After Messy Price War, OPEC Gets the Blues, Can’t Figure Out How “to Live Together” with US Shale Oil

El-Badri’s nightmare.

OPEC Secretary General Abdalla Salem El-Badri admitted on Monday that the price war has backfired.

While it still controls about 40% of global oil production, OPEC has been losing market share to US and Canadian producers. So to escape the dreary fate of becoming an irrelevant cartel, it unleashed a price war at its Thanksgiving 2014 meeting by refusing to cut production. And oil fell off the chart.

The casualties are piling up everywhere. Countries like Venezuela and Nigeria are teetering. Russia and Brazil have plunged into deep recessions. Petro-currencies have swooned. State-controlled oil companies like Pemex or Petrobras are hoping for a bailout. The sovereign wealth funds of Norway, Saudi Arabia, and other oil-producing nations have had to dump stocks and bonds to fill budget holes. Dozens of smaller US shale-oil and offshore drillers either have already defaulted or filed for bankruptcy. Investors have lost their shirts. Even the “smart money” got cleaned out.

The price of WTI hit $26.19 a barrel on February 11, the lowest since May 2003. And OPEC was not amused. So Secretary General Abdalla Salem El-Badri blamed US shale oil drillers for mucking up OPEC’s elegant price-war strategy.

“Shale oil in the United States, I don’t know how we are going to live together,” he told energy executives at the annual IHS CERAWeek in Houston on Monday, according to Bloomberg:

OPEC has never had to deal with an oil supply source that can respond as rapidly to price changes as U.S. shale, El-Badri said. That complicates the cartel’s ability to prop up prices by reducing output.

“Any increase in price, shale will come immediately and cover any reduction,” he said.

In a rare admission that the policy hasn’t worked out as planned, El-Badri said that OPEC didn’t expect oil prices to drop this much when it decided to keep pumping near flat-out.

So last week, cracks emerged in OPEC’s elegant price-war strategy when a group of countries, including Saudi Arabia and Russia, agreed in principle to freeze oil production, hilariously, at current balls-to-the-wall levels, provided that other oil-rich countries, particularly Iran, which is just now starting to ramp up production, join in as well. But, as we pointed out, “political baloney doesn’t fix the fundamental issue” [read The Saudi/Russia Oil Deal “Just a Bunch of Bull”].

“This is the first step to see what we can achieve,” is what El-Badri said about this oil deal. “If this is successful, we will take other steps in the future.”

He refused to specify what these “other steps” might be, and alternatively what OPEC might do if this deal is not “successful.”

But there’s hope for OPEC, according to El-Badri: the price collapse has caused companies to cut capital expenditures too much, which down the road could create a squeeze in supply and “a very high price.”

“The concern is no investment now, no supply in the future. It’s as simple as that,” he said. “If there’s no supply coming to the market, prices will go up.”

That’s what he wants in his sweet dreams. And it contradicts his nightmare about US shale being able to respond “rapidly to price changes.”

But before this “very high price” can set in, there will be a lot more bloodletting, according to the IEA’s report, also released on Monday. Like prior reports, it kicks the end of this oil bust further into the future.

The IEA now figures that US production might decline by 600,000 a barrel a day over the course of 2016, and another by 200,000 barrels day in 2017, when the market “will begin rebalancing.” But then it will start all over again as “a gradual recovery in oil prices, combined with further improvements in operational efficiencies and cost cutting, allows production to resume its upward climb” in 2018. By 2021, the US and Iran will likely be “leading production gains among non-OPEC and OPEC countries, respectively.”

Forecasts in early 2014 have proven to be painfully wrong. The future doesn’t listen to forecasts. But the report did have an element that rang true:

“Anybody who believes that we have seen the last of rising” shale oil production in the US, “should think again.”

How fast US shale oil production can respond to price increases is the big question. By then, whether it’s 2017 or 2018 or later, more oil companies, including some larger ones, will have gone bankrupt. The survivors are left with wrecked balance sheets. Rigs and other equipment will have degraded and won’t be instantly ready or available. Laid-off workers will have dispersed. And after this much capital destruction, beaten-up bankers are going to be leery, investors are going to be shy, and capital is going to be expensive.

