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Here Is Oil's Next Leg Down

Tyler Durden's picture




 

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

News reports about developments in the oil markets are coming fast and furious, and none of them indicate any stabilization, let alone rise, in oil prices. Quite the contrary. There are very large amounts of extra barrels flowing into the market, which is just, as one analyst puts it “even more oil flooding the market that nobody needs.” Saudi Arabia looks set to battle for sheer market share, even if it sends strangely contradictory messages.

While the US shale industry aggressively tries to convey an attitude based on confidence and breakeven prices that suddenly are claimed to be much lower than what seemed common knowledge until recently. Bloomberg says today that most shale is profitable even at $25 a barrel, and we might want some independent confirmation and/or analysis of that. Just hearing the industry claim it seems a bit flimsy; they have plenty reasons to paint the picture as rosy as they can get away with.

Last night, the Wall Street Journal reported on a Saudi price cut for the US, and a simultaneous price hike for Asia.

Saudi Price Cut Upends Oil Market

Oil prices tumbled to their lowest point in more than two years after Saudi Arabia unexpectedly cut prices for crude sold to the U.S., likely paving the way for further declines and adding to pressure on American energy producers. The decision by the world’s largest oil exporter sent the Dow industrials into negative territory for the day amid concerns about the pace of global growth. The move heightened worries over the resilience of the U.S. oil industry, which has expanded rapidly in recent years.

 

But that growth, driven largely by new production technology used to extract oil from shale-rock formations, has never been tested by a prolonged slump in prices. While lower crude prices generally help consumers by reducing the amount they pay for gasoline, analysts said falling energy prices will squeeze profit margins at many U.S. energy companies, particularly smaller firms or those with large debt loads. Meanwhile, Saudi Arabia raised the prices for its oil in other locations, including Asia, where the country had cut its prices for four consecutive months.

Which led Barron’s to speculate on energy ETFs.

Saudi Oil Price Cut Dings Energy ETFs

Saudi Arabia’s unexpected price cut to oil it ships to the U.S. is roiling the market for crude and squeezing a host of exchange-traded funds that hold energy stocks. The United States Oil Fund (USO) sinks 2.2% to $$29.12 in early trading, while iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) falls 2.3%. West Texas Intermediate crude futures dropped to the lowest level in three years, recently down 2.1% to $76.77 a barrel.

 

Oil futures prices have tumbled by about one-quarter in recent months in a world awash with oil after production increases in the U.S. and, more recently, Libya. For weeks, speculation has swirled that the Saudis might be keen to hold prices low in order to keep a tight grip on market share and choke off competitors. Monday’s move by Saudi Arabia to cut prices for crude exports to U.S. customers, while at the same time a raising the prices it charges to countries in Asia, provides more evidence that the Saudis are bent on quashing competition.

But then just now Reuters says ‘recalled’ an email that detailed the cuts:

Saudi Aramco Recalls Email Showing Steep Oil Price Cuts

Saudi Aramco said it was recalling an email it sent on Thursday which had announced a sharp drop in January official selling oil prices for Asia and the United States. Official Selling Prices (OSPs) for oil from Saudi Arabia, OPEC’s largest producer and exporter, have been eagerly watched by the market in recent months for indications of the kingdom’s oil policies.

 

Some analysts have said sharp drops in OSPs over the past months are an indication the kingdom is fighting for market share with other producers, but others have said the OSPs only reflect the market and are a backward-looking rather than a forward-looking indicator.

 

“(The) Saudis making it clear they don’t want to lose market share,” Richard Mallinson, analyst at consultancy Energy Aspects told Reuters Global Oil Forum before Aramco recalled prices. It was not clear whether Aramco was recalling all prices or only some prices, or what changes if any had been made. It was also unclear whether and when a new email might follow.

 

The email, which was later recalled, showed Aramco had cut its January price for its Arab Light grade for Asian customers by $1.90 a barrel from December to a discount of $2 a barrel to the Oman/Dubai average. The Arab Light OSP to the United States was set at a premium of $0.90 a barrel to the Argus Sour Crude Index for January, down 70 cents from the previous month. The email also said Arab Light OSPs to Northwest Europe were raised by 20 cents for January from the previous month to a discount of $3.15 a barrel to the Brent Weighted Average.

That $24 a barrel breakeven price for shale contrasts somewhat with what Abhishek Deshpande, lead oil analyst at Natixis, says about Saudi oil: “..because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.”

Collapse Of Oil Prices Leads World Economy Into Trouble

OPEC, the largest crude-oil cartel in the world, wanted others to feel its pain as oil prices collapsed. “OPEC wanted … to cut off production … and they wanted other non-OPEC [countries], especially in the US and Canada, to feel the pinch they are feeling,” says Abhishek Deshpande, lead oil analyst at Natixis. But in its rush to influence others, OPEC ended up hurting everyone in the process – including itself. Low oil prices, pushed down further by OPEC’s meeting last week,have impacted world economies, energy stocks, and several currencies. From the fate of the Russian rouble to Venezuelan deficits to American mutual funds full of Exxon or Chevron stock, OPEC’s decision was the shot heard round the world for troubled commodities.

