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Shale Oil Producers Will Be Disappointed By Today's OPEC Address

By Ellen R. Wald, Ph.D.CommoditiesFeb 23, 2016 12:20AM ET
www.investing.com/analysis/the-saudis-and-the-shale-producers-200119138
Shale Oil Producers Will Be Disappointed By Today's OPEC Address
By Ellen R. Wald, Ph.D.   |  Feb 23, 2016 12:20AM ET
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Ali al-Naimi, Saudi Arabia’s minister of petroleum, will be delivering the keynote address at a major energy conference in Houston, Texas today. Representatives from large and small oil companies will be gathering to hear the most influential energy policy-setter deliver his thoughts on the oil market.

Small shale producers, many of whom have not made a profit off a barrel of oil in nearly a year, are hoping that he will talk about how OPEC and other major producers are working together to bring balance to the market. Some are even hopeful that he will announce Saudi Arabia’s intention to support future production cuts. They are looking for any pronouncement that will cause prices—and speculation—to jump.

They may be sorely disappointed.

Shale producers feel a collective sense of pain that they hope Saudi Arabia is feeling as well. They see the fact that S&P recently downgraded the country’s credit rating and reduction in foreign currency reserves as signs of Saudi suffering. However, Saudi Arabia’s financial situation is nothing compared with what is happening in the shale oil fields.

Saudi Arabia can produce a barrel of oil at a cost of about $2. Even the best shale producers cannot produce a barrel of oil for less than $50 a barrel. With oil selling at about $30 a barrel, Saudi Arabia is still making more money off of its oil than any American shale oil producer. The media loves to report that Saudi Arabia is on the brink of disaster, citing its military activities in Lebanon and freeze in government payouts.

The fact is that Saudi Arabia does not feel their pain. In fact, some locals tell me the Saudi government may even welcome these minor inconveniences as a way to help nudge its own economy towards some diversification.

OPEC is not coming to bail out the shale oil producers. Meetings held last week in Qatar between Russia, Venezuela, and Saudi Arabia and in Tehran between Iran and Iraq yielded no substantial changes in policy. The Russian-Venezuelan-Saudi decision was to not raise production IF other OPEC and non-OPEC producers also agree to not raise production. This simply confirms al-Naimi’s policy that Saudi Arabia is open to discussing potential cooperation between OPEC and non-OPEC producers. It reflects no actual change in policy, because nothing was agreed to. In Tehran last week, Iran and Iraq committed not to make any commitments. This just tells us what we already knew—these two producers need the flexibility to increase production when opportunity arises and will take it. Therefore, OPEC will also keep its options open.

Times are tough for shale producers and bankruptcies and asset sales are increasing. Job losses in Texas alone are pushing 60,000. Any relief producers thought would come from ending the oil export ban has not materialized.

Hanging on the thread that Russia and OPEC will decide to cut production is wishful thinking to the extreme. Ali al-Naimi may be coming to Texas, but he is not coming to save the American oil industry.

Shale Oil Producers Will Be Disappointed By Today's OPEC Address
 

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Shale Oil Producers Will Be Disappointed By Today's OPEC Address

