Probably helped along by oil breaking the $35 psychological barrier--now your biggest decision is whether to hope for more profits or exit with your hide still intact.
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That's in historic terms and the problem with history is that its out of date very quickly.
The average cost of production is around $45/bbl.
10M bpd of production is above $75. You cannot lose that sort of production unless its replaced by cheaper production which is possible, but not easy.
So half of global production is not profitable below $45 and that's not accounting for a profit.
So the poo needs to be quite a bit higher than that.
A normal oil price therefore is around $75-85/bbl.
Look at this 5 yr chart---feel free to reevaluate your figures
http://www.infomine.com/investment/m...de-oil/5-year/
The average cost of production is around $45/bbl = Rubbish
10M bpd of production is above $75 = please substantiate
So half of global production is not profitable below $45 = rubbish.
I posted production costs a couple of pages back from January 2016. Only Brazil & UK were above US$45/bbl, but not by much
http://marketrealist.com/2016/01/cru...oil-producers/
A "Normal" price is arrived at when supply isn't artificially constrained, as it has been for the past 20 years. That is how I determined my baseline for "normal" price, than adjusted it upwards
Before you say things like "So half of global production is not profitable below xxx" ask the question - would half the world's oil producers continue pumping oil when they are loosing more money with every barrel they extract? The answer must be "No". Some hypothetical numbers
Cost for country X to produce = US$50/bbl
Revenue from sale = US$33/bbl
Volume = 1M bbl/day
Period = 1 month (30 days)
Loss = US$510M
Cost for country X to produce = US$50/bbl
Revenue from sale = US$33/bbl
Volume = 0
Period = 1 month (30 days)
Loss = US$0
Country X is better off by not extracting and selling oil, so why would they - out of the goodness of their hearts? because they are stupid and can't do the maths? Or is it because their cost of production is lower than you think and they are in fact still making money?
Shale production costs are apparently falling quickly as the fracturing technique is improved
The ONLY rational reasons for continuing to extract oil when cost of extraction is above sale price that I can imagine are
- the oil is a by-product, the well is primarily a source of gas (like in NZ)
- the oil is being stored in anticipation of a future price rise, and not being sold (would need some very big tanks and a big stack of money to fund this.....)
- the well shutdown process is long and is currently underway
I wondered how low can it go, and wondered how much longer they can keep pumping at a loss, and I wondered who is making a loss. These questions will never be answered, because it is such a secret. The spot price of oil, is a lot different to what they are selling it for. Most of the oil producing countries are selling to either middlemen, end users etc, who have hedged the price some time ago. When the spot price reached its high no doubt they were selling it cheaper than that and entered into future contracts for supply at a lesser price that the spot price at the time and more than the spot price now. Genesis in their final results have said they were getting (off the top of my head) around $58 per barrel in the last period. Anyway it was a lot higher that the spot price at the moment. I believe some of the purchasers of oil who hedged their price are now trying to either store it or offload it at a loss, just to keep their cash flows up (desperation) before they go completely bust. I don't know what the lag time would be but we must come to a point where the spot price dissects the hedged price. I would suggest that while the spot price is just over $30 per barrel, even an astute purchaser would be buying above that so that if the price goes high and they were a spot market purchaser they may be without supply. I again believe Gull buys a lot on the spot market. I think if I was someone like Gull, I would try and buy some on the spot market, and hedge some at a higher price, just in case the price starts to skyrocket quickly, and then you are priced out of the market altogether. Any end user would be a bit foolish to ruin their continued source of supply for too many short term gains.
I believe there are a lot of investment syndicates out there who buy oil, just to sell at a higher price, they must be crying at the moment.
If the major oil producing companies were selling at less than it cost them to extract, I am sure they would stop production, once the variable costs were not being recovered, they may continue to pump at a loss, just to pay the fixed costs which would continue anyway. What those costs were for each producer is just about any bodies guess as I am sure, their fixed and variable costs will be kept under lock and key. Any way that's my impression and I am no expert. But what comes down will go up, and no doubt what goes up too far will come down somewhat.
This might interest the oil debaters http://knoema.com/otsvwed/north-amer...rd=vizoftheday
I remember my Grandad telling me stories of how oil was quite literally dirt cheap...
http://inflationdata.com/Inflation/i...hart_small.jpg
When it gets under $20, then maybe all producers will begin to "feel the heat", and even then, it would just be a bigger "global tax cut" :t_up:
Andrew, bloody good point about the hedging. The price per barrel will be market rate, the big buyers will be on higher fixed rates. The fixed rates will be hedged at higher rates as the oil companies will be in a better position to predict future prices than the customers as they control the supply.
Given this, how low any given oil company will let the market price will go down will be dependant on the length of time left in their average hedge price.
Who knows how low the price can go before it starts to effect profit. One things for sure, as soon as it starts hitting them, they'll want to show an upward price tend so they can lock in higher hedge prices before letting it drop any further if that's what they want to do...
Your logic is flawed about continuing to sell oil when you are not making a profit--That may be because you (and I ) are from countries that are blessed with never knowing real hardship like many developing countries.
a little money is better than no money when you are up against it.
Did anyone speculating on the whys and wherefores read this? Start here and then do some research on who the creditors are that stand to lose everything. It might also help those struggling with this to consider that the oil companies are not the market.
North American Oil and Gas Bankruptcies
"With the slump in crude oil and natural gas prices dozens of North American oil and gas companies have commenced Chapter 11 bankruptcy" ... "The total amount of aggregate debt involved in filed cases reached $17.2 billion for E&P and $5.3 billion for oilfield services companies." ... etc.
Attachment 7924
etc.
Personally, I give 2016/17 a 50-50 chance for the world economy to enter deeper, more prolific turmoil. That's my way of saying that I don't really know, but believe that something significant could happen.
I do not believe that any of it will be caused by, or a symptom of oil prices dropping. Rather it will be general poor performance of the economy (of one or more countries) or some political/religious event, if anything.
My current strategy is (once I get my THL dividends) to go 50% cash, ready to jump in if there are any panic sales.
Moving this here a w69 planted it in with the row of corn..
https://www.janus.com/bill-gross-investment-outlook
Sobering reading--Everything deflating in value except cash which is then discontinued or penalized by negative interest rates
To the non believers I would say--Go ahead and discount oil and its repercussions--bank failures-and celebrate the NZX's performance-----but have a back up plan