 

So how low could oil go? Standard Chartered analysts expect a “chaotic” quarter ahead, saying OPEC’s decision to keep the production target unchanged is “extremely negative for oil prices for 2015”. The bank slashed its 2015 average price forecast for Brent crude oil by $16 a barrel to $85. Other forecasts are lower. Citi Research estimated an average 2015 price of $72 for WTI and $80 for ICE Brent. Natixis’s Deshpande said their average 2015 Brent forecast is around $74, with WTI around $69. These prices have real-world effects on world economies. Everyone in the sector is smarting. Deshpande said because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.

 

Other OPEC members have even higher budgetary breakevens. Saudi Arabia is sitting on a “war chest” of money it stockpiled when prices were high, Deshpande said. Citi analysts said Saudi Arabia has about $800bn in cash reserves. Venezuela, on the other hand, is a prime example of a country squandering its riches. Citi said for every $10 drop in oil prices Venezuela loses about $7.5bn in revenues. “Already weak fiscally, this should call for reducing energy subsidies. But domestic politics including the 2015 election makes this nearly impossible,” they said. OPEC countries as a whole could lose $200bn in revenue if Brent prices stay at $80, which is about $600 per capita annually, Citi said.

And that in turn makes you wonder how the Saudis feel about Bakken shale oil being sold at $49.69 a barrel.

Sub-$50 Oil Surfaces in North Dakota As Regional Discounts Swell

Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there. Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All American Pipeline LP. That’s down 47% from this year’s peak in June, and 29% less than the $70.15 paid for Brent, the global benchmark. The cheaper price for North Dakota crude underscores how geographic and logistical hurdles can amplify the stress that plunging futures prices have put on drillers in new shale plays that have helped push U.S. oil production to the highest level in 31 years. Other booming areas such as the Niobrara in Colorado and the Permian in Texas have also seen large discounts to Brent and U.S. benchmark West Texas Intermediate.

 

“You have gathering fees, trucking, terminaling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said Dec. 2. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.” Discounted prices at the wellhead have been exacerbated by a 39% drop in Brent futures since June 19 to $69.92 a barrel yesterday. Prices have fallen as global demand growth fails to keep pace with surging oil production from the U.S. and Canada. Much of that new output is coming from areas that are facing steep discounts. Bakken crude was posted at $50.44 a barrel Dec. 2. Crude from Colorado’s Niobrara shale was priced at $54.55, according to Plains. Eagle Ford crude cost $63.25, and oil from the Oklahoma panhandle was $58.25.

American consumers probably still feel good about developments like ever lower prices at the pump, but they should be careful what they wish for.

First U.S. Gas Station Drops Below $2 a Gallon

$2 gasoline is back in the U.S. An Oncue Express station in Oklahoma City was selling the motor fuel for $1.99 a gallon today, becoming the first one to drop below $2 in the U.S. since July 30, 2010, Patrick DeHaan, a senior petroleum analyst at GasBuddy Organization Inc., said by e-mail from Chicago. “We knew when we saw crude oil prices drop last week that we’d break the $2 threshold pretty soon, but we didn’t know if it would happen in South Carolina, Texas, Missouri or Oklahoma,” said DeHaan, senior petroleum analyst for GasBuddy. “Today’s national average, $2.74, now makes the current price we pay a whopping 51 cents per gallon less than what we paid a year ago.”

 

Gasoline is sliding after OPEC decided last week not to cut production amid a global glut of oil that has already dragged international oil prices down by 37% in the past five months. Pump prices have fallen by almost a dollar since reaching this year’s high on April 26. 15% of the nation’s gas stations are selling fuel below $2.50 a gallon, “and it may not be long before others join OnCue Express in that exclusive club that’s below $2,” said Gregg Laskoski, another senior petroleum analyst with GasBuddy. Retail gasoline averaged $2.746 a gallon in the U.S. yesterday, data compiled by AAA show. Stations will cut prices by another 15 to 20 cents a gallon as they catch up to the plunge in oil, AAA’s Michael Green said.

And here’s the reason to be careful with those wishes: job losses.

Norway Seeks to Temper Its Oil Addiction After OPEC Price Shock

After the biggest slump in oil prices since the start of the global financial crisis, the prime minister of Norway says western Europe’s largest crude producer must become less reliant on its fossil fuels. “We need new industries, a new tax system and a better climate for investment in Norway,” Prime Minister Erna Solberg said yesterday in an interview in Oslo. The comments follow threats from SAFE, one of Norway’s three main oil unions, which warned this week it will respond with industrial action unless the government acts to stem job losses. Solberg said that far from triggering government support, plunging oil prices should be used by the industry as an opportunity to improve competitiveness.

