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Page added on November 28, 2014

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Oil Price Drop After OPEC Decision Is ‘Terrible’

Public Policy

The plunge in crude prices after OPEC’s decision to keep its production ceiling unchanged is “terrible,” according to Iraq’s oil minister.

Brent crude, the global benchmark, fell the most in more than three years after the 12-member group completed talks and traded at $72.50 a barrel in London today. That’s 29 percent less than the $102.20 Iraq needs to balance its budget, according to International Monetary Fund estimates.

“We are trying to follow up what is going on, then we will assess the whole issue,” Oil Minister Adel Abdul Mahdi said in an interview today in Vienna. “I already had a meeting with my team. We will try to put the right policy to face the situation.”

Iraq is the second-largest producer in the Organization of Petroleum Exporting Countries, which left its daily output target unchanged at 30 million barrels yesterday. The group considered a cut of 5 percent in production, Abdul Mahdi said after the meeting.

Iran’s Bijan Namdar Zanganeh said the decision wasn’t what his nation had wanted and Venezuela favored a cut, according to Rafael Ramirez, the nation’s OPEC representative.

Oil tumbled into a bear market this year as the U.S. pumped the most in more than three decades and conflict in the Middle East and Ukraine failed to disrupt supply. The group produced almost 1 million barrels more than the ceiling last month, data compiled by Bloomberg show.

Iraq pumped 3.3 million barrels a day last month, data compiled by Bloomberg show.

bloomberg.com



30 Comments on "Oil Price Drop After OPEC Decision Is ‘Terrible’"

  1. rockman on Fri, 28th Nov 2014 9:35 am 

    “That’s 29 percent less than the $102.20 Iraq needs to balance its budget”. I suspect like Saudi Arabia Iraq’s budget is primarily based upon anticipated income and not on mandatory projects. No doubt the Iraq govt could easily spend twice the amount they have budgeted if they had sufficient income. They’ll adjust their new budget accordingly to match their current anticipated income. The KSA, thanks to the massive revenue surpluses they had the last few years can cover their shortfall…for a while.

  2. Westexasfanclub on Fri, 28th Nov 2014 9:44 am 

    Ladies and Gentlemen, with theses politics of economic oil-warfare I dare to call the peak.

    Open up the valves, let it flow like never before – bring down Iran, bring down Russia, bring down fracking – and then, what?

    What are you going to pump in 2015? Let alone 2016?

    So here we go, climbing to the highest of all peaks on that undulating plateau!

    The only thing uncertain for me is if the top of the peak and/or the highest yearly average fall in the 12 month of 2014 or those of 2015.

    But I’m convinced 2016 will definitely be lower and so will be all the years to come henceforth.

  3. Plantagenet on Fri, 28th Nov 2014 9:58 am 

    Maybe we should change the name of this site from peakoil.com to oilglut.com

  4. louis wu on Fri, 28th Nov 2014 10:14 am 

    While all of the oil producers are making less than what they were when oil was recently around $100/b they are still making a lot more than they were about a decade ago selling the same amount.

  5. Perk Earl on Fri, 28th Nov 2014 10:28 am 

    As oil price began its recent descent, the rumor was OPEC wanted a lower oil price to put the kybosh on North American non-conventional that was impeding on their market share.

    Even Russia was willing to chime in to cut production 300kbd if OPEC cut their 1.4mbd.

    The fact no cuts were decided upon in their meeting speaks volumes as to their intention to follow through by not backing off production in a ‘market share war’.

    Once that news hit home, the price of oil started dropping again. The big question is; If LTO goes bust, could it resume fracking once oil price sufficiently rises again? Are the investors willing to ante up for a situation that could oquite easily occur again? Would capex lenders weigh the risks the same after this price shock to the industry? I think the answer is some activity would resume but probably not on the same scale.

  6. shallowsand on Fri, 28th Nov 2014 11:00 am 

    If one drilled and completed a Middle Bakken Well and it’s IP is today, and if WTI stays flat in 2015 and price differential stays, and noting we are now below extraction tax trigger, assuming it is a good well and has cumulative gross of 125,000 and 80% NRI, so net of 100,000 in year one, looking at gross, after severance and extraction taxes of:

    First 5 months 60,000 bbl x $46 = $2,760,000.00

    Next 7 months 40,000 bbl x $49 = $1,960,000.00

    Total of these two figures is $4,720,000.00

    Assume LOE of $6 per bbl. And G&A of $4 per bbl. So $1,000,000.00

    So we have $3,720,000.00 of cash flow in year one on a well that cost $10 million dollars. Assume well nets an additional 100,000 in years 2-5, and costs an additional $3,000,000.00 in LOE and G&A in years 2-5. Will need average WTI oil price of $123 per bbl in 2016-2019 to break even. This ignores payment of interest and the time value of money.

