When ISIS dared to steal and sell oil at below market rates, they were dire pirates that needed to be destroyed (and anyone who dared to buy it was pariah). So when, as Bloomberg reports, 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), you know there is an issue in the US Shale industry. As one analyst notes, "to a producer in Wyoming, if Brent’s $70 then I’m at $50, then I have to start asking does it economically make sense to keep drilling, they might start reallocating capital, you might see projects slowed or shut down."
Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there.
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.”
Discounts are not that unusual due to location or quality...
Discounts for all crudes are based on two things, location and quality, according to John Auers, executive vice president at Dallas-based energy consulting firm Turner Mason & Co.
Most U.S. refiners are along the coasts, which gives them a choice between oil pumped from wells in the middle of the country or foreign crude that can be delivered to the plant on a tanker.
That means the producer has to charge less, to make up for whatever it costs to transport it to the plant. In the Eagle Ford, that just means a few dollars to get to a pipeline that can cheaply push it 100 miles or so to Corpus Christi, Texas.
It’s more complicated in places like North Dakota, Colorado or Wyoming, where there is limited pipeline capacity. Producers have to fill rail cars with crude and pay $10 to $15 a barrel for them to be pulled a thousand miles or more to the coasts.
But this massive discount signals something different as cash liquidity becomes crucial and every shale oil driller is pumping like crazy to get their revenues...
“To a producer in Wyoming, if Brent’s $70 then I’m at $50, then I have to start asking does it economically make sense to keep drilling,” Auers said yesterday. “They might start reallocating capital, you might see projects slowed or shut down.”
“Places that are just starting to build up are going to be hit the worst,” Larry said by phone yesterday. “They’re going to get hit the hardest because it’s harder to get the oil out. Not out of ground, but out of the area.”
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So with every expert in financial media clinging to some hope that oil prices can't go down any more surely right? The answer is yes... and have already broken below $50... something that may indicate not just transportation issues, but desparation for crucial liquidity needs.