About those dropping oil prices – 3

A global game of chicken is underway. Will falling oil prices slow or shut down the rapid expansion in shale oil production in the US before the budgets of Saudi Arabia, Venezuela, and Russia are devastated? Which will happen first?

I think it isn’t a smart bet to go against the human ingenuity that has driven the shale revolution.

10/30 – American Interest – OPEC Makes Shaky Bet on Fragility of US Shale Boom – Article quotes a Bloomberg report which in turn quotes the OPEC Secretary General saying that 50% of tight oil (read shale in US) is uneconomical at current prices. That means he believes a lot of projects will get shut down at current pricing. AI article calls that a game of chicken. I agree.

11/3 – Wall Street Journal – Saudi Price Cut Upends Oil Market – Saudi Arabia dropped the price they are asking for crude oil shipped to the U.S. and increased their asking price for oil shipped to Asia.

A graph in the article helps explain why.

The oil imported to the U.S. from Saudi Arabia dropped from around 1.5M barrels a day in January to 894K a day in September. That’s a forty percent drop in volume in addition to the fall in prices.

At one level, this is to protect market share. At another level, this puts pressure on U.S. producers, which might curtail production, which would increase prices and increase the oil Saudi sells.

Regardless of the motivation, Saudi Arabia is driving prices lower.

11/6 – Bakken.com – U.S. oil CEO Hamm goes out on a limb, scraps hedges – This article goes deeper into the inside-baseball stuff of the oil industry than I usually tread. Harold Hamm, CEO of Continental Resources is one of the biggest players in fracking. The company, referred to as CLR, has liquidated all their hedges on future oil prices. That means he, and the company, are betting that oil prices will rise over the near and intermediate term.

11/7 – Dickinson Press – Bankers: Oil drillers not convinced on lower prices – Bankers at a conference say that oil producers aren’t changing their capital expenditure plans for 2015 (that means the number of wells to be drilled) because they don’t think the recent price drops will hold.

11/7 – American Interest – Plunging Oil Prices Are a Boon for U.S. Economy – A Barclay’s analysis estimates that a drop in gas prices by 20% produces a savings to U.S. consumers of $70B. I’ll guess that is annualized. The article suggests prices are just right – the drop is enough to hurt Russia and OPEC but not enough to stop drilling:

As in the Goldilocks fable, [the price of oil is] not high enough to fill Putin’s coffers or constrain economic growth, not low enough to seriously impact the shale revolution, but seems to be just right, at least for now.

11/5 – American Interest – Saudis Set Up Showdown With Shale – Article quotes a New York Times article that says the consensus is Saudi Arabia is protecting market share. The AI article continues with a guess that the Saudi goal is to slow down shale development in the U.S. The high stakes gamble is whether petro-states, who depend on oil revenue for most of their revenue, will suffer before US drilling takes a dramatic reduction in drilling.

What Saudi Arabia is doing is betting against human ingenuity and technological advances.

That is not a good bet.

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