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Comments (10)
Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. Mar 01, 2016 3:24PM ET
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See https://www.investing.com/analysis/at-what-price-is-shale-oil-really-profitable-200119942 for more information about the prices shale producers actually need to be profitable in the current market.
Muhammad Hasnain Yousaf
Muhammad Hasnain Yousaf Feb 25, 2016 5:19AM ET
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I think its still bound to situation in Iraq and Syria than Shale producers. The oil being pushed to 20$/B is not because Saudis wan't to keep shale production out, its because Saudis want to keep a check on Funds tap of Russia and Iran (both economies being largely oil dependent) and thus limit their ability to gain leverage on the ground. Had this been the long term phenomenon, we would have witnessed a visible wave of fiscal reforms across GCC. Whatever we have seen so far, simply doesn't convey GCC gearing up for long haul. I'd start believing the long term theme once I see . 1)Major Fiscal reforms like introduction of individual or corporate taxation. 2) De *****the currencies from US Dollar etc.
wise money
wise money Feb 25, 2016 1:36AM ET
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I don't care who paid you what. This is either the most uninformed opinion I've ever read, you got paid to write it, or you are just not that bright. My apologies for coming across as rude, but this is garbage.
Jeosef Broz
Jeosef Broz Feb 24, 2016 7:55AM ET
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Hogwash. Firstly, Ibn Saud's production costs are $21/bbl, but that can be written off as a typo, but AMAZINGLY poor proofreading. RAND in 2005 projected shale's break-even costs to be $30/bbl by 2012 -- and it was already lower than $50/bbl (this author's HILARIOUSLY far-off claim) even in 2005, said RAND analysts, WORSE STILL for this author, the drilling technology since 2005 has actually brought costs even lower than the $30/bbl which RAND projected:. In 2015, the "Shale 2.0" research paper further noted that shale costs should be $5 to $20/bbl... These facts are WHY this chart shows US shale production is still INCREASING into 2016, even as rig count dropped:. https://www.google.com/search?tbm=isch&q=shale+production+chart+2016&gs_l=img.3...15835.17089.0.17486.5.5.0.0.0.0.97.427.5.5.0....0...1.1.64.img..0.0.0.jwFQzwVAam8#imgrc=9G727TZX6uPfNM%3A. . What's more, the technology has yet to be exported to nations like China, who also have large shale deposits.
Trading Systems
Trading Systems Feb 24, 2016 7:55AM ET
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I agree with you. It is definitely hogwash. Also, SA needs oil to be around 80 just to fund their social programs and meet the needs of the people in Saudi Arabia
Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. Feb 23, 2016 2:27PM ET
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Shale oil companies cannot collude with each other to cut production because U.S. anti-trust laws prohibit this. You can be sure that if they tried it, the Justice Department would investigate immediately. Harold Hamm (CEO of Continental Resources) actually suggested this publicly last year, but of course, nothing came of it.. . Ali al-Naimi confirmed during this speech this morning that OPEC will not be cutting production, no matter how hard it gets for shale producers. He also spoke derisively of developed Western countries who are demanding of developing ones that fossil fuels be kept "in the ground" rather than used to benefit their populations. Perhaps he's had enough of Westerners trying to tell him what to do.
Chris Lai
Chris Lai Feb 23, 2016 2:27PM ET
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Thank you Doctor Wald for your informative prediction - it is only common sense that higher oil price can only be achieved by having more producers exiting the market. According to IEA, in the past few years, US's oil production exceeded Russia, and then Saudi Arabia and became the largest oil producer in the world. The response of Saudi Arabia to this threat (compounding with the Chinese crisis and thus raw material demand shifting to the left) is to start a price war. In short, the primary objective of Saudi Arabia is to show the world (esp. US and Russia) that oil production is their turf, and they are the monopoly (price leader) who dictates the trading value. I do not think they are going to stop - there is not enough blood on the street yet.. . http://www.eia.gov/beta/international/
Trading Systems
Trading Systems Feb 23, 2016 2:27PM ET
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The problem is - it is not there "turf". SA cannot fund itself without higher oil prices. Crude is a small portion of revenue GDP in North America. Saudi Arabia is however a one trick pony economy when it comes to crude and absolutely needs higher prices
Chris Lai
Chris Lai Feb 23, 2016 2:27PM ET
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Exactly, because crude is Saudi Arabia's "one trick pony", it must protect their market share. They need higher price, in the long run, and therefore must drive out competitors in the short run (by starting a price war), so they can regain price control again.
Lee Marvin
Maven Feb 23, 2016 2:27PM ET
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Comp,et ely agree.
Brian Boyd
Brian Boyd Feb 23, 2016 6:41AM ET
