004 has WTI achieved the years high so late in the year.  In Oct 2004, WTI was trading at $56.43 and was in the beginning phase of a multi year rise which eventually reached $147 on July 15, 2008.  Similar to 2004, WTI is in a multiyear rise supported by global industrial rebound, however, added to this phase of rising prices is technology driven emerging market growth and demand unlike anything ever witnessed in human history. Economic growth and development outside the United States from emerging and developing economies will pressure oil prices and resources beyond supply capabilities.

Oil will continue to provide the bulk of the world’s energy needs in 2040 and the Untied States along with it’s oil producers and partners will lead the way in meeting this demand.

Developing economies represent 80% of the world’s population and over the next 25 years these emerging and developing economies will account for 94% of the world’s population growth. Current global population is approximately 7.3 billion with global population forecast to reach 9.2 billion by 2040.  Yet, 1.7 billion of that growth will be from developing economies as these economies will demand energy to support their growth and development.

Global GDP currently stands at 87 trillion USD with the Untied States accounting for 25% or 21 trillion USD. However, China GDP for 2018 is forecast at 14.5 trillion and will grow to 21 trillion by 2023 and forecast to overtake the Untied Sates by 2025. Global GDP is expected to more than double by 2040 with 90% of this growth from developing countries. And what is really scary, its not only China that will lead the way but other economies such as India, Indonesia and surprisingly, Africa.

All these countries will require and demand automobiles and the necessary fuel to run them.  Currently the Untied States as 270 million passenger vehicles while China at present has 116 million passenger vehicles. By 2040, the United States is forecast to have 320 million passenger vehicles while China is forecast to have 450 million passenger vehicles. By 2040, the largest sector consuming energy will be the transportation sector. Furthermore, by 2040, less than 20% of passenger vehicles will be electric vehicles.  With global oil demand remaining firm into the decades ahead, oil prices are guaranteed to continue to rise well into the 2050’s.  Oil will continue to provide the bulk of the world’s energy needs in 2040 and the United States along with it’s oil producers and partners will lead the way in meeting this demand.