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Why oil under $30 per barrel is a major problem

Why oil under $30 per barrel is a major problem

  1. Oil producers can’t really produce oil for $30 per barrel

A few countries can get oil out of the ground for $30 per barrel. Figure 1 gives an approximation to technical extraction costs for various countries. Even on this basis, there aren’t many countries extracting oil for under $30 per barrel–only Saudi Arabia, Iran, and Iraq. We wouldn’t have much crude oil if only these countries produced oil.

Figure 1. Global Breakeven prices (considering only technical extraction costs) versus production. Source:Alliance Bernstein, October 2014

Figure 1. Global breakeven prices (considering only technical extraction costs) versus production. Source: Alliance Bernstein, October 2014

2. Oil producers really need prices that are higher than the technical extraction costs shown in Figure 1, making the situation even worse.

Oil can only be extracted within a broader system. Companies need to pay taxes. These can be very high. Including these costs has historically brought total costs for many OPEC countries to over $100 per barrel.

Independent oil companies in non-OPEC countries also have costs other than technical extraction costs, including taxes and dividends to stockholders. Also, if companies are to avoid borrowing a huge amount of money, they need to have higher prices than simply the technical extraction costs. If they need to borrow, interest costs need to be considered as well.

3. When oil prices drop very low, producers generally don’t stop producing.

There are built-in delays in the oil production system. It takes several years to put a new oil extraction project in place. If companies have been working on a project, they generally won’t stop just because prices happen to be low. One reason for continuing on a project is the existence of debt that must be repaid with interest, whether or not the project continues.

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Oil Price Crash: How low will the oil price go?

Oil Price Crash: How low will the oil price go?

In August 2015 I gave a crude answer to that question based on history in a post called The Oil Price: how low is low? where I observed:

To get straight to the point. Brent will need to fall below $30 to match the lows seen in 1986 and to below $20 to match the lows seen in 1998.

This observation was based on deflated annual average price from BP ($2014). The notion of $20 oil has since caught on and some commentators are now speculating that $10 is possible. It is time to have a closer look at what history tells us.

This article was originally published on the Energy Matters blog.

First a look at recent oil price action.

Figure 1 Long term picture of WTI and Brent daily spot oil prices. The most recent falls have taken the oil price to the 2008 lows that technically may provide price support. But supply demand fundamentals are against that. The last time we had an over-supply based rout was 1998/99 (arrow) where in money of the day, Brent bottomed at $10/bbl. Adjusted for inflation, that is approximately $15/bbl in today’s money.

On a money of the day basis, the oil price has now reached the lows, and support level, seen in the wake of the 2008 finance crash. In detail, the support level has already been pricked and on a deflated basis, that support is already broken.

…click on the above link to read the rest of the article…

Will Reckless Saudis Seek War with Iran?

Will Reckless Saudis Seek War with Iran?


Now that Saudi Arabia has severed diplomatic ties with Iran and reportedly bombed Iran’s embassy in Yemen, the big question is whether the Saudis are desperate and unhinged enough to launch an attack across the Persian Gulf. While Saudi leaders insist they have no such intent, there are mounting pressures pushing them in that direction.

The ruling family is under unprecedented strain. Its economy is shrinking; it’s bogged down in a seemingly endless war in Yemen; and its human-rights policies are an international scandal. If countries could have nervous breakdowns, Saudi Arabia would be well on its way. And when breakdowns occur, nations do crazy things.

King Salman the President and First Lady to a reception room at Erga Palace during a state visit to Saudi Arabia on Jan. 27, 2015. (Official White House Photo by Pete Souza)

King Salman the President and First Lady to a reception room at Erga Palace during a state visit to Saudi Arabia on Jan. 27, 2015. (Official White House Photo by Pete Souza)

Of course, there is always the possibility that sanity will suddenly descend upon the Saudis.  But reason seems to be in increasingly short supply. Here’s a quick rundown of the reasons why Saudi Arabia is in such dire straits that war with Iran might appear to Saudi leaders as the best remaining option.

Reason #1: Economic collapse.

The 70-percent crash in oil prices since mid-2014 is not unprecedented. Crude plunged some 70 percent during and after the 2008 financial crisis, though it quickly bounced back once central bankers began cutting interest rates. But this time around the realization is growing that the prices will not be coming back anytime soon.