So investment in new production is going to be slow. That could create the supply squeeze El-Badri is dreaming about. OPEC would only be too happy to supply the crude at “a very high price.”

But never underestimate just how fast global money can respond when it sees in its wildest dreams that oil might once again hit $150 a barrel. And that money would kick off the glut all over again. That’s El-Badri’s nightmare.

But for now, the upside for oil is extremely limited. Read…  Another Doomed Rally in Oil

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  37 comments for “After Messy Price War, OPEC Gets the Blues, Can’t Figure Out How “to Live Together” with US Shale Oil

  1. Ptb says:

    Ah, the cure for high prices, is high prices. If all it takes to suppress prices at this level is a 4% increase in supply over demand, it could be around a while. Or at least at some level like $60/barrel price might act as a sort of governor on price increases…

    • alexaisback says:

      I think you miss the point.
      ” By then, whether it’s 2017 or 2018 or later, more oil companies, including some larger ones, will have gone bankrupt. ”
      Yes. But in Bankruptcy others will pick up the pieces at drastically reduced prices and with no/limited debt. And therefore Shale production costs shall only DECREASE from here on.
      And that is just one cog in the wheel.
      Iran will be producing more.
      And sovereign funds last only so long. Saudi’s will have to produce and sell more to maintain stability as will Denmark for example.
      Production will only increase from here. Rest assured.
      Too many countries ( Argentina for example ) rely on oil to
      calm the masses there is no possible way they could ever
      slow production, they shall seek only to increase it. They have to.

      • alexaisback says:

        Rest assured.
        Argentina has no choice but to borrow from China
        and spend to increase production.
        There is no other choice.

  2. Nick says:

    The price of oil from here on out is going to be a massive gamble — does anyone think that the current price factors in the immense political instability in the Middle East? Any event that makes continued production even unlikely, much less actually impinges on drilling, refining, or shipping, will introduce tremendous volatility. Oil at 30 dollars a barrel assumes that the Middle East three years from now looks like the Middle East today, with the fighting confined to the non-essential bits. And yet Saudi Arabia itself is unstable, their price war is increasing their instability, U.S. oil exports are decreasing their ability to control the market, and their government is stale.

    • MC says:

      One thing we learned over the past four decades is no matter who’s in charge of the oil wells, he will continue pumping and selling to anybody willing to pay.
      See Daesh: they may not have much oil, but they are selling every barrel they can spare from fueling their rapidly dwindling fleet of pickup trucks. While it’s very hard to track where oil pumped by Daesh ends up, it seems most, ironically enough, ends up in Europe.

      The only political figure who attempted using oil as a political weapon was the Shah, the major driving force behind the First and Second Oil Crisis, and we all know how long he lasted after pulling that stunt, hinting he was not the first class statesman some claimed.
      In the course of their long and bloody war, Iran and Iraq pumped like maniacs. Despite attempts by both sides to choke off the other’s exports, very little real damage was done to infrastructures and tankers, and the only thing which slightly increased the price of oil were increased insurance costs for tankers, which dropped off once Kuwait managed to drag the US Navy into the Persian Gulf.

  3. NY Geezer says:

    Before the US developed fracking US oil production was in a steady down trend. OPEC was then capable of controlling the price of oil. But OPEC relied heavily on Saudi Arabia. OPEC would agree to production cuts. The Saudi’s would cut their production, but everyone else would would violate their production cut commitments and continue to produce flat out. It worked only because the Saudi cut was enough to make the price go back up.

    But the fracking revolution coupled with the desire of Iran, Iraq and perhaps Libya to restore their economies has changed the game.

    Respecting the frackers, I have read that in the US there 3000-4000 wells that have been drilled but not yet fracked. It is claimed that completion of the fracking stage will be cheap, perhaps not as cheap as the Saudi’s cost of lifting oil but nonetheless cheap, and that each few hundred fracked wells would substantially contribute to the US production of oil. Thus, when this occurs, the anticipated US production decline for 2016-2017 would vanish and might become a production increase.

    Respecting Iran, Iraq and Libya, their representatives would have to be senile to agree to participate in the freeze of their current production.

