Guys, you are really missing the point. Oil prices are falling because that’s the way OPEC takes back market share and dominance in the market. Their break even points are signficantly lower (especually Gulf countries) than the USA. Honestly, prices at around this level will result in defaults for some operators if it is sustained. OPEC’s refusal to cut production is a giant middle finger to shale oil. And some people believe that the USA is encouraging this via back channels to put pressure on Russia and ISIS. Can’t say I wouldn’t belieeve this.
Iran and Venezuela may also default at these levels. Or have massive civil unrest. Its silly to think OPEC is a bottom pit of wealth. The Saudis are running deficits at these levels. Russia/Venezuela/Iran will be the first to crack and really demand higher prices. Hell, would I be shocked if Putin stokes a war in the Middle East over this? Hell no.
This. Either the American economy benefits from lower oil prices or we end up going to war and crushing some of these one-product terrorist states and stealing their production ala Iraq, but either way it seems like a long-term win for the US. The outcome here is predictable – if your entire country was built on oil wealth, would you seriously allow your production to get disintermediated by your largest customer without a fight? The question answers itself. The US has the oil trump card now that shale is viable at certain prices – the technology will improve over time and the cost curve will come down. We are sitting on an ocean of oil and the Arabs better start marking time.
^ That ocean isn’t coming out of the ground at $60. Oil can’t permanently trade below its marginal cost of adding new production. This is why I can sleep at night with a heavily oil weighted portfolio. OPEC can pressure America a bit, but eventually production will wane and costs will rise and market will find equilibrium again. At least that’s my investment basis. If oil falls much more or is sustained at these levels >1 year, I will have made a big mistake.
Right but it’s a win either way. We can import oil at relatively cheap prices, or we can make it if prices go up, albeit with a pretty big spread between the two (for now). However, shale technology will only improve and the cost curve will come down over time. OPEC can’t really pressure us that much as a country as shale puts a cap on their earnings and market share, which is the reason for their tantrum. Yes, they can pressure individual companies, but not the country.
^ agreed. there will be little room for Venezuelan heavy crude when Canada ramps up and the U.S. continues to grow production. there is nothing Venezuela can do to prevent this. they’re also in a catch-22 whereby very low oil prices are bad for them in the short-term and good for them in the long-term (could go bankrupt int he ST but Canadian heavy oil and other high cost oil get priced out) and high oil prices are good for them in the short-term but bad for them in the long-term (as Canadian heavy oil ramps up faster than expected, pushing Venezuelan crude out of the market and forces it to go thousands of miles to find a buyer, potentially pricing it out of the market). not a good century to be Venezuelan!
lol it already sucked to be Venezuelan on account of the fact that it’s not a real country. But to your broader point, I am almost giddy at the prospect that a bunch of these crappy terrorist state countries with one export are going to get hosed over the next several decades. God bless America. Canada’s pretty cool too.
Kuwait, Saudi and low cost producers will be ok. North Africa, Russia and other higher cost producers are screwed in the near term.
Some of the break even prices posted by BipolarBB are way off. Saudi is $106? Don’t think so. Closer to $90, with a good amount of wiggle room in the budget.
^ Those breaks quoted were for government budgets, not marginal production cost.
Does anyone else think the collapse in oil prices is collusion between the US and their allies in the middle east to give Putin the middle finger?
^ No. Lots of Americans have said this. I don’t believe it. I don’t think OPEC, a cartel made up of many countries whose citizens hate infidel Americans (this includes Saudi Arabia), would be to potentially harm their country’s finances to please Americans’ interests. The world doesn’t revolve around the United States (as an American, I think we are sometimes prone to believing it does). I believe the absence of a production cut last week is due to a lack of trust amongst cartel members to actually live up to production cut agreements. They are fighting for market share. Simple as that. I think the cartel is weakening. I expect others to disagree with me, it’s just my opinion.
One of these days I’ll convince you Petrodollar Warfare is a very real thing. It’s happening right before your eyes. You really think the welfare state that is Saudi Arabia wants to see oil in the mid $60s? They’re doing us a solid for birthing all those terrorists.
Suck it Putin (and ISIS to a lesser extent).
Edit for clarity: ISIS is worse than Putin, obviously. Just that low oil prices are directed moreso towards Putin than ISIS.
I agree with Bromion complete. Here is the cost of oil production everywhere.
http://www.businessinsider.com/crude-oil-cost-of-production-2014-5
This low oil price is good for the US since we consume most of it. Some opec members can try to run US shale to the ground, but if we go down, other opec producers go down with us. the best thing about this is if the weaker us shale plays go down, guaranteed we will see M&A itera save the day and keep them afloat.
Also Oil gonnna bounce up within 3 to 12 months. We juss moved 2 std below the 200 day moving average, this only happened 4 times in 20 years and recovered to the 200 day within that time frame. 80 bucks minimum. if i had to guess.
