The reason oil could drop as low as $20 per barrel

Reuters ^ | December 19, 2014 | Anatole Kaletsky

[C19fan]

How low can it go — and how long will it last? The 50 percent slump in oil prices raises both those questions and while nobody can confidently answer the first question (I will try to in a moment), the second is pretty easy.

Low oil prices will last long enough for one of two events to happen. The first possibility, the one most traders and analysts seem to expect, is that Saudi Arabia will re-establish OPEC’s monopoly power once it achieves the true geopolitical or economic objectives that spurred it to trigger the slump. The second possibility, one I wrote about two weeks ago, is that the global oil market will move toward normal competitive conditions in which prices are set by the marginal production costs, rather than Saudi or OPEC monopoly power. This may seem like a far-fetched scenario, but it is more or less how the oil market worked for two decades from 1986 to 2004.

[discostu]

Yes but bankruptcy isn’t fast and assets can stay tied up in court for a long time. And probably if one company couldn’t survive getting that oil out at $50/b other companies won’t have better luck.

[gogeo]

I understand, but remember the cost basis for the acquirer will not be the cost basis for the seller. It will be marked down to market (IOW, what it’s worth), whatever that is.

[discostu]

Of course if they’re smart they realize that the market is glutted and they shouldn’t actually do anything with the oil until a few more place have gone under and the price has gone up.