Posted on 11/29/2014 8:41:39 AM PST by Kaslin
The biggest news for the United States stock market and American consumers happened on Thanksgiving in a far off desert kingdom. Saudi Arabia has taken the big gambit of not cutting production which means downward pressure on oil will continue, and that means less revenue for them. Why would a nation that gets 90% of their revenue from oil allow the price to plunge? I’ve said it several times, but I’m more convinced this is their (last) chance to crush, or at least derail/stall, America’s fracking miracle.
It’s a war without bullets, but make no mistake, it's also about no prisoners. According to the Wall Street Journal, the Eagle Ford Region is the only drilling region still able to be profitable with oil prices at a 4-year low of approximately $69.27 per barrel.
| Drilling Region | Breakeven Begins |
| Permian Basin | $75 |
| Bakken | $75 |
| Eagle Ford | $65 |
| Mississippi Lime | $83 |
| Texas Panhandle | $81 |
| Niobrara | $78 |
| Scoop | $91 |
| Tuscaloosa Marine | $86 |
In the meantime, this is party time for American consumers as gasoline is poised to get even cheaper.
Early reports from retail land shows robust foot traffic at malls and shopping centers, but not sure how much people are buying, although it’s clear retailers are getting smarter and smarter about coaxing people to malls in the internet era and getting them to buy stuff.
Please note, due to the shortened trading session, there will not be an afternoon commentary. We hope everyone has a safe and wonderful weekend.
Why is Saudi Arabia doing this NOW? Maybe because Obama stabbed the Saudis in the back by making a deal with its mortal Shiite enemy, Iran, that will allow the Ayatollahs to continue to build their nuclear bomb.
Earlier, the West had imposed sanctions on Iran to hurt its economy and therefore stall its nuclear program. However, Obama has now lifted those sanctions.
Also, for years the Saudis, like the rest of the world, had believed that the U.S. and/or Israel would destroy Iran’s nuclear facilities with air strikes. Remember Bibi Netanyahu’s Red Line? But for some reason, Bibi has turned, if not into a chickensh**, at least into a chicken.
So there stands Saudi Arabia, alone — like the British during the Blitz of World War II — and very vulnerable.
So is it any wonder that the Saudis would try to destroy Iran with their own version of sanctions — lowering oil prices until Iran’s oil-dependent economy — much poorer than Saudi Arabia’s — collapses, or at least has to stop its centrifuges from running?
And how much is Saudi Arabia suffering from lower oil prices? Not much if it hedged its sovereign investments by buying stock in airline companies (American Airlines, up 30% since August, or by loading up on U.S. dollars which trade inversely to the price of oil).
If bringing America’s fracking companies to their knees is the Saudis’ main objective in keeping oil prices low, it won’t be long before its goal has been reached and the situation can reverse itself. However, if the Saudis are determined to destroy Iran and its Ayatollahs, we could be in for a long siege.
In which case, the airline stocks will be flying into the stratosphere and so will their investors. American Airlines (symbol: AAL).
The US Oil Patch and US Oil Patch innovation has been written off many times. This business has Booms and Busts. The smart Oil Patch players know and plan for this.
Let the camel jockies run the price down, its them that is losing both money and their dwindling reserves. The US oil Patch will still have the ability to rein them back down when they try the next cut in production to run the price back up.
Globally, this will hurt Putin, ISIS, Venezuela and Iran much more than the US.
Farmland does not equal oil, mineral ownership does and that ain’t been for sale in a long time. SD may be one of the States that limit foreign ownership.
Don't use the word "Farm" when talking to any of the ranchers out in western NoDak. They're pretty sensitive about that.
Once, when in the Bowman area looking for a place to shoot prairie dogs, I stopped at a ranch and asked the owner. Once I said the words 'field" and 'farm', he lit up like a roman candles. To wit: "Do you see a plow around here? I ranch." I left out a few non-PG adjetives.
Then he told me to get the hell off his property.
Just put a tariff on imports to establish a price floor, and reduce the tariff if the price increases. America keeps working, the treasury takes in money, and for at least a range of prices, people can plan what fuel will cost.
The big fish will eat the highly leveraged smaller ones, and life will go on.
If the boom busts. The biggest players might reduce activity and contractors will be pressed to reduce rates and prices (we call that competition). With the amount of investment involved, unless the price drops below lift costs nothing will be shut in.
Maybe rent will drop to more reasonable levels, too.
The real question is one of just how long even the Saudis can keep taking a hit to try to harm the US.
In the meantime, those few who defaulted will have lost production assets to banks, who will realize a handsome profit when the price goes back up, and those who kept on drilling new wells will be in a position to do the same because they will have more oil to sell.
The surviving producers, which includes some well-backed players with plenty of resources, will increase drilling activity and the game will be on again. Only once in the history of the Williston Basin has drilling completely stopped since oil was discovered, and that year sweet crude was selling for $6.50 a barrel.
Why? Farm prices aren’t in the tank, and a lot of farmers are flush with oil money, too. Agriculture is our other major industry up here. We don’t need a bunch of foreign buyers coming in and buying up farmland.
Responding to several comments.
The Saudis have not increased production 1 bpd. Not at all. They did not drive the price down. Why are all eyes on them to drive a price up (by cutting their own revenue via reduced pumping)? They did nothing to cause this. No reason they should be the party to fix it.
They did a tiny price reduction to the US in early November, at which time oil was already down about $25 - $30 since June.
Repeat, the Saudis didn’t do any of this. No reason they should be the party to “fix” it.
NoDak’s reclamation bond is $20K. That won’t even dent hauling stuff from a pad and pouring concrete down a hole. Price for all that, maybe $150K. NoDak will be stuck with it. Future such bonds will be $250K.
