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Tax Benefits for Oil and Gas Investors

There are several major tax benefits available to oil and gas investors which makes this investment unique above all others. U.S. tax codes favor investment in energy resources and oil and gas leads the way with a catalogue of incentives for investors as well as oil producers. Below are just a few of the key incentives.

Primary Tax Benefits of Investing In Oil

  1. Intangible drilling cost:
    These include everything except the actual drilling equipment. Labor, chemicals, mud, grease, paraffin, and other miscellaneous items necessary for drilling.  These expenses generally constitute 65-80% of the total cost of drilling a well and are 100% tax deductible in the year incurred. So, a million dollar investment could deduct approximately $800,000 right away, which would generate a net tax savings of approximately $280,000 in year one (assuming a 35% tax bracket), reducing the net investment by 28%. Furthermore, it doesn’t matter whether the well actually produces or even strikes oil. As long as it starts to operate by March 31 of the following year, the deductions will be allowed.
  2. Tangible drilling costs: Tangible cost are those directly related to the cost of the drilling equipment. These expenses are also 100% deductible, but must be depreciated over seven years. Therefore, in the example above, the remaining $200,000 could be written off according to a seven-year schedule.
  3. Active vs. Passive Income: The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income such as wages, interest and capital gains.
  4. Small Producer Tax Exemptions: This is perhaps the most enticing tax break for small producers and investors. This incentive, which is commonly known as the “depletion allowance,” excludes from taxation 15% of all gross income from oil and gas wells. This special advantage is limited solely to small companies and investors. Any company that produces or refines more than 50,000 barrels per day is ineligible. Entities that own more than 1,000 barrels of oil per day, or 6 million cubic feet of gas per day, are excluded as well.
  5. Lease Costs: These include the purchase of lease and mineral rights, lease operating cost and all administrative, legal and accounting expenses. These expenses must be capitalized and deducted over the life of the lease via the depletion allowance.

 

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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WTI Moves Above 200 Month Moving Average, First Time Since Feb 2009

Oil prices have remained firm for all of 2018 as seasonal increasing demand will continue to witness higher prices into late summer 2018.  However, long-term global demand, especially that from developing emerging economies, will continue to pressure global supplies and keep oil prices firm in the years ahead. Emerging economies are witnessing annual growth rates from 6-16% annually and expected to sustain this growth rate through 2030. Global oil production is at 93% capacity utilization, so, unless global production capabilities improve at a much faster rate, then from a mathematical perspective it is a certainty that demand will exceed supply by 2025 and certainly within the next 10 years.

From a technical perspective, West Texas Intermediate (WTI) is finding bids above the 200-month moving average currently at 65.61. Since moving above this key long-term indicator a few days ago, there have been 7 days where prices have opened above and closed higher followed by a weekly open and higher close above 65.61. The next pivotal confirmation to support further rise will be a monthly open above 65.61 and higher close.  It appears May 2018 could meet these criteria as the last time such a trifecta occurred was Feb 2009 when prices sustained above the 200 month moving average and eventually rallied from 33.55 to 114.79 by May 2012.

However, there is one component missing during 2009-2012 multi-year period of sustained rise in prices which is present at this time, and that is the unprecedented rapid growth and subsequent demand from emerging economies.

Global daily oil consumption is now approaching 100 million barrels a day, which is just about the same as total global daily production, so, the risk for global shortfall in supply is very high. Adding the further potential for global oil shortage would be any geopolitical event or natural disaster which could easily see prices spike to $100 a barrel in a few days.

For additional information, use the following video link to view additional details.

http://fxlivetrader.omnovia.com/archives/354998

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Oil’s Technical Breakout

West Texas Intermediate (WTI) made an upside technical breakout last week of the 2018 high ($66.63) as a higher close this week will confirm further price rise is underway initially targeting 68.85, 69.91, 70.92, 71.93 and eventually 76.43 in the weeks ahead. A series of higher daily lows beginning with the Feb 2018 low of 58.05 confirmed rising demand as global markets begin to move into the seasonal high demand period. However, unlike recent years when US inventories were at surplus when season high demand period arrived, this year US inventories are in a deficit year to date and over 50 million barrels in deficit since one year ago. All this sets the stage for what could be a very rapid rise in oil prices in the months ahead as the global industrial rebound continues and fueled by unprecedented demand from emerging markets.