    This is the way I see the numbers working for a better than average Middle Bakken well making those assumptions.

    I am sure I’ve missed something. Tell me what if you see errors.

  7. meld on Fri, 28th Nov 2014 11:44 am 

    POP POP POP

  8. shortonoil on Fri, 28th Nov 2014 12:14 pm 

    If LTO goes bust, could it resume fracking once oil price sufficiently rises again?

    If chicken went to $100/lb how much chicken would be sold? Not much. If chicken was the only meat available, and it went to $100/lb you still wouldn’t sell much chicken. Not many people could afford it at that price. Oil is the same thing. The economy can no longer afford $100 oil, regardless of how much it needs it. Oil prices are not going back up (at least not very far, or for very long). Depletion is reducing the amount that the economy can pay for oil.

    http://www.thehillsgroup.org/

  9. Westexasfanclub on Fri, 28th Nov 2014 12:33 pm 

    Exactly Shortonoil. That’s what I think. We actually have a strange mix of relatively high production numbers and a staggering economy with flat or even reduced demand. That’s why the price is dropping without any big surplus production.

    Once fracking, bitumen, tarsands and deepsea drilling are dropping out of the game because they are too expensive at that price, the supply will significantly shrink and it’s questionable if rising prices are capable to jumpstart the more expensive part of production. It would probably trigger a new or more severe recession before enough oil would hit the market.

    Anyway it would only be an extension of the “undulating plateau” with the absolute peak about to come in the next months, IMO.

  10. Northwest Resident on Fri, 28th Nov 2014 12:35 pm 

    If LTO goes bust (not if, but when), I don’t see how they global economy can produce another round of astronomical debt accumulation to finance another “shale boom”.

    The most recent shale boom was only made possible through producing extreme levels of debt. That is debt that will never be paid off. Many billions of dollars in junk bonds are on the verge of evaporating into thin air, leaving investors and stock owners holding bags of ashes in their retirement accounts and various portfolios.

    So, after the loss of hundreds of billion$ on the first shale boom, how will the hype and propaganda machines entice what few investors remain with any money to invest to put their faith in another shale boom?

    And where are the magnificent virgin shale plays that would be needed to produce another boom? In Africa? In Russia? In Europe? I don’t think so. The American shale boom was made possible not only by the FED’s ability to gin up trillion$ in debt, but by a combination of unique geology, built out infrastructure, experienced workers and lots of equipment. We won’t find that unique combination anywhere else, most likely.

    For the reason that shortonoil gives, and for the above reasons, it is very unlikely that there will ever be another shale oil boom. The Age of Oil will end with a bust, and my guess is, THIS is that bust.

  11. andya on Fri, 28th Nov 2014 12:38 pm 

    It is worth remembering all that nat-gas fracking that was and still is happening even though the price of nat-gas did a similar thing a few years ago. I’m sure the same forces are in play with oil, keep fracking is still the least bad option afaik. So far the price drop is just short term, how it will play out over the longer term, nobody knows, actually the peak oil is a myth team seems to be proven right.

  12. Westexasfanclub on Fri, 28th Nov 2014 12:43 pm 

    “actually the peak oil is a myth team seems to be proven right”

    No team, no myth, not being proven right. We only discuss timing and direction of a very complex socioeconomic situation.

  13. shortonoil on Fri, 28th Nov 2014 1:27 pm 

    So far the price drop is just short term, how it will play out over the longer term, nobody knows,

    We have a model that has hit it right on the head for the last 53 years, and it is based on fundamental laws of physics, not FED speak, or he said, she said. If you want something a little more authoritative you will have to wait for Arch Angle Gabriel to deliver it engraved on a gold platter with ten cherubs singing the anthem to Peak Oil.

    You can wait for the lights to go out, or go find yourself a lantern before they do.

    http://www.thehillsgroup.org/

  14. rockman on Fri, 28th Nov 2014 1:34 pm 

    Louis – “While all of the oil producers are making less than what they were when oil was recently around $100/b they are still making a lot more than they were about a decade ago selling the same amount.”

    Making a lot more CASH FLOW. Which doesn’t mean they are making a profit on previous investments. And it doesn’t mean current prices allow them to replace ongoing production with that cash flow and thus maintain let alone increase their reserve base. The reserve base dynamic that Wall Street tends to heavily value when setting a company’s stock price. IOW Company A might be posting a nice rate of return even at today’s prices but if it can’t justify enough drilling to replenish its booked reserve base Wall Street will likely downgrade its stock. And that’s even true if they have the cash flow to pay for drilling. At lastly the time honored method for a pubco to increase its net income during times of falling sales prices is to reduce expenditures.

