The global oil glut, as some call it, is caused by the toxic mix of soaring production in the US and lackluster demand from struggling economies around the world. Since June, crude oil prices have plunged 30%. It drove oil producers in the US into bouts of handwringing behind the scenes, though they desperately tried to maintain brittle smiles and optimistic verbiage in public.
But everyone in the industry – particularly junk bondholders that have funded the shale revolution in the US – were hoping that OPEC, and not the US, would come to its senses and cut production.
So the oil ministers from OPEC members just got through with what must have been a tempestuous five-hour meeting in Vienna, and it was not pretty for high-cost US producers: the oil production target would remain unchanged at 30 million barrels per day.
“It was a great decision,” Saudi Oil Minister Ali al-Naimi said with a big smile after the meeting.
Saudi Arabia and other Gulf states were thus overriding the concerns from struggling countries such as Venezuela which, at these prices – and they’re plunging as I’m writing this – will head straight into default, or get bailed out by China, at a price, whatever the case may be.
Venezuelan Foreign Minister Rafael Ramirez emerged from the meeting, visibly steaming, and refused to comment.
The US benchmark crude oil grade, West Texas Intermediate, plunged instantly. Even before the decision, it was down 30% from its recent high in June. As I’m writing this, it crashed through the $70-mark without even hesitating. It currently trades for $68.51. Chopped down by a full third from the peak in June.
This is what that Thanksgiving plunge looks like:
Nigerian Oil Minister said OPEC and Non-OPEC producers should share responsibility to stabilize the markets. I don’t know what he was thinking; maybe some intervention by central banks around the world, such as the coordinated announcement of “QE crude infinity” perhaps?
Ecuadorian Oil Minister called the decision a rollover. However, the Iranian Oil Minister, whose country must have a higher price, kept a positive face, saying, “I’m not angry.”
The next OPEC meeting will be held in June, 2015. So this is going to last a while. And there is no deus ex machina on the horizon.
It seems OPEC, or rather Saudi Arabia and some of the Gulf States, decided for now to live with the circumstances, to let the markets sort it out. High-cost producers around the world will spill red ink. Governments might topple. Junk bondholders and shareholders of oil-and-gas IPOs that have blindly funded the miraculous shale revolution in the US, lured by ever increasing hype, will watch more of their money go up in thick smoke.
And the bloodletting in the US fracking revolution will go on until the money finally dries up. Read… How Low Can the Price of Oil Plunge?
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This is going to be extremely tough indeed on Venezuela. I expect major tensions there within the coming months, if not weeks, and I pity the Venezuelan people, who have fallen victim first to insane national policies and now a disastrous decision by the oil cartel. It will prove to be the straw that broke the camel’s back, there’s little doubt about that now IMO.
And to think Venezuela is sitting on one of the largest proven oil reserves known to mankind. It’s always the regular Joe that ends up paying for the stupidity of its leadership and international interests.
Desperate people may do desperate things. ME pipeline bombings, even sutble encouragement for Israel to take action against Iran would certainly raise the price of oil and ‘save’ the LTO players and junk bond investors.
I’m not saying there is a conspiracy afoot, only that world events are dynamic and ‘%&it happens.
Regardless, either collapse of Shale or some geo-political ‘event’ will ensure one obvious outcome. The bubble popping will be heard around the world.
The regular Joe always pays because there’s no free lunch in this world. As one of my favorite video games likes to say: “The price of freedom is eternal vigilance.”
wow. At least cliches are still cheaper than crude, eh!
Anybody stopped to consider that this hurts Iran’s major backer Russia far more than it does US Shale.
That Iran may be the actual target and US shale is just convenient/bonus collateral damage.
Iran is currently selling its hard/expensive to refine crude through devious back channels at a heavy discount to circumvent sanction’s.
The iranian cash in hand after production costs and sanction avoidance expenses will be shrinking rapidly to 0 as the price continues to nose dive.
The sanction’s at this point are helping to hold up the price, the rest of OPEC will not want to take a production cut to allow a new “legitimate” iranian supply to enter the market.
The big question is. Has Saudi clandestinely adjusted its finances, that were publicized as based on a $100.00 Per barrel oil, to a considerably lower number. If this is the case then Saudi has the capability to play this price game for a long time.
The gulf States opposed to, or in fear of iran, will play the Saudi game as it is cheaper and easier than all out direct military conflict with iran.
Watch the iran/hezbollah, Israeli front line, among other flashpoint’s capable of pumping the oil price.
Seems a lot like 1986. There are two main theories about the Saudi oil dump. One was that it was economic warfare instigated by Reagan to take down the USSR. Critics point to Reagan sending VP Bush I to Saudi to ask for respite as it was killing US oil companies.
The other theory is that Iraq and Iran, being at war, were violating their OPEC quotas to fund their militaries and the Saudis wanted to punish them.
Whatever the motive, the guy who had been running the Saudi oil show for decades got the boot when prices overshot below $10/bbl.
Whoever the target is, there’s a lot of collateral damage. Maybe the target is everyone as the Saudis reassert themselves as king of the hill. Russia us definitely taking a hit. Asia may do well because they are major importers for their manufacturing sectors.
They can play this game for a short time. It’s not just a matter of the breakeven on extraction. They need $100 oil to support their bread and circuses for the populace. Eventually the cash reserves will run low. Unlike 1986 when the marginal wells were stripper wells that are not economical to re-open, fracking rigs can be shut down and restarted.
The wild card is the effect on the junk bond market although IIRC the oil companies were pretty leveraged then too.
Looks like the target has been clarified. It’s shale.
I might agree if I could access the link.
The fact is that the target is the USA because of our reluctance to participate in a potential remedy.
The Saudis are the largest producer at about 11.7 mbd of crude and the USA is 2nd at about 11.3 and growing. Russia is a distant 3rd at about 10.3. So when the Saudis suggest the USA should join in any plan to cut production I believe they are very serious. This is about money and market share first and foremost.
As for USA cooperation, how likely is the US to agree to reduce production when energy independence is our mantra and is equated with patriotism?
When the millions of Chinese with their ten year “Obama visas” start flooding the US there’ll be plenty “cheap labor for shale oil producers.
Remember the Chinese built the railroads in the USA back in the days!
This time they will rebuild the rotting US road and railroad infrastructure and dig for oil for pennies!
You think I’m crazy? Watch!