 

A 39% slump in oil prices since June is killing jobs in Norway, which relies on fossil fuels to generate more than one-fifth of its gross domestic product. In the past few months, Norway has lost about 7,000 oil jobs and SAFE said this week it was up to the government to reverse that trend. Solberg says protecting oil jobs will ultimately make it harder for the economy to wean itself off its commodities reliance. “We need to lower our cost of production in the development of new fields,” she said. “Oil production is not going to rise, it will slowly fall in Norway.”

And may I volunteer as an aside that Norway’s intentions to become less reliant on oil are perhaps a little past their best before date? They have this large sovereign oil fund, but never thought of using it to diversify their economy?

Perhaps the numero uno reason that oil prices will keep sinking is production becoming available in the Middle East. And in North Africa, where Libya recently reportedly brought an extra 800,000 barrels/day to the fray. Now it’s Iraq’s turn. Bloomberg put 300,000 barrels in its headline, only to say this in the article: “As much as 300,000 barrels a day of Kirkuk blend will be shipped through the Turkish pipeline under the terms of the deal, according to the KRG. Another 250,000 barrels daily of oil produced in the Kurdish region will be exported through the same route”. I corrected the headline.

There Are 550,000 Iraqi Barrels Signaling Oil Glut Will Deepen

Not only is OPEC refraining from cutting oil output to stem the five-month plunge in prices, it’s adding to the supply glut. Just five days after OPEC decided to maintain production levels, Iraq, the group’s second-biggest member, inked an export deal with the Kurds that may add about 300,000 barrels a day to world supplies. In a global market that neighboring Kuwait estimates is facing a daily oversupply of 1.8 million barrels, the accord stands to deepen crude’s 38% plunge since late June. Or as Carsten Fritsch, analyst at Commerzbank, put it: There’ll be “even more oil flooding the market that nobody needs.”

 

Benchmark Brent crude slumped immediately after the deal was signed Dec. 2 in Baghdad, dropping 2.8% to $70.54 a barrel. Prices, which slipped 0.9% yesterday to reach the lowest since 2010, were at $70.38 at 1:30 p.m. Singapore time today. Futures are down about 10% since OPEC’s Nov. 27 decision. The agreement seeks to end months of feuding between the Kurds and officials in Iraq over the right to crude proceeds, a dispute that has hindered their joint effort to push back Islamic State militants. The deal allows for as much as 550,000 barrels a day of crude to be shipped by pipeline from northern Iraq to the Mediterranean port of Ceyhan in Turkey, according to the regional government. The Kurds were already exporting about 220,000 barrels daily, according to data compiled by Bloomberg.

 

The Kurdish Regional Government expanded its control of Iraq’s oil resources in June when it deployed forces to defend Kirkuk, the largest field in the north of the country, from Islamic militants. The Kurds have been shipping crude through Turkey in defiance of the central government, which took legal action to block the sales, leaving some tankers loaded with Kurdish oil stranded at sea. As much as 300,000 barrels a day of Kirkuk blend will be shipped through the Turkish pipeline under the terms of the deal, according to the KRG. Another 250,000 barrels daily of oil produced in the Kurdish region will be exported through the same route, according to the government in Baghdad.

What it will all lead to, and increasingly so as prices fail to recover and instead keep falling, is the disappearance and withdrawal of financing in the oil industry, especially the insanely overleveraged shale patches. The financiers will need a little more time to consolidate, minimize and liquidate their losses, but they will get up and leave. So all the talk of growing the industry sounds just a tad south of fully credible. This is an industry that lost over $100 billion a year for at least three years running, i.e. didn’t produce sufficient revenue even at $100 a barrel, and at $60 they would be fine, without much of their previous external financing?

Energy Junk-Debt Deals Postponed as Falling Oil Saps Demand

Two energy-related companies are postponing financings after a plunge in oil prices made their high-yield, high-risk debt more difficult to sell. New Atlas, a newly formed unit of oil and gas producer Atlas Energy Group, put on hold a $155 million loan it was seeking to refinance debt, according to five people with knowledge of the deal, who asked not be identified because the decision is private. EnTrans International, a manufacturer of equipment used in fracking, delayed selling a $250 million bond, according to three other people with knowledge of that transaction. Investors in bonds of junk-rated energy companies are facing losses of more than $11 billion as oil prices dropped to a five-year-low of $63.72 a barrel this week. This is deepening concern that the riskiest oil explorers won’t be able to meet their obligations, and sending their borrowing costs to the highest since 2010.

 

More than half of Cleveland, Tennessee-based EnTrans’s revenue comes from equipment sales to the hydraulic fracturing and the energy industry, Moody’s Investors Service said in a Nov. 17 report. The notes, which were being arranged by Credit Suisse, would have been used to refinance debt. Gary Riley, chief executive officer at EnTrans International, said yesterday in an e-mail commenting on the deal status that “the decision to defer or go forward has not been made.” Riley didn’t respond to questions seeking comment today. Deutsche Bank and Citigroup were managing New Atlas’s financing and had scheduled a meeting with lenders for this morning, according to data compiled by Bloomberg.

