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Column: Saudi Arabia and New Mexico: oil price threat By Dr. Daniel Fine

For the complete article in the Farmington Daily Times use this link-->


The shale oil boom which returns 25 percent of the New Mexico State revenue is under "bust" threat from Saudi Arabia.

The current price decline in both midland Texas light sweet crude and brent (world price) will begin to defer future projects if prices fall to $72 a barrel and below. An estimated 80 percent of production and projected production in the next five years requires price stability higher than $ 75 per barrel. Saudi Arabia is combining market share strategy with a world oversupply of crude oil.

Oil producers in New Mexico are partially protected through cash flow hedges, which are crude barrels sold forward with prices established in futures (must be higher than present prices). However, no more than 50 percent of production is estimated to be hedged or protected in 2015. The other half must be sold at whatever the market (West Texas crude) price will be. An oil company can hedge 2016 production at $79.00 per barrel compared to the current hedge protection of $95.

Decline ratios (rate of recovery after initial production) are high. Massive drilling of new wells for replacement is the economic challenge. At least half of the new shale or light sweet crude oil production from the Southwest to North Dakota through the Rocky Mountain energy corridor is at risk.

This effectively limits the 10-year-old shale oil technology play and consequent "energy revolution."

The shale oil or light sweet unconventional oil boom is the target of Saudi Arabian oil strategy which is market share. This rejects production cuts in response to weak demand and prices. Defense of market share coupled with falling world oil demand accounts for a global price fall of 25 percent since July.

The timing of the Saudi action has hit the Southwest U.S. unconventional oil producers when they are already vulnerable to a massive infrastructure bottleneck. Producers have confronted a discount price of as much as $15 per barrel because there is not sufficient pipeline take-away capacity from the Permian and San Juan basins to refineries on the Gulf of Mexico coast or anywhere. This is the result of unanticipated high oil production without investment in transport to get it to markets or process it here in New Mexico. Stand-by rail transport is costly and trucking is competitive with rail. New pipeline and refinery capacity is required in New Mexico and Texas.

Strategic market share is the Saudi Arabian counter-attack upon the American shale-oil and gas-supply revolution which threatens Saudi exports. Saudi ARAMCO is reacting to the rise of American oil production as a threat because of the demand to lift the 1975 prohibitions against American crude oil exports.

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Replies to This Discussion

"...Stand-by rail transport is costly and trucking is competitive with rail. New pipeline and refinery capacity is required in New Mexico and Texas. "

Why shucks!  Dontcha wanna hire some tanker cars from Warren Buffett/Burlington Northern/Berkshire Hathaway?

http://www.bloomberg.com/news/2014-12-03/sub-50-oil-surfaces-in-nor... Some of the "fees" are in this article. Off topic but I don't understand Oklahoma Panhandle crude being 58 dollars. Valero recently built a huge oil terminal near Perryton, Texas with a pipeline going to their refinery at Dumas, Texas. The trucking to the terminal would be 50 miles at most. No rail involved.

Ralph T said:

"...Stand-by rail transport is costly and trucking is competitive with rail. New pipeline and refinery capacity is required in New Mexico and Texas. "

Why shucks!  Dontcha wanna hire some tanker cars from Warren Buffett/Burlington Northern/Berkshire Hathaway?

But even loading a truck is a fixed cost. The cost of driving the "x" number of miles is another expense with fixed and variable expenses, etc.

http://pricedingold.com/us-retail-gasoline/   This will be a series of posts that don't make sense in the past in commodity markets. Every one has an opinion and mine is "something isn't right."

Gasoline and gold track very well on this chart going to 1995. Use your calculator and see what you think. Gold never takes this long to catch up also.

https://www.youtube.com/watch?v=QPwZ-wQFFu8   Simple but true. It's old as the hills a quarter will buy appx. a gallon of gas. A real silver quarter pre 1964. This has closely tracked since '64. Use your calculator and see what you think. Yeah silver could crash to eleven something to catch up to crude, but it needs to hurry. Trouble is silver demand is at record highs. Google American Eagles to see for yourself.

Something isn't right. If this is too simple I can come up with stuff way over my head.

http://www.zerohedge.com/news/2014-12-14/exposing-oil-price-shock-c...  This is why our problem is more than meets the eye. Some put the number at nine trillion of derivatives from world wide crude markets. Ask your self why Nancy Pelosi and Ted Cruz would vehemently agree on anything. See for your self what the Amendments were in the spending bill passed this weekend. I hope we don't have another '08 on deck. If you were in the oilfield in '86 raise your hands.

Like I said, something isn't right. I hope I am 100% wrong.

http://www.bloomberg.com/news/2014-12-18/saudi-arabia-s-oil-exports...   Saudi exporting 6.9 mm bbls. per day. Sounds like jaw boning that drove prices down. This number is hardly flooding the world with oil. Maybe it really is demand ?. 

http://www.zerohedge.com/news/2014-12-23/t-boone-pickens-rages-cnbc...   T. Boone Pickens Rages On CNBC " I Am The Expert Not You," Says " Oil Down Due To Demand"

Video included-must see

J Richard...what is your theory behind "something isn't right"?

https://twitter.com/nanexllc/status/553605069493772288    John, for starters the HFT algos really went after crude yesterday (1-9-15) Play with this gentleman's twitter account and you will see more.

I will look for link but S. R. Rocco has a chart of demand vs. Saudi supply which is 1 + million bbls. per day differential to equilibrium but that shouldn't cut WTI in half this quickly. Jim Sinclair has also said crude weakened and the algos jumped on it.

Also see gold crude chart above. Gold needs to crash or oil is overshot down by algos. Gold crash would signal deflation and that would mean "recovery" isn't intact.

John Allen said:

J Richard...what is your theory behind "something isn't right"?

Do you think that there's any significance to rising gold prices?  

I don't work in finance and I have only a rudimentary understanding of HFT terminology.  I think I get your drift that gold and oil aren't lockstep.   But it does seem that gold and oil both have risen slightly over the last few days.  I'm still trying to understand what you think isn't right...or more, what's your theory of what is behind what isn't right?

http://www.usatoday.com/story/money/columnist/bartiromo/2015/01/11/...   Almost every Sunday one of these is trotted out before the Asian markets open. See the time stamp on the piece. The algos trade on news.

http://www.reuters.com/article/2014/08/04/cftc-arcadia-idUSL2N0QA2C... This case is child's play compared to what HFT can do now.


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