Posted on 11/20/2014 5:12:35 AM PST by thackney
My favorite quote by H.L. Mencken is ‘a cynic is a man who, when he smells flowers, looks around for a coffin‘. A bit morose, I know, but this appeals to the contrarian in me. My second favorite is überly-applicable to US shale oil break-evens: ‘For every complex problem there is an answer that is clear, simple, and wrong‘. For there is no lack of estimates flying around as to the price level at which US shale oil production could be curtailed. The problem is, they all appear to be different.
The debate was ignited by OPEC, after comments from Secretary General El-Badri. The Libyan said late last month that tight oil (aka US shale) would be the first to be impacted by the drop in oil prices, stating:“If prices stay at $85, we will see a lot of investment, a lot of projects, a lot of oil going out of the market.” He said half of shale oil would be out of the market at a price of $85.
This view is at the high end of the range when it comes to estimates, with the IEA seemingly taking the other side of this bet. Executive Director, Maria van der Hoeven, said last month that 98% of U.S. shale plays have a break-even price of below $80.
The IEA’s Chief Economist, Fatih Birol, tempered this optimistic view in recent days, stating current low oil prices would hurt investment in the industry and likely hurt production growth going forward. That said, slowing production growth is very different from an Opecian view of ‘a lot of oil going out of the market’.
The below graphic of oil break-evens from the Wall Street Journal highlights the current conundrum faced. Not only are shale break-evens wide-ranging from play to play, but they can also wildly vary within each formation itself:
Further conjecture is stoked as oil prices have been unable to rebound back above $80. Oil producers on earnings calls are shrugging off the suggestion that this lower price environment is having any impact (either that or they are not being completely transparent).
The CEO of Halliburton, David Lesar – the world’s biggest provider of fracking services – endorses this notion somewhat, saying U.S. shale oil producers will be fine, as long as oil remains between $80 and $100. Meanwhile, signs of rigs being idled, from Texas to Utah is providing a counter-point to this argument.
The below chart from Goldman Sachs (via Zero Hedge) points to a price of $75 where production would start to slow, a number affirmed by other bank research:
In addition, the level of financial pain which each individual producer can withstand is going to vary wildly; larger producers may be more financially stable, while smaller producers may be more highly leveraged.
It was this Reuters summary of various bank estimates which instigated me to go all Mencken in the first place, as break-evens are so wide-ranging, given likely different methodologies and assumptions. The below graphic (pilfered from Business Insider) shows a similar trending to the above image, emphasizing the gravitation around the $80 mark:
So where does this leave us? Despite wide-ranging estimates, consensus indicates that some degree of US shale oil production would be impacted at around current levels. Whether this translates to a mere slowing in the rate of oil production growth due to lower future investments, or a more material crimping of production, is yet to be seen. But if OPEC seems intent on leaving this up to market forces as opposed to intervening to balance it, then it would appear we may well find out.
I leave where we started, and with a quote from H.L. Mencken: time stays, we go.
I don’t understand the OPEC strategy. OPEC has gotten used to $100+/bbl oil and they cannot possibly maintain these prices for very long.
When OPEC goes back to $100/bbl oil, domestic shale oil production would simply restart.
Or is this just capitalism working out the best price based on supply vs. demand, and OPEC strategies are irrelevant?
One idea is starving ISIS.
Saudis have reasons better than shale to let prices fall
http://www.freerepublic.com/focus/f-news/3225105/posts
In economics, they refer to the "income effect" vs. the "substitution effect". The Saudis don't have a substitute for the oil revenue. The only way they may have to replace the lost profit from the falling oil price is to pump even more oil. This increase in production would, of course, just drive prices down even further.
I don't really know much about the current state of the world oil market, so I can't really make an intelligent prediction, but I will predict anyway. Oil prices will continue to fall, a lot.
Unless the price drop is far more drastic than what we see today, I would expect sell-offs and mergers rather than much Bankruptcy.
There are many with strong financial positions that would buy the assets at reduced prices.
This price fall will be a godsend for Exxon and Chevron, two companies that can’t replace their usage currently with new finds. We used to have a saying on Wall Street decades ago that the best place for them to drill for oil was in the market.
If prices stay here look for both of them to start to at least provide working capital in joint agreements in exchange for a percentage of the production or even outright takeovers. Someone like Chesapeake, given how much they have cleaned up their balance sheet and their production costs, would look very attractive to either of them at these price levels.
Remember, to a major oil company, these assets, being in America, carry a political safety that many other places to drill do not.
Absolutely true, we have a history to observe, they've been impotent for some time now for the reasons you provide.
For American shale plays, natural gas is the ace in the hole, natural gas prices are up significantly, while the price of crude has been declining.
Whatever the negative impact on American crude extraction, the positive effect of cheaper gasoline to consumers more than compensates.
http://www.nbcnews.com/business/autos/pump-prices-tumble-gas-guzzlers-soar-fuel-sippers-slide-n248631
I guess that is true, there are a ton of properties for sale so those who can off load enough properties to reduce their overhead debt costs will not go away. Those who cannot, well, I expect few actual chapter 7s, more like chapter 11s where the equity holders get wiped out.
