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OPEC Policy Ensures U.S. Shale Crash, Russian Tycoon Says

OPEC Policy Ensures U.S. Shale Crash, Russian Tycoon Says thumbnail

OPEC policy on crude production will ensure a crash in the U.S. shale industry, a Russian oil tycoon said.

The Organization of Petroleum Exporting Countries kept output targets unchanged at a meeting in Vienna today even after this year’s slump in the oil price caused by surging supply from U.S shale fields.

American producers risk becoming victims of their own success. At today’s prices of just over $70 a barrel, drilling is close to becoming unprofitable for some explorers, Leonid Fedun, vice president and board member at OAO Lukoil (LKOD), said in an interview in London.

“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun, who’s made a fortune of more than $4 billion in the oil business, according to data compiled by Bloomberg. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

Oil futures in New York plunged as much as 3.8 percent to $70.87 a barrel today, the lowest since August 2010.

At the moment, some U.S. producers are surviving because they managed to hedge the prices they get for their oil at about $90 a barrel, Fedun said. When those arrangements expire, life will become much more difficult, he said.

Saudi Arabia

While some OPEC countries including Venezuela pushed for a reduction in output quotas at today’s meeting, Saudi Arabia, the group’s dominant member, argued for the status quo.

In Russia, where Lukoil is the second-largest producer behind state-run OAO Rosneft (ROSN), the industry is much less exposed to oil’s slump, Fedun said. Companies are protected by lower costs and the slide in the ruble that lessens the impact of falling prices in local currency terms, he said.

Even so, output in Russia, the biggest producer after Saudi Arabia in 2013, is likely to fall slightly next year as lower prices force producers to rein in investment, Fedun said.

“The major strike is against the American market,” Fedun said.


16 Comments on "OPEC Policy Ensures U.S. Shale Crash, Russian Tycoon Says"

  1. JuanP on Fri, 28th Nov 2014 7:02 pm 

    I expected OPEC to do nothing at its meeting for political reasons. Saudi Arabia is obviously not willing to cut production, and I don’t know if anyone other than the Russians volunteered any cuts. The Russians had that meeting on Tuesday with KSA, Mexico, and Venezuela to offer a matching 300,000 bpd cut and try and convince them to make cuts, but it didn’t work.

    I expect prices to stay low for a few months at least. If the market is left to find its own bottom and come back on its own, the process could take up to a year. I also expect many oil producers to experience financial difficulties if this happens.

  2. Makati1 on Fri, 28th Nov 2014 7:05 pm 

    Sounds reasonable. Oil left in the ground is not going anywhere. Better than USD in the bank where they are being pillaged and shrunk to pennies.

    From my readings, this whole sanctions/low oil price situation is a plus for Putin. Never let a good disaster go to waste. He is using it to consolidate Russia. It gives him leverage to clean up some of the corruption while maintaining a popularity that Obomination can only dream of.

  3. Brent on Fri, 28th Nov 2014 7:28 pm 

    Also all the debt that is leveraged in us shale oil could cause another credit crisis now that oil prices are so low.

  4. keith on Fri, 28th Nov 2014 9:20 pm 

    Is this an exit strategy for the U.S.? They need to raise interest rates and start making money again. How do you do that without destroying the shale industry? They don’t want the shale investors(American public) to be angry with the Fed, after they lose all their pension fund money from the backruptcies to follow from the Ponzi revolution. So, lets get the Saudi’s involved and blame it on them. 2015 is going to be such an interesting year.

  5. rockman on Fri, 28th Nov 2014 10:10 pm 

    “In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun”. True. And as oil prices eventually ties so will US shale production. The same US oil patch some believe will disappear with these lower prices is the same industry that came off of $18/bbl just 10 years before the highest production rate increase in the history of the US. The shales will still be, the equipment will still be there and the capex will reappear as it always does when prices increase. It might take 5+ years but all the factors that led to the shale boom will come together again. That next boom may be lead by companies most aren’t familiar with. Just as unfamiliar as many of the companies that started chasing the shales 5 years ago.

    And those new reserves KSA et al were going to develop thanks to high oil prices and record incomes? If OPEC prices stay $30/bbl under the $100bbl they were used to for 5 years they’ll see a revenue loss of $2.5 TRILLION. I suspect we’ll see little development of new OPEC (or any other country’s) oil reserves for quite a while. Just as we saw in the 90’s.

  6. Makati1 on Sat, 29th Nov 2014 2:00 am 

    rockman, you may be correct in your future scenario but I think your timing may be off by many years. When the SHTF, the collapse of the economy and banking system is going to put a super large dent in any ‘investments’ in the future. It may actually kill the Stock Market this time around. When the retirement funds go down, the US is cooked. Paper wealth does not put a roof over your head or food in your mouth if it is worth pennies on the dollar, or nothing. What was Zimbabwean currency worth at the bottom? Good for lighting the fires or keeping warm with by burning it in the fireplace. Wiemer Republic? The US? We shall see.

