Could the Saudi strategy be working?

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dataTake it away, OilPrice.com

“Slumping oil prices are putting pressure on U.S. drillers.

The number of active rigs drilling for oil and gas fell by their most in two months, according to the latest data from oil services firm Baker Hughes. There were 19 oil rigs that were removed from operation as of Oct. 17, compared to the prior week. There are now 1,590 active oil rigs, the lowest level in six weeks.

“Unless there’s a significant reversal in oil prices, we’re going to see continued declines in the rig count, especially those drilling for oil,” James Williams, president of WTRG Economics, told Fuel Fix in an interview. “We could easily see the oil rig count down 100 by the end of the year, or more.”

Baker Hughes CEO Martin Craighead predicted that U.S. drilling companies could begin to seriously start removing rigs from operation if prices drop to around $75 per barrel. Some of the more expensive shale regions will not be profitable at current prices. For example, the pricey Tuscaloosa shale in Louisiana breaks even at about $92 per barrel.”

Well, that was easy. Then again, who knows what the Saudi strategy is? Today we learned that the Saudis are cutting production, and this sent oil prices up again. Uncertainty … is the name of the game.

1 COMMENT

  1. But keep reading, Juan.

    The article says:

    “As the Wall Street Journal notes, given these assumptions, U.S. oil production in the Eagle Ford, Bakken, and Permian could actually break even at just $60 per barrel.”

    Since May 2010, Texas has added 1.96 million b/d of production (from 1.146 mbd to 3.102 mbd) almost entirely from the Permian and Eagle Ford basins. North Dakota now produces 1.1 mbd (and it produced 0.3 mbd in May 2010) from the Bakken.

    To put that into perspective, between May 2010 and today, U.S. production increased by 2.5 million barrels – equivalent to all of Canada’s, Mexico’s and Venezuela’s output in 2013.

    Initial investments for production in fields in those basins have largely been made and that’s why they can probably still produce at $60 per barrel. I’m not so sure Saudi strategy is working already…

    • Whoa, wait a minute …
      “U.S. production increased by 2.5 million barrels – equivalent to all of Canada’s, Mexico’s and Venezuela’s output in 2013.”

      That’s not right…

        • maybe they meant increase in output in 2013? As is ““U.S. production increased by 2.5 million barrels – equivalent to all of Canada’s, Mexico’s and Venezuela’s increase in output in 2013.”

          • No.

            The increase in US *crude oil* output is 2.5 million b/d.

            That is equivalent to Canada’s 2013 crude oil production (2.398 mbd, excluding nonconventionals and natural gas liquids), to Mexico’s crude oil 2013 production (2.522 mbd, excluding nonconvs and ngls), and to Venezuela’s 2013 crude oil production (2.497 mbd, excluding nonconvs and ngls).

            Over the past few years, the US essentially added Canada’s crude oil output, or Mexico’s, or Venezuela’s. Whichever you choose. Not all three.

          • wait what?!

            “equivalent to all of Canada’s, Mexico’s and Venezuela’s output in 2013” clearly implies “equivalent to the three of them put together”. (Otherwise you’d write “equivalent to all of Canada’s output in 2013, or to Mexico’s or to Venezuela’s.”)

            I’m still calling it a giant factchecking fuckup

          • Quico, I missed the OR. It is so very obvious that it is not equivalent to all three put together, but fine.

            Yes, you are right. I should’ve written OR a million times in that sentence to not confuse everyone. Calm down.

      • Sorry, should’ve made clear we’re talking crude oil here, not non-conventionals or NGLs.

        Canada’s 2013 production of crude oil (excluding non-conventionals and NGLs) –> 2.398 mbd
        Mexico’s 2013 production of crude oil (excluding non-conventionals and NGLs) –> 2.522 mbd
        Venezuela’s 2013 production of crude oil (excluding non-conventionals and NGLs) –> 2.497 mbd

        If you add nonconvs and NGLs all figures are higher, especially Canada’s

        Hope that clears it up.

      • It increased by 2.5 million, the total output (after the increase) is equivalent to the total production of the aforementioned countries

        • No.

          The total increase in US output is equivalent to the total production of whichever ONE of these THREE you want: Canada, Venezuela, OR Mexico.

          ONE of the three. Not two of the three, and certainly NOT all three put together.

          Canada, Mexico, and Venezuela each produce 2.5 million b/d of crude oil.

