WHY OIL IS MORE LIKELY TO TEST $50 THAN $100 AGAIN NEXT YEAR
John Kilduff, partner at Again Capital 9 Hours Ago CNBC.com Heinz-Peter Bader | Reuters
Saudi Arabian Oil Minister Ali al-Naimi.
When oil and gasoline prices are soaring, oil analysts like myself try to assuage the fears of consumers with the old saw: There is no better cure for high prices than high prices.
The succinct analysis of commodity market dynamics likely makes motorists irate, as they pay $100 or more to fill up the family SUV. They fail to appreciate how efficient market forces can be, even at that particular moment of pain.
However, that is precisely why oil prices are falling now—and will likely continue to fall in the coming months to as low as $50 per barrel!
On Thursday, in its weekly inventory report, the U.S. Department of Energy reported that oil production in the United States rose to its highest level in 29 years to just over 9 million barrels per day. To put that in perspective, the U.S. is now nipping at Saudi Arabia's heels, with that country currently producing about 9.6 million barrels per day.
The surge in U.S. oil production is due to the immense success of a reborn technology: hydraulic fracturing (better known as fracking), which has liberated millions of barrels of oil and millions of cubic feet of natural gas from fields that were thought to be bereft of fossil fuels.
Opponents of the practice have their work cut for them given the tremendous impact the drilling is having on oil and natural gas prices.
The second part of the low oil price story involves several key pipeline upgrades that actually changed the flow of oil, bringing it from the middle of the country to the Gulf Coast, where it is needed to supply the majority of the country's refineries.
The changes have been so impactful that, at times, Gulf Coast storage facilities have been nearly filled to capacity. The U.S. has virtually ended imports of crude oil from West African countries, such as Nigeria, which used to be a key source of supply.
OPEC members are now scrambling to prop up oil prices, and find buyers for their oil. During the past several months, tankers of oil have sat idling, waiting to sail to port to unload their cargo. Saudi Arabia, Kuwait and Iran are in a battle to secure sales to China and other Asian buyers at the expense of other countries in the cartel.
It is not helping their cause that Alaska North Slope crude oil is now being exported to South Korea on a regular basis now. That started in September.
Adding to the supply glut has been the return of Libya's oil production, despite a raging civil war with two competing governments asserting governance over the country. Also, even as ISIS forces roll through Iraq, exports continue to rise to record post-Iraq war levels.
The Kurds were finally able to strike a deal with Baghdad that will allow exports from Northern Iraq to surge, as well, in the coming months. If that's not enough, North Sea production is set to rise over 11 percent in December, due to upgrades to the system there.
In other words, increasing amounts of crude oil are hitting the global market, left, right, and center.
Several OPEC members are now calling for a production cut to be announced at their upcoming meeting, but they are looking for Saudi Arabia to carry the load, which is not going to happen. Based upon bewildering statements by the Saudi oil minister this week, the Saudis do not appear inclined to cut.
Market share is more important to them because they want to maintain their relevance. With their low cost of production, they believe they can sweat out the higher-cost competition, including U.S. frackers.
So, the OPEC meeting on Thanksgiving Day will likely end in discord and cause another leg lower for oil prices.
By next March, U.S. oil production will be nearing the 9.5 million barrel per day level, and possibly higher. With the winter coming to an end then, the global market enters a slack demand period, which will increase the downward pressure on prices.
Oil producers of all stripes will be staring down prices near the $50 level. Russia's President Putin is already preparing for a "catastrophic" oil price drop.
Something will have to give. Saudi Arabia and other OPEC members will be forced to curtail production or U.S. oil producers will have to throw in the towel as they await a price rebound. The U.S. needs to be careful what it wishes for, in terms of setting back the march toward energy independence.
The surging production trends will have consequences, in addition to the huge benefit to consumers. After all, as the saying goes, there is no better cure for low prices than low prices.
Views: 1634
Replies to This Discussion
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Permalink Reply by tc on
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As the USA is now the largest oil producer, I am sure that the Saudis think it is now time for the US to cut production if they want higher prices.
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Permalink Reply by Steve on
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It wouldn't bother me one bit if oil went to $10 and the Saudi's and the other OPEC members had to eat dates to survive for the next 10 years. Shale oil will still be here for us to harvest when prices are better. On another note, anyone predicting oil prices over 1 year out is no safer than a weather man predicting the number of hurricanes we will have . The Saudi's purportedly need oil to be at $83 to support their current budget requirements. Granted, they have a lot of money to tide them over but they can't afford to cut social services, which they will have to do eventually to prevent social unrest. Some OPEC countries do not have a lot of cash reserves but do spend a lot on social services to stay in control,so, the pressure is on among OPEC members to cut production to support higher prices - the Saudi's will not be able to snub their noses at the other OPEC members for very long. Some of the shale plays will suffer and some operators will be sold off at a bargain, but the fracking boom may be curtailed temporarily but is not nearly "over" as the Forbes article seems to suggest. IMO
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Permalink Reply by DTrucks on
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Take away the corporate jets, platinum parachutes,
multi million dollar salaries & bonuses, & other bling,
and the numbers change. In other words, they may
still be able to make it work.
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Nov 12th Bakken Magazine Article:
...could decrease well costs by $1.3 million to $2.6 million on a $6.5 million well.
http://www.thebakken.com/articles/874/searching-for-unconventional-...