    • night-train says:

      Fracking shale plays – good for what ails you. It is the alpha; it is the omega. Cures everything from the epizudi to the common cold. I have never heard anything in the oil patch hyped as much. A lot of expensive short-lived wells, with little if any hope for secondary or tertiary recovery, are the future. We haven’t reached the disastrous end of the first shale hype cycle and the boys in the patch are trying to inflate a new a new one.

      I hate to repeat myself, but without going in to a plethora of on the ground oil patch realities, let me say this: Shale plays, for the most part, are only economical north of $60/bbl. To make them really attractive, $100+/bbl.

      And BTW, when an oil man’s lips are moving, there is a real good chance he is misleading, if not out right lying.

  4. Vespa P200E says:

    When will the oil producers figure out the Econ 101 supply and demand curve?

    Glut of supplies will continue with Iran joining the fray with global demand is flattening if not declining, Add to this OPEC of today is not OPEC of 1970’s with cheaters abound desperate to hold onto their regime with oil revenue down 30% forcing them to pump more…

    Only way to stem the oil price decline is a war in ME so don’t be surprised by skirmishes in Strait of Hormuz or escalation of Sunni-Saudi/Shiite Iranian proxy war in Syria.

  5. Yoshua says:

    The last time the oil price hit 150 USD we had a financial meltdown. Today with the oil price at 30 USD the oil business is tanking. The global breakeven price for oil 50 USD.

  6. Alan Einstein says:

    Does anyone remember the pay phone booth, the pager, the cassette tape player or thick tubed televisions? Of course you do, and what happened to them, they all got changed by technology. Fracking has been the single greatest change in oil production in the last 10 years. Just this week the number of Drilling Rigs operating in the U.S. is for the first time at below 500 and our production is still up. The Saudis and Opec have not adopted to technology and the world is forever changed. We will always need fossil fuels, just like we will always need telephones but the delivery system and technology has changed the pricing reliability. The Saudi’s living in the desert and resting on their past fortune of literally being at the right place at the right time will some day be a Harvard Business School case study on how not planning for the long term ruined one of the richest economies in the world.

    • Chicken says:

      Our head-chopping ISIS bankroller Saudi allies were too greedy for their own good? Shut down those frackers now!

    • meat wad says:

      “not planning for the long term”


      I know this is a finance & business blog, but I can’t help observe that it’s kind of ironic to invoke “planning for the long term” regarding who should be drilling oil and how while we’re in the midst of the warmest February on record. Another 5 years of maximum drilling & burning oil, and it is possible that Harvard may have some more interesting things to consider…

      • Mary says:

        Nice point.

        I enjoy Wolfstreet and have learned much from Wolf’s commentary. But like all financial/market opinion sites, it seems to operate in a bubble-like parallel reality.

    • MC says:

      Fracking in itself is not exactly new technology: the Germans already toyed with it during WWII to exploit shale sands deposits.
      What has changed is fracking has advanced by leaps and bounds in the past five years.
      Pad drilling alone has radically changed the US fracking industry: in its simplest terms it’s the practice of drilling multiple wells from a single location. First introduced in the Bakken in 2006, it started becoming widespread in Q4 2010.
      Pad drilling means production not only doesn’t fall off but will actually increase with less and less rigs. Here’s your explanation on why rig counts continue drop off but production actually increases. It has made rig count irrelevant, apart from Wall Street’s obsession to find something, anything, to force a rally.

      Now, pad drilling has another two benefits for US shale producers: it substantially decreases breakeven costs and labor requirements.
      Pad drillers in the Barnett (TX) now have a breakeven cost of $23, about the same as Venezuela and lower than Nigeria. By comparison traditional fracking outfits in the Permian (TX/NM) have a breakeven cost of $58.
      With new advances it’s not impossible to think the most technically advanced fracking outfits will push drilling costs towards Gulf States/Russia levels, meaning under $15.
      And while many smaller and less efficient fracking outfits have fired thousands to reduce overhead, pad drillers have been firing people because they don’t them anymore. A single pad can stay in operations for a few years before needing to be moved. A single crew will suffice servicing and moving it.