  2. Hope the aporrea folks pass by and read, so they can finally acknowledge that the drop in prices does not any good to american oil business. Hope they don’t suffer a stroke realizing that this time El Imperio is not the villain behind this “plot”, though.

      • They are correct to blame the US. The US responded to high oil prices by drilling more, especially in non-conventional areas [shale]. As Chavismo knew that anything the US did was wrong, PDVSA did not increase drilling.
        And think of all the PDVSA announcements in the last ten years of increasing production by 1,2…. million BBL/day. But that would have meant more drilling, which couldn’t be done because that would be imitating the behavior of the Evil Empire.

    • Oh no, you’ve got it all wrong. The imperio is waging a financial “blockade” by imposing high interest rates. So says Maduro. From now on, the Revolution will not take money from Wall Street. Ya Basta!

  3. The Pdvsa philosophy before it became tinted in red was that higher prices were in the long run harmful for those oil producing countries with big reserves because their interest was to make their reserves still valuable in the future and the higher prices were allowed to go the greater the incentive for alternative technologies to develop and ultimately make oil replaceable . Stable prices and higher production went hand in hand and made Venezuelas huge reservoirs most likely to remain a valuable resource for the future .
    Saudi Arabia has the same philosophy but must play politics with its opec partners , now the booming shale oil production is threatening the future of traditional oil and it begins to act , lowering both production and prices , with consequences which the above article reports.

  4. Yes and no.

    Yes. The Saudi are pumping more oil on the market. The price goes down. Some marginal producers shut down.

    No. Or at least, “no, this is not a repeat of the 80s”.

    What’s missing in the discussion is the change in the dynamics of oil prices and production introduced by shale oil. For the first time since the late 50s, early 60s, oil markets have become elastic with a strongly positively sloped price/production relation.

    Contrary to conventional oil and tar sands, shale oil is a low risk, fast return play.
    – Contrary to conventional oil, there is essentially no exploration risk. Producers know where the oil is, how to get to it and how much it will cost them to get that oil to market.
    – Contrary to tar sands bitumen, which depend on a very heavy upstream infrastructure (upgraders or specialized refineries) aka large upfront CAPEX, shale oil is a highly fungible product, light, mostly sweet crude oil, that requires next to zero investment beyond the production outlays.
    – Shale oil is highly reactive to market conditions. It takes 5 to 15 years to put conventional oil or tar sands leases in production. For the best operators, it only takes less than 12 months in the continental US to put a shale oil lease in production and start shipping by truck and rail. Then it produces for a year or two before running dry or very marginal.
    – The downside of shale oil for operators is its high OPEX, which only makes it a player above a fairly high threshold.

    Above its production price, shale turns on. Below its production price, shale turns off. The time constant, both on and off, is in the order of one year. It is that simple, and it turns the world of oil completely upside down.

    The Saudi are not really applying a new strategy. They are simply adapting to the new reality that they have effectively lost control of oil prices in the range above $60/bbl.

    • Thanks Fifi for the informative piece on the economics of shale oil production , Shale oil certainly has the potential for becoming a game changer for the oil business . Evidently the Saudis by manouvering to lower the price of oil will make Shale Oil less profitable for whoever invests in it , specially where conditions make its exploitation a bit more costly or uncertain . A 100$ a bl is more favourable for future shale oil ventures than $70 or $80 per bl and thats possibly what the Saudis are targetting, getting future producers of shale oil or other non conventional oils in areas where production is more costly to drop or downsize their plans .

      Not mentioned is that shale oil requires an abundance of water resources which not always the case arround the world ( China ??).

      In the past the policy of keeping prices level was meant to slow development of new energy sources , not necessarily the production of oil from other kind of deposits . The philosophy is the same although adapted to new conditions such as the rase of shale oil production industry.

    • I used to agree with the above, but I’ve been convinced that it’s not 100% certain that shale dynamics will work as advertised. Two reasons. The first is a secular decline in the cost of drilling. The second is that drilling costs in the U.S. have a strong procyclicality to them — e.g., when prices decline, costs often decline. (Longer discussion at http://noelmaurer.typepad.com/aab/2014/10/oil-prices-and-the-new-tight-oil.html.) Bill Bass below also has a good point, which is that the low exploration risk applies only to U.S. plays; it isn’t an inherent characteristic of tight oil.

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