How does market share help the major producers? Are you saying that the big dogs are squeezing the little guys to reduce the amount of current players in the market so they can control the future price?
To me, a couple of traders at the fed selling into the future market to crush the commodity producing contries (and to offset cost-push inflation?) is an easier premise to fit into today’s market controlled economy.
It’s P*Q. More quantity, the more you produce and the more market share you get. Cartels hold back production (idle capacity) to support pricing. It’s a price-over-volume strategy. The trouble starts when a group says they’ll hold back production to keep prices high, but one of the cartel members cheats on the agreement and produces more of the commodity to gain market share…they’ll get a higher price b/c their cartel members are holding back production, and the cheater will sell more of the commodity. It’s the best of both worlds! High price, and more quantity.
If you’re Saudi Arabia and you suspect cartel members will cheat on an agreement to cut back production, why the hell would you cut back production yourself? Others will benefit (obtaining higher price and selling more) at your detriment. If you think cartel members will cheat on the agreement, you won’t cut back production. I think this is what is going on. The Saudi oil minister was quite pissed off after the last meeting – he told a British CNBC reporter to “get the hell out of here” and strangely blew on the microphone to shoo him away – I don’t think he’s doing what he wants to and OPEC is in trouble. Research the potash (also a cartel commodity) dispute between Belaruskali (Belarus) and Uralkali (Russia) last year – the freakin CEO of the major Russian company was thrown into jail in Belarus as a result of all this…it’s downright crazy. These cartels can get messy when they don’t trust each other.
I also don’t think this OPEC action was made to screw North American producers over. The moment WTI gets to $80/bbl, U.S. shale producers can start fracking again quickly (assuming they are cutting back now) and earn good returns on even marginal acreage positions in the Bakken, Eagle Ford, Permian, etc. It really doesn’t take much time to start production on these wells (only a few months), unlike a major deepwater project that’ll take 3-4 years. I don’t think OPEC can drive U.S. producers out of the market forever… they want higher prices and when those higher prices start, U.S. production will get booming again quickly (assuming it’ll start slowing at these lower prices). Tight oil (U.S. shale) is a very short cycle investment…it’s quick to get in and the payback is quick (1-2 years).
I know, and they are much higher than those used by the IMF and most major international/macro research houses. The article is probably biased high to make its point.
Edit: just realized they are using the 2015 budget, which is obviously flexible. Historical breakevens are lower, and the gulf states like Saudi, Qatar and Kuwait are relatively good credits.
Yea, and like I’ve said elsewhere – countries like Saudi, despite being welfare states, have extremely low Debt/GDP. They can run deficits in the short term to protect their long-term influence on the market if that is what their strategy is. Other countries, not as easily. But countries aren’t companies, which is a big difference. The producers in USA can’t just run deficits, the people who provide financing wouldn’t allow it for very long.
^I’d rather have to deal with pissed off shareholders than a pissed off populace. Fracking shale costs about $40 a barrel, and that’s with a 10% gross margin for the drillers. We’ve got a ways to go before US companies start shuttering production. Meanwhile, welfare benefits in Saudi Arabia are tied to oil profits.
Personally I don’t think oil is going to stay below $80 long enough for either oil companies or welfare states to get hurt too bad. After all, unrest in Saudi Arabia is just about the last thing we want right now.
I think people are going to be really surprised how quickly E&P companies curtail production at these lower price levels. Saudi welfare benefits are tied to a combination of oil profits and the countries ability to borrow. Following 2011, Saudi took steps to preemptively spend massively on domestic projects to head off becoming an Arab Spring casualty. Their currently inflated budget reflects that. They are in good shape from a domestic support, foreign support and fiscal perspective. Their stock market is slated to open to foreign investors next year and they’ve been liberalizing trade.
Long Saudi.
My point is that the pissed off populace isn’t as immediate as default. Saudi Arabia could enter the capital markets and finance their welfare for several years.
And some breakeven is 40, but I’d say on the whole that sounds like an overly optimistic breakeven unless you have a source. I posted a Woods Mckenzie research graph that showed estimates by play and subplay, but of course there is diversity amongst companies even in the same play.
I’m bullish on energy (more natural gas than oil), but I think people are downplaying how long oil could stay supressed. Even if the shale guys keep going, that increased prodution is not going to increase the prices unless we have demand side changes. Which doesn’t seem likely in the near term.
For an example on the elasticity, check out these numbers from Texas: http://www.reuters.com/article/2014/12/02/us-usa-oil-permits-idUSKCN0JG2C120141202
Plunging oil prices sparked a drop of almost 40 percent in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.
Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October.
The pullback was a “very quick response” to U.S. crude prices, which settled on Tuesday at $66.88 CLc1, said Allen Gilmer, chief executive officer of Drilling Info.