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article imageOp-Ed: Saudi's market share challenged by U.S. shale producers

By Ken Hanly     Dec 1, 2014 in Business
Vienna - The last two days of this week after OPEC decided not to cut current production levels, oil prices plunged by 10 percent just within the span of the last two days of the week.
The drop in price is threatening the viability of some US producers as the cost of production falls below the selling price: At $66 per barrel North American producers have real problems on their hands. While Eagle Ford is still profitable, both Bakken and Permian Basin are in now the red.
Scotiabank estimates that break-even costs in the North Dakota Bakken is roughly 69 dollars per barrel and in the Permian Basin in Texas not much less at $68 dollars a barrel. Some companies may find themselves having trouble financing operations and no doubt there will be other better off companies looking to take them over at fire sale prices.
The Saudis are aiming to reduce US production so as to prevent a drop in their market share:
If prices persist at current levels for months to come, the Saudis will achieve their objective of dealing a blow to North American oil production. Current expectations of the US outpacing Saudi Arabia as the number one oil producer... will be shelved for some time. And the only thing the US government could do at this point to support the domestic oil industry is to begin increasing the Strategic Petroleum Reserve. Of course such a measure would be temporary and if global demand does not improve, prices will begin falling again.
Other countries than the US will also be negatively effected by the low oil prices including Venezuela (which attempted to get OPEC to reduce production), Libya, Iran and Russia. Leonid Fedun, vice president and board member of OAO Lukoil noted that at present prices some US shale oil producers will become victims of their own success. Fedun has made more than $4 billion in the oil business. He claims: “In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,. The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”
Fedun also claimed that Russia was less impacted by the drop in price because of lower production costs and the fall in the rouble. However, Russia, the largest producer in 2013 after Saudi Arabia expects to produce somewhat less oil next year with producers deciding to reign in investment because of lower prices. However, Fedun maintains that the main target of Saudi policy is US production.
OPEC decided last Thursday to retain production at 30 million barrels a day in spite of the glut of oil on the market. US crude futures on Friday reached a low of $67.75 the lowest level in over four years in May of 2010. Neil Beveridge, senior analyst at Sanford Bernstein said that at this price there is a risk of bankruptcy for US shale players.
For airlines, and transport companies, the drop in fuel prices will mean an increase in profit. For those who simply use their cars to drive to work or for pleasure, it will mean more money to be spent for other purposes. However, to oil companies with high production expenses the situation could be disastrous. The big lower cost producers however will be looking at buying opportunities a decrease in production and rising prices again over time. The appended video provides other reasons why Saudi Arabia wants to keep the oil price low. It wants to keep the costs of oil low for its best customers so as to keep their economies growing.
The Saudi plan may not work as US shale production may continue to climb after production is consolidated in larger corporations. The Saudis too need income from oil to fund social programs that help stave off protests against their authoritarian regime. They may find that they cannot keep producing at these lower price levels without trimming their own expenditures.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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