Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

About those dropping oil prices – #9 – on the price war

 

 

I have a backlog of articles about what’s going on with crude oil prices. Will start catching up.

Articles in this post look at the issue of whether this is a price war kicked off by Saudi Arabia.

1/8 – Reuters at Bakken.Com – No chance of OPEC output cut, even after oil dips below $50 – Gulf delegatesBrent benchmark slips below the $50 point. Guesses are there won’t be any more OPEC meetings before the regularly scheduled get-together in June ’15. Sort of seems that all the OPEC members expect Saudi Arabia to take the full production hit.

US production has grown from about 5M bopd to around 9M bopd in six years.

1/11 – USA Today – Saudi prince: $100-a-barrel oil ‘never’ again – Prince Alwaleed bin Talal says in the interview that crude prices won’t hit $100/bbl.  He thinks prices will likely drop further.

He doesn’t think Saudi Arabia will cut production 1M or 2M bopd because other producers would increase output by an equal amount.

Article also suggests one of the Saudi goals now is to break or destroy the U.S. shale industry. Question is to how many drilling rigs will be idled and how many U.S. companies will go bankrupt.

The price war is well underway.

1/9 – Bloomberg – How OPEC Weaponized the Price of Oil Against U.S. Drillers

– It’s a price war, no doubt about it.

As for the rationalization the price drop is all because of U.S. shale, consider U.S. production has increased 1M bopd in the last 12 months but there is an estimated 2M bopd oversupply at the moment. I doubt a 1M increase caused a 2M oversupply.

Article says the IMF estimates the OPEC countries have combined reserves of $826B, which makes it possible to ride out the likely $257B losses they will run in 12 months (said loss appearing to be the reduction in their top line revenue needed to fund their national budget assuming they would have otherwise maintained production and the previous high prices).

Guess is prices will recover in the second half of 2015 as producers are forced to scale back production.

In ancient history, the article points out that in 1986, Saudi Arabia flooded the market with oil, dropping prices 67% to $10/bbl, collapsing the US industry, triggering 25 years of declining US production.

I hadn’t seen that explanation before for the near-dead oil sector in the U.S. during the late 80s and into the 90s. If that is a correct analysis, that means there was a quite successful price war in 1986.

Of course, another factor is that radical price drop also played a major role in collapsing the bad ol’ Soviet Union back in the bad ol’ days.

One analyst thinks the goal is a rapid drop in prices to force faster production drops.

1/12 – American Interest – Fissures Widening in Once-Relevant OPEC – Venezuela and Iran are pushing the Saudis to cut production. The fissures widen.

Widely reported amounts needed to meet their national spending plan:

  • $120 – Venezuela
  • $140 – Iran
  • $  90 – Saudi Arabia

There’s gonna’ be a whole lotta’ hurtin’ in a lotta former-cartel capitals as oil prices drop through high $40s and the rig count only drops by a couple every week in Bakken.

Article suggests there isn’t a lot of concern in Saudi Arabia over possibility the Iranian economy is crippled. Of course, they are hoping for the same outcome in North Dakota and west Texas.

1/13 – Wall Street Journal Oil Extends Selloff as OPEC is Seen Standing Firm on Output – Brent crude closed down on Tuesday at $46.50 for February delivery. NY Merc closed at $45.89. Those are the lowest closes since spring 2009.

Reason for drop, per the article, is the UAE oil minister said OPEC won’t change their output. He thinks it could take 2 or 3 years for supply & demand to stabilize. The US EIA expects global supply to exceed demand throughout 2015 and 2016.

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