No one should underestimate the impact of AI (artificial intelligence) on the future of the entire capital markets complex. The LinkedIn group, Algorithmic Traders Association, has recently been running a series of articles warning of the seismic shift that is and will continue to be felt in the global hedge fund industry as machines take over from people on trading desks.
But what intelligent human being would ever suddenly have turned bullish on the morning of Monday 15 May 2017 just because of renewed jawboning from Saudi Arabia and Russia, indulging in the same old two-step as they did at Doha in April 2016 and Vienna in November of last year. That is however precisely what the machines did. Hallelujah.
In the past couple of weeks, crude oil futures really did a round trip. First, they took a beating. WTI futures fell on May 4th to $45.52 per barrel, coming down from an April peak of $53.40, hitting the lowest point since the deal between OPEC and non-OPEC oil producers was signed last November. Since then, WTI has rallied up above $49 on as confidence grows over an OPEC cut. So is this more noise or a portent of things to come?
Despite the occasional rally, it's hard to see that the outlook for oil is encouraging on both fundamental and technical levels. The charts look to be screaming double top for WTI, while the fundamentals seem to be saying Economics 101: too much supply, too little demand. The parallel with 2014 is there if you want to see it.
At the heart of the matter is the same old cast of characters that recur again and again. What's different this time is the rise in cheap U.S. production, primarily shale. While it's perfectly true that there isn't enough U.S. shale to flood the world with oil, a lot of what there is is historically cheap to produce so as to give crude from the Middle East a real run for its money; and a solid proportion of that production has been sold forward at attractive levels in the futures market ensuring financial stability for U.S. producers. This growing price competiveness is nothing new. In the Bakken, for example, the average breakeven cost per barrel was $59.03 in 2014, which fell to $29.44 in 2016, a reduction of 50 percent in just two years. Meanwhile, U.S. oil production has risen to approximately 9.3 million barrels a day and is estimated by the EIA to reach 10 million barrels a day by 2018. In the meantime, crude oil inventories remain stubbornly high. Most recent EIA data puts crude oil inventories at 527. Related: Investors Unimpressed By String Of Oilfield Services IPO's
8 million barrels, stuck at the higher end of the 5-year range.
In a recent and highly informative article in Business Insider originally published in The Motley Fool and using energy industry consultant Rystad Energy research, author Matthew DiLallo shows that it costs Saudi Arabia around $9 per barrel to breakeven, Russia $19 and U.S. shale a little over $23. That said, the simple average of Saudi/Russian breakeven would be about $14, a number which can only go higher, while U.S. shale breakeven is declining significantly, with production also growing significantly. So who's going to win this one?
DiLallo sums it up nicely: "Saudi Arabia has the lowest oil production costs in the world thanks to two strategic advantages: Abundant pools of oil close to the surface and no taxes on production. Because of that, it can make money in almost any oil price environment. That said, Saudi Arabia made a mistake by trying to use its low costs to kill the shale revolution; it only made shale stronger."
Let the Saudis and their close allies the Russians do whatever it takes. Because they're going to have to do a lot more than that.
By Brian Noble for Oilprice.com
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Brian Noble is principal with Financial Communications in Toronto, Canada which specializes in communications initiatives for the Canadian and global financial services industry. Brian Noble MA,… More
Comments
Shure, one or another writes a small plus, but as everybody knows a small plus is more about accounting than earning money.
There are shale wells that break even at 15 $ - and there are lots that are at > 100. It's a lottery.
Shale is all about wallstreet money, and low interrest rates. If you get billion of cheap dollars, file for bankrupcy every now and then (http://oilprice.com/Energy/Energy-General/US-Shale-Just-Wont-Die-Bankrupt-Drillers-Rise-Again.html) and get new dollars afterwards, you can drill independend of break even or oil prices. Faked break even prices are to get more money - and you repay it with a filing for bankrupcy. Easy solution.
Shale is all about wasting other peoples money.
Good Luck.
"In the Bakken, for example, the average break-even cost per barrel was $59.03 in 2014, which fell to $29.44 in 2016 ...."
His "for example" is the best possible case for his argument. Is the Bakken a unique formation -- a stacked formations play -- not typical of other plays. The author's seems to be stacking his deck to make a point and generalize an impression across the entire U.S. shale industry.
Are we entering an age of "tough oil"? Is oil becoming more expensive to bring in, and the politics of oil supply more militarily and strategically problematic? Are alternative energy sources looking increasingly attractive, even in the near term?
Major oil producers in the Mid-East, including Saudi Arabia, are ramping up significant investment in solar energy. Why does the U.S. seem so behind in envisioning its future? Are we so ruled by short-term profit?
It's essentially a case of brains over matter, where the technological
ingenuity trumps passive freeloaders every-time.
But it is not all about the US shale. The residual break-even costs from North See for example are about $18/pb.
The article also relies on a "break even" point without taking account of the difference between the business requirement for a profit margin and the requirement of a government that is dependant on oil income to balance its national budget, particularly if the government has not been prudent with its past oil revenues. That difference is being dramatically displayed in Venezuela right now and Iran is an example of how an oil industry can go into decay very quickly if it can't attract investment because of political factors.
For a commercial enterprise, once start up capital has been spent any profit on sales is better than nothing as long as it is enough to cover running costs and pay off debt. Even if not then bankruptcy can be an exit. Governments substantially reliant on oil are in a much worse position if they can't balance their national budgets over a long period of time and that can spiral downwards very quickly if they become destabilised. Some of the largest oil producers are dependent on oil income and are among the potentially least stable nations.