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(Re-)Covering Oil and War

(Re-)Covering Oil and War

The first thing that popped into our minds on Tuesday when WTI oil briefly broached $30 for its first $20 handle in many years, was that this should be triggering a Gawdawful amount of bets, $30 being such an obvious number. Which in turn would of necessity lead to a -brief- rise in prices.

Apparently even that is not so easy to see, since when prices did indeed go up after, some 3% at the ‘top’, ‘analysts’ fell over each other talking up ‘bottom’, ‘rebound’ and even ‘recovery’. We’re really addicted to that recovery idea, aren’t we? Well, sorry, but this is not about recovering, it’s about covering (wagers).

Same thing happened on Thursday after Brent hit that $20 handle, with prices up 2.5% at noon. That too, predictably, shall pass. Covering. On this early Friday morning, both WTI and Brent have resumed their fall, threatening $30 again. And those are just ‘official’ numbers, spot prices.

If as a producer you’re really squeezed by your overproduction and your credit lines and your overflowing storage, you’ll have to settle for less. And you will. Which is going to put downward pressure on oil prices for a while to come. Inventories are more than full all over the world. With oil that was largely purchased, somewhat ironically, because prices were perceived as being low.

Interestingly, people are finally waking up to the reality that this is a development that first started with falling demand. China. Told ya. And only afterwards did it turn into a supply issue as well, when every producer began pumping for their lives because demand was shrinking.

All the talk about Saudi Arabia’s ‘tactics’ being aimed at strangling US frackers never sounded very bright. By November 2014, the notorious OPEC meeting, the Saudi’s, well before most others including ‘analysts’, knew to what extent demand was plunging. They had first-hand knowledge. And they had ideas, too, about where that could lead prices. Alarm bells in the desert.

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Canadian Stocks in Bear Market, Loonie Swoons, Crude Crashes to $16, Consumer & Business Confidence Dives…

Canadian Stocks in Bear Market, Loonie Swoons, Crude Crashes to $16, Consumer & Business Confidence Dives…

“Investment and hiring intentions lowest since 2009”: Bank of Canada

Since Christmas Eve, the Toronto Stock Exchange index has dropped every single day, 10 trading days in a row, including so far today as I’m writing this, the longest losing streak since 2002. Now at 12,210, it’s down 21% from its 52-week high, set on April 17, and thus in bear market purgatory.

Beaten down energy producers, at about 20% of the index, have had a big impact. But the problems are broader. Among the standouts is the must-own, super-growth, TSX mega-cap Valeant, whose shares have plunged 65% from their 52-week high.

The Canadian dollar just dropped below US$0.70 for the first time since spring 2003, to US$0.6996. It now takes C$1.43 to buy a US dollar, up from about parity in 2011, 2012, and much of 2013. That year, Stephen Poloz became governor of the Bank of Canada. His solution was to demolish the currency. So he took it down 28% against the US dollar, with a big supporting hand from the collapsing prices of the commodities that Canada exports. Oil joined them in mid-2014.

The US benchmark WTI is trading just above $30 a barrel. Pundits at major investment banks have their eyes set on $20. Doom-and-gloomers see $10.

Canadian producers aren’t so lucky. Alberta’s heavy crude blend, Western Canada Select, plunged 30% so far this year, and on Monday hit US$16.51 a barrel, according to PSAC. “Lowest close on record,” according to the Globe and Mail.

Canadian producers are already experiencing what doom-and-gloomers are predicting for WTI. The swoon of the Canadian dollar is in part a reflection of this. Poloz is patting himself on the back. He sees benefits for big exporters outside the resource sector, such as auto manufacturing plants and component suppliers to the US auto industry that compete with Mexico.

…click on the above link to read the rest of the article…

Loonie Lurches To 13 Year Lows As Crude Nears ‘2’ Handle

Loonie Lurches To 13 Year Lows As Crude Nears ‘2’ Handle

This can only serve to worsen the death of the Albert Dream, and all the societal depressions that is bringing with it.