Perhaps those sub-$50 Bakken prices tell us pretty much where global prices are ahead. And then we’ll take it from there. With 1.8 million barrels “that nobody needs” added to the shale industries growth intentions, where can prices go but down, unless someone starts a big war somewhere? Yesterday’s news that US new oil and gas well permits were off 40% last month may signal where the future of shale is really located.

But oil is a field that knows a lot of inertia, long term contracts, future contracts, so changes come with a time lag. It’s also a field increasingly inhabited by desperate producers and government leaders, who wake up screaming in the middle of the night from dreaming about their heads impaled on stakes along desert roads.

 

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Thu, 12/04/2014 - 18:11 | 5518201 pendragon
pendragon's picture

goodnight putin lol

Thu, 12/04/2014 - 18:17 | 5518224 Ahoy Polloi
Ahoy Polloi's picture

THE SHAREEF DON'T LIKE IT

 

"Now the king told the boogie men
You have to let that raga drop
The oil down the desert way
Has been shakin' to the top
The sheik he drove his Cadillac
He went a' cruisnin' down the ville
The muezzin was a' standing
On the radiator grille"

Thu, 12/04/2014 - 18:33 | 5518284 maskone909
maskone909's picture

i guess the moral of the sstory is, when you control the petro dollar, you can do whatever the fuck you want with the price of oil.  even if that means financial terrorism.  they are trying to really fuck over some "folks" 

 

is there really anything that has fundementally changed since WTI was at 100?  it is becomming pretty blatant.  the economy is doing so "GOOD" that demand is in the shitter?  the economy is doing so "GOOD" that wage growth is stuck in the 70's??  home ownership is garbage! labor force is shrinking.  it goes on and on and on .  its sickening to watch the tv pundits spin this which ever way tptb tell them too. 

Thu, 12/04/2014 - 18:51 | 5518323 Escrava Isaura
Escrava Isaura's picture

 

 

maskone909

Stop watching TV otherwise you won't be prepared.

We're enmeshed in a situation that's beyond anyone's control.

The world will be facing financial ruin in the next three years or so that’s unprecedented.

 

 

Thu, 12/04/2014 - 18:58 | 5518346 NoDecaf
NoDecaf's picture

Wasn't ISIS selling oil at $40 like two months ago? So what are they getting now?

Thu, 12/04/2014 - 23:03 | 5519028 DaveyJones
DaveyJones's picture

they're getting more young boys to join every day 

I guess we got to give the west some credit for that

Thu, 12/04/2014 - 20:52 | 5518631 Augustus
Augustus's picture

Sure things have changed since oil was at WTI.

That is what the article just explained to you.

It is not lack of demand.  It is greatly increased supply.

Mon, 12/08/2014 - 12:33 | 5528898 draego
draego's picture

Doesn't have to be one or the other - at this point in time, both (reduced demand and increased supply) are in play. Just like inflation and deflation are not mutually exclusive.

 

 

Thu, 12/04/2014 - 18:13 | 5518208 Bell's 2 hearted
Bell's 2 hearted's picture

. Monday’s move by Saudi Arabia to cut prices for crude exports to U.S. customers, while at the same time a raising the prices it charges to countries in Asia,

 

say what?  sounds like a gift to goldman sachs (and others of the ilk) who will arb that profit

Thu, 12/04/2014 - 18:20 | 5518241 Carpenter1
Carpenter1's picture

Waiting for something to happen that actually matters? It has. Below $70 oil will do grievous injury to the global economy and it won't take 5 years. 6 months at most and we'll be seeing all kinds of uncontrollable events taking place.

You can't buy demand with fiat. This is one problem a printing press can't fix, for if it was, they would've done it already.

Thu, 12/04/2014 - 20:55 | 5518645 Augustus
Augustus's picture

So you believe that lower energy prices for the whole world will be classified as INJURY? 

Then if someone did finally invent that Free Energy gizmo you believe human progress would be set back decades?

Mon, 12/08/2014 - 12:36 | 5528914 draego
draego's picture

If it is a temporary situation (which it is), and the consequence is that the US oil industry gets decimated (think jobs and energy security), then yes it's a problem. As much as we like to hate the oil companies, they do provide an essential service and provide lots of jobs.

Thu, 12/04/2014 - 18:14 | 5518210 Bell's 2 hearted
Bell's 2 hearted's picture

shale breakeven at $25?

