Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
While lower oil prices can be good, crashing oil prices have consequences, and sometimes those consequences are not very good. While we have been recently touting record U.S. oil production, the reality is that the oil that you have seen come to market recently was based on a price when oil was trading above $70 a barrel. Because of the lag time to bring that oil to market, there is an assumption that somehow U.S. oil producers are shielded from this recent oil price collapse. While some of the producers may be hedged and happy, others are now burning through cash wondering where the money for their next rig is going to come from. Inevitably, if oil goes sub $50 a barrel basis WTI, we will see a pullback the same way we saw when prices crashed in 2015-2016. The economics of shale work best with stable prices but crashing prices don’t work for anyone.
We know they don’t work for OPEC either. The Wall Street Journal is suggesting that OPEC will be forced into making a dramatic production cut because most OPEC nations are at risk of steep budget deficits after the recent oil-price crash. In fact, they say that when Brent crude is at $60 a barrel, 12 OPEC nations are below their budget. If it falls below $55 even Russia gets hurt. The Wall Street Journal puts the breakeven price that oil producers need into clear daylight. Venezuela need the highest price at $216 a barrel. Good Luck with that. Nigeria needs $126, Libya $114,Bahrain $111, Saudi Arabia $88, Algeria $84, Angola $83, Ecuador $78, Oman $77, Iran $72, UAE $72, Kazakhstan $62, Azerbaijan $59, Iraq $55, Russia $53, Kuwait $48 and Qatar $47.
While President Donald Trump may be happy that he conned Saudi Arabia and Russia into raising output ahead of Iranian oil sanctions that never really happened, the ensuing crash might force OPEC plus one into making too steep of a production cut that could cause a price spike later this winter. A price spike that could derail U.S. and global economic growth. While the President rightly deserves credit for breaking the price of oil, he also will have to take credit for the consequences, both intended and unintended.
The Wall Street Journal says that falling prices could force shale drillers—who fracture underground rock formations to release the oil and gas trapped inside—to moderate their growth in booming areas such as the Permian Basin in Texas and New Mexico, and the Bakken region of North Dakota. That means a pullback and less high paying jobs in the shale states.
Still, oil is acting like a wounded puppy. It tried to rally after a bearish API report which probably signals that the low for oil should be near. API reported Crude: +3.453M/Gasoline: -2.620M/Distillates: +1.185M/Cushing:+1.302 M.
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