    Andy – “It is worth remembering all that nat-gas fracking that was and still is happening even though the price of nat-gas did a similar thing a few years ago”.

    Not as it once was. Much of the NG that has come to market in recent years was production associated with the oil shale plays…not the NG shale plays. Yes: about 25% of the NG produced with Bakken oil is flared. That also means 75% of that associated NG is sold into the market place. From the peak in 2008-09 to today the rig count drilling all NG prospects dropped by 70%. At what price will the gas shales take off again? I wouldn’t make a guess. But in early 2009 Devon paid a $40 million cancellation penalty for 14 of the rigs it had contracted to drill the Haynesville Shale in E. Texas. And at that time NG was selling for almost twice the current price.

    WTFC – “That’s what I think. We actually have a strange mix of relatively high production numbers and a staggering economy with flat or even reduced demand. That’s why the price is dropping without any big surplus production.”

    It would be handy if we had a short hand way of describing the same. Maybe like the POD…Peak Oil Dynamic. LOL. Which, as pointed out, relegates the actual date of global PO as a not very meaningful metric with respect to what happens in the world’s economies with respect to energy. But it clearly shows the huge impact demand has on oil prices. And it would appear we may soon see the huge impact lower oil prices have on drilling and thus production rates. And in time we’ll see what a positive impact lower oil prices have on economic growth. And later we’ll see the positive impact of economic growth has on the demand for oil. Which will have a positive impact on the price of oil which will have a positive impact on the drilling for oil.

    Or we can just refer to it as the POD and save all those words. LOL.

  15. Speculawyer on Fri, 28th Nov 2014 1:39 pm 

    $66/barrel WTI.

    I sure did not see that coming. I see a lot of pain coming to Texas and North Dakota. A lot of operations have got to be slamming the brakes.

    I won’t mind seeing a lot of Wall Streeters losing their money.

  16. Speculawyer on Fri, 28th Nov 2014 2:07 pm 

    I don’t understand this view of shale plays not getting investment money after a lot of people lose money right now. Sure, lots of investors may lose their shirts with this current drop. That is the way capitalism goes.

    But as soon as oil prices shoot back up to $100/barrel, there will be lots of hedge funds and others willing to invest in more drilling. Heck, entire countries default on their debts but soon thereafter, investors are lining up to buy that country’s debt.

    If there is a profit to made in oil, there will be investment money to fund the drilling. Remember, we have massive income inequality and there are a lot of rich people with a lot of money looking for places to invest.

  17. GregT on Fri, 28th Nov 2014 2:51 pm 

    “But as soon as oil prices shoot back up to $100/barrel”

    You’re missing the point Spec. Our economies do not run on $100bbl oil. All of the investment dollars in the world are of little matter, if the price of oil is too high for the market to afford.

    High prices cause recession and economic contraction. Contraction causes a reduction in demand, or a glut in supply, which in turn causes prices to drop. Low prices cause an increase in economic activity, and therefore, an increase in demand, which causes prices to rise. Wash rinse repeat.

    Welcome to the undulating plateau of oil price volatility. Unconventionals may have temporarily made up for the shortfall of conventional oil production, but they are not the $30bbl oil that the economy has come to rely on. We cannot continue to amass mountains of debt. BAU is coming to an end.

  18. poaecdotcom on Fri, 28th Nov 2014 3:38 pm 

    Not only do our economies not run on $100, the shale industry was bleeding red ink at $100+ oil.

    $70 oil is clearly ka-boom for the shale miracle.

    and HY credit…

    and the bond market…

    and the S&P..

    Time to put the popcorn on folks and this epic bloodbath has yet to be rated!!

  19. poaecdotcom on Fri, 28th Nov 2014 3:40 pm 

    north west….. ballsy call on the peak.

    I am leaning your way but Uncle Sam may yet throw a couple of trillion at the shale industry “in the interest of energy Independence and national security”

  20. poaecdotcom on Fri, 28th Nov 2014 3:55 pm 

    TAE hits it on the head if any of you guys are not yet regular readers:

    http://www.theautomaticearth.com/the-price-of-oil-exposes-the-true-state-of-the-economy/

  21. Financier43 on Fri, 28th Nov 2014 4:15 pm 

    There are many comments on this site stating that $100 oil is too high for the market to afford. I don’t know who comprises that market, but where I live I’ve noticed in the local food stores, that folks on food stamps seem to be able to afford $12 a gallon “sugar water” and $15 a pound bagged popcorn, etc. Why do commentators keep claiming that $3.00 a gallon gas is unaffordable?

  22. Harquebus on Fri, 28th Nov 2014 4:50 pm 

    GMH Elizabeth (South Australia) will soon cease manufacturing and the unemployment rate in this suburb is already 30%. So goes Detroit, so goes Elizabeth.
    Western economies can not afford $100 oil.

