The Sellside Chimes In On The Crude Crush: "This Will Reverberate For Years"

Tyler Durden's picture

The sell-side is worried...

SocGen's head of oil research Mike Wittner warns "this will reverberate for years"... (via Bloomberg)

OPEC decision to keep output target is "unambiguously bearish,"

 

"We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC"

 

"It's huge,” he says by phone from New York. “This is a signal that they’re throwing in the towel. The markets have changed for many years to come"

 

"The change is that it's no longer Saudi Arabia and OPEC that are going to be managing the supply side of the market. It doesn’t sound like much, but that is so fundamental, it is hard to overstate”: Wittner by phone

 

"This will reverberate for years," adding, it will "bring on lower prices and let the market do the job of throttling U.S. shale oil growth"

 

U.S. shale output unlikely to contract for 1-2 yrs amid lower prices

Goldman warns another large leg lower in Brent oil prices to near $60/bbl would not be sustainable beyond a few months (absent significant demand weakness) as it would accelerate the rebalancing of the oil market with Canadian oil sands and US shale oil projects reaching their production variable costs

The call on OPEC becomes the call on US shale

 

Today, November 27, OPEC announced that it would maintain its production target at its level of 30 million barrels per day. The organization further commented that it would aim to adhere strictly to this quota, although past quotas have only been loosely implemented. Today’s decision came in line with our expectation and our view that it is not in OPEC’s interest to balance the market on its own but that US shale oil production should contribute as well, given its scalability. Further, today’s decision comforts us in our forecast for a large market surplus in 1H15.

 

Potential for further price declines until evidence of a US production growth slowdown...

 

While we continue to believe that WTI prices in a $70-$75/bbl range are sufficient to incentivize US producers to reduce capex, today’s price sell-off creates potential for further declines in oil prices. In particular, now that OPEC is aiming to maintain production and market share, prices could trade lower until evidence of a pull-back from US E&Ps, when they announce their 2015 capex guidance in January-February (and despite our expectation for an only modest build in 4Q14 inventories). The next OPEC meeting is scheduled for June 5.

 

...although prices at current levels likely lead to a balanced market by 2H15

 

Ultimately, we expect US production growth will slow and that OPEC will implement moderate production cuts once this slowdown is apparent. Consequently, we reiterate our 2015 price forecast with Brent prices at $80-$85/bbl and WTI at $70-75/bbl. Importantly, we do not believe that it is in OPEC’s interest to push prices significantly and sustainably lower, and we forecast lower OPEC production starting from 2Q15, as the fiscal strain on non core-OPEC countries would be too large otherwise. Further, we believe another large leg lower in Brent oil prices to near $60/bbl would not be sustainable beyond a few months (absent significant demand weakness) as it would accelerate the rebalancing of the oil market with Canadian oil sands and US shale oil projects reaching their production variable costs.

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ForWhomTheTollBuilds's picture

The funniest part will be seeing the stock market go up to a new record high after a complete collapse in the "Shale Oil Miracle".

 

I went into the future and brought back a client report from Goldman Sachs for you:

 

"Frankly all that oil just created a lot of logistical problems, potential for environmental degradation and worker injury.  Now that America is free of it, the economy will expand just as it did when it was freed from the hinderance of manufacturing"

knukles's picture

You sir, are destined for Partnership at the Squid.
Bravo!

El Vaquero's picture

I agree knucks.  That was brilliant.  Simply brilliant.

knukles's picture

Best trademark that ASAP so there's recourse when the Squid lifts it.

BellyBrain's picture

Good.  Less fracking to fuck up our groundwater.

SWRichmond's picture

A massive deflationary collapse is to be expected, and i have said so here many times, just before the final collapse of the USD.

This is just another of many symptoms.

flacon's picture

...but the S&P will probably hit new all time highs as this massive deflationary collapse is happening. 

NoDebt's picture

For the other 90% of companies that are NOT in the energy business (mass consumers of energy), as well as most of us individually, it's a good thing.

I think what the shale oil "miracle" did was basically put a ceiling on oil prices for the forseeable future.  Sure, they're gonna get crushed short-term, but every time prices creep back up around $80/bbl they'll ramp up production again.  I think it's effect will be basically to flatten the high end of the price curve. 

Payne's picture

The Shale oil companies will have to declare BK, renegotiate debts wipe out shareholders and start over with a lower profitability margin.  These wells are not going to be shelved like some repo house in Orange county.

Publicus's picture

Once they go BK the cost of production goes way down. America will rise again,  this time, with Goldman Sucks as the Owner.

Incubus's picture

textbook rothschild takeover plan.

SWRichmond's picture

Yep...guess who winds up owning the oil projects, at new lower overhead?

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."   Thomas Jefferson

knukles's picture

WTF is that dingle-berry from SoGen talking about? 
OPEC has thrown in the towel and energy prices will stay low forever?

This is idiocy of the highest order.
Fuck me.  I can write tripe like this for several hundred thousand a year as well . And even talk shit in front of clients, to boot!
Guys, y'all know where ya can find me.
I can answer any questions that your clients might have.