The Financial Crisis Of 2016 Rolls On – China, Oil, Copper And Junk Bonds All Continue To Crash

The Financial Crisis Of 2016 Rolls On – China, Oil, Copper And Junk Bonds All Continue To Crash

Buy Sell - Public DomainNever before have we seen a year start like this.  On Monday, Chinese stocks crashed once again.  The Shanghai Composite Index plummeted another 5.29 percent, and this comes on the heels of two historic single day crashes last week.  All of this chaos over in China is one of the factors that continues to push commodity prices even lower.  Today the price of copper fell another 2.40 percent to $1.97, and the price of oil continued to implode.  At one point the price of U.S. oil plunged all the way down to $30.99 a barrel before rebounding just a little bit.  As I write this article, oil is down a total of 6.12 percent for the day and is currently sitting at $31.13.  U.S. stocks were mixed on Monday, but it is important to note that the Russell 2000 did officially enter bear market territory.  This is yet another confirmation of what I was talking about yesterday.  And junk bonds continue to plummet.  As I write this, JNK is down to 33.42.  All of these numbers are huge red flags that are screaming that big trouble is ahead.  Unfortunately, the mainstream media continues to insist that there is absolutely nothing to be concerned about.

A little over a year ago, I wrote an article that explained that anyone that believed that low oil prices were good for the economy was “crazy“.  At the time, many people really didn’t understand what I was trying to communicate, but now it is becoming exceedingly clear.  On Monday, one veteran oil and gas analyst told CNBC that “half of U.S. shale oil producers could go bankrupt” over the next couple of years…

…click on the above link to read the rest of the article…

Petro States Dipping Into Coffers As Oil Price Reality Kicks In

Petro States Dipping Into Coffers As Oil Price Reality Kicks In

Fifty-two years after Johnny Cash’s “Ring of Fire” became the first country album to top the US pop album chart, and the crude complex is stuck in a vicious circle once more.

We have nada-nothing-nil on the economic data front today, as is the way after the first-week-of-the-month-economic-data deluge, although Q4 earning season kicks off after hours today with Alcoa up first, as usual. It won’t be until next week, however, when we really get into the full swing of things on the earnings front.

China’s equity market continues to have a torrid time of it, selling off a further 5.3 percent to start the new week. While European and U.S. equities are looking less ruffled by this news, the crude complex is being dragged lower once again – stuck in a tractor beam, being pulled toward the $30 level it would seem. Gasoline is trying to buck the trend, pushing higher after last week’s inventory report-sponsored plunge.

Related: Statoil CEO: Expect Volatility Now, Price Spike Soon

The chart below is from Capital Economics, and it addresses the current issue of Chinese economic weakness.

(Click to enlarge)

The key point they are expressing (via Twitter) is that although China’s financial markets may be in turmoil, their economic indicators for the most part haven’t shown deterioration since the equity market peaked mid-last year:

While oversupply has been a key driver behind the oil market crash over the last eighteen months, another huge influence has been a strengthening US dollar. Hence, regardless of oil market fundamentals, if you think the U.S. dollar is going to continue strengthening this year, then you have to think that oil prices will continue to trundle lower. (Morgan Stanley do).

…click on the above link to read the rest of the article…

Chart Of The Day: Canadian Heavy Crude Falls To $19.81—–Down From $100 In 2011

Chart Of The Day: Canadian Heavy Crude Falls To $19.81—–Down From $100 In 2011

Petro Currencies Under Fire As Oil Keeps Sliding

Petro Currencies Under Fire As Oil Keeps Sliding

Low oil prices put pressure on the budgets of major oil producing countries in 2015, but the next domino to fall could be their currencies.

Petro-economies with flexible exchange rates have already seen double-digit declines in the value of their currencies over the past year, in percentage terms. But with crude now at 11-year lows, pressure is also mounting on a range of currency pegs. The futures contract for the value of the Saudi riyal, which has been pegged to the dollar for three decades, hit a 16-year low. While Saudi Arabia has no plans to ditch its currency peg, at least officially, the markets are starting to bet that the country won’t be able to maintain the peg due to budgetary pressures and dwindling foreign exchange reserves.

Low oil prices have blown a massive hole in the Saudi budget. For now, Saudi Arabia has chosen a path of austerity in order to try to address the problem. It revealed a budget that calls for reforming fuel subsidies, raising taxes, and lower spending. But for a government that is keen to maintain social stability, slashing public expenditures is not really something it can lean on too much.