Big guys will buy out small guys? Why? The small guys were late to the party and didn’t buy sweet spots. Why would big guys want to buy less sweet spots, and with what money would they buy it when they owe billions for their own well financing that now can’t be serviced?
Suppliers will cut prices? Suppliers are about to be stiffed. They will go COD and/or elevate prices because the purchaser is now untrustworthy. They MUST guard against getting stiffed by the drillers. If the drillers want 60 day loans (which is that placing an order without paying up front is) they can get it from a bank and pay COD. If the bank won’t lend, that will say a great deal.
As for ho hum, it’s just another boom bust, there is no history for shale. It’s very credible, per all of the above, that this is an ending that is permanent.
Saudi wells break even at about $10 per barrel.
USA wells, specifically new wells, break even at $60 or higher.
Economically, it would make more sense for the USA to bomb and completely destroy the Mideast oil fields.
Then, we could sell our oil for $500 per barrel to foreigners and easily subsidize American citizens.
Of course, American oil reserves would run out after a few weeks, but Obama could solve that problem with an Executive Order.
Unless the Fed prints up a few hundred billion and hands it to frackers.
Odds of that?
Don’t propagate such nonsense. Saudi Arabia doesn’t tax its people like we do. They fund their government with oil sales.
Right now, the Saudi national budget needs $89/barrel Brent oil prices to break even. Sure, Saudi Aramco has $10/barrel in extraction/production costs...but that just pays for Saudi Aramco, not the Saudi national budget.
Moreover, the plunge in oil prices has come from 0bama and Europe relaxing the embargo against Iranian oil exports...they think that they can score a nuke deal...the Persians know to game them as long as they can.
Today, global oil production is on track to be 1.5 million barrels PER DAY greater than global oil demand.
What do you THINK oil prices are going to do?! Pretty soon the global oil surplus will be so large that there won’t be any places left to store the oil above ground.
The whole “fiscal breakeven” meme is weak, at best. Yeah, KSA needs $XXX to fund government.
What happens if they don’t get it? They cut spending or they BORROW. You know any lenders who would refuse to lend to KSA? I don’t. If someone is willing to lend hundreds of billions of dollars per year to the insolvent US government, why in hell would they refuse to lend to God’s Oil Spigot?
KSA had nothing to do with this price event and they are 1) not obligated to act to save the US shale industry and 2) under zero pressure to achieve fiscal breakeven. That’s what deficits do, and they’d be delighted to run a deficit for years if it destroys shale.
I remember reading somewhere that the Chinese had bought a 33% stake in northeast Colorado gas lands, several hundred square miles worth. So while I was being snarky, it wasn’t entirely out of the realm of reason.
My point was that Bakken and other shale lands are reducing Saudi ability to control the price. I haven’t heard of the Saudis buying up foreign oil fields (although they own a large stake in Shell Oil I believe) but the Chinese are doing it. I think they just bought a large field in Alberta.
You’re right, though. In a lot of places the mineral rights just come with the surface rights, but once someone has found oil in the area, you can forget that. They’ll sell the surface but if you want the minerals you have to cough up real money.
Good analysis. I suspect the Saudis have “cooperated” with behind the scenes US international political interests on more than one previous oil price drop.
Subsidize our producers until the Saudi economic terrorists quit.
Just put a tariff on imports to establish a price floor, and reduce the tariff if the price increases. America keeps working, the treasury takes in money, and for at least a range of prices, people can plan what fuel will cost.
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I like your idea a lot better.
Without the current energy jobs, our economy would be in very bad shape.
this isn’t DUMB, the writer is...Saudi have three trillion in reserves and can ride out any storm...only true financial idiots cant see the game they play...in a game of Poker if you bet constant amounts and YOU have the most money youll outlast the competition...
It’s not nonsense.
It’s parody.
How could anyone take my comment seriously?
I was poking fun at the guy who said we should subsidize American oil producers.
If you can’t party with the big boys, don’t show up.
Saudis have reasons better than shale to let prices fall
http://www.freerepublic.com/focus/news/3225105/posts
Waterless Fracking promises more energy, less trouble
http://www.freerepublic.com/focus/chat/3224724/posts
Lower oil prices are unambiguously good
http://www.freerepublic.com/focus/news/3216683/posts
Oil price drop threatens to hit Russia, Iran harder than sanctions
http://www.freerepublic.com/focus/news/3215289/posts
Putin to push trade in Turkey despite disagreement on Syria
http://www.freerepublic.com/focus/news/3232087/posts
Ruble scrapes new lows as Russia braces for cheap oil
http://www.freerepublic.com/focus/news/3232092/posts
China, Russia Sign CNY150 Billion Local-Currency Swap As Plunging Oil Prices Sting Putin
http://www.freerepublic.com/focus/news/3214480/posts
Recession in Russia, revolt in Venezuela? The knock-on effects of tumbling oil prices
http://www.freerepublic.com/focus/news/3216125/posts
Russia says in talks with Venezuela over countering oil price falls
http://www.freerepublic.com/focus/news/3228373/posts
Putin Laughs At Saudi Offer To Betray Syria In Exchange For “Huge” Arms Deal
http://www.freerepublic.com/focus/news/3052444/posts
Well said. One quibble, the Saudis are trying to bring Iran around to their own side, meaning cooperation vis a vis Syria, Lebanon, and Iraq, followed by the capitulation of Turkey, currently the third big regional power (not counting Israel, which is in a league by itself).
Kuwait Says Technical, Not Political, Reasons Behind Oilfield Closure
http://www.freerepublic.com/focus/news/3219958/posts
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