The Shale-War Is Over?

The logic behind that model was that the price of oil that the world can afford to pay, without going into debt, and/or creating inflation, which is what happened in the 1980’s, was between $75 and $85. So when oil was $100+ the customers were paying too much, likely that was thanks to QE which gave them the money to finance current expenditure by going into debt, which is always a bad idea.

So what happens if you find out you have been inadvertently over-charging your customers? If you are an honest business-man, you say “How about if I sell you oil at a 50% discount on the “fair-price, until we are square?" And that’s exactly what Saudi Arabia did, you can’t criticize that.

The model figured that by Christmas all of the money paid out above the “fair-price" during the oil-price bubble, would have been paid-back (in kind), at which point the price would go back to the “fair-price".

All that happened was the Saudi's told their competitors, "we have paid our customers back what we over-charged them, and so now we are going to start charging "proper" prices...but we will only do that if you promise not to steal our customers"

That's one explanation, another explanation is the "invisible hand", waved its wand, after all The Prophet Mohamed (Peace be upon Him), once said "only God fixes prices". The Saudi's are not fixing prices; they are simply communicating an intention, subject to how the market goes.

OK - perhaps not $85 and perhaps not by Christmas. Unless:

The main source of “new-oil" these days is offshore. Currently 40% of offshore drilling rigs are stacked, and the trend-line is down, likely 60% will be stacked by Christmas. Charter-parties for offshore rigs are typically five-years with no option for termination for convenience so it takes time to react to an oil-price bust.

Two years ago Rystad Energy was saying breakeven for offshore was also about $70. The difference between offshore and shale is that number didn’t change much. It’s not just the cost of the drilling rig, or the crews (going for pennies these days), you also need the pipelines, jackets and topsides; that’s the real cost, and that cost didn’t change.

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The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources ...

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