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The Oil Price Dance

Am I the only one that seems a bit puzzled over oil prices?

As the chances for an OPEC agreement on production oscillates between they will or they won’t, the oil price gyrates in step with sentiment on the outcome of the meeting. For everyone in the Commodities industries, higher prices wouldn’t hurt. However, I think the speculators have got it wrong. While all of the noise is about OPEC’s attempt to manipulate prices by limiting output (and people complain about market manipulation by speculators etc.!), I am also reading plenty of articles in which it appears as if the world is awash with crude oil and that US and non-OPEC production will actually continue to rise. So what is it I am missing? All I see is oversupply and more oversupply for some time to come.

Today, I read a Reuters story in which the case was made that OPEC’s war on shale oil has backfired on them. In fact, is has simply made the industry more resilient and more capable. “In shale fields from Texas to North Dakota, production costs have roughly halved since 2014, when Saudi Arabia signaled an output free-for-all in an attempt to drive higher-cost shale producers out of the market.

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Rather than killing the U.S. shale industry, the ensuing two-year price war made shale a stronger rival, even in the current low-price environment.

In Dunn County, North Dakota, there are around 2,000 square miles where the cost to produce Bakken shale is $15 a barrel and falling, according to Lynn Helms, head of the state’s Department of Mineral Resources.

$15 a barrel break even is actually less than Oman and Qatar and not much higher than Saudi Arabia’s break even. “Everybody is drilling wells faster and completing them better,” said Mike Breard, an energy stock analyst at Hodges Capital Management in Dallas. “It’s not just a Bakken phenomenon.”

Breard said he prefers shale stocks in the Permian basin in Texas, where he is expecting more big gains in production next year.”

Meanwhile, US stocks continue to grow at record pace

OPEC has lost some of its ability to dictate oil prices for the moment anyway, and it seems like this may last for sometime. The oil price is now being set more by sentiment and speculation and that sentiment may well have underestimated the oversupply in the market now and into the future. There is plenty of supply and an OPEC deal is unlikely to have much of a long-term impact as far as I can see.

What do you think? Let us know here