      Now: in the past few years it was assumed most oil producers had far higher breakeven costs than they truly have. This was mostly because many analysts confused technical with fiscal breakeven: technical breakeven is the cost of pumping the oil out of the ground and delivering it to the nearest pipeline or terminal. It also includes ammortization of rigs and similar infrastructures (but not debt servicing). Fiscal breakeven is a completely different beast: it means oil prices a producer needs to service its fiscal/accounting needs. For fracking outfits this may mean servicing the huge loans they took out in the past. For Saudi Arabia or Venezuela this means financing healthcare, education etc.
      Generally speaking Gulf States have ridiculously low technical breakeven and incredibly high fiscal breakeven. For example Saudi Arabia is estimated (ARAMCO doesn’t go around telling its secrets, you know) to have a technical breakeven of $10-13 and a fiscal breakeven of $80.
      Fiscal breakeven can be cut, for example by cutting food and fuel subsidies, but Saudi Arabia has talked a lot about it and done little. It has been selling off liquid stocks and bonds to raise cash, and draining its foreign currency reserves. In short, as we say around here, “Until there’s some, long live the King!”
      Iran surprised oil companies which arrived in Teheran after sanctions were lifted by having much lower technical breakeven than anybody thought: they stand at a measly $12. One thing the Iranians have made very clear to these potential foreign partners is contracts will be signed only with those companies which will help bringing breakeven under $10. Only Kuwait and Iraq are in that ballpark. That’s an extremely aggressive and ambitious goal which will require knowledge only a few oil companies have. Ironically enough most of them are US-based and, as such, still cut off from Iran.
      It also betrays the intention to go straight for Iran’s old favorite market: Europe, which has been lost to Kuwait and chiefly Iraq since sanctions were slapped upon them.

      Whatever happens, Saudi Arabia is in for a whole lot of pain.

      • night-train says:

        And so too it is pain for the US shale producers. Despite the nice prospectus you just provided. Funny, even with all the technological efficiencies you laid out, that drilling multiple wells from one location pad (the standard practice off-shore for many years), the individual completed well cost is $8-10 Million. Which is high dollar oil when compared to conventional reservoirs.

        Unless we have a stable global oil price of $100+/bbl USD, shale oil is still a Ponzi scheme.

    • CrazyCooter says:

      Actually, fracking is an 80s technology that was never widely used as it was un-economic. Only when free money flooded the system and started looking for a “sink” did fracking really take off – and its crash was inevitable as well.

      If the idiots running the fed never opened the spigots after 2008, the shale revolution never would have happened.

      Now that the capital has been blown, as pointed out up thread, future operators will have less overhead and thus a lower break even point – but only after massive, massive write downs.

      My best sense of the real break even point for fracked oil before the current bust is probably in the $70-$80/bbl range (broad average – every well is different). Almost all companies that cite a lower cost exclude some kinds of expenses that should be included in their well head break even prices. They also lie about their EUR as well. Both lies make them look more viable/profitable than they really are, as they need suckers to give them cash to keep them alive.

      If oil elevated to that broad break-even price (in 2015 dollars) and stayed there, production would start to creep back up. However, as Gail Tverberg points out, this is a drag on the economy as it has to eat those costs throughout the system.

      The gap between “too low” prices and “too high” prices is narrowing – and that is something that bears watching.



      • night-train says:

        Cooter: Fracking wells was a successful technology in the conventional oil industry for much of it’s history. Sure, early fracking used dynamite and ended badly about as often as it ended well. The idea is enhanced production through well stimulation. Hydraulic fracking started being standard during the 60s and was common during the 70s. Whether there was need for stimulating a well depended on the reservoir characteristics you had and were often needed in some and not others within the same well, or even the same play.

        The first well I drilled in 1980 was fracked in two sandstone reservoirs and made a nice dual completion well.

        • CrazyCooter says:

          I recall reading on The Oil Drum, and perhaps my memory is deceiving me, but the basis method used these days is (1) shape charges placed in (2) horizontal wells which are then (3) fracked (hydraulic pressure to expand the fractures) using a (4) mix of proppant and chemicals (acids, water, etc) which then keep open the fractures.

          I recall this specific mix being a circa 80’s proof of concept (the combination of the four techniques) where many of the constituent components had older birthdays.

          But, my memory isn’t what it used to be!



