US oil settles at $63.05, lowest since July 2009

[barbos]

Interesting, seems kinda high to me.
In any case, I would like to know true break even price (cost of extraction), my understanding it is pretty low like $10.

From what I understand plays in the Bakken are $50-100/bbl for extraction. For crude it depends on a lot of factors. ($10 for Middle East oil, maybe, if the rate of extraction is low) Granted the entire industry plays games of informational asymmetry.

Interesting, looks like current $70 is the price of most expensive (to extract) oil.
So if price drops a lot places will be shut down. Well, assuming shutting down losses are less than selling at a loss.

ME is $27 on average, makes me wonder how they were selling it at $10 in 1998.

 

[NobleSavage]

Some here seem to think the price fall is supply driven, but others say that it's demand driven. In short, China is using less oil.

There are also doomsayers saying that oil fracking in the US is too heavily leveraged for this price war. The banks have a lot of loans out and there are a lot of CDOs backed by those loans. 2008 take two?

By my calculation about $750 billion in junk bonds.

Interesting, looks like current $70 is the price of most expensive (to extract) oil.
So if price drops a lot places will be shut down. Well, assuming shutting down losses are less than selling at a loss.

ME is $27 on average, makes me wonder how they were selling it at $10 in 1998.

Yep. Venezuela, Nigeria, and Russia are not in a good position. I don't think the ME was making money on $10-15 oil. OPEC members were all cheating on their quotas and the Saudis tried to punish everyone by flooding the market. The Saudis were in deep shit financially at the time, but in 1998 OPEC finally agreed to cut back production.

 

[barbos]

Yep. Venezuela, Nigeria, and Russia are not in a good position. I don't think the ME was making money on $10-15 oil. OPEC members were all cheating on their quotas and the Saudis tried to punish everyone by flooding the market. The Saudis were in deep shit financially at the time, but in 1998 OPEC finally agreed to cut back production.

Well, oil is not as big part of the economy in Russia as in ME.
I mean extra $100bil a year for $2trln GDP economy is only 5%. Of course it's hard cash but I think Russia will survive. ME, I am not so sure.

 

[Axulus]

ME is $27 on average, makes me wonder how they were selling it at $10 in 1998.

Why does that make you wonder? What does today's average have to do with the average from 1998?

 

[Derec]

Interesting, looks like current $70 is the price of most expensive (to extract) oil.

$75 actually for Arctic, but those are averages with rather wide ranges. Cheaper oil sands or Arctic oil is still cheaper than the more expensive onshore non-ME conventional oil or shelf offshore for example. But it does show that the oil price can't fall too far without a drop in demand because too much of the oil production requires more expensive price.

So if price drops a lot places will be shut down. Well, assuming shutting down losses are less than selling at a loss.

What you will see first is project cancellations because existing projects have sunk the development costs already and only have the day-to-day costs.

ME is $27 on average, makes me wonder how they were selling it at $10 in 1998.

Well for one you have inflation. $10 in 1998 is ~$15 today. Second, ME average was lower 16 years ago because a lot of their easy fields weren't as depleted and now require more expensive extraction methods. It is quite fascinating to read to what lengths they have to go to keep up the production of ageing gigafields like Ghawar 60+ years into its lifetime. In that chart you can see that even today they have some production that costs $10 but not too much of it (as the average is firmly in the upper part of the range).
Also Brent oil price never quite dropped to $10 in 1998 anyway, and ME oil tends to be lighter and sweeter than Brent benchmark (based on North Sea oil) and can thus demand a bit of a premium.

 

[dismal]

Once you have drilled the well the variable costs of producing oil are very low. When you see $60 required for Bakken (or whatever) that's full cycle economics. For an existing well op costs might $5 bbl or so. Even less in some areas.

Most of my early career oil was $20 or 30 and gas was $2 and there were still projects worth doing, just not as many.

 

[Sarpedon]

I've head the Russia argument, but it's not clear to me what the Saudis get out of that

Well, there's the fact that Russia is a big supporter of Iran, who is Saudi Arabia's biggest regional competitor. And there's no doubt the desire to do the US a solid, so that we continue to be faithful to their bloc.

 

[NobleSavage]

One thing that tripped me up is that "shale oil" != "oil shale". Shale oil, better described as kerogen, is what they have in the Green River Basin. It's not economic. Oil Shale, better described as tight oil, is what they have in the Bakken. When reading most news articles reporters always confuse and mix the two.

The thing with tight oil is that it's basically constant drilling and fracking. The wells deplete 95% in 3 years. With conventional crude, as Deric pointed out Ghawar, lots of money goes into advanced recovery. The oil doesn't just bubble to the surface or shoot out like a gusher. They have to pump a tons of water into the wells, and employ a bunch of other tricks to keep it flowing. In both cases, the accounting isn't a simple sunk costs calculation. It's real easy to get into a situation where you are throwing good money after bad.

 

[NobleSavage]

Yep. Venezuela, Nigeria, and Russia are not in a good position. I don't think the ME was making money on $10-15 oil. OPEC members were all cheating on their quotas and the Saudis tried to punish everyone by flooding the market. The Saudis were in deep shit financially at the time, but in 1998 OPEC finally agreed to cut back production.

Well, oil is not as big part of the economy in Russia as in ME.
I mean extra $100bil a year for $2trln GDP economy is only 5%. Of course it's hard cash but I think Russia will survive. ME, I am not so sure.