  7. pat on Sat, 29th Nov 2014 4:30 am 

    whether the oil is at $150 or at 40-60 levels for any significant amount time is only going to make the world economy collapse. as already the rapidly slowing chinese and recessionery europe economys and declining parchasing power of us has reduced the demand for the oil. the world papers may see use nothing more than but burning it in firplace.

  8. Davy on Sat, 29th Nov 2014 7:24 am 

    We can rant and point fingers at the Fed or every other major economy if you like. They are all at it. The Fed is singled out but China is the worst Ponzi scheme of them all with 25 Trillion in credit creation. 2008 was when the terminal illness set in. The policies that were put in place returned BAU relatively quickly and were a success in that respect but BAU’s death is still inevitable.

    If after the economy was stabilized in 2010 we had embarked on economic reform to correct all the damage from the previous years do you really think this would have succeeded? Do you really think BAU could have been fixed? I personally believe that recovery point in 2010 would have been the perfect time to initiate the descent by deflationary policies of less with less. We know TPTB would never choose a policy of less with less.

    There was no chance of BAU recovery with or without the current policies. The only outcome is or would have been a descent. We are at that point where limits of growth and diminishing returns are in effect at the fundamental level globally. The AGW folks should be happy the route we have taken guarantees a quicker descent for lowering carbon. IMA the only effective way to limit carbon is less with less in a generalized descent.

    I could argue that what the Fed did was buy us time. The shale folks bought us time. If policies in 2010 would have gone deflationary we would still have people crying and you can damn sure bet things would not be good. I will say the current debt economic policies will make the fall come quicker. There is some advantages to this. It also allowed many preppers time to adjust and many players to play.

    I tell all of you out there that think these oil prices might cycle back that this time may be different. We may be on the bumpy descent down now. The bumpy descent will probably be a shorter duration then the bumpy plateau we have been on. I doubt the shale industry will come back to its former glory. I may not even come back until a command control martial law economy brings it back for national security.

    The end was written in 08. We just blew through our survival stocks instead of husbanding them for a longer term descent. The end was coming either way. Energy depletion, limits of growth, diminishing returns, and population overshoot, and ecological degradation all have one end when they converge and reinforce each other. We are on borrowed time now. The blame game is useless. The hopium game is useless. Start preparing for something that is impossible to forecast. We are talking the unraveling of 200 years of growth into a descent to a new post industrial age.

  9. Kenz300 on Sat, 29th Nov 2014 8:45 am 

    “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

    Enjoy the low prices while they last……

  10. Northwest Resident on Sat, 29th Nov 2014 11:02 am 

    It is official. The real reason for declining oil prices is those damned shale oil producers just flooding the market with vast quantities of oil, far more oil than the world needs. And the reason that Saudi Arabia has cut their oil price is to drive those over-productive shale producers out of business before shale oil producers do the same to them.

    And if you believe that, then you’re going to love this article, from none other than the main purveyor of steer manure to the gullible and adoring masses.

    Oil News: OPEC Looks to Stomp Out American Rival Before it Loses Control

    “Clearly, the U.S. shale boom is having an impact on OPEC’s policies. While the cartel is standing firm on production, some of its members are really hurting, so it will be interesting to see how long it can withstand these lower oil prices. However, OPEC is hoping this pain will spread to American shale producers and force them to cut investments while pushing weaker producers out of business. It’s an aggressive plan to endure some pain now in an effort to stifle its newest rival. That said, American producers should be able to adapt to lower prices as the cost of shale production has been rapidly declining over the past couple of years, suggesting that while shale growth will slow, it’s unlikely to be stopped.”

    You know, to have to resort to lies like this strongly indicates that TPTB must desperately need for individual and institutional investors to STAY invested in junk energy bonds, for the time being anyway.

  11. agramante on Sat, 29th Nov 2014 11:18 am 

    Rock–I have no doubt that American shale players will return to the field (presuming they’ve been forced off by low prices) once prices begin to rise again. After all, the oil will still be in the ground, not going anywhere, while prices are depressed. So this price crash will amount to a hiatus, more or less. Even so, I also have no doubt that Saudi Arabia and other major producers are happy to inflict what damage they can, however transitory, on American tight oil producers. A dollar gained is a dollar gained.

  12. Makati1 on Sat, 29th Nov 2014 8:13 pm 

    agramante, why is it a sure thing that shale producers will be back after prices bottom and start upwards? I think the ability to recover will depend on investors willing to buy their stock and banks willing/able to lend them the billions needed. Neither are very likely to happen. By then the financial system in the West will be broken beyond repair. Or so it seems to me.

  13. rockman on Sat, 29th Nov 2014 9:22 pm 

    M – “…why is it a sure thing that shale producers will be back…I think the ability to recover will depend on investors willing to buy their stock and banks willing/able to lend them the billions needed.” You mean like the resistance of companies and capex sources to fund the shale plays just 5 years after oil was selling for $35/bbl? Remember companies and capex sources started throwing money at the shale players in 2009 when the oil price averaged $58/bbl.