  23. antaris on Fri, 28th Nov 2014 4:53 pm 

    Maybe the folks on food stamps don’t show up at the market when they don’t have any stamps left. Maybe a little starving goes on between food stamp deliveries.

  24. poaecdotcom on Fri, 28th Nov 2014 4:55 pm 

    The market meaning in aggregate. Of course, Bill Gates can afford $100 oil but the social complexity that made him his fortune cannot.

    High cost oil is equivalent to a lower net energy fuel source (fracking). Current social complexity requires a minimum net energy from oil (95% of transport and so much more) to function.

    $100 cannot support the social complexity required to extract it, therefore “$100 oil is too high for the market to afford”

  25. Perk Earl on Fri, 28th Nov 2014 5:01 pm 

    “north west….. ballsy call on the peak.”

    Yeah, I’ll double down on calling it ballsy too NWR, but if it isn’t peak it sure gotta be close.

    “I am leaning your way but Uncle Sam may yet throw a couple of trillion at the shale industry “in the interest of energy Independence and national security”

    poaecdotcom, I have been wondering about that as a distinct possibility as well. It seems like Obama is a very cautious, often quite slow to make a move, so I’m figuring he will wait too long for most frackers, but then finally jump in the fray late with some form of incentives.

  26. poaecdotcom on Fri, 28th Nov 2014 5:09 pm 

    My fear is that oil will be back at $110 within six months.

    How?

    USD will be deliberately devalued to support domestic oil production (currency war).

  27. ghung on Fri, 28th Nov 2014 5:57 pm 

    antaris – I’m not sure why you brought it up, but since you mentioned it, pre-2008, my daughter worked at the checkout and said that, as you suggest, people on SNAP (EBT; food stamps) would come in and max their card out on staples the week their card was funded (staggered system). While she saw some abuse (what people not on SNAP love to bitch about), she had to admit that the system is working mostly as designed. In our area at least, it seems folks who qualify for SNAP are pretty good at stretching their food dollars, whatever the source.

    As for folks spending their SNAP dollars on junk food and sugar water, blame the food producers along with the consumers. Big Food has continuously put a full-court lobby on the Government(s) to keep all food items eligible for purchase with SNAP money; unfair competition and all that. Follow that money and you’ll see why government programs are a huge subsidy for factory food as a whole; $76.4 billion last year for SNAP alone (there are other more ‘stealthy’ programs).

    Do you think Cola-Cola or Kraft Foods want SNAP reined in; stop folks from buying the junk they sell? Seems that poor folks are at least as addicted to high-fructose corn syrup as everyone else. Be glad they’re not sneaking around your yard trying to catch your dog or cat.

  28. Northwest Resident on Fri, 28th Nov 2014 7:00 pm 

    “north west….. ballsy call on the peak.”

    I don’t think that I’m saying we hit peak yet. To be honest, I wasn’t even thinking about Peak Oil when I wrote that post.

    Regardless of barrel count now, however, I do think that we’ve seen the last BOOM, for the reasons stated. We live in a contracting economy, no matter how hard they try to obscure that fact. And as shortonoil points out, we have passed a critical point where just from a thermodynamic point of view there isn’t enough energy in what we’re extracting to keep the current version of high tech civilization going, much less grow it.

    I don’t believe the FED or other governments in the world have enough juice left to pump another umpteen trillion dollars into another BOOM. Not to mention that where would the oil to create that BOOM come from? I’m no expert, but somebody please tell me where the next boom is coming from and how are they going to get financing in a contracting economy that is already encumbered by unmanageable debt and screaming from lack of (cheap enough) energy.

    There’s no way to look at this situation logically without coming to some very unpleasant conclusions.

    Even if the government does squeeze another $2 trillion out to re-inflate the shale industry, how long will that steroid shot last in a contracting economy brought on by decreasing amounts of energy?

    But don’t worry, TPTB have a convenient excuse cooked up as to why it all fell apart at the seams.

    “Oil prices keep plummeting as OPEC starts a price war with the US”

    “The (Saudi Oil) cartel will let prices keep falling in the hopes that many of the newest drilling projects in the US will prove unprofitable and shut down.”

    It wasn’t due to bad planning or mismanagement on the part of TPTB. It was those damn Saudi’s and Russians! Most of us here know that isn’t the truth, but that’s the excuse they’re pushing out to the masses via media saturation and the infinite echo effect of the internet.

    http://www.vox.com/2014/11/28/7302827/oil-prices-opec

  29. Kenz300 on Sun, 30th Nov 2014 10:57 am 

    Buy a bicycle…… worry less about the price of oil..

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