Related: BP’s CEO Finally Sees Oil Prices Bottoming Out

With its oil market strategy a priority at the moment, ruling out an effort to significantly increase oil prices through production cuts, the only other option to fix its budget deficit is to abandon its currency peg. The Saudi riyal has been pegged at 3.75 to 1 U.S. dollar, but the futures market sees one-year contracts at 3.82, a 16-year high. Commerzbank AG says the peg is no longer sustainable. “Markets clearly no longer believe that the USD-SAR peg is durable,” Peter Kinsella, an analyst at Commerzbank, concluded. “If they did, then forwards would not diverge from spot prices to any large extent.”

…click on the above link to read the rest of the article…

Canadian dollar dips below 71 cents for 1st time since 2003

Canadian dollar dips below 71 cents for 1st time since 2003

Oil and threat of global conflicts weigh on risky loonie

The Canadian dollar is dropping to levels not seen since the summer of 2003.

The Canadian dollar is dropping to levels not seen since the summer of 2003. (Pawel Dwulit/Bloomberg)

The Canadian dollar lost more than half a cent this morning, pushed down by oil prices and widespread risk aversion, going to below 71 cents US.

Early Wednesday, the loonie was changing hands at 70.90 cents US, down 0.55 of a cent. That’s the lowest level on record for Canada’s currency since the summer of 2003, when the dollar was on a multiyear march upwards from below 62 cents, which it briefly hit in 2002.

The reasons for the loonie’s weakness are a mix of old and new, as oil prices sank back to $35 US per barrel, but also “added pressure from the broader market tone of risk aversion,” Scotiabank foreign exchange strategist Shaun Osborne said in a note to clients.

Broadly speaking, the Canadian dollar is perceived to be a riskier asset than other currencies, such as the U.S. dollar and the euro. Anything with risk attached to it is getting savaged in the current market, as investors consider the possibility of conflict between Saudi Arabia and Iran, coupled with Tuesday’s news that North Korea may have detonated a hydrogen bomb.

On Tuesday, Bank of Montreal chief economist Douglas Porter told a gathering of leading economists that the loonie could fall below 70 cents US before it begins to recover.

Doom and Gloom for North American Oil Producers

To the dismay of U.S. shale producers, oil prices continue their long slow slide into the abyss.  Perhaps the current price of $35 per barrel – an 11 year low – is the final destination.  More than likely, however, it’s a brief reprieve before the next descent.

excess natural gas burns southeast of BaghdadPhoto credit: Mohammed Ameen / Reuters

Oil exporters, including Saudi Arabia and Russia, have maintained high production rates.  Their goal is to bankrupt U.S. shale companies and preserve market share.  At the same time, oil demand is tapering as the global economy cools.

1-World3Global crude oil and condensate (c+c) production as of June 2015. In record high territory.

The combination of high production and declining demand has resulted in excess supply, and lower prices.  The trend of lower prices won’t change until either demand increases or production decreases.  At the moment, it doesn’t appear that either of these factors will change any time soon.

So how low can oil prices go?  If you recall, in the late-1990s, oil prices dropped below $20 per barrel.  Goldman Sachs thinks we’ll see $20 per barrel oil again.

Obviously, oil prices can’t go to zero.  However, this offers little consolation for the many oil companies that borrowed gobs of money from Wall Street to leverage development of fracked wells that require $60 per barrel oil to pencil out.

2-Russia3Contrary to widespread expectations, Russian production has proved more than resilient in the face of low prices. The decline in the ruble and high export taxes on oil (which are based on threshold prices) have left Russian producers in a competitive situation.

Declining Hedges

So while it isn’t possible for oil prices to go to zero.  It is possible for the stock prices of oil companies to go to zero.  In fact, over the next 12 months there could be a rash of bankruptcy’s that results in delisted, worthless shares.

…click on the above link to read the rest of the article…

Why the oil price slump hasn’t kickstarted the global economy

There has only been a modest boost to global growth despite the oil price plummeting to as low as $35 a barrel. But as prices fall so the risks to producers rise

An oil pump at sunset in the desert oilfields of Sakhir, Bahrain
 An oil pump at sunset in the desert oilfields of Sakhir, Bahrain. As the low oil price endures, so the risks rise for producers. Photograph: Hasan Jamali/AP

The good news is that this welcome but modest effect on growth probably will not die out in 2016. The bad news is that low prices will place even greater strains on the main oil-exporting countries.

