John Kilduff, partner at Again Capital   9 Hours Ago  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.

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  I've been reading that this will likely drive well costs down very significantly.  One article was predicting a cost of $5M average.  Makes me wonder what kind of profit is involved in drilling & completion: 300%?  Any idea?  

It could reduce drill costs eventually but most rigs are under long term contracts.  Companies have to pay the day rate whether the rig is drilling or stacked.  The cost of completion might come down quicker.  What play was the article referring to for the $5MM well cost?  It couldn't be very deep.

This Forbes Article is saying that the profit ratio is only around 15% which would mean...

15% profit at $100/barrel.  5.5% at $90/barrel.  1.8% at $80/barrel.  If the author's facts and math are correct.  Whether that is the case or not the contention that high cost shale plays are vulnerable to low crude prices is a fact we can't ignore.  And that the highest cost plays do not generate sufficient return on investment to be developed at current prices.  If the price of a barrel continues to decline below $70 the TMS Play is frozen.  And Goodrich Petroleum is in serious trouble.

So if prices stays around $50, the US would have to start importing oil again?

That would put the Saudi's back in business again, right?

The US is importing oil now.  Who knows what would happen at $50?  I don't think it will go that low.  The vast majority of US oil is coming from a couple of plays that could probably sustain production for quite a while at sub-$70 crude prices as could the Saudis.  The remainder of the US oily/wet shale plays would be in trouble.  And the companies that are over extended to acquire and develop acreage in the less economic plays are in trouble. 

Just thinking that if the Saudi's can get the prices below our cost to produce oil, at least they would be moving oil. Higher prices doesn't do them much good if we produce our own rather than be dependent upon them.

Although some think that the Saudi decision to maintain production in the face of falling prices is aimed at US shale producers, other "experts" contend that the main reason to do so is to preserve market share in Asia.  In other words the Saudis are more interested in those producers, including their OPEC partners, with whom they compete with to supply China and other Asian countries.  That makes a lot more sense to me than an attempt to shut down US shale production.  Excepting emerging plays with questionable economics, the US shale plays can weather any cyclical price decline as well as Saudi Arabia or any other major producer.  Shale plays shut down by depressed price will likely spring back to life in the future at higher prices.

I am not much given to conspiracy theories and I do not know if the theory that the Saudis are acting at the behest of the U.S. Government qualifies as such.  The theory goes that the Saudis are cutting back at the request of the U.S. to give traction to the sanctions against the Russians.  If so, unintended consequences may arise when the jobless numbers increase.

Excerpt from A Different Kind of Oil Crisis

By Leah McGrath Goodman / November 18, 2014 2:06 PM EST

Link to full artiacle:

“Changes in the forecast of Saudi Arabian oil production are crucial to the revised outlook and a major source of uncertainty in the year ahead,” the U.S. Department of Energy’s statistics branch, the Energy Information Administration (EIA), stated in this month’s outlook.

Market observers had theorized that the world’s largest oil exporter may trim exports as a way of propping up oil prices, but after Saudi Arabia recently cut the price it’s charging U.S. clients, that seems less likely.

“Saudi Arabia’s No. 1 priority is they don’t want to lose their market share,” says Luay al-Khatteeb, a fellow at the Brookings Doha Center, an offshoot of the Washington-based public policy organization.

Taking that cue, the EIA recently revised upward its estimate of Saudi oil output, putting it at above 9 million barrels a day for 2015. Of course, keeping oil output high will only reduce how much Saudi Arabia makes on the barrel, but unlike Russia, Saudi Arabia can take it.

“With some of the lowest cost-per-barrel production in the world, and cash reserves approaching $1 trillion, Saudi Arabia is better positioned to withstand a lower oil price than other producers and can make up some of the lost revenue from lower prices by maintaining supply volumes,” the EIA said.

Yes, if they can undercut other's production costs, they'll still get all the business.
Less on something is better than more on nothing.

I don't think we should expect the Saudis to blink.  And I don't expect them to bail out their OPEC brethren.



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