When OPEC Collapses
There’s no denying that the oil market is in a tight spot right now.
We've seen down cycles before, haven't we? We've weathered harsh bear markets before, right?
But I want you to take a closer look the next time someone tells you oil prices are crashing to the floor.
We’re far from a crash, dear reader.
What you are going to see, however, is a shift... a change in the tides. Old cartels will collapse under the weight of their spending.
You’re also going to witness a new oil regime taking shape.
And U.S. drillers may come out of this transition in a unique position.
The Real Price of Oil
This week, crude prices reached a seven-month low, sitting at just above $43 as I write this. For months, we’ve seen oil trade around $50 per barrel, trying desperately to find some support.
Unfortunately, that just wasn’t in the cards.
Even after OPEC and Russia extended the production cut deal, it wasn’t enough for prices to rally.
And let’s be clear: No one wants to see $30 oil again.
This price dictates where drillers will be profitable, with the best, most economical plays (the Permian Basin, for example) leading the charge.
And you have to ask, “Who can afford to operate under such low margins?”
Well, it’s certainly not OPEC.
Compared to U.S. drillers, whose breakeven prices can be as low as $30 in some parts of the Williston Basin, or even $15 in West Texas, the cold, bitter truth for OPEC is that it doesn’t stand a chance.
Over the past five years alone, the cost to build and operate wells in the best U.S. shale basins has dropped by millions of dollars each.
So, even though rig counts plummeted between 2014 and 2016, it took a while before production started to decline.
OPEC, on the other hand, is still struggling under current prices...
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As hard as it is to admit, it’s true that Saudi Arabia has some of the cheapest oil out there. Saudi Aramco is able to extract a barrel for just under $9.
That’s just getting it out of the ground, mind you.
In a second, I’ll explain just why this issue is the real elephant in the room when it comes to OPEC’s upcoming collapse.
First, let’s take a look at a few of the group’s total breakeven prices.
Saudi Arabia has stated that it could see profits with oil around $60–$70. Although this is lower than the projected $90/bbl it took for the Saudis to be profitable in 2015, it accounts for more than simply pumping it out of the ground.
Iran needs oil above $55 to turn a profit. According to estimates from the International Monetary Fund, Iran is followed by Iraq and the UAE, both of which need oil above $60.
The IMF noted that just one OPEC member, Kuwait, has a breakeven price below $50, and only just barely makes that cut at $47.80 per barrel.
So what makes oil from these countries so expensive?
End Costs Justify the Means
It takes all of the lush social programs the House of Saud has to keep the Arab Spring from spreading into Riyadh.
And as the oil cartel is learning with Venezuela, it doesn’t matter if you have the largest deposit of crude oil reserves on the planet; it’s worthless if it remains underground.
Even then, there’s the daunting task of finding a market that can handle the increasingly poor quality of crude that we’re seeing.
Years ago, when the Saudis assured us that they would make up any lost supply after Libya plunged into civil war, European refineries were unable to process the heavier crude that made up Saudi Arabia’s spare capacity.
By heavy, I mean with sulfur, nitrogen, and other compounds that make it difficult to use... and very expensive to refine.
The tight oil being extracted at record rates (and now accounting for half of the United States’ oil supply) in the Lower 48, however, is of the light, sweet variety that the market salivates over.
Personally, I believe the IMF is lowballing those OPEC breakeven prices.
Mark my words now: The giants will topple... and Venezuela will be first.
And once those dominoes begin falling, the dissolution of OPEC will be inevitable.
Until next time,
A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.
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