Greenskeeper_Carl's picture

My interpretation it this- the Saudis, who have a ver low cost per barrel to get it out of the ground, will happily keep selling it sort cheap. The US encourages them to do so. This move lower in oil may hurt US shale producers as well as offshore drilling, but it is worth it to hurt countries the US sees as enemies. Mainly Russia, but it also devastates Venezuela, one of the few countries in this side of the world that doesn't tow the line type the usgov. This, coupled with collapsing demand due the our papered-over depression becoming more apparent, will drive prices even lower. Another way of looking at it is that we pick all the low hanging fruit from easy to extract Middle East countries leaving our massive shale deposits untouched for the time being. Once that oil in the Middle East is used up, we can look inwards for oil and let all the hajjis wipe each other out, since oil is the usgov's only reason for being involved there.

Winston Churchill's picture

That would be clever policy.

Not possible from the morons at Foggy Bottom, or the White Hut, so no.

Just another move backfiring on the US, IMO.

knukles's picture

Absolutely.  That idea makes all the sense in the world, but unfortunately, the pols don't think past the next campaign contribution.
Well, unless it's pedophilia.

Greenskeeper_Carl's picture

our useless pols may not think tht far in advance, but i would bet the 'deep state' types who rotate in and out of govt/fed/bank/think tank (revolving door) do. Again, putting these shale guys out of business is not a big deal, long term, if you are one of 'those' types of people. To them, the producers are completely unimportant, as are the people who foolishly invested in the shale oil ponzi scheme. They can get wiped out, put out of business, etc, if thats the price needed to try to gain the upper hand on countries or entities they see as a threat. The oil will still be there 1, 2, or 10 years from now, and the price won't stay this low forever. There will always be someone willing and able to pump it out of the ground at a later date once prices are up again, just as there will always be people with money to invest who are looking to make more money.

 

BTW, Thanks for the comment and not pointing out how riddled with spelling errors and typos my first post was. Gotta proof read more when typing on a phone.

knukles's picture

I hadn't thought of the deep state/shadow folks.
Would sound like something right smack dab in their sights.
After all, we're not the only ones who think like this and some of them folks are downright evil

Coke and Hookers's picture

I think this just demonstrates the overwhelming urgency to take out Russia. The US real economy has already suicided and snuffing out shale oil producers is like putting another bullet in a corpse: it doesn't really matter. Geopolitical goals are all important, the US simply doesn't matter compared to that.

NoDebt's picture

A quick revisit of the Fear and Greed Index (now signaling greed):

http://money.cnn.com/data/fear-and-greed/

A month ago it hit 1 (extreme fear).

 

knukles's picture

A month ago I thought I had the clap but the doctor said to just quit slapping it. 
Things change

NoDebt's picture

They do indeed change.  I think that "index" is a fantastic contrary indicator, and said as much when the Tylers first posted it up.

williambanzai7's picture

They cured Ebola didn't they?

knukles's picture

I just spit out a bite of a Talimook pepperoni sausage stick.
OMG.  Next the Boiking will get the Nobel Prize for Medicine.

PhineasGage's picture

REAL-LIFE MEETUP FOR ZEROHEDGE GUYS IN THE BAKKEN... I've already sent contact requests to two commenters from a previous article today on the shale boom. Send a contact request to me and we'll get this shit together. 

MrTouchdown's picture

Well, isn't this the reason we have ISIS? They're supposed to help Saudi Arabia achieve their production cuts.

williambanzai7's picture

As the price per barrel decreases the incentive to cheat increases...

There is no mechanism for enforcing production quotas other than the threat of being punished by even lower prices.

Meanwhile demand is in the negative growth shitter, which can only get worse.

Sounds like a death spiral to me.

knukles's picture

We been through this a hundred times before since the activist price manipulations of the 70's. 
Always OPEC's end.
Then the Saudi's cut back after the marginal producers shut down or political objectives accomplished.
(or some dingle-fuck from some administration really pisses the Saudis off over some dumb shit.... sound like a possibility?)

Wash, rinse and repeat.

PS  And just when you'll think it's safe to get back in the water....

Spitzer's picture

In the 70's, the USD was devalued by 40%. Oil prices went to the moon but  they blamed it on Iran. Fact is, it was a devaluation of the dollar. The USD was devalued by 40% against oil in the 70's just like gold was revalued 40% higher against the dollar in the great depression.

seek's picture

And don't forget the inflation shock from that devaluation rippled through the economy and triggered gold's move from $35 to $800 in under a decade.

knukles's picture

Oh yes, I remember that clearly.
Every single time OPEC met and announced a price increase, the FED simply expanded the monetary base by an amount approximate to the price increase as a percentage of GDP. 
The Fed Monetized every single price increase in order that the contractionary impact of the energy price increase translated into higher inflation while allowing ovarall output to be relatively maintained.

Difference this time around is that we're in a liquidity trap and the price is falling.
I wonder what Ma and Pa Kettle's reaction will be to lower gas prices?
Sure as shit ain't gonna be a big assed spending spree I can tell ya'

No need to devalue the dollar from this alone.
The competitive devaluations of the Big Currencies will continue unabated.  Due to crappy real economic activity regardless of doctored numbers.

