[Jester]

This is all solid evidence that the price is not too low. Ballooning inventories are a sign that prices are *too high*. Shortage is the sign that prices are too low.

That's following strictly traditional understanding, but the rules change when you've got the entire economic system in danger of a collapse. People losing jobs all over and others fearful the same will happen to them, will cut back. If the economy was not in freefall and usage had remained at the rates it was, you wouldn't be seeing a glut of oil right now.

When the rules of the game change, previous established formulas don't prove out the same.

[JohnDenver]

Why did production rise from Sept to Nov if all this oil is going off line? Something isn't adding up here.

I believe this particular small rebound may be associated with recovery from shut in wells due to hurricanes and shut pipelines due to war. Really it isn't a large enough shift to say anything about the supply intentions of OPEC as the "noise" between EIA and IEA data sets can be of this magnitude.

Point taken. But at a minimum, the graph does show that there has been no marked reduction in supply due to the falling price, up through November.

[rockdoc123]

So why are they still pumping? We've heard a lot about all the oil that is going offline, but the latest stats show world liquids production rising from Sept. to Nov. (see graph above). Why did production rise from Sept to Nov if all this oil is going off line? Something isn't adding up here.

we would need to look at where that production is coming from..a few new fields starting up etc. Without that granularity it is hard to comment. Note that in November we were still somewhere near the $50 range of pricing which is above the marginal cost of production for most fields but is well below the price needed to sustain new projects. Throughout November and December there were a number of announcements about projects being either delayed or cancelled, many in the heavy oil area. So what is happening is many new projects aren't happening but companies were still pumping existing fields where the price was above the marginal cost of production. With oil price at $30 or so we are near the marginal cost for many fields outside of Saudi Arabia.

Can you elaborate more on why there should be a time factor? I can understand why there would be a significant delay when increasing production in response to a price which is artificially too high -- i.e. it takes time to design, build and bring new capacity on line. Reducing production doesn't seem to take much time at all. How long does it take to stop pumping? The Saudis seem to be able to turn down their tap almost immediately.

The issue is it takes time for the markets to level out. Many of the key players hedged production at higher prices thus it takes a few months for the lower prices to affect them. Many companies are still anticipating higher prices (we are in full blown contango) so they will produce even at a loss for a short while believing they can make it up in a few months time. Shutting in production creates all sorts of problems, you only do that if prices look like they will stay low for some time.

What you are missing is that regardless if all of the existing fields keep producing there is an overall decline as the fields deplete. Because much of that production comes from legacy fields the decline can be significant. If new production through new projects, new exploration etc. is not happening then through time supply will decrease. Simply put what if Ghawar were to get to the point where operating costs were higher than production revenues and the oil price was not high enough to warrent development of the deep water Brazil fields (i.e. Tupi and others)?

[yesplease]

Simply put what if Ghawar were to get to the point where operating costs were higher than production revenues and the oil price was not high enough to warrent development of the deep water Brazil fields (i.e. Tupi and others)?

That depends on a buncha stuff like consumption, the proportion of projects coming online that will stay online, what projects are viable at lower prices, lets say ~$35-50/bbl (I keep revising the low end down), and what kind of upkeep is viable at current prices, as well as of course what price actually does. Like you said we could be seeing some lag when there's a glut on the market and once producers adjust sufficiently prices could bounce back up above $50/bbl.

[copious.abundance]

Most large projects like Tupi are not going to be canceled just because of a short-term dip to below-cost oil prices (and Petrobras has already stated this). A big project like that will be operative for decades. During those decades the price of oil will go up and down, and sometimes they will make more money than in other times. Any oil company which does not know this is stupid.

There could be some large projects which might be delayed due to low prices as the company takes a wait-and-see attitude. But if the price goes back up again to a level to make it profitable reasonably soon, then the oil company can just figure the price dip was temporary and proceed with the project. On the other hand, if the price stays low for a long while, then that would probably indicate the market is balanced and the expensive project is not needed for the foreseeable future.