“The article mentions the possibility of OPEC cutting production. I really doubt that will happen. They might agree to production cuts, but they will all cheat. Most of these countries are completely addicted to the oil revenue.
In economics, they refer to the “income effect” vs. the “substitution effect”. The Saudis don’t have a substitute for the oil revenue. The only way they may have to replace the lost profit from the falling oil price is to pump even more oil. This increase in production would, of course, just drive prices down even further.
“
Being, among other things, an economist, I have seen the many different types of commercial terms countries impose.
Most of the third-world countries that are overly-dependent upon oil sales are finding a difficult time right now.
This is chiefly due to their history of possessing a greater and greater amount of the production “take”. There is little money which exchanges hands when an international company explores, develops and produces oil: most of the return a company gets is in the form of oil it is allowed to export to cover capital costs and a modest profit.
The company does not take the big hit when oil prices fall. It is the country due to their big production share.
To exacerbate things further, many countries like Saudi Arabia have kicked out internationals companies and allowed only their own company to operate. These countries take even a bigger hit.
The moral of the story is: When prices are high, places like the US are where you want to be as you get an improved margin. When prices weaken like now, you want to be in the OPEC countries as your return on investment falls less.
Watch the big internationals go after new developments and new contracts in the big third-world oil producers.
If Saudi production is a good proxy for OPEC production, the cartel isn't producing more and it isn't producing less. The reason prices are coming down is presumably that non-OPEC sources have finally upped production to the point that prices have to come down for the oil market to absorb it. It's more or less the kind of thing you get when there's a bumper crop of potatoes. Spud prices crash.
The Saudis haven't increased or decreased oil production.
Their exports had been dropping.
Saudi exports in August fell to the lowest since December 2009, as the kingdom pulled back exports in an attempt to improve revenues by reducing pricing pressure on US domestic crudes, she said.
http://www.ft.com/cms/s/0/e15b4e4e-6382-11e4-8a63-00144feabdc0.html#axzz3JeD78B2K
November 4, 2014
HEY...that is good idea, because after ransacking and running off the Kurds and Iraqis, then the food supply may be getting low. Someone in ISIS would have to be getting supplies from Syria or Turkey??? I like it, but how do we implement it?
The following month, Sept, bumped up a little but still down from the summer.
http://www.hellenicshippingnews.com/saudi-crude-oil-exports-edge-up-to-6-72-mln-bpd-in-sept-data/
20/11/2014
The world’s top oil exporter shipped 6.722 million bpd of crude in September, up from 6.663 million in August but lower than July’s 6.989 million, data published by the Joint Organisations Data Initiative (JODI) showed.
Production rose to 9.704 million in September from 9.597 million in August but was lower than July’s 10.005 million, the data showed.
Good discussion over here.
Saudi Arabia is all desert. Syria and Iraq have significant chunks of agriculture. Iraq is the land of the Two Rivers (Tigris and Euphrates). Food shouldn't be a problem for ISIS. Gasoline and diesel will be, at the rate ISIS controlled refineries are getting bombed.
ISIS would need slaves to work the agriculture, and if we keep drones tearing up the farm...what food? what meat?
Data for this Date Range July 31, 2014 9.84M June 30, 2014 9.69M May 31, 2014 9.69M April 30, 2014 9.69M March 31, 2014 9.69M Feb. 28, 2014 9.89M Jan. 31, 2014 9.94M Dec. 31, 2013 9.84M Nov. 30, 2013 9.84M Oct. 31, 2013 9.84M Sept. 30, 2013 10.14M Aug. 31, 2013 10.24M July 31, 2013 10.04M June 30, 2013 9.84M May 31, 2013 9.64M April 30, 2013 9.44M March 31, 2013 9.14M Feb. 28, 2013 9.14M Jan. 31, 2013 9.14M Dec. 31, 2012 9.24M Nov. 30, 2012 9.54M Oct. 31, 2012 9.80M Sept. 30, 2012 9.80M Aug. 31, 2012 10.02M July 31, 2012 10.02M
From Reuters, October production numbers:
June 30, 2012 10.02M May 31, 2012 9.73M April 30, 2012 9.93M March 31, 2012 10.03M Feb. 29, 2012 10.04M Jan. 31, 2012 9.84M Dec. 31, 2011 9.84M Nov. 30, 2011 9.84M Oct. 31, 2011 9.54M Sept. 30, 2011 9.74M Aug. 31, 2011 9.94M July 31, 2011 9.84M June 30, 2011 9.64M May 31, 2011 8.94M April 30, 2011 8.94M March 31, 2011 8.94M Feb. 28, 2011 9.14M Jan. 31, 2011 9.14M Dec. 31, 2010 8.94M Nov. 30, 2010 9.04M Oct. 31, 2010 8.84M Sept. 30, 2010 9.34M Aug. 31, 2010 9.34M July 31, 2010 9.34M June 30, 2010 9.24M
The report by economists at OPEC's Vienna headquarters said Saudi Arabia had told OPEC it produced 9.69 million bpd in October, little changed from 9.704 million in September.Bottom line is that they're not doing anything drastic. Deep water and fracking have finally raised production levels to the point that prices have to come down for the market to clear.
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