Could The Shale Oil Boom Be Ending? Depends On Price Of Oil -- October 12, 2014

Updates

October 17, 2014: the NY Times on the slump in oil prices.  My feelings, exactly, in general.  


October 13, 2014:  two articles on this issue.
First, Reuters, Meeyoung Cho -

SEOUL, Oct 13 (Reuters) - Global oil prices lost more than a dollar on Monday in early Asian trades, as Kuwait said OPEC is unlikely to cut ouptut to support prices and Saudi Arabia privately told oil markets that it is ready to accept oil prices perhaps down to $80 a barrel.
U.S. front-month November crude futures fell $1.01 a barrel at $84.81, and Brent crude oil declined $1.12 a barrel at $89.09.
Kuwait's oil minister Ali al-Omair was quoted as saying by state news agency KUNA on Sunday that OPEC is unlikely to cut oil production in an effort to prop up prices because such a move would not necessarily be effective.

Second, Reuters, get used to it -

Saudi Arabia is quietly telling oil market participants that Riyadh is comfortable with markedly lower oil prices for an extended period, a sharp shift in policy that may be aimed at slowing the expansion of rival producers including those in the U.S. shale patch.

Some OPEC members including Venezuela are clamoring for urgent production cuts to push global oil prices back up above $100 a barrel. But Saudi officials have telegraphed a different message in private meetings with oil market investors and analysts recently: the kingdom, OPEC’s largest producer, is ready to accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.

Original Post

A reader sent me this link from Fortune:

Most analysts predict that companies will stay the course for the short-term as prices of West Texas Intermediate crude, the U.S. benchmark, briefly dipped below $85 Friday before recovering to $86. In June, a comparable barrel cost as much as $105.

But if oil prices fall below $85 and remain there for several months, analysts predicted companies would start taking a hard look at next year’s drilling plans. Should they fall below $80, then mid-sized and small producers may cut back their spending and suspend some of their operations.

“If it falls below $80, the companies start having the conversation of slowing down their drilling activity,” said Daniel Katzenberg, an analyst with Robert W. Baird. “It would have to be there for several months for them to actually follow through and reduce drilling plans.”

It's an interesting discussion, but focusing on one data point (the spot price of WTI) is extremely short-sighted.

In the big scheme of things, I feel strongly that politics in Washington, DC, in general, and politics in Bismarck, ND, specifically, will have more effect on the Bakken than the spot price of WTI.

And, of course, it doesn't help that farmers in Minnesota, Iowa, and Nebraska prefer the more costly way to transport oil, by rail, adding anywhere from $1 to $12 to barrel for transportation costs (the range in transportation costs are my own WAG; others have firmer and more reliable figures, but the "general" idea is probably correct). 

The Bakken's main competitor is probably Texas (the Eagle Ford and the Permian). Northern California and the Northeast may be the Bakken's advantage over Texas.

I'm not worried about Saudi flooding the market to cripple the North American energy revolution; Saudi may flood the market but it won't be for that reason. But I don't think they will flood the market in the first place.

When we get into these discussions, one might find it useful to:

• look at the price of WTI over the years (be careful; the link may take a long time to load);
• recall that the Montana Bakken boom began in 2000;
• recall that the North Dakota Bakken boom began in 2007;
• recall the number of active rigs over the years;
• recall that current rigs are significantly better than earlier rigs;
• recall that completion techniques are incredibly different than when the boom started
• note that cost of wells have remained fairly constant throughout the boom when comparing apples to apples and oranges to oranges;
• transportation costs have an impact and are negotiable; 
• North Dakota's new flaring rules are in effect;
• oil services costs have an impact and are negotiable;
• one could argue, exploration is more expensive than development; the Bakken is in the development phase for the most part;
• any slowdown "now," will simply prolong the duration of the development phase in the Bakken; I doubt any new huge fields (bigger and better than the Permian, Eagle Ford, and the Bakken are going to be found during the period of decreasing oil prices);
• when the going gets tough, the tough get going; and,
• there's more to life than the crude oil.

Again, for newbies, it might be best to read my welcome/disclaimer with regard to purpose of the blog. 

This is not an investment site. Do not make any investment, financial, or relationship decisions based on what you read here or think you may have read here.