 

NFW

Thu, 12/04/2014 - 19:10 | 5518374 MollyHacker
MollyHacker's picture

Way

Thu, 12/04/2014 - 20:41 | 5518606 Hohum
Hohum's picture

MollyHacker,

I know your ideology was behind your foolish opinion.  Look at some data:

https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf (6M per well)

Thu, 12/04/2014 - 18:14 | 5518211 nah
nah's picture

American utopia bitchez

Thu, 12/04/2014 - 18:16 | 5518217 disabledvet
disabledvet's picture

So oil is priced differently within the United states itself?

I don't understand.
I thought the price I got was the "global price" not the "North Dakota price."

Thu, 12/04/2014 - 18:16 | 5518220 kowalli
kowalli's picture

taxes everywhere

Thu, 12/04/2014 - 18:18 | 5518228 Urban Roman
Urban Roman's picture

WTI and Brent have been known to diverge at times. As I recall, as much as $15 between them.

Thu, 12/04/2014 - 18:21 | 5518245 Broccoli
Broccoli's picture

You have grades of oil (heavy, high sulfur, etc.), shipping costs, etc. So yea each field has a +/- (normally minus) on the benchmark price that they receive for their oil.

 

That is why a lot of US refiners are geared up for heavy oil from Venezuela, it is cheaper.

Thu, 12/04/2014 - 20:36 | 5518593 Tall Tom
Tall Tom's picture

Venezuela Heavy is a lot less expensive than Saudi Light Sweet.

 

Furthermore Venezuela is a hell of a lot closer to US Refineries than Saudi Arabia. All that they need to do is cross the Gulf of Mexico to get to the Gulf Refineries. That beats traversing the Mediterranian Sea and then crossing the Atlantic to the East Coast Refineries. 

 

Getting it from Venezuela also saves a substantial amount on the shipping costs you previously noted.

 

It is not just the cost of pumping it out of the wells.  Delivery and cracking are added costs which need consideration.

Thu, 12/04/2014 - 22:30 | 5518898 disabledvet
disabledvet's picture

Hmmmm. Just don't get Brent and the North Dakota discount then. Why is English oil cheaper than American oil inside the USA again?

Thu, 12/04/2014 - 18:21 | 5518246 seek
seek's picture

Transportation and handling costs can influence pricing, as well as the grade of oil (it's cheaper to extract gasoline from sweet crude v. sour heavy crude.) Localized price discontinuities aren't that rare.

Thu, 12/04/2014 - 18:55 | 5518336 wrs1
wrs1's picture

Yes, oil is not fungible and never really has been.  It's all different, especially with the LTO type of oil. Price depends on location, API and sulfur content.

Thu, 12/04/2014 - 19:09 | 5518356 Ahoy Polloi
Ahoy Polloi's picture

"Price depends on location, API and sulfur content."

 

LOL ~ Umm... Some would argue that, notwithstanding API & sulfur content... It has mainly to do with:

 

- geopolitics

- leveraged counterfeit paper

- narrative

 

while COMPLETELY ignoring DEMAND [unless the propaganda narrative calls for it]...

 

FFS ~ If Rothschild sent a wire to AP & Reuters to publish an article that there were 10 trillion untapped barrels of oil in Kim Kardashians ass, we could be back to 2 digits by Christmas.

Thu, 12/04/2014 - 19:14 | 5518383 wrs1
wrs1's picture

Well the benchmark price is what depends on your list.  The actual wellhead price is adjusted against the benchmark price based on API, location and sulfur content.  So we are both correct.

Thu, 12/04/2014 - 19:59 | 5518480 Ahoy Polloi
Ahoy Polloi's picture

with all due respect, last time I checked (when I filled up my tank), I wasn't getting the WELLHEAD UNCRACKED PRICE.

 

 

Just sayin'

Thu, 12/04/2014 - 19:56 | 5518496 Beowulf55
Beowulf55's picture

Hey Ahoy, thanks for the visual................LoL...and you own me a keyboard.

Thu, 12/04/2014 - 20:02 | 5518509 Ahoy Polloi
Ahoy Polloi's picture

I... I... I... won't venture 2 ask if it was the 'oil', or the 'sulfur content' which was responsible 4 precipitating the motivation.

Thu, 12/04/2014 - 21:00 | 5518665 Augustus
Augustus's picture

Who ever would argue that is an illinformed crackpot.

Thu, 12/04/2014 - 20:57 | 5518654 Augustus
Augustus's picture

North Dakota price is WTI price less quality and tranport adjustments.

The world price changed down when the US reduced imports with more production.

Thu, 12/04/2014 - 23:32 | 5519152 Wahooo
Wahooo's picture

Go to Valero's web site. They have a spreadsheet showing what they pay and the spread on the various crises.

Thu, 12/04/2014 - 18:16 | 5518219 Urban Roman
Urban Roman's picture

Long stakes and desert roads.

Thu, 12/04/2014 - 18:16 | 5518221 Bell's 2 hearted
Bell's 2 hearted's picture

as CHS has been pointing out this week ... (high) oil has been collateral for whole lotta debt ... and when the value of collateral takes a big fall ...

