Lower oil prices are driving energy stocks down and the market with them. OPEC met and not only are major producers going to reduce production but countries like Iran are promising to pump more. More production in the face of lower demand is likely to drive prices down. The question is just how low can oil prices go? The Wall Street Journal reports on how oil keeps sliding.
“Oil down in the $38 range is the bulk of what you see equity-market weakness from,” said Michael Antonelli, equity sales trader at Robert W. Baird.”You’ve seen a lot of people over the last three or four months looking for a low in energy, but it just remains elusive.”
New oil from new oil fields can be cheap to pump and oil from older fields or from fracking is expensive. There may come a point where some oil will become too expensive to pump as the price of crude falls.
Cost of Oil Production by Country
The Knoema web site has useful graphics showing the cost of oil production by country. It makes the point that some nations will find it too expensive to find new oil and bring new wells on line and some will simply need to shut down expensive operations.
The oil price has fallen by more than 30% since Summer 2014. This affected everyone from producers to consumers. The visualization represents Oil Price Dynamics, Breakeven Oil Price which shows oil prices needed to meet general government expenditure and Marginal Cost of Oil Production which shows the change in total cost of producing one additional barrel of oil.
World oil price at $55-$60 / barrel exceeds the cost of Russian Arctic oil production, Europe and Brazil biofuels production, shale and tight oil production in US and Canada and offshore oil extraction in Brazil.
State budgets of oil-producing countries will suffer from oil price decrease if the market price falls below breakeven price. In Dec. 2014 world oil prices fell lower than necessary for almost all oil exporters in order to balance their government expenditures.
It became too expensive for many countries to produce oil in the Russian Arctic and offshore Brazil when oil fell to the $55 range. Today West Texas intermediate crude oil futures fell to $37.59 per barrel. How low can oil prices go? Demand will have to go up or large numbers of oil producers will need to cap their wells.
The World Economy and Especially China
Seeking Alpha writes about the Chinese debt snowball gaining momentum. If oil producers are waiting for a strong rebound of the Chinese economy to drive prices up they may have a long time to wait.
Financial crises can happen quickly, like the bursting of the tech stock bubble in early 2000, or slowly, like the late-1980s junk bond bust. The shape of the crash depends mostly on the asset in question: Equities can plunge literally overnight, while bonds and bank loans can take a while to reach critical mass.
China’s bursting bubble is of the second type. During its post-2009 infrastructure binge, trillions of dollars were lent to (way too many) producers of cement, steel, chemicals and other basic industrial inputs. And now a growing number of them can’t make their payments:
It’s a safe bet that China, following the developed world’s lead, will soon toss a big chunk of its foreign exchange reserves at the problem. When this fails, the next steps include QE and negative interest rates, which take money from savers and retirees and give it to banks, again with the hope of moving the inevitable crash to some later date. The result? An even more highly-leveraged world and Potemkin markets that look real but no longer are.
If the China situation is as bad as these folks think the global economy will shrink farther. Low can oil prices go? Saudi Arabia can pump a barrel of oil for about $20 each. That is about half of today’s low price!