Monday, October 20, 2014

Oil to $75: OPEC Waits for US Frackers to Blink

A main point of interest for the oil market is the floor for oil prices. As oil slides toward $75, who hurts first and most on the supply side? In other words, who has to cut production first? Here is a simplified cost curve for the marginal global oil barrel of supply today:


Another view of marginal global oil supply showing the relative scale of each source from lowest cost to highest initial production cost is as follows:

Current marginal barrels are, due to costs, US tight oil (fracked oil) and, due to government spending dependent on oil, OPEC (Saudis in particular). Ultra Deep offshore oil (in places like Brazil) and Polar oil (in places like the Russian Arctic) have not proven to be economical at any scale yet.

So in the short term, it is a battle between OPEC and US tight oil. OPEC government budgets require close to $100 oil, but interest rates are so low at the moment that Saudis and other members may choose to borrow over the short term in order to stall US supply growth and to raise the price bar for new US tight oil supply.