Spitzer's picture

Short Canadian banks.

 

This is going to granade the Canada housing bubble, hopefully. Iv'e been renting in Alberta for 5 years in anticipation of this. Better to be 5 years early then leveraged long for 30 years on some over -priced house.

 

Australia and Canada are in full retard housing bubble mode. And its all built on commodity prices.

SHRAGS's picture

Australia and Canada are in full retard housing bubble mode. And its all built on commodity prices.

 

Not so fast.  Cheap credit (I've been expecting the RBA to cut rates for a while, depite their jawboning that the next move will be up - always in "6 months time").  The housing boom is now centred on Sydney, and to a lessor degree Melbourne.  Perth & Brisbane appear to be weakening.  The infamous "cashed up Chinese buyer" is the bogeyman pricing locals out of the maket is one additional factor to the panic to buying in Sydney.

Anecedotal evidence shows new car sales in QLD cratering along with the coal price.

Long story short, the RBA still has some juice left to sustain this East coast boom for a while longer yet.  That and we haven't run out of Chinese buyers either.

SoCalBusted's picture

The incentive to cheat will always be there regardless of the price, just different motivation depending on price leve/direction.

countupir's picture

By cheat you mean .gov subsidy in US oil/energy companies? The only obvious solution seems to be more bailouts in more and more industries until the whole thing goes under. The entire .gov system goes kaputz.

q99x2's picture

Wittner warns "this will reverberate for years"

That'd be us as we shake the squid M'Fer.


buzzsaw99's picture

nothing has changed. inventories are the same, everything is the same. this is all just a screw job by the maggot manipulators to hurt russia which will backfire and hurt the usa instead in the long run.

Carpenter1's picture

Actually, plenty has changed. The bagholders don't want to hold the bag anymore. That means the bag will drop, markets and fundamentals will determine reality, not manipulation.

The very fact that OPEC made this decision is evidence they believe demand isn't coming back for a long time. They decided its in their best interests to take an economic hit in order to clear out the competition.

Inventories haven't changed, but the game sure has.

wrs1's picture

OPEC told you this huh?  LOL!  As long as oil prices stay high enough, harder to reach oil will be produced.  Oil too cheap means that OPEC will run out sooner than later, it's the same stupid shit as miners high grading when gold is cheap.  Shale oil is equivalent to high grade gold though and so what OPEC thinks will work is going to backfire.  The people around here and apparently everywhere that writes about this subject seem to have swallowed up a myth that shale oil is based on free money.  Wrong, check this well and it's not a freak, in fact the well we drilled next to it is producing about 30% more.  OPECkers just cut off their PECker.

http://tinyurl.com/ng7ctgv

williambanzai7's picture

As far as the Russians are concerned, this is yet another orchestrated existential threat to the motherland.

Given their tenacity when these kinds of threats arise every 50 years or so and the combined stupidity of the checker masters in Vichy DC, the prognosis for global peace and tranquility is not looking good.

oddjob's picture

Its funny when some drunk loser picks a fight with a boxer.

knukles's picture

Agreed 105% full military power, William.
And the Vladster has yet to retaliate for any of the misgivings of the West, yet.

His last and biggest whammy will be trading energy for rubles or gold  (As an either or)
De facto gold standard for the ruble.
Ain't enough shiny to buy one winter's month gas for Europe.

And just as a games theory aside, this is the wrong fucking time from the West's perspective to engage this action.
Winter is here.

Winter has always been Mother Russia's close friend and ally

tarabel's picture

 

 

I'm not sure I understand this belief that Russia will insist on gold for oil. If nobody has any gold, then Russia's sales go to zero. Given the choice of buying from Russia for gold or from anywhere else for fiat, which gas station would you patronize?

Yeah, that's what I thought.

Also, the Wehrmacht is not exactly camped on the border at this time. Any land campaign is months or even years away. The only winter campaign likely to occur will be a Russian invasion of another country.

It is also important to remember that it is always winter at 30,000 feet so the USAF is ready to roll anywhere and anytime the Russians want to get froggy.

Coke and Hookers's picture

Interesting article. To do maximum damage Putin could partly switch over to physical silver delivery from the west since that is also artificially depressed. I would like to see the faces of JP Morgan bigshots when Russia starts ordering physical delivery of several thousand tons of silver per quarter.

williambanzai7's picture

Time trouble I am familiar with, shitcoin is a new one.

That was an excellent read.

Dakota Kid's picture

Obama to Putin: How about a game of checkers?

Putin to Obama: No thanks, but how about a game of chess?

           Obama to Putin: What's chess?

knukles's picture

Oh and another PSS
So with oil prices falling, the Geniuses at the Board of Governors will now say.....
That the cut in oil prices is like a tax cut and thus the economy will naturally expand, etc., etc., etc...

Sing along with me, now, "Happy Days are Here Again"  (song from the depression, folks)

And, they'll say that inflation is now gonna fall below that lower threshold of the whatever dumb ass idea they have about the Phillips Curve and whatever else. 
But for the moment, real growth trumps lower inflation.

Meaning the talk about tightening being the next step, increases WILDLY!