    • Mikey says:

      Complete and utter tosh. Fraccing has been around for decades. Production is not still up.

      You get the constant break even quote prices from majors suggesting its $30….but then their accounts show they are losing a fortune every quarter?

      Go figure.

      If you don’t recognise these oil prices are being deliberately weaponised then more fool you.

  7. Julian the Apostate says:

    While OPEC was in the driver’s seat in the 70’s the market reacted predictably with smaller cars and in the end made no difference, like the South Improvement Scheme back in oil’s heyday. Get the hell out of our way. Stop trying to manipulate the market. A false premise not only fails, it achieves its own opposite. Thus saith John Galt. Hear endeth the lesson.

  8. Paulo says:

    Insanity. Depletion never sleeps, unless you happen to believe in abiotic oil theory and count on the earth being an oil-filled nougat. What a great idea people. Let’s drill and burn oil resources flat out while today’s prices ensure no one makes any money. Then, when oil resources decline we’ll try and obtain more debt financing to ramp up production of even more expensive supplies.

    It is going to hurt, big time. This is the undulating plateau of Peak Oil….as forecasted. No, the US is not Saudi America, nor does it actually export net production. The US still imports at least 40% of what she burns. Just because ZIRP funded a yield chase through the Light Tight Oil Patch doesn’t mean the industry is healthy or has legs. So, go buy your guzzling SUV on a 7 year note and when you lose your job in the looming downturn and/or the price of gas climbs again, (as it will), you can always park it in the bank’s parking lot or leave it on a side street with the keys in it.


  9. Paulo says:


    Fracking is not new technology, nor is it only ten years old. It has been extensively used in the oil industry for the past 60 years. What is new is the access to cheap money (free), and gullible investors. Tight Oil needs $70-$100 price to break even. Unfortunately, consumers can’t afford it and the economy will not grow in an expensive energy environment. We’re all getting poorer for a reason, mostly because the cheap fossil fuel ride must now charge for their resource production. We have wasted it on Sunday drives and meaningless commutes.


  10. zoomev says:

    “The survivors are left with wrecked balance sheets. Rigs and other equipment will have degraded and won’t be instantly ready or available. Laid-off workers will have dispersed. And after this much capital destruction, beaten-up bankers are going to be leery, investors are going to be shy, and capital is going to be expensive.”

    You forgot to mention by then the cancer clusters may start appearing from drinking fracking fluid.

  11. Sumo says:

    Want to increase the price of oil? A ‘terrorist’ strike at Ghawar would do the trick – increasing the price oil in quite a rapid and for some insiders, lucrative manner. So models calling for a gradual increase or decrease in supply are wonderful to consider as part of a ‘wealth effect’ but are simply exercises to employ the over educated children of what will some day be known as the ‘Petroleum Man’ era in geologic time. There are so many players with vested interests in the area it might be hard to determine who the particular ‘terrorist’ was in such a situation. Who has a good reason for wanting the price of oil to go up? Just look around in any direction. They are all there, all armed and very angry. This is especially true as SA gets dragged into, and thus in a greater spotlight, regional conflicts it used to get the US to fight. Even SA would probably benefit from such a strike if properly blamed on Iran – a dispute Russia, who happens to be just next door now, could step into and establish a peace benefiting everyone. So hold off on that new SUV or at least get one with very good shocks because we’ve got a bumpy ride ahead before the pipeline wars are over.

  12. wratfink says:

    Bakken light tight oil.

    Is it even crude oil or is it condensate and various short chain molecule liquids that American refiners don’t want?

    Is this “oil” the stuff that is building up in storage?

    Is this why the US is increasing crude imports while the storage tanks are filling up?

    What is this stuff?

  13. nick kelly says:

    I’m a bit puzzled by the idea that the Saudi move ‘backfired” irrespective of what their mouthpiece says publicly.
    You don’t start a war of attrition unless you think you can endure more pain than your adversary. There is no middle room ($50?)
    So far the Saudi plan looks like working. Canadian and US producers first cancelled plans- now they are cutting back.
    Those who think the Saudis are crazy should study World War One.
    In the final push, the Allies endured huge casualties but so did Germany who could afford them LESS.
    It would made no sense for Saudi to call for a ceasefire until the lenders to the frackers have gone broke.
    So in 18 months, bar a depression, go long oil.

