by Chris Becker
The oil complex continued its calamitous collapse overnight, with both major markets (WTI and Brent) off 3% as OPEC struggles with gaining support on cutting production in the face of rising supply and falling demand.
The Saudi Arabian oil minister last night reiterated that it was “impossible” for an OPEC cut to reverse the fall in oil due to the supply surge.
From CNBC:
On Thursday, Naimi told Saudi state news agency SPA that OPEC sought last month, as on past occasions, cooperation from other non-OPEC oil producers but “those efforts were not successful.”
Russia has said it would not cut production even if oil prices fell below $60 per barrel – far below some $100 a barrel it needs to balance its budget.
“OPEC’s quota as well as Saudi Arabia’s in the global oil market has not changed for several years, which is at the level of 30 million barrels per day for OPEC, out of that around 9.6 million bpd is the kingdom’s, while the production of others from outside OPEC is continuously rising,” Naimi told SPA.
“In a situation like this, it is difficult, if not impossible, for the kingdom or for OPEC to take any action that would reduce its market share and increase the shares of others, at a time when it is difficult to control prices,” he said.
Note the emphasis on controlling prices – OPEC and the Russians really have it in for “speculators”!
OPECs intransigence is really overshadowed by the US shale industry with is fast catching up to the Saudis on oil production, with shale production now slated to expand outside the US in a macro wide shift that could finally break OPEC.
More from Forexlive:
Exxon just announced its discovered a second shale well in Argentina. It’s beyond naive to think the only shale will be in the US and the technology is advancing rapidly. Even Gulf countries will be pouring capital into exploiting shale.
In 2013, the US EIA estimated that Russia has the largest reserves of shale oil and overall they only estimate the US holds 16% of recoverable shale.
Of course there are some serious tumbling blocks in front of the shale revolution, financial ones in the main, which is why the huge falls in crude oil (similar to the dynamic playing out in the iron ore market) maybe too quick too soon for both current and projected fields.
Goldman Sachs reckons up to $1 trillion in future oil projects might be at risk with only a third of new projects viable at current prices:
If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8 percent of current global demand.
How Profitable Is $70 Oil?
Source: Goldman Sachs Global Investment Research. Annotated by Tom Randall/Bloomberg
If cheap oil continues, it could be a major setback for the U.S. oil boom. In the chart below, ClearView shows projected oil production at four major U.S. shale formations: Bakken, Eagle Ford, Permian and Niobrara. The dark blue line shows where oil production levels were headed before the price drop. The light blue line shows a new reality, with production growth dropping 40 percent.
Source: ClearView Energy Partners LLC
But the initial impact of low prices may be swift. Next year alone, oil and gas companies will make final investment decisions on 800 projects worth $500 billion, said Lars Eirik Nicolaisen, a partner at Oslo-based Rystad Energy. If the price of oil averages $70 in 2015, he wrote in an email, $150 billion will be pulled from oil and gas exploration around the world.
However, these glut-driven prices can’t stay low forever. Oil production hasn’t slowed yet, but as zombie projects go unfunded, it will. This is how the boom-bust-boom of the oil market goes: prices fall, then production follows, pushing prices higher again. The longer this standoff goes, the more zombies will languish and the sharper the rebounding price spike may be.
And that is why investors must be ready to step in and take advantage of this volatility.