OPEC vs. U.S.: Who will blink first on oil?

CNN Money ^ | January 13, 2015 | Travis Hoium

[shepardspie33]

The Merriam-Webster dictionary offers this definition for the word capitulate: "to stop fighting an enemy or opponent; to admit that an enemy or opponent has won."

I'm not sure who oil companies are fighting, whether it's oil traders, OPEC, Russia, or some invisible market force, but they're losing. The domestic standard, West Texas Intermediate crude oil, fell below $45 per barrel on Tuesday, while the global standard, Brent crude oil, is now well under $50.

Who is going to stop the bleeding? OPEC is not cutting production, the U.S. is expected to increase output in 2015, and Russia has little choice but to sell whatever crude oil it can just to make money. But someone will have to capitulate if these players aim to halt the slide in oil prices. Energy companies are nervous about a cutback in spending, but so far rigs are still finding work drilling for oil. Who is going to blink first? Depending on whom you ask, oil markets are oversupplied by 1 million to 2 million barrels per day. That creates a problem with oil prices because supply and demand are very inelastic, meaning they don't change very much even if prices change dramatically. Think about your own gasoline usage. If prices fall 50% how much more do you drive? Probably not very much.

[gogeo]

This assumes Margins is constant. Usually, margins are compressed when prices are falling.

Constancy of margin is irrelevant. Margin X volume always equals profit.

If one does the math, that means that it makes no sense, as some are alleging, that SA is dropping the price to make more money. If the price of oil drops by half, it would be necessary to at least double volume of oil pumped. That's not happening.

[gogeo]

sales is a function of volume

Yes, as in volume X price=sales.

And unit price-cost=margin.

It's all math.

[econjack]

Actually, we are agreeing. All I was saying is that what they are doing is not consistent with trying to maximize profits, so there must be some other reasons for their actions and I was speculating that the reasons are political more than economic.

[gogeo]

I think there's a political element. But doing what they are doing is consistent with maximizing their long term return on their reserves.

I'm not a greenie by any means but I believe that oil will be relegated as old technology for energy within 50 years. I suspect SA thinks so too. Once the world uses another primary energy source their reserves are worth little.

They have to pump while there's demand.

[econjack]

You’re probably right...