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Saudis national budget requires much higher prices. Shale is now competitive at the 35 dollar mark in many cases. OPEC is powerful, but nowhere near as is in the days of past. Many of their members are having major issues. Iran just received 150 Billion from the US, so they approach this differently. But there are a lot of views that are not represented here. Payments to oppressed citizens is expensive, let's never forget that. Saudis are fearful if they cut back subsidies too much of another Arab Spring situation. Higher prices are better for most everyone, to a point. The lack of invest,nets that are occurring right now will be an issue in the future. Many open countries have no diversification. I do not believe shale is in as much trouble as long term as you suggest. Never forget Saudis budget and no diversification issues.
Lee Marvin
Maven Feb 23, 2016 6:41AM ET
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Thank, Brian. You saved me the trouble of pointing out the fallacies in this article. Good post.
Brian Boyd
Brian Boyd Feb 23, 2016 6:41AM ET
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Thank you The Maven, for not pointing out my ludicrous typos! $2 Saudi and $50 shale, kind of had me rattled.....
Jeosef Broz
Jeosef Broz Feb 23, 2016 6:41AM ET
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Spot on, Brian. This is why I never take advice from PhD's under the age of 40 or from the Baby Boom generation, as USA's (and most of EU's) universities have become of such poor quality (indoctrination, instead of education, these days). ...Additionally, as Sunnan fight Shia+Russia, neither side can afford to cut production; they are all major oil-producers with wartime budgets heavily impacted if they cut production, as their economies have so little diversification.
Brian Boyd
Brian Boyd Feb 23, 2016 6:41AM ET
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Excellent points Jeosef Broz..
Prof Prof
Prof Prof Feb 23, 2016 4:52AM ET
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Billionaires have been created because of ridiculous high oil prices during the last decade. Not because oil is scares or worth a lot of money. Prices sky rocketed because of speculation. It is good that all those blown up companies get deflated. Oil should be cheap. The cheaper the better. If you can not compete, get broke or change your business model. Great times are ahead of us.
Lee Marvin
Maven Feb 23, 2016 4:52AM ET
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Some Econ 101 would do wonders for you.
Brad Smith
Brad Smith Feb 23, 2016 4:52AM ET
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There is some factual economic basis to his statement. It seems many have short memories as the high price of oil was frequently referenced as a major factor causing the last recession. Even now, there are many companies and consumers benefiting from low oil prices. Transportation costs have dropped off drastically. Generally, only companies and investors with business in the oil patch are suffering right now.
Brian Boyd
Brian Boyd Feb 23, 2016 4:52AM ET
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Hi Brad, there are healthy price levels and unhealthy for sure! What worries me is the repercussion from lack of investment and the markets eventual over reaction in the long run. YIKES.
Trading Systems
Trading Systems Feb 23, 2016 4:52AM ET
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The last recession was caused because of greedy bankers selling mortgages and financing houses people couldn't afford with nothing down---not crude prices. This time low crude prices are going to crash the stock market
HiNick Itsme
HiNick Itsme Feb 23, 2016 1:45AM ET
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It costs more than $2/bbl for Saudi Arabia to produce oil. It is approximately $10.50/bbl. Also some Eagle Ford shale can be produced for around $35/bbl. Your article is full of misinformation.
Kuhailan كحيلان
Kuhailan2010 Feb 23, 2016 1:36AM ET
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Sorry Mom, OPEC is not a charity organization ... who broke systems to flood the world with oil and started the oil prices war he must meet the consequences. Do not blame others of your mistakes. The Glut kills sometimes ? Lust for money and greed is unhealthy and bad habit must be changed :)
Lee Marvin
Maven Feb 23, 2016 1:36AM ET
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Lust for money is enshrined in the Saudi constitution, isn't it? I am enjoying watching the corrupt Saudi squirm like dogs.
Kuhailan كحيلان
Kuhailan2010 Feb 23, 2016 1:36AM ET
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Apparently you are experiencing symptoms the shock of investing in shale-oil , believe me, treatments must come through the Saudis. Screaming as much your pain
Brian Boyd
Brian Boyd Feb 23, 2016 1:36AM ET
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OPEC is at ~30 percent of Global production. Oppressed citizens are subsidized for obedience!. Give me Shale or give me death! LOL.
Lee Marvin
Maven Feb 23, 2016 1:36AM ET
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Arabian citizens not lucky enough to be part of the ruling family are experiencing the shock of not getting the monthly stipend. Saudi credit rating downgraded, more to come. Saudi treasury bleeding $$$$, no end in sight. Shale-oil drillers proving much more resilient than Salman anticipated. US exports of crude and NatGas have begun. Sad to see an economy based almost entirely on oil hoisted on it's own petard.
Steve Massey
Steve Massey Feb 23, 2016 1:08AM ET
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Maybe US shale producers should cut production in conjunction with and in proportion to OPEC.. Better than going bust at a negative margin of -$20 per barrel.. I am sure the credit providers would be supportive.
Trading Systems
Trading Systems Feb 23, 2016 1:08AM ET
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They can't - it's prohibited in the anti trust laws; that's about the only thing this article was accurate on
 
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