Thu, 12/04/2014 - 18:16 | 5518225 kowalli
kowalli's picture

more banksters will jump out without parachute

Thu, 12/04/2014 - 18:19 | 5518231 Broccoli
Broccoli's picture

I am an oil man. Most already drilled wells will be profitable at $25 since all the drilling and construction costs are sunk. OPEX at that point if you stop doing workovers, maintenance, etc. can be really low. A minority of new wells will be profitable just because they are awesome, but most new wells assuming a price of $25 going forward will not justify the lease, royalties, drilling, and construction costs. But you need new wells and workovers to slow the natural decline, and with how fast shale wells decline it is catastrophic for shale focused companies like Continental. Yea, $25/bbl is death to the shale revolution.

 

So they may not be lying, but they are being intentionally deceptive. Some wells make money at $10 a barrel, but the  majority of US production would be shut-in at $10/bbl and there wouldn't be a single drilling or workover rig active anywhere.

Thu, 12/04/2014 - 18:26 | 5518255 kowalli
kowalli's picture

most of old wells produce about 10% or less, so it's like cut production from 10mln to 1 mln.

Thu, 12/04/2014 - 18:39 | 5518289 Escrava Isaura
Escrava Isaura's picture

 

 

Broccoli

So, explain these to us:

 

a) At which rate of depletion $25 dollars will do?

 

b) Steven Kopits: Between 1984 and 2005 the world had a 25% oil surpluses. Since 2006, global oil production is declining.

From 2005 to 2013, the world spent $4 trillion dollars on upstream [not including pipelines, refinery, transportation, wholesale] exploration and production. And another $3.5 trillion dollars to maintain current legacy [fields]. Result: Oil production has fallen by 1 million barrels per day [mbpd].

For Comparison: Between 1998 and 2005, $1.5 trillion dollars spent added 8.6 mbpd.

To put into perspective: Germany GDP: $3.5 trillion dollars. So if you compare to 1998/2005 period, the world ‘vaporized’ the GDP of Germany on oil production. And the world still came up short 1 million barrels a day.

How challenging is the situation: 2014 Capex [upstream] Expenditures Trend: About $300 billion. Current forecast Capex: $193 billion. Over 30% decline. Shell, 2nd largest oil company in the world, not only cut capex by 20% but, since 2013, it has been borrowing money to pay dividends.

 

https://www.youtube.com/watch?v=dLCsMRr7hAg

 

By the way: My first job was for Zapata Marine Service, in Brazil

 

 

Thu, 12/04/2014 - 19:01 | 5518350 wrs1
wrs1's picture

Yeah, $25 isn't going to cut it unless you have a bunch of already paid for wells with good flow rates that are sustainable.  The biggest issue I see with making projections about shale is that there just isn't enough production data to know what ultimate recovery is on a well.  In the Wolfcamp the oldest wells are only four years old and the first ones weren't frac'd right so they weren't much good.  So the best ones are only about a year old now and they are showing 50% to 60% decline rates in the first year.

On the other side, I don't think the Saudi's can cash their "savings" for very long without destroying the financial markets through one imbalance or another.  They won't be selling gold, they will be selling sovereign debt and the whole house of cards is built upon no one needing to cash in their savings.  The rest of OPEC is going to be in deep trouble within three months of the current pricing structure so I expect some kind of face saving move after the first of the year.  This isn't the 80s and these stupid fuckers are messing with the stability of the entire world's energy system because they are upset about their "market share".

Thu, 12/04/2014 - 19:38 | 5518440 Escrava Isaura
Escrava Isaura's picture

 

 

wrs1

You started your post well; then, you let yourself show that you don’t understand the crux of our problem:

The common good (you wrote: face saving first of the year) is irrelevant, because the system is about to collapse. All human (religion, political, economic, and our systems of survivability) are about to fail, for good.

 

Humans are about to face the destruction of the resources that are critical for our survival. And we did that in about 150 thousand years. The dinosaurs, by contrast, roamed the world for about 180 million years.

 

These people are not stupid; they just bought into the indoctrination, the nonsense that we, humans, are exceptional.

 

And that is the flaw.

 

Thu, 12/04/2014 - 19:41 | 5518456 oak
Thu, 12/04/2014 - 23:07 | 5519049 DaveyJones
DaveyJones's picture

"So they may not be lying, but they are being intentionally deceptive"

I can't believe this industry (and their government) would do that

Thu, 12/04/2014 - 18:20 | 5518234 Philo Beddoe
Philo Beddoe's picture

The savings at the pump are not going to cut it assholes. Cut taxes. Good luck with that you fuckers.   I would spend more if my taxes were a flat 20 percent or something sane. But, that will never happen because you spent all my money into the future to pay for bullshit promises, bank bailouts and a host of other shit. 

Thu, 12/04/2014 - 19:14 | 5518381 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

I never understood why a "free" country like USA never implemented a flat tax while in a "Communist" country like Russia they got one since many years now...

