23 Dec 2014
Shale be or no be? - BBH
FXStreet (Guatemala) - Analysts at Brown Brothers Harriman noted that the issue that the highly respected Antaloe Kaletsky raises is whether the US shale producers can replace OPEC in general, and Saudi Arabia in particular, as the swing producer.
Key Quotes:
“He argues that it is fairly easy to turn off or ramp up shale production, and that in truly competitive market, Saudi Arabia and other low cost producers would maximize output”.
“Kaletsky paints a scenario that shale producers reduce supply when demand is weak and ramp up output when demand is strong. That their low cost of production (what he calls 'marginal') is $40-$50 a barrel and that this could become the ceiling not the floor going forward. He recognizes the possibility that OPEC re-establishes oligopolistic control. He asks, "So which of these arguments will prove right: The bearish case for $20-$50 trading range based on competitive market pricing? Or a bullish one for $50 to $120 based on resumed OPEC dominance? Ask me again once the price of oil has fallen to $50--a stayed there for a year or so."
“Kaletsky may be exaggerating the flexibility of US shale producers, especially in an environment of falling oil prices and rising interest rates”.
“The overhead for next year’s output is already in place. The relatively high fixed costs mean that many will produce even at a loss, if necessary. Next year could be the peak in shale production”.
“Already the EIA is cutting its longer-term forecasts. Between OPEC and US shale producers, we don’t have to wait for oil prices to fall to $50 and stay there to expect US shale producers to cry uncle before the Saudis”.
Key Quotes:
“He argues that it is fairly easy to turn off or ramp up shale production, and that in truly competitive market, Saudi Arabia and other low cost producers would maximize output”.
“Kaletsky paints a scenario that shale producers reduce supply when demand is weak and ramp up output when demand is strong. That their low cost of production (what he calls 'marginal') is $40-$50 a barrel and that this could become the ceiling not the floor going forward. He recognizes the possibility that OPEC re-establishes oligopolistic control. He asks, "So which of these arguments will prove right: The bearish case for $20-$50 trading range based on competitive market pricing? Or a bullish one for $50 to $120 based on resumed OPEC dominance? Ask me again once the price of oil has fallen to $50--a stayed there for a year or so."
“Kaletsky may be exaggerating the flexibility of US shale producers, especially in an environment of falling oil prices and rising interest rates”.
“The overhead for next year’s output is already in place. The relatively high fixed costs mean that many will produce even at a loss, if necessary. Next year could be the peak in shale production”.
“Already the EIA is cutting its longer-term forecasts. Between OPEC and US shale producers, we don’t have to wait for oil prices to fall to $50 and stay there to expect US shale producers to cry uncle before the Saudis”.