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Wednesday, November 30, 2016

If Today's OPEC Meeting Fails : Oil could go below US40

Today Wednesday 30th November 2016, the OPEC countries are meeting in Vienna to see if they can agree to cut oil production. By tomorrow the oil prices will react. Dont worry folks. I doubt oil will go up. Even if it does, it will come back down. Here is some news:

Failure by OPEC to cut production could push oil back under $40 /barrel
deal is (OPEC) should lower production to 32.5m - 33m barrels per day
first agreement to reduce supply since 2008.

It's binary. If deal done its US$50 per barrel. Fail and you're below US$40.


Saudis say market will rebalance in 2017 even without OPEC agreement 
justification for maintaining production at existing levels
latest communication from Saudi significant

OPEC runs sharp risk of loss of credibility if fails to deliver a deal.
OPEC meeting in Vienna this Wednesday (today). 
pre-meeting with non-OPEC abandoned after Saudi refused to attend 
Venezuela's oil minister flying to Moscow with Algerian counterpart before Vienna.
Libya would not participate in any OPEC production cuts 

Saudis treading fine line between propping up oil price 
and ensuring competitors are NOT enticed back into industry.

Saudis not aiming for $70 oil or $80 oil 
They do not want to resurrect entire U.S. shale oil

My comments :   The last statement above "They do not want to resurrect entire U.S. shale oil is the key to this entire issue.

Its market forces versus  politics. 
Technology versus camel herding.
Menggunakan otak versus 'kita tidak boleh gunakan akal dalam semua perkara'. 

Oil is now shooting out of the ground just about everywhere. You can see the supply curve versus the price per barrel curve going in opposite directions.


Not too many years ago, shale oil was profitable at above US$60 per barrel.
Then the technology to extract shale oil improved. 
The costs of producing shale oil dropped. 
Some shale producers are profitable at US$30 per barrel.
Here is a very long but interesting article about oil from The Economist :

http://www.economist.com/news/briefing/21688919-plunging-prices-have-neither-halted-oil-production-nor-stimulated-surge-global-growth 


Among other things it says "even at $30 a barrel, only 6% of global production fails to cover its operating costs"
This means that above US$40 per barrel (the current prices), oil is profitable even for shale producers.  Here is a chart from that article :




Here is some 'copy paste' from Forbes Magazine:


' some (shale) producers can break even at US$30, 50% break even at $60/bbl (for example)..'

And the possibility of reducing the cost of producing shale oil still has major 'upside' potential. The reason is the technology curve for shale extraction is still rising. The technology for "hydraulic fracturing" and drilling horizontal wells is still a function of technology. And technology ultimately lowers the cost of production. 

Also "technology that is both cheaper and quicker to deploy than conventional oil rigs, have made the shale oil industry more entrepreneurial."  

The days of expensive oil are over.  
The days of OPEC are also over. 

It also means serious thinking is needed in oil countries, including Malaysia.


That could be a serious problem.

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