'The price of crude will stay in the doldrums for the forseeable future' January 08 2015

Articles from The Sunday Times - 28/12/14 & 01/03/15

Last week Ali al-Naimi, Saudi Arabia's oil minister, gave the strongest indication yet that the price of crude will stay in the doldrums for the forseeable future.  Speaking on behalf of Opec, the cartel of oil-producing nations that accounts for a third of the world's output, he said: "It is not in the interest of Opec producers to cut their production, whatever the price is.  Whether it goes down to $20, $40, $50, $60, it is irrelevant". 

The fall is the result of a confluence of factors.  One is the slowing down in China.  For the past decade the world's most populous country was the main source of demand growth.  It's economy has finally started to cool.  At the same time the shale revolution in America has brought new supplies on a scale few foresaw. 

For the first time in years, supply is outstripping demand.  American production has accounted for virtually all of the increase (outside of Opec) over the past four years.

Saudi Arabia's strategy appears to be to choke off the newcomers by letting the price stay low.  Riyadh is estimated to need oil at $95 to balance its national budget but has enough cash reserves to see it through for a while.  And on a per-barrel basis, nobody can compete.

By virtue of the sheer size of its reservoirs and the fact that they are on land, Saudi crude costs as little as $2 a barrel to pump out of the ground.  Some of America's frackers, on the other hand, need crude near $70 to break even.  Nearly all of them struggle to make money at $50.

That's because fracking, the process of blasting underground rock formations with high pressure water, chemicals and sand to free the fuel locked inside, is expensive.  To maintain production, new wells need to be sunk constantly because the formations drain quickly once they have been tapped.

Of the world's 3,000 drilling rigs, nearly half - 1,450, according to research from Canaccord Genuity - are operating in America.  However, hundreds have already been pulled out of action.  About two thirds of the oil rigs in Texas are expected to be shut in 2015 according to forecasts from the oil companies themselves.  There is still oil and gas being produced but the exploration has stopped until the oil price recovers.

As of 7th January 2015:

Brent Crude - USD50 per barrel
US Oil Price - USD50 per barrel
(West Texas Intermediate)

This is the lowest price since April 2009.