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Page added on September 20, 2015
U.S. oil waits out decline
West Texas Intermediate crude oil has dropped in price more than 50 percent this year. The International Energy Agency, meanwhile, reports rising oil inventories. Whether the dramatic fall in oil prices indicates a short term dip or a permanent deterioration, oil companies are cutting back — even borrowing — to maintain dividends and keep shares attractive.
Responding to these developments, Wall Street firms have lowered their oil price forecasts to near $20 per barrel, which was below the lowest 2007-2008 Great Recession price of $30.28. Goldman Sachs, citing a “new oil order,” predicts oil will average only $55 per barrel in 2020. Oil settled at $44.68 a barrel Friday.
Senior global research strategist Allison Nathan said “the most immediate impact of low oil prices on countries has been a large redistribution of income away from producing countries and towards consuming countries.”
The post-2010 economic expansion, particularly from energy-hungry China, boosted oil prices to over $100 a barrel. This sustained high price encouraged oil exploration in areas considered unprofitable. It prompted the development of enhanced extraction methods, including horizontal drilling.
As the supply of oil from new sources increased and world economic growth declined, the price dropped. As domestic oil production increased, traditional imports fell — particularly from the Middle East.
To protect market share, OPEC producers, apparently led by Saudi Arabia as the “swing producer,” continued to pump oil far exceeding demand, causing further price erosion. As low-cost producers, OPEC members were positioned to absorb the reduced prices better than the newer, high-tech, more costly producers.
Baker Hughes announced that 10 U.S. rigs closed in the week ending September 11. This brought the rig count down to 652 from the record of 1,609 active rigs when oil reached $107.26 a barrel on June 20, 2014.
Rig closures affect the supply and price of oil and the employment of top wage earners. They threaten defaults in the high-yield bond markets in which many new oil producers have raised funds for their development.
Major U.S. oil companies are suffering. The cash flows of ExxonMobil and Chevron were negative $2.2 billion and $12.6 billion, respectively, last year and are forecast to be far worse through 2016. International oil companies, including BP, ENI and Shell, are facing difficulties. Most have cut employment, sold assets, curtailed exploration and borrowed to keep dividends.
Emerging markets rescued much of the tobacco industry. The fervent hope of oil companies is that the current oil price downturn is merely a dip.
If oil prices continue to fall and the industry fails to adapt to the declared political intent to replace fossil fuels with renewable sources, it could experience irreversible decline.
Accustomed to and even lulled by an industry marked by rich returns, with dividends of two to three times the yield on a 10-year U.S. Treasury, investors appear remarkably sanguine and unaware of the wealth transfer from producers to consumers.
6 Comments on "U.S. oil waits out decline"
rockman on Sun, 20th Sep 2015 12:39 pm
Wealth distribution has gone from the oil producers to the consumers??? The oil producers are currently receiving about $1.3 TRILLION PER YEAR from the oil consumers. And at last count how many $’s were the oil consumers receiving from the oil producers?
Do folks that write such stories bother to think about their words?
Davy on Sun, 20th Sep 2015 8:19 pm
This Is What Needs To Happen For Oil Prices To Stabilize
http://www.zerohedge.com/news/2015-09-20/what-needs-happen-oil-prices-stabilize
Makati1 on Sun, 20th Sep 2015 8:41 pm
May the ‘dip’ become a plunge. $20 oil for Christmas? That would shake out the fluff and rearrange the world.
Nony on Mon, 21st Sep 2015 1:13 am
Rock, you went on and on about the wealth transfer at 100+. Well that just got cut in half. Kaboom!
P.s. I keep wondering if you are stupid or disengenous. I think more the former, but still a blend.
GregT on Mon, 21st Sep 2015 5:47 am
“Rock, you went on and on about the wealth transfer at 100+. Well that just got cut in half. Kaboom!”
Didn’t really think that one through, did you Nony. So who exactly is the stupid or disingenuous one? It’s very clear to most here, that would be you.
Davy on Mon, 21st Sep 2015 6:58 am
Right Greg, it is not Rock looking stupid it is the NOoo crew’s econ 101 looking dripping wet with stupidity. The problem with econ 101 is that it does not have a high priest of doom discussing demand and supply destruction in a world at limits with declining or negative marginal utility of economic efforts. A global system based on a depleting foundational commodity with no substitutional alternatives. We need a high priestess econ 101 doomer to point out how efficiency and technological improvements are not adequate for our minimum operating levels of growth required for stability. We see depletion and entropic decay found in deflationary economic tendencies and demand destruction destroying the vital financial system making a complex system of confidence and exchange possible.
All this is pointing to a new econ 101 narrative that is not dared talked about by any of the cornucopian dominated econ 101 crew. I might add this cult is really the de facto human religion of globalism. We are all motivated and dominated by money and money issues. Even the churches today are driven by money, resources, and development.
This is all crashing down in a slow motion train wreck with few acknowledging this train wreck as the end game of globalism. The end game of globalism is a rebalance of consumption and population of a global amalgamation of delocalized locals fully exposed to the decaying global. An amalgamation of locals most in population and consumption overshoot by a factor of 10. That number is astounding and points to some really serious pain and suffering ahead.
All this is too horrible for NOoo crew to contemplate. They have been habituated to a way of life that is ending and they have little ability to contemplate this. It is a sad testament to human advancement which in reality has been human devolution. It is further sad because if we had different attitudes on the subject there is plenty we could do right now to soften the blow of a very hard landing coming.
https://www.youtube.com/watch?v=78656nwE8pY