Weird time we live in...

Thu, 12/04/2014 - 18:20 | 5518243 A Lunatic
A Lunatic's picture

Oil tycoon? Bankster? Schizophrenic racist perhaps......?

 

http://dfw.cbslocal.com/2014/12/03/dead-body-found-in-west-dallas/

Thu, 12/04/2014 - 18:26 | 5518256 WTFUD
WTFUD's picture

Never ever do i hear from these anal(ysts) regarding the fracking non-financial cost on a barrel of that sludge.
I guess these hidden costs are for another time long down the road . . .

Thu, 12/04/2014 - 18:28 | 5518268 Philo Beddoe
Philo Beddoe's picture

All the cans that have been kicked down the road will be found floating one day in a toxic pile of shit.  

Thu, 12/04/2014 - 18:30 | 5518269 arrowrod
arrowrod's picture

Saudis used to produce a barrel of oil for $.25  (25 cents).  How did it get to $30?  Oh...

Thu, 12/04/2014 - 19:03 | 5518353 wrs1
wrs1's picture

That was when a quarter was made of silver and gold was pegged at $35/oz.

Thu, 12/04/2014 - 19:11 | 5518375 kowalli
kowalli's picture

inflation

Thu, 12/04/2014 - 20:47 | 5518624 Tall Tom
Tall Tom's picture

There used to be pools of Oil sitting on top of Saudi desert sands.

 

Now they are pumping Ocean Brine into the wells to bring the remaining Oil to the top of the underground reservoirs. Oil floats.

 

That is Energy intensive. That costs both energy and money. They are depleting their stocks. And when it is gone then Saudi is finished.

Thu, 12/04/2014 - 18:29 | 5518271 The Shape
The Shape's picture

With the middle east pumping out more oil I guess we can assume their reserves will also continue to increase without question.

Thu, 12/04/2014 - 18:49 | 5518320 wrs1
wrs1's picture

LOL! Sure, they will just keep claiming infinite reserves right up until they pump out 100% water cut.

Thu, 12/04/2014 - 18:30 | 5518272 bmr22
bmr22's picture

Cant wait to fill up my 96 nissan pu for 10 bucks again. What do they expect with global demand in the toilet. We may be buying cars by the boatload in the good ole USSA but we cant afford to drive them anywhere. I reguraly see people here in my neck of the woods buying $5.00 worth of gas in that new F-150, Silvarado or the best choice a POS Dodge Charger and paying with rolled change. Welcome to prosperity.

Thu, 12/04/2014 - 18:33 | 5518285 The Shape
The Shape's picture

Does $5 worth of gas in a Silvarado even get them out of the gas station driveway again?

Fri, 12/05/2014 - 00:46 | 5519362 Abbie Normal
Abbie Normal's picture

Like Leno used to say, that car is so thirsty that if you didn't shut the engine off while pumping, it would never fill up.

Thu, 12/04/2014 - 18:30 | 5518277 oklaboy
oklaboy's picture

ahhhhhh capitalism, I love the smell of panic in the morning...

Thu, 12/04/2014 - 18:40 | 5518295 TuPhat
TuPhat's picture

The article failed to help me understand how the price of oil stabilising at a lower level will be bad for anyone but overleveraged producers and financiers.  Who cares about them anyway? The price will continue to increase again as time goes on.  Nothing is static.  Anyone who bet their money on anything staying at a static level is a fool.  Fools will always lose and I won't shed a tear.

Thu, 12/04/2014 - 19:16 | 5518388 kowalli
kowalli's picture

1)banks will lose money on ponzi shale oil so they rise taxes -
2)people in shale oil lose jobs
3) people in support industry for shale oil lose jobs
4)people without jobs spend less...

Thu, 12/04/2014 - 19:20 | 5518401 lasvegaspersona
lasvegaspersona's picture

The entire monetary system was doing poorly, it just got rabies...no problem right? ...just a few borrowers will default...a few of those defaulted upon will default. 

The CB will react to contain this deflation....then the deluge.

Thu, 12/04/2014 - 18:42 | 5518306 Bobportlandor
Bobportlandor's picture

There goes the Jobs and Tax revenues. I guess this means we will see more choke holds as governments try to replace lost revenue.

 

 

Thu, 12/04/2014 - 18:48 | 5518315 wrs1
wrs1's picture

What a rambling hodgepodge of nonsense.  These prices are not really based on oversupply, they are based on one supplier attempting to get rid of others by undercutting the market JD Rockefeller style.  Like I keep pointing out, snakes in suits, this is right out of the SONJ playbook.  There is a good reason that piece of shit wasn't allowed to operate in Texas.

Thu, 12/04/2014 - 19:08 | 5518368 angel_of_joy
angel_of_joy's picture

It's dead, Jim ! You may not like it, but that doesn't change the reality... And the 25 $ breakeven price is all BS. Bloomberg got even worse than CNBC. Who would have thought...

