Oil prices

Saudis hit 'panic button' at $40 oil: Energy CEO

CNBC,

26 December, 2014

Saudi Arabia has insisted that OPEC will keep oil production at 30 million barrels per day no matter the cost of crude, but even the world's biggest oil exporter has a limit, the CEO of Breitling Energy told CNBC on Friday.

"I think the panic button is at $40," Chris Faulkner said in a "Squawk Box" interview. "They can say whatever they want, but at the end of the day, they can't just bleed out money forever."

With the Saudis' deficit for 2015 projected to reach $50 billion—the official figure is $39 billion—the country's leaders will face challenges in maintaining its subsidies, he said. Young people will not stand for planned wage cuts, either, he added.

Read More Gartman: Get ready for oil bankruptcies

That said, Faulkner expects oil prices to rebound to the low $70s by the end of 2015, after initially sliding further into the low $50s and possibly recovering in the second quarter.

With oil prices at current levels, Venezuela will likely default on its debt payments due in March and October, Faulkner said.

Brent crude for February delivery traded below $61 in morning trade on Friday.

Faulkner sees natural gas remaining below $5 until 2020, as the supply and demand fundamentals are unlikely to change significantly.

Read More Just beginning of nat gas decline, could hit $2.50: Pro

Natural gas dipped below $3 on Friday for the first time since Sept. 24, 2012.

Saudi Arabia Ready For $20, 

$30, $40 Oil

Zero Hedge,

26 December, 2014

Submitted by Colin Chilcoat via OilPrice.com,

Brent crude and West Texas Intermediate (WTI) fell 2 and 3.3 percent respectively to start the week and Saudi Arabia is prepared to go much lower in a bid to trim the fat. Oil Minister Ali al-Naimi said as much in an interview with the Middle East Economic Survey on Monday. Naimi defended the Saudi position and made clear that OPEC nations will not cut production at any price. His comments dismiss any notion of collusion with the United States and spell trouble for producers everywhere.

Since its November meeting, OPEC production has remained relatively steady while trending upward. Libya has had a few slip-ups and Venezuelan production is hurting, but the 12-member cartel exceeded their collective target for the sixth straight month, pumping 30.56 million barrels per day (mbpd). The price however, has fallen roughly 20 percent in that period and shows no sign of returning to its June highs.

For its part, Saudi Arabia accounts for nearly one-third of current OPEC production, orapproximately 9.86 mbpd in the month of November. Still, production capacity is nearing 12 mbpd and Naimi suggested the oil-rich nation might put it to use sooner rather than later. It’s all part of a plan to demonstrate that high-efficiency producing countries deserve the greatest market share – an idea Naimi describes as the operative principle of all capitalist countries. OPEC produces around 40 percent of global output, but non-OPEC production is projected to grow 2.3 percent next year after a 3.5 percent expansion this year.

Source: EIA

Naimi’s argument obviously ignores the significant geopolitical factors present in oil trade, but is nonetheless a worthy defense. Among the non-OPEC low-efficiency producers, Saudi Arabia aims to squeeze out Russia – who they mentioned specifically – and particular plays across North America, where non-OPEC growth has been most rapid.

In Russia, President Vladimir Putin and Rosneft head Igor Sechin project calm despite the downward march of nearly every significant indicator of economic health. As the government searches for solutions to the ruble’s disastrous final quarter, Russia’s five leading oil exporters are under orders to sell part of their foreign exchange revenues in the next few months. The EIA predicts Eurasian production will see a drop of approximately 100,000 barrels per day (bpd) into next year. Energy Minister Alexander Novak has yet to revise his production outlook, but admits oil exports will decline by 4.3 percent in 2015.

In North America, efficiency is not really the name of the game. In 2013, US shale accountedfor approximately 20 percent of world oil investment while supplying only 4 percent of global production – numbers Naimi would deem unworthy of a market share, even if that market is domestic. The side effects of oil’s decline are less evident to date, but that is not to say they have been completely absent. 