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Permalink Reply by Skip Peel - Mineral Consultant on
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Bakken wells aren't TMS wells. That would be an apples to oranges comparison.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Halliburton-Baker Hughes Deal Will Only Prolong The Shale Drilling Downturn
forbes.com 11/17/2014 @ 10:52AM
After a week of negotiations that on Friday turned into a must-see soap opera, Halliburton HAL -1.4% is buying Baker Hughes BHI -2.58% in a deal that values Baker at an enterprise value of $38 billion, including $34.6 billion in equity value, a 41% premium. Baker shareholders will get 1.12 Halliburton shares plus $19 in cash for each share. The combined company will boast revenues of more than $52 billion, with 136,000 employees. The deal is expected to close in mid 2015, and Halliburton CEO David Lesar forecasts $2 billion in annual cost synergies and cash flow accretion to Halliburton by the end of the first year.
It was October 13, when Halliburton made an inital overture to Baker Hughes. Talks got testy on Nov. 4 when Baker CEO Martin Craigshead objected to pressure from Halliburton to get a deal done. And they got nasty last Friday, when Halliburton threatened to wage a proxy battle and replace Baker’s board with directors more amenable to a deal. (For more, The Wall Street Journal has covered this story here, here and here.) Have Craigshead and Lesar now kissed and made up? We’ll see as the deal unfolds in the months to come.
Thus Halliburton + Baker Hughes becomes the first megadeal in what promises to be a wave of consolidation in the oilpatch as plunging crude oil prices bring about an abrupt popping of the shale bubble. So what other companies are now in play? National-Oilwell Varco, Weatherford International , Cameron International CAM +0.71%, FMC Technologies FTI +0.11%, could all be in play for M&A. Potential shoppers outside the core of the industry include General Electric GE +1.5%, which has been moving aggressively into the oil services business with acquisitions including Hydril, Vetco-Gray and a compression business of Cameron.
Ironically, although this deal will be good for the competitive position of oilfield service companies, it won’t do much, if anything, to help the Exploration & Production companies that take on the risks and make the decisions. Usually when oil prices drop and drilling budgets get dialed back (as they are now), the E&P guys can lean on the service providers for better deals. Baker Hughes, which has perennially been less profitable than Halliburton or Schlumberger SLB -0.37%, would have been especially susceptible to arm twisting. But not anymore.
All else equal, by helping prop up marginal pricing for fracking services, this deal will drag out the downturn in shale drilling.
Link to full article: http://www.forbes.com/sites/christopherhelman/2014/11/17/halliburto...
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Permalink Reply by Skip Peel - Mineral Consultant on
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Oil slips on U.S. crude inventory rise
Reuters with CNBC.com staff November 19, 2014
Oil prices slipped lower after data from the U.S. Department of Energy's Energy Information Administration showed that crude supplies unexpectedly rose by 2.6 million barrels last week.
A Reuters poll of seven analysts had forecast crude stocks to fall 800,000 barrels in the week through November 14.
U.S. crude was down 52 cents at $74.09 a barrel shortly after 10:30 a.m. EDT. The U.S. crude futures contract closed $1.03 lower on Tuesday.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Halliburton, Baker Hughes merger could reduce producers' leverage
Nov 18, 2014, 5:12pm EST Updated: Nov 19, 2014, 8:31am EST
Aaron M. Sprecher | Bloomberg
Halliburton Co. signage is displayed on the Dual-Fuel Q10 Pumping Unit (fracturing pump) outside of the company's facility in Houston, Texas.
The marriage of oilfield services giants Halliburton and Baker Hughes may help insulate the two from declining oil prices and competition from rival Schlumberger Ltd., but it also may reduce the leverage producers have in negotiating service contracts.
"I would suggest the smaller producers can become frustrated after losing what semblance of leverage they thought they had for negotiating field services," said David J. Marks, a consultant and fuels manager for the Beech Hollow Power Project, a proposed natural gas-fired power plant in Washington County.
"Here now may be opportunities for consulting companies to create real value by brokering service contracts for groups of small local producers," he said.
"Frankly, the small producers have been the backbone of the natural gas industry here in western Pennsylvania for many years. I would like to see them remain viable," he said.
Halliburton is the world's second-largest oilfield services company, followed by Baker Hughes, which is No. 3. The two announced Monday that they would merge through a deal in which Halliburton will acquire all of Baker Hughes' outstanding shares. The stock and cash deal is valued at $34.6 billion, or $78.62 per Baker Hughes share.
Based on 2013 results, the combined company would have revenue of $51.8 billion, more than 136,000 employees and operations in more than 80 countries.
Both companies have operations in southwestern Pennsylvania.
David Wallace, co-founder and past CEO of the former Indiana County-based Superior Well Services, said he's not so sure the merger will raise the floor on prices.
He said that there is still excess equipment floating around, and barring a significant uptick in drilling, that's not likely to change in the short term.
Superior was sold in 2010 to Nabors Ltd., which is now merging it with C&J Energy Services.
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Permalink Reply by William C. Morrison on -
Nothing new about exporting oil from the North Slope of Alaska, been doing it for years.
If the Saudi's cut back on production or return to old pricing structures the price of crude oil will rise. The market as referred to in the opening of the article is very efficient.
I suspect high risk endeavors like TMS will slow down or stop. The Permian Basin in Texas is going great guns with slick fracking. So I think we have reached a plateau in pricing for a while. It will shake out the unstable oil companies. The big guys like XOM will do okay as they are in the total side of the business and make money on refining as well as exploration. And I think the Russians will take a back seat for a while because their economy, totally crude based will suffer.
No more cheap oil, but there is a glut and that don't help matters at all.
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