The recent decline in oil prices is on par with the supply-driven drop in 1985-1986, when Opec members (read: Saudi Arabia) decided to reverse supply cuts to regain market share. It is also comparable to the demand-driven collapse in 2008-2009, following the global financial crisis. To the extent that demand factors drive an oil-price drop, one would not expect a major positive impact; the oil price is more of an automatic stabilizer than an exogenous force driving the global economy. Supply shocks, on the other hand, ought to have a significant positive impact.

Although parsing the 2014-2015 oil-price shock is not as straightforward as in the two previous episodes, the driving forces seem to be roughly evenly split between demand and supply factors. Certainly, a slowing China that is rebalancing toward domestic consumption has put a damper on all global commodity prices, with metal indices also falling sharply in 2015.

…click on the above link to read the rest of the article…

Why Big Oil Should Kill Itself

Why Big Oil Should Kill Itself

LONDON – Now that oil prices have settled into a long-term range of $30-50 per barrel (as described here a year ago), energy users everywhere are enjoying an annual income boost worth more than $2 trillion. The net result will almost certainly accelerate global growth, because the beneficiaries of this enormous income redistribution are mostly lower- and middle-income households that spend all they earn.

Of course, there will be some big losers – mainly governments in oil-producing countries, which will run down reserves and borrow in financial markets for as long as possible, rather than cut public spending. That, after all, is politicians’ preferred approach, especially when they are fighting wars, defying geopolitical pressures, or confronting popular revolts.

But not all producers will lose equally. One group really is cutting back sharply: Western oil companies, which have announced investment reductions worth about $200 billion this year. That has contributed to the weakness of stock markets worldwide; yet, paradoxically, oil companies’ shareholders could end up benefiting handsomely from the new era of cheap oil.

Just one condition must be met. The managements of leading energy companies must face economic reality and abandon their wasteful obsession with finding new oil. The 75 biggest oil companies are still investing more than $650 billion annually to find and extract fossil fuels in ever more challenging environments. This has been one of the greatest misallocations of capital in history – economically feasible only because of artificial monopoly prices.

But the monopoly has fallen on hard times. Assuming that a combination of shale development, environmental pressure, and advances in clean energy keep the OPEC cartel paralyzed, oil will now trade like any other commodity in a normal competitive market, as it did from 1986 to 2005. As investors appreciate this new reality, they will focus on a basic principle of economics: “marginal cost pricing.”

…click on the above link to read the rest of the article…

Lower Oil Prices Are Shaking the World

Lower Oil Prices Are Shaking the World

The long-term effects will echo for a decade or more.

Oil prices fell by over half from June 2014 to January 2015 (Brent:  $110 to $50), then another one-third since (to $35). Natural gas and coal prices have also plunged, partially due to the same forces but also from substitution.

These are the results from a modest slowing of demand growth and — more importantly — the decision of the Saudi Princes to wage the first financial waragainst next-gen oil producers, those that tap oil sands, shale fields, and deep ocean deposits.

This is how Bloomberg put it:

Saudi Arabia won’t be satisfied with another temporary rebound in oil prices, such as the one that occurred last spring: Their U.S. competitors would just increase output again. They must inflict permanent damage by demonstrating to investors that with shale, they can’t bet on any kind of predictable return.

This will not end quickly; the list of casualties will be long. Goldman found $1 trillion in “stranded” or “zombie” investments in oil fields — a year ago at $70 oil. At $35 oil the total would be much larger.

The end will come with the bankruptcy or restructuring of many next-gen oil corporations, followed by a newly empowered (and perhaps expanded) OPEC cutting production to bring spare capacity back to average (3 or 4 million b/day) — providing a valuable production cushion for the world economy’s supply of this vital input. The long-term effects will echo for a decade or more: a higher cost of capital for and depressed risk-taking in the petroleum and coal industries.

The bond market has already begun to price in the coming bankruptcies of oil and natural gas Exploration and Production companies. But the geopolitical implications remain largely unexplored.

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