Despite overall growth, the EIA has lowered its expectation for US production in 2015 by 100,000 bpd. Layoffs are already underway at Halliburton and more areexpected elsewhere. In all, US exploration and production spending is projected to fall by more than 35 percent if WTI averages $65 per barrel or below into 2015.

North of the border, Canada believes it can weather the storm. The oil sands, while more capital intensive up front, operate on much longer timelines than shale projects and those already online can breakeven at $40 per barrel. Even so, a handful of Canadian oil companies are slashing their 2015 capital budgets and reducing output forecasts.

It’s unclear whether or not OPEC and Saudi Oil Minister Naimi are simply trying to put a scare into markets long enough to defend their market share – and if they can even keep up in this game of chicken – but the scare is there and the advantage is theirs.

Drilling Cutbacks Mean Service Companies Forced To Scrap Rigs

Zero Hedge,

26 December, 2014

Submitted by Nick Cunningham via OilPrice.com,

Despite the decline in oil prices, the U.S. is expected to boost production by 300,000 barrels per day in 2015, up to a yearly average of about 9.3 million barrels per day, according to the most recent government estimates.

But the number of oil and gas rigs in operation is already beginning to drop. For the week ending in December 19, the rig count dropped to 1,875 active rigs, down from 1,893 a week earlier. The fall off is an indication that exploration companies are beginning to pare back investments. Pulling back on drilling may result in a lower future production, which could hurt the growth prospects of some oil firms.

However, the slowdown in drilling activity is having a much more immediate and acute effect on a separate set of companies – those supplying the rigs.

Offshore oil contractors such as Halliburton or Transocean have seen their share prices tank worse than exploration companies because their revenue comes from being paid to drill, not necessarily from oil production after wells are completed. 

That means that when drilling slumps, their profits take an immediate hit. Even worse, exploration companies may see rising profits from existing production as oil prices rebound, but drilling service companies don’t benefit if their drilling contracts had been put on hold or cancelled.

The problem is compounded by the fact that a slew of new offshore oil rigs are set to come into operation – an estimated 200 over the next six years. As Bloomberg reports, these new rigs will mean there could be a surplus of about 140 rigs, meaning offshore oil contractors will have to scrap that many to bring new ones online.

If oil prices stay where they are now – in the neighborhood of $60 per barrel – a deep contraction in shipping rig supply will be inevitable. In 2015, spending on offshore exploration may be slashed by 15 percent, which will mean taking a deep knife to companies providing rigs and contracting. Transocean has already announced that it is idling seven deepwater rigs, along with several other drillships.

However the shakeout may take some time because offshore contractors can resort to using older rigs in order to bring down the rates they are charging, essential to maintaining market share. In order to entice exploration companies to keep up the drilling frenzy, older ships can keep costs lower.

But that may not be a tenable prospect since offshore contractors will feel compelled to put the new and more state-of-the-art rigs into operation. That will force companies with older fleets to start discarding the most dated drilling rigs.

Transocean already took a $2.6 billion impairment charge in the third quarter of this year, due to a “decline in the market valuation of the company’s contract drilling services business.” By scrapping more ships, it expects to write down at least $240 million in the fourth quarter. More may be in the offing – Transocean released an update on the status of its fleet in mid-December, confirming its plans to scrap 11 ships. The statement also added that “additional rigs may be identified as candidates for scrapping.”

Perhaps it is Seadrill, another offshore drilling services company, that has taking the worst of the oil price downturn. The company decided to cancel its dividend in November amid falling oil prices, a move that sent its share price tumbling downwards. Seadrill has seen its shares lose almost 75 percent of their value since July.

As with the rest of the industry, the fortunes of offshore drilling services companies depends on the price of oil. However, unlike the oil majors, which have more diversified interests both upstream and downstream, offshore contractors take it on the chin first when oil prices go down.