Yeah, Saudi Arabia is fucked with out oil. Their citizens find most work demeaning (they have to bring in tons of foreign workers) and their education system is shit. The are making radical changes, but will it be enough in time? Don't know. The thing with this entire debate is the numbers are all suspect. In the US there is a big incentive to make things sound better to sell stock and find investors. OPEC is always making shit up about their reserves. A fun read is the diplomatic cables that were leaked http://en.wikipedia.org/wiki/Contents_of_the_United_States_diplomatic_cables_leak_(Saudi_Arabia) Supposedly, Saudi is overstating their reserves by 40%.

As far as Russia or China I don't trust any any of their official numbers.

 

[barbos]

$75 actually for Arctic, but those are averages with rather wide ranges.

I was talking about upper limit, not average. I mean above $70 all oil fields are making money, below $70 some would start losing money.

 

[dismal]

$75 actually for Arctic, but those are averages with rather wide ranges.

I was talking about upper limit, not average. I mean above $70 all oil fields are making money, below $70 some would start losing money.

It's not that simplistic. There are some fields that need $90. There are some that need $120. There are some that need $250.

What is true is there are a lot of fields currently seeing high levels activity that will see a lot less at ~$60 sustained.

 

[funinspace]

Prices also depends greatly on proximity to pipelines:
http://www.bloomberg.com/news/2014-...north-dakota-as-regional-discounts-swell.html

Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All American (PAA) Pipeline LP. That’s down 47 percent from this year’s peak in June, and 29 percent less than the $70.15 paid for Brent, the global benchmark.
<snip>
“You have gathering fees, trucking, terminaling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said Dec. 2. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.”
<snip>
Most U.S. refiners are along the coasts, which gives them a choice between oil pumped from wells in the middle of the country or foreign crude that can be delivered to the plant on a tanker.

That means the producer has to charge less, to make up for whatever it costs to transport it to the plant. In the Eagle Ford, that just means a few dollars to get to a pipeline that can cheaply push it 100 miles or so to Corpus Christi, Texas.

It’s more complicated in places like North Dakota, Colorado or Wyoming, where there is limited pipeline capacity. Producers have to fill rail cars with crude and pay $10 to $15 a barrel for them to be pulled a thousand miles or more to the coasts.

 

[dismal]

Prices also depends greatly on proximity to pipelines:
http://www.bloomberg.com/news/2014-...north-dakota-as-regional-discounts-swell.html

Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All American (PAA) Pipeline LP. That’s down 47 percent from this year’s peak in June, and 29 percent less than the $70.15 paid for Brent, the global benchmark.
<snip>
“You have gathering fees, trucking, terminaling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said Dec. 2. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.”
<snip>
Most U.S. refiners are along the coasts, which gives them a choice between oil pumped from wells in the middle of the country or foreign crude that can be delivered to the plant on a tanker.

That means the producer has to charge less, to make up for whatever it costs to transport it to the plant. In the Eagle Ford, that just means a few dollars to get to a pipeline that can cheaply push it 100 miles or so to Corpus Christi, Texas.

It’s more complicated in places like North Dakota, Colorado or Wyoming, where there is limited pipeline capacity. Producers have to fill rail cars with crude and pay $10 to $15 a barrel for them to be pulled a thousand miles or more to the coasts.

Yes, the commonly quoted price in the media is for a specific quality of crude in a specific place. West Texas Intermediate at Cushing, OK. If you have something else you are subject to a differential. This differential is usually baked into the breakeven numbers you hear bandied about, however. Though sometimes if a producer says they have $60 breakeven price you need to ask "is that $60 at the wellhead or WTI"?

 

[bleubird]

If oil prices stay low how long before it effects Keystone xl?

 

[NobleSavage]

If oil prices stay low how long before it effects Keystone xl?

That's an interesting question I hadn't thought about. My hunch would be that it won't effect it at all. They have most of it built and oil will rise again.

 

[bleubird]

http://www.usatoday.com/story/money/business/2014/11/13/crude-keystone-project/18994601/
Boom bust economy.Is there not a better way?

 

[Axulus]

http://www.usatoday.com/story/money/business/2014/11/13/crude-keystone-project/18994601/
Boom bust economy.Is there not a better way?

Better than what? How is it a bad thing when suppliers respond to demand and prices?

 

[NobleSavage]

http://www.usatoday.com/story/money/business/2014/11/13/crude-keystone-project/18994601/
Boom bust economy.Is there not a better way?

Like a damper in a shock absorber? Another interesting question. That would make for a good thread, you should start it.

The part I found relevant in your link:

Customers to the pipeline have long-term contracts in place — some as high as 25 years — and its construction or use will not be impacted by the rise and fall of crude prices, Shawn Howard, a TransCanada spokesman, said in an email. He points out that customers did not shy away from the project when crude hit lows of $33 and $37 a barrel in 2009.

 

[NobleSavage]

http://www.usatoday.com/story/money/business/2014/11/13/crude-keystone-project/18994601/
Boom bust economy.Is there not a better way?

Better than what? How is it a bad thing when suppliers respond to demand and prices?

Not everyone likes roller coasters. I'll play the other side if you or bleubird start a new thread.

 

[Derec]

That's an interesting question I hadn't thought about. My hunch would be that it won't effect it at all. They have most of it built and oil will rise again.

That's right. The lower prices will affect new projects and expansions first and foremost rather than existing production. Also the pipeline will take time to build, and as you say oil will rise again.