The curious drop in gasoline prices, which recently dipped below $3 for the first time since December 2010, may be welcome by consumers. But the accompanying dive in crude oil prices has some U.S. producers concerned. Though typical economic stressors of higher supplies and weaker global demand are in play, the current slump is indicative of a crude oil price war being waged by Saudi Arabia.

The domestic shale oil boom pushed the United States into the number one spot amongst global producers of combined oil and natural gas liquids in July of 2014, though it remains the number three producer of crude oil behind Russia and Saudi Arabia, respectively.

It is this threat to OPEC (Organization of Petroleum Exporting Countries), responsible for 40 percent of global crude oil production, that has the organization’s leading producer, Saudi Arabia, concerned about the future. OPEC’s recently released annual report, “World Oil Outlook, 2014,” paints a picture of declining demand for Middle East oil indicating that forecasts for exports will reach a fourteen year low in 2017.

In a clear move to assault U.S. shale market gains, the Saudi’s have increased the discount rate of its crude exports for a second straight month. Last months discount only applied to the United States according to a November 7th Forbes report.

With oil exports accounting for 85 percent of Saudi government revenues, the Saudis seem prepared to sacrifice profit in exchange for a bid to retain global market share.

What analysts don’t readily agree on is whether the Saudi gamble will serve to stunt U.S. shale production.

The IMF (International Monetary Fund) indicates that to maintain profitability, Saudi drillers need an annual average price per barrel of oil to stay above the $83.60 mark. But due to their strong market position and ability to absorb losses below this mark, the Saudis are gambling that U.S. producers won’t be able to do the same.

Though the Kingdom of Saud has some $735 billion in financial reserves allowing it to withstand near term losses, its partner OPEC members are beginning to show public concern over the freefall of crude oil prices. Since June, the Brent Crude benchmark dropped from $115.19 bbl to a November 3rd low of $84.90. Nearly every other OPEC member state can not withstand drops below $90 a barrel as their costs of production are typically higher than the Saudis.

In a move to calm member state fears, the Saudi Oil Minister visited Venezuela on November 3rd for the first time in fifteen years after that nation called for an emergency meeting of OPEC to address falling prices. The Saudis, who effectively serve as the “chair” nation of OPEC in boasting a third of the organizations output, rejected the call, insisting that their scheduled November 27th meeting will handle all concerns.

But analysts across the industry agree that prices could drop as low as $70 a barrel for both benchmarks, if not more, before the Saudis could act by reducing output and raising prices.

What analysts don’t readily agree on is whether the Saudi gamble will serve to stunt U.S. shale production. The move is indeed strategic as U.S. producers are making decisions on 2015 investment in production during this quarter of 2014. Such decisions have not yet been finalized as each corporation is still determining the impact of dropping prices as it pertains to each individual shale play.

In The Spotlight

Taken as a whole, confusion reigns as to average break-even prices for shale production. Deutsche Bank states that 40 percent of “U.S. shale oil production needs prices to be around $80 a barrel in order to be profitable” as reported by Bloomberg News on the 8th of November. Reuters reports that Bernstein analysts put that price as impacting around one-third of shale producers. Yet the IEA believes only 4 percent of U.S. shale oil production has an $80 break even point.

Due to the geological nature of each shale play, that average means little to production decisions. The Eagle Ford Play of Texas reveals break even prices of roughly $62 per barrel according Scotia Bank of Canada, while the Barnett play break even figures range widely from $72 to $93 per barrel depending on the analyst group (Scotia Bank and Baird Equity analyses respectively).

Bakken crude break even numbers range from $61 to $69, but North Dakota state regulators indicate that anything below $70 would begin to negatively affect rig counts. However, the state’s lead regulator, Lynn Helms, says that price could only show a 10 percent impact on rig count. Further, a state legislated “trigger” aimed at protecting the E&P industry will lead to a default drop in state production taxes from 6 percent to 2 percent if prices were to dive below $52 a barrel, according to Helms in a discussion with Oil Patch Hotline.

Indicators suggest that the Saudis are more than willing to take their gamble through the end of 2014 in an effort to slow U.S. production and thus maintain market share through 2015. Regardless, the damage done to the other eleven members of OPEC could result in a heated November 27th showdown at their meeting in Vienna.


Eric Sharpe
About The Author Eric Sharpe
Eric Sharpe is editor and feature contributor of Energy Ink Magazine, which covers the energy industry in the Rocky Mountain West and Northern Plains. He holds a Master’s degree in Educational Technology from Pepperdine University.

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