Thu, 12/04/2014 - 19:04 | 5518354 mastersnark
mastersnark's picture

With all the money I'm saving on gas, I can finally start buying my heart pills again. No more dizzy spells, vomiting, or blurry vision for me! #GreenShoots

Thu, 12/04/2014 - 19:06 | 5518362 KittyStix
KittyStix's picture

Naked paper breaks everything...

Thu, 12/04/2014 - 19:15 | 5518393 lasvegaspersona
lasvegaspersona's picture

The world can live with lower prices. It cannot continue to function with the debt created when prices were higher.

Something has to give.

Thu, 12/04/2014 - 20:23 | 5518558 Incubus
Incubus's picture

Jubilee or jubileevin without your head.

Thu, 12/04/2014 - 19:22 | 5518403 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

Norway welfare state going to collapse, those liberals f*cker will stop to annoye me with their "Scandinavian welfare model" and their "+60% statist income tax is good" rhetoric, but fail to realise that scandinvian countries derive their majority of tax revenue from oil...

Thu, 12/04/2014 - 19:44 | 5518459 Lin S
Lin S's picture

What happens when declining revenue translates into states not being able to continue funding social programs, and/or service national debts?

I wonder how much time we have left to prepare...

Thu, 12/04/2014 - 21:03 | 5518674 Augustus
Augustus's picture

Social programs cost less and are less necessay with lower energy prices.

Thu, 12/04/2014 - 19:53 | 5518485 gmak
gmak's picture

Weren't the Japanese concerned about market share back when the joke was "We lose money on every car, but we'll make it up on volume"?

 

I don't understand why part of the article is so focused on OSPs and interpreting as the need for the Saudis to maintain market share. 

Everyone else can sell only so much oil - their supply is limited. Where does market share com into it?If oil consumption is dropping - it has been for a while. It's a little late to worry about market share. That's a false bogeyman if you ask me. 

A lot of the production must already be under longer term contracts - with some kind of price rider. 

Is the implication that a $55 / bbl price drop over the last six months is due to the marginal pricing? Am I misinterpreting something here?

If I wanted to lock up market share, I wouldn't get involved in a price war and be overt in my intentions. I would quietly sell oil futures using many different fronts and shells so that it wouldn't be suspected that it was all from the same source.  I would be guaranteeing a price.

 

This whole Saudi / price thing is about as subtle as a hammer blow to the head. It's brutish; it lacks finesse; it smacks of some kind of desperation - but about what?

This is not fencing or chess, it is NFL linemen doing ballet; interesting but bizarre and pointless. 

 

Thu, 12/04/2014 - 20:38 | 5518599 Hohum
Hohum's picture

Everyone guessing; look at some data:

https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf

You first, Bloomberg!

Thu, 12/04/2014 - 21:01 | 5518664 wwxx
wwxx's picture

I blame President Barack Hussein Obama, of whom could of easily, as a 'whim for change' with the full support of 90% of the U.S. population could have demanded $50/barrel price cap...when it was necessary 8 years ago...but of course he didn't.  8 years ago, Venezuela's Chavez was willing to sell at that price. 

 

And now, today, it seems to be news or something that we need Raul Ilargi Meijer to write an blog essay divining that the real price is somewhere around $50...no shit sherlock.

 

But we haven't heard President Barack Hussein Obama ever deny the top 1% of anything they manipulate, with timely price escalations, forgery, treason, & the same old excuses, no respect to the resource has been and shall continue to be 'the new normal'.

 

I would go so far as to say, $50/barrel price cap today, with the U.S. citizenry legally manifested their own individual interest in said resource and royalties paid equally to each & every citizen-- true & good leadership would do such a thing. 

 

And, the 1% will scream in terror.

 

wwxx

Thu, 12/04/2014 - 22:20 | 5518865 doc333
doc333's picture

Saudi will INCREASE output until major bankruptcys occur....then reduce output and rake it in on the SUPER SPIKE to $250+ a barrel.

Thu, 12/04/2014 - 22:31 | 5518897 BullyBearish
BullyBearish's picture

A few well-placed explosions, a couple of sunken tankers in the Strait of Hormuz, any number of "events" can get the price of crude back up in the 90s nearly overnight.

Thu, 12/04/2014 - 22:56 | 5519000 jonjon831983
jonjon831983's picture

Easy solution:

Build more oil tankers to circle around the globe.

Create ship building jobs and keep oil off the market.

When oil goes back up - sell the oil then sell the ships for scrap.

Fri, 12/05/2014 - 07:51 | 5519811 Ms No
Ms No's picture

This is nothing more than the US playing a very dangerous game of chicken.  People forget that the house of Saud does exactly what it's fucking told to do by those that implanted their asses in power.  If this boom were to fully collapse it takes everything with it.  Not yet.

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