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Investors Freak: Oil on its way down to $20 A Barrel?

Screen Shot 2015-01-02 at 23.58.26From an article by Christopher Helman published by Forbes.com on 6 Jan 2015 under the headline:

“Investors Freak As Saudi Inaction Could Sink Oil To $20 A Barrel. Time To Buy?

OPEC is not going to come to the rescue. It is up to American producers to cut oil supplies.

The world freaked out over oil Monday. U.S. crude fell as low as $49.77 a barrel, down about 6%. Brent crude is at $53. This is the lowest price since early 2009, when oil bottomed at $35 less than nine months after hitting a record high of $147.

The Dow Jones Industrial Average fell 331 points Monday. Many reports have blamed oil for the stock market weakness, but that doesn’t really make much sense. All else equal, low oil prices are a boon to economic growth. And besides, considering how high the Dow has risen, 330 points just ain’t what it used to be — merely a 1.8% move. Back in 2008 the Dow suffered 11 days with losses of 4% or more.

Indeed, it’s the pain being borne by energy investors that is dragging down the market.

It used to be that OPEC controlled the world oil market while Saudi Arabia was the designated swing producer. But with the rise of new American oil, that has changed. Henceforth, it will be American oil producers that supply the world’s marginal, high-priced barrels, and American producers that will need to have the discipline (without collusion of course!) to keep from over drilling.

This reality hasn’t quite been accepted by oil companies still waiting for OPEC to take action and cut its own production. Which is why oil prices (and stocks) likely have another big leg down from here.

How far? At least $40. Maybe even $20.

But don’t take my word for it.

Two weeks ago, while most of us were getting merry and happy, the Middle East Economic Survey landed an exclusive interview with Saudi oil minister Ali Naimi. (I encourage everyone with an interest in oil markets to read the full interview for free here.)

In the interview, Naimi said in no uncertain terms that neither the Kingdom nor OPEC has any intention to cut production. He said that Saudi production costs are no more than $5 per barrel, and that marginal costs of development are “at most” $10 per barrel.

Thus, Naimi said, “As a policy for OPEC, and I convinced OPEC of this […] it is not in the interest of OPEC producers to cut their production, whatever the price is.” He added: “Whether it goes down to $20, $40, $50, $60, it is irrelevant.”

Oil companies worldwide have already cut their capital spending and drilling budgets. Rigs are already being mothballed, hedges will roll off, supplies will tighten, WTI discounts to Brent will shrink, bankruptcies and defaults and consolidations will occur…

FULL ARTICLE

RELATED

Screen Shot 2014-02-18 at 18.34.00Why Chevron, ConocoPhillips and Royal Dutch Shell Aren’t Safe Investments (TheStreet.com)

Extract: “Can Chevron, ConocoPhillips, Royal Dutch Shell survive in the “new normal?” These companies were once seen as less vulnerable to weak oil prices. No one is thinking that anymore, and growth investors have to wonder what’s going on here.”

FULL ARTICLE

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