The largest 7 emerging market’s, E7,  (China, Russia, India, Indonesia, Brazil, Mexico and Turkey) gross domestic product (GDP) was 1/2 that of the largest  7 advanced economies, G7, (United States, Japan, Canada, UK, Germany, France and Italy) in 1995. By 2015, the E7 economies annual GDP was equal that of the G7, and by 2035 will be double that of G7.  It is this dramatic growth of E7 and other emerging economies that will demand more and more of the world’s energy and setting up what could be a global energy crisis beginning as soon as 2025. However, the United States will soon become the worlds largest producer of oil and it will be the United Sates and Saudi Arabia who will be providing the oil and energy resources to the rapidly growing emerging markets.

Video Link to Oil Technical Breakout

http://fxlivetrader.omnovia.com/archives/354162

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Trade War Concerns Fuel Volatile Markets

US stocks, commodities and US Dollar witnessed volatile swings this week fueled by trade war concerns after President Trump’s continued rhetoric about potentially adding an additional $100M in Chinese tariffs. This latest round and potential escalation in the back-and-fourth comments between the two nations officials steadied sentiment early in the week, but as the week progressed, markets reacted less and less to walk backs from the President’s advisors. Friday’s March employment report did little to change the momentum after the payrolls number came in well below expectations, though many analyst cited poor weather largely responsible for the weak employment numbers. The selling intensified in the afternoon and into Friday’s close after Fed Chairman Powell spoke in Chicago pushing the S&P towards its first weekly close below the 200-day since 2016 before bouncing back into the bell.Volumes remained relatively muted considering the outsized move by many indices with the buyback quiet period remaining in effect ahead earnings season. Treasuries sold off and the Dollar firmed early on before risk off flows pushed yields lower. For the week the S&P fell 1.4%, the Dow dropped 0.7% and the NASDAQ lost 2%.

West Texas Intermediate (WTI) also had a volatile week closing lower at 61.90 despite crude oil inventories declining 4.6 million barrels for the week as trade war concerns could possibly threaten the global industrial rebound.

Corporate news was relatively light this week as markets awaited the new earnings season. All eyes were on Amazon as President Trump dispatched a slew of negative tweets and comments about the company and its CEO Bezos, though White House advisers insist no action against Amazon is forthcoming. News resurfaced that MGM may consider acquiring Wynn if the price were right, as Wynn reels from scandals involving its now-resigned namesake CEO. Humana rose on a report of Walmart’s interest in acquiring the health insurer. The Big Three automakers lifted after posting big beats in their March sales figure. Tesla deliveries impressed investors despite not hitting Model 3 output expectations yet, though the company continues to expect the rate to increase “rapidly” through Q2. Viacom shares were weighed on by reports that CBS submitted a bid below their current market value.

Next week’s focus will be March US Consumer Price Index (CPI) and Core CPI as any higher than expected number will certainly witness raise concerns that the Federal Reserve will raise rates in 2018 beyond the expected 3 rate hikes.

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Oil Bid Higher Now Targets $76.47

http://fxlivetrader.omnovia.com/archives/352270

Oil prices moved sharply higher during the far east market open on Monday, initially reaching 66.52, just shy of the 2018 high of 66.63. Prices have recently moved higher partially due to two reasons today, first, China’s Shanghai Yuan-denominated oil futures first day of trading caused prices to bid higher as this newly available market will have a significant impact on the US dollar dominated oil markets. I will have a detailed report on that in a few days.  Secondly, the other key event today that drove prices higher were the Iranian backed rebels in Yemen launched missiles at Saudi Arabia capital of Riyadh in their efforts to cause havoc and disruption of the world’s leading producer of oil economy.

However, there are several events currently unfolding which will soon see oil prices test $76.47.

  • Demand: Global demand lead by E7 economies demand continues to outpace world supply. The unprecedented oil demand from the rapidly developing emerging economies and the 7 largest emerging markets (E7 China, India, Brazil, Mexico, Russia, Turkey) will sustain oil prices for the next 3 decades as these E7 economies annual gross domestic product (GDP) will witness annual growth rates between 4 1/2%-12% well into the mid 21st century.
  • Geopolitics: Continued Venezuela sanctions and political turmoil will continue to impact Venezuela production cuts and reduce world supply by 1.5 million barrels/day.Events out of the middle east, China Sea, N Korea, Malaysia, Eastern Mediterranean,m Libya, Nigeria continue to impact oil price volatility and potentially affect global supply.
  • Speculation: Short-term, traders will continue to bid prices higher on the futures market as northern hemisphere demand moves into the peak season while long-term speculators will seek prices dips and breakouts to position for long-term global demand.

Oil is a short-term buy for $76.47 target while bids ahead of $51.43 will support medium-term target of $88.39 in the weeks ahead.  Look for daily prices to open above 67.84 and close higher followed by weekly open and higher close above 67.84 to confirm further price rise initially targeting 68.65 followed by 69.91, 70.92 ,  71.93 and 76.47  in the weeks ahead.