Oil prices

Oil Below $80: The First Shoes Drop

Forbes,

4 November, 2014

We’re beginning to see the effects that the low oil prices of the past few months is having on America’s domestic energy boom. On Thursday, ConocoPhillips became the first big producer to announce it plans to scale back drilling in some of the hottest U.S. oil plays, such as the Rocky Mountains and the Permian Basin of West Texas.

While ConocoPhillips COP +1.51% still expects to boost production from other areas, chief executive Ryan Lance told reporters the company also may cut exploration spending. Oil prices on the world market have fallen more than 25 percent since June, and the price of West Texas Intermediate crude, the U.S. benchmark, is now trading at a three-year low of $76 a barrel, down from more than $107.

Meanwhile, Shell said it plans to cut spending and eliminate jobs in its U.S. operations because of weak results from its shale projects. Shell cited the Eagle Ford play in South Texas, one of the country’s hottest drilling prospects, as an area it hopes to exit.

Like many of the major oil companies, Shell came to the hydraulic fracturing game late, and even before the oil price decline it struggled to generate the higher returns it needs as a large company. Now, with commodity prices falling, its prospects of making money in shale have dimmd.

In contrast to the caution exhibited by ConocoPhillips and Shell, smaller independent producers have said they expect to continue their fracking operations unabated. Many smaller companies have lower cost structures and can still make money fracking at current prices.

Oil would have to fall farther before they started feeling the pinch. The concern, of course, is that’s exactly what’s happening as crude prices now hover in the mid-$70 range. As I wrote earlier, the recent slump in global oil prices was prompted by Saudi Arabia’s announcement that it had no plans to slow production and support prices. The U.S., the world’s biggest oil consumer, is importing 35 percent less crude than it did in 2005 thanks to the fracking boom.

The Saudis appear willing to use the abundance of U.S. production to allow prices to keep sliding, enabling the kingdom, which can profit from oil at as little as $30 a barrel, to grab a larger share of the global market. The move is giving the Saudis an upper hand in a long-running struggle with Iran for the dominance of OPEC.

The plan may be working. Iran’s crude oil revenue fell 30 percent as a result of weaker global prices, Iranian President Hassan Rouhanitold the Iranian parliament,according to a copy of the comments that were published on the oil ministry’s web site. As Bloomberg noted:

Iranian oil exports fell to the lowest level on record in August, according to the Joint Organisations Data Initiative. Economic growth and energy demand is slowing in China, Iran’s biggest buyer, while the Persian Gulf state’s sales are restricted by U.S. and European Union sanctions.

In other words, the Saudis may be winning on both fronts. They’re putting pressure on Iran while at the same time slowing the advance of the drilling boom in the U.S. Meanwhile, U.S. producers, having pushed output to its highest in three decades, find themselves facing the paradox of achieving energy independence: the more oil they produce, the harder it becomes to reduce imports. That’s because as oil prices fall, expensive hydraulic fracturing projects become unprofitable, tipping the scales in favor of cheaper imports.