    Of all people you are the last I think would give up the power of greed. LOL.

    And no: if this is the beginning of a true bust it will take many years for the full cycle to roll back around. Remember I’ve been doing this for 4 decades and have listened to countless predict quick come backs. The last big boom began 40 years ago with the bust following about 10 years later. And the about 20 years later the next price boom begins. And now about 8 years later we MIGHT be seeing the beginning of the next bust.

    And the folks counting on a quick turn around back in the 80’s? Many of them left the oil patch for ever. Some of us with limited alternative skills stayed behind to start the next vicious cycle all over again. LOL.

    But my MS will guarantee I won’t be around to help the recovery. You’ll be on your own, suckas. LOL.

  14. rockman on Sat, 29th Nov 2014 10:48 pm 

    A – “…Saudi Arabia and other major producers are happy to inflict what damage they can…on American tight oil producers. A dollar gained is a dollar gained.” A dollar gained??? If oil prices just stay where they are at now OPEC will lose $1 TRILLION in revenue in just the next 24 months alone. How high will oil prices have to go and how fast before the shales players reproduce the recent phenomenon?

    And once again: OPEC and the shale players didn’t drive the price of oil down by producing at to high rate. According to the EIA in 3Q 2014 the world consumed 92.31 million bbls of liquid fuel per day. And 12 months ago in 3Q 2013 that amount was 91.21. Or a 1.2% increase. And prices? WTI 3Q 2013: about $105/bbl. 3Q 2014: about $95/bbl. And now just a few months later about $75/bbl.

    So who thinks there’s been a huge surge in US oil production in the last few months that pushed the price of oil down that far? I know some folks still refuse to accept a very simple reality: neither the KSA or any other oil exporter sets the price of crude oil. The buyers (the refiners) set the price they pay. The KSA cannot not force a refiner to pay particular price. The only control the KSA et al has is how much oil they are willing to sell at the price the refiners AGREE TO PAY. The refiners can’t force the KSA to sell them oil at a certain price. All they can do is buy the amount of oil the exporters offer at price they are willing to pay. Today every oil producers is selling as much oil as the refiners are willing to buy AT THE CURRENT PRICE. And the refiners are selling as much product the consumers are willing to buy AT THE CURRENT PRICE.

    So how do refiners estimate how much they can pay for oil and make an acceptable profit? They forecast the amount of refined product (mostly motor fuel) consumers will buy at a certain price. Trust me: if a refiner could buy oil for $75/bbl and sell gasoline for $5/gallon he would: he would feel no obligation to pass on his lower cost to the consumers.

    The consumers aren’t paying for motor fuel at a 5 year low because oil prices have fallen. Oil prices have fallen because consumers are unable/unwilling to pay more then the current price. Gasoline prices have fallen from the 2014 peak of $3.79 in the last week of April to the latest price of $2.91. That’s a 23% decline in price. And lo and behold: WTI prices fell from $100/bbl to $75.74/bbl over the same period. A 24% decrease in price.

    It’s as if the refiners new they couldn’t make a profit selling fuel today if they were playing the same price for oil as they were in April. And again believe: if a refiner could pay $75/bbl for oil and still sell gasoline at last April’s price of $3.79/gallon he would without the slightest sense of guilt. LOL.

    So when will oil prices go back up? Only when you selfish consumers agree to start paying more for fuel. Shame on you for refusing to pay more, you dang bunch of commies.

  15. agramante on Sat, 29th Nov 2014 11:34 pm 

    You certainly have a more detailed understanding than I do of oil trading, Rock, but fundamentally I agree with you: prices have fallen due to falling demand. It’s the most fundamental of free-market axioms. And while OPEC nations might be losing out on prospective profits ($1T being the difference between sales at current prices and sales at former prices), and while they’re not happy at that prospect, their margins are higher than the shale players’. Due to the nature of their fields, their ROI is much higher (and I acknowledge that governments like the KSA do have increasingly large obligations, in the form of social spending, at home to finance with their oil proceeds). And I’m not claiming that OPEC has engineered the current price drop. I’m one who thinks that OPEC has next to no power to control prices internationally. Saudi Arabia is no longer a swing producer. It’s producing flat-out. They’re not happy that prices have tumbled. But they’ll happily let more highly leveraged, and lower-profit-margin, producers like those in American shale, go bankrupt before they seriously consider cutting back. And even if every single American shale producer shuts its doors and prices continue going down, I doubt they’ll cut back.

  16. Kenz300 on Sun, 30th Nov 2014 10:45 am 

    Shale growth will slow…… tar sands growth will slow…… deep water growth will slow………..

    The cost of production is high………

    The price of oil is low……….

    Highly leveraged and poorly capitalized companies will go broke………

    Low prices will increase demand and help the world economy heal from the effects of the Great Recession. That will cause demand to grow and prices to rise once again.

    Enjoy the temporary price decline…… while it lasts.

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