Why oil is cheap; what does it mean?

[Frank Lee]

Why oil is down by half, what it means for you

...Years of high oil prices, interrupted briefly by the recession, inspired drillers around the world to scour the earth's crust for more oil.

They found it...

[Cobb]

2.32 a gallon here.

[gone-ot]

So, the phrase "...Drill, baby, drill..." does NOT refer to Dentists?!?

[jcp123]

It means OPEC is legitimately scared.

It means Russia will have trouble flexing it's muscles.

It means the US is gaining some of its muscle back.

It means I pay less for the fuel I use less of anyway.

I see no downsides, unless OPEC is willing to help drive prices down a bit further. I think frack-based extraction here has gotten cheaper and is close to break-even point now. OPEC has to be committed to a long-term game of low prices if it wants to drive frackers out, or risk them popping back up at a moment's notice. And, since many of the wells are already sunk, many will have an ongoing output life no matter what.

[jamesqf]

Doesn't even address the main reason: ISIS. They control a good bit of oil, which they can sell for whatever they can get. Since they stole it, and can keep on producing it with gunpoint labor, they don't have to worry about making a profit on investment: like any other thief, they sell for whatever they can get.

So you have two other kinds of producers: those (like the OPEC states) with proven reserves & established infrastructure. Since they need revenue, they can, to a certain extent, follow the ISIS price downwards for a while. But it won't last, because of those other producers with new reserves (like the US fracking stuff) that cost upwards of $80/bbl to extract. They can't sell that oil for $60/bbl or less for long without going bankrupt. When they do, supply contracts, producers with deep pockets will buy up the assets of the bankrupt producers (at bargain prices), and the price of oil will go right back up again.

[jcp123]

$80/bbl is a price for establishing new wells. The wells already sunk won't suffer as much but it will stifle or put on hold more exploration and well drilling. That's why it has to be a long-term game.

[niky]

Saudi Arabia for the long squeeze. Curtail new fracking operations with low prices, just to ensure market share stays stable.

And keeping prices low just happens to hurt ISIS and Russia, too, which is a bonus.

EDIT: And now, the Russian economy is going to hell in a handbasket.

http://www.bbc.com/news/business-30492518

Combination of sanctions due to the Ukraine and the Saudi squeeze.

[darcane]

Originally Posted by jcp123

It means OPEC is legitimately scared.

It means Russia will have trouble flexing it's muscles.

It means the US is gaining some of its muscle back.

It means I pay less for the fuel I use less of anyway.

I see no downsides, unless OPEC is willing to help drive prices down a bit further. I think frack-based extraction here has gotten cheaper and is close to break-even point now. OPEC has to be committed to a long-term game of low prices if it wants to drive frackers out, or risk them popping back up at a moment's notice. And, since many of the wells are already sunk, many will have an ongoing output life no matter what.

But, fracking wells don't continue to produce... they have to continue fracking in order to get more oil. This is part of why the cost to recover fracking oil is higher, and at the low prices, it won't make sense to continue producing at a loss. Unfortunately, with all the capital sunk into developing the fracking infrastructure, production needs to continue or the frackers risk big losses or bankruptcy.

That's what OPEC is banking on...



P.S. I can't help substituting a similar sounding f word for fracking, which makes this whole conversation rather amusing.

[RunningStrong]

Originally Posted by jamesqf

Doesn't even address the main reason: ISIS. They control a good bit of oil, which they can sell for whatever they can get. Since they stole it, and can keep on producing it with gunpoint labor, they don't have to worry about making a profit on investment: like any other thief, they sell for whatever they can get.

No.

ISIS are estimated to be making $1-3 million dollars a day. A lot for a terrorist organisation. Not a lot for a state. Nothing compared to a major oil producing nature. ISIS produces maybe 10,000 bpd at the moment, down from 80,000 in the summer.

Major producers like Saudi and Russia make 10,000,000 bpd, each. And it's good quality stuff, compared to the poorly refined stuff from ISIS refineries.

Originally Posted by Niky

Saudi Arabia for the long squeeze. Curtail new fracking operations with low prices, just to ensure market share stays stable.

And keeping prices low just happens to hurt ISIS and Russia, too, which is a bonus.

Bingo.

[niky]

And as we speak, the panic continues. Russian interest rates at an incredible 17%.

People lining up around the block to exchange rubles for dollars... only to watch the numbers slide ever lower as they sit in line.

Joke of the day:

"Daddy, can I have 5 rubles to buy some sweets?"

"20 rubles? What do you need 50 rubles for?"

I imagine it's not very funny for the Russians, though.

-

But Russia, already weakend by sanctions, is just the tip of the iceberg. US new fracking contracts are on the decline, and other parts of OPEC are also feeling the pinch. Particularly Iran, which is also on the Saudi crap list.

Used to be a few terrorist scares or civil unrest in another OPEC member nation could prop prices back up, but the taps are flowing full force now, and the Saudis don't seem inclined to close them till the wells are dry.

Expect a few "accidents" to hit Saudi operations if they keep this up over the next few months.