    • Nicko says:

      Saudi is a one trick pony. All they have is oil, and all they can do is pump it out as fast as they can. Meanwhile, there is an energy revolution in N. America. Fracking and renewable energy – both leading a technological Renaissance of domestic manufacturing and drive for clean energy. As an added bonus, Saudi is making record weapons purchases from the US, $60 billion and counting, as domestic and foreign threats mount against the regime. The US can’t lose.

      • FruitMonster says:

        And if the Obama utopia from climate change fears ever comes full circle, the Saudis (unlike US coal companies) will be using those weapons/profits to take out anyone (directly and indirectly) who threaten their way of life. In fact, the Saudis may very well be FOR climate change, as rising oceans may allow them to expand their economy. Sand farming doesn’t have the same prestige or profit margin.

        Don’t think they haven’t been planning for this scenario.

  14. Mike R. says:

    But the BIG question on fracking is HOW MUCH SUPPLY is really there? I’ve seen estimates of a century to as little as 10 years.

    Who has the scoop on this?

    • night-train says:

      Mike R.: Not a simple answer to the question. There are reserves, proved reserves (those we have proved up by drilling), recoverable reserves (those which can be produced by existing and expected technology) and economically recoverable reserves (those which can be produced at current and expected oil prices). Which you refer to often depends on whether you are buying or selling.

      The shale rock has a lot of oil in place, as shale and associated tight sands have a lot of pore space (porosity), but very poor permeability (the ability of a fluid to flow through interconnected pore spaces within the rock to the well bore). Which is why fracking is so critical to shale plays. So, how much of the original oil in place (OOIP) can be recovered at an economical price point given the technology at hand. Obviously, more are considered economically recoverable at $100/bbl, than at $30/bbl. It is also worth noting that both conventional and unconventional production leave oil behind in the reservoir. In conventional reservoirs, production typically proceeds through primary production capturing 15-20% of OOIP, into enhanced, more expensive, secondary and possibly, tertiary recovery, which may increase total oil recovered to 40% of OOIP. We do not yet know how or if enhanced recovery will work in the shale plays.

      EIA and/or the USGS have resources showing locations of shale oil deposits and estimates of OOIP. In short, there are many places in the world with shale oil resources. However, they all have their eccentric geological and engineering characteristics and all will not be economically exploitable. I hope I didn’t muddy the water too much for you.

  15. RD Blakeslee says:

    There’s no “figuring out” available, IMO.

    Fracking technology and virtually limitless frackable shale deposits worldwide mean global hydrocarbon extraction expansion, practically as soon as extraction is cheaper than wellhead price locally.

    • Mike R. says:

      Limitless frackable shale deposits? Come on. Sounds like you’ve been watching CNBC.

    • night-train says:

      I’m afraid it is not quite that simple. A shale play is not a shale play is not a shale play. While it is true that many areas have shale deposits, they are hardly homogeneous. Some will be more exploitable than others, while some will be uneconomic to exploit at almost any reasonable price. So many variables to consider when evaluating shale plays. The geological properties of the rock, the type of oil contained therein, and the engineering characteristics of the potential reservoir. Then there is the technology available and its cost effectiveness. And other considerations beyond the scope of this comment.

  16. Mike R. says:

    You folks appear to know quite a bit about how this all works. Still I read lots of different estimates. Here’s one:

    “The basis for these forecasts are estimates of shale oil reserves. A 2013 Energy Department report on technically recoverable shale oil—the amount that’s recoverable without regard to cost—puts U.S. potential at 58 billion barrels. That’s equivalent to a little more than eight years of U.S. consumption at the current rate of almost 19 million barrels a day.”

    Of course even more important than technically recoverable is economically recoverable. What happens when it takes one barrel of oil to extract one barrel of oil?

    • night-train says:

      Mike R.: Reserve estimates not only vary as different entities calculate them, they change as new data is acquired and, of course, to allow for resource draw down. With regard to your question of taking a barrel to extract a barrel, or energy in to energy out, there are studies that try to quantify that. Let me answer the question this way, it is time to get serious on renewables for a host of reasons.


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