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Oil Price to drop. U.S. shale oil producers will feel the pain October 4, 2014

Posted by hslu in China, Cold War, Economics, Global Affair, Middle East, Oil.
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CNBC Headline; 10-2-2014: “Saudi signals price skirmish as oil heads to bear market” 

http://www.cnbc.com/id/102053966

I saw this headline this morning on CNBC website and all the sudden what I talked to my friends about last night became so real right in front of my eyes.

Saudi has lowered the price of oil it exports without telling other OPEC members. I think Saudi is basically tired of seeing its market share drops even though oil prices stayed at $100+ level. To Saudi and a few other OPEC countries, even though oil price will drop, higher oil production rate will keep total oil revenue at more or less the same level. Some people predicted that oil will eventually drop to $75. WTI traded today at one time below $90 and finished at slightly higher than $90 at the close. I don’t know where oil will be traded at because no one is smart enough to call the price of oil with any kind of consistency.

One thing is for sure, oil price will head lower if Saudi carries out its plan.

Basically what Saudi wants to do is to keep Saudi’s oil production at a higher level to maintain its market share which Saudi has the spare capacity to do so and move oil price lower.

The implications of Saudi’s plan will be huge depending on how hard it wants to push price of oil down:

  1. Oil price will drop until it finds a floor, i.e., market find a new equilibrium point where high cost producers will drop out of the market and whoever can keep its production and development cost at a competitive level will survive. The ones who can’t will drop out of the market for now.

 

  1. S Gasoline prices will decrease to below $3/gal in many parts of the U.S. soon. Consumers will have more disposable money to spend. Lower gasoline prices will make people less likely to switch to all electric cars. America will increase oil import and trade deficit will move higher.

 

  1. Canadian oil sand and U.S. shale oil projects will suffer. Some companies will go out of business and layoff will happen sometime later. U.S. economy will take a small hit from lower activities in the oil patch. Canadian GDP will be negatively affected as well. Their production costs are simply too high to compete with those from oil producing nations in the Middle East. Oil companies operated in the Bakken will suffer more than the ones operating in the Eagle Ford area in Texas. Both will feel the pressure though.

 

  1. The financial situations for several OPEC countries will be positive even though oil price drops. The bottom line for OPEC countries is that total oil revenue will be kept at roughly the same level because production rates are higher. North Sea oil productions will decline as oil price moves lower. South American and African countries will see unrest as oil export decline. Civil unrest may happen if their oil exports decline.

 

  1. Russia will suffer the most because of sanctions and low oil prices. It will accelerate Russia’s alliance with China.

 

  1. Oil importers such as China, Japan, Korea, Taiwan and many SE Asian countries will benefit from lower oil price. It will help their economies grow.

 

  1. Inflation will come down globally. Pressure on the Fed to raise interest rate will ease. Consumers all over the world will pay less for transportation.

 

  1. Gold may drop in price too as commodity may move in sympathy. Natural gas may move in sync with price of oil too.

 

  1. Saudi will be less inclined to listen to what U.S. wants in the Mid East.
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