I started my day like every day…Kettlebell and Nordictrack and CNBC at 0530. The heads are finally getting at what the Frac boom mans to the oil market. Combine the frac with very low economic growth expectations and you get several things:
A Saudi billionaire investor has sounded the alarm over the potential impact of falling oil prices on the Gulf kingdom’s economy.
In an open letter to Saudi ministers posted via Twitter, Prince Alwaleed bin Talal al-Saud expressed his “astonishment” at comments made by Ali al-Naimi, the oil minister, who reportedly played down the impact of oil prices falling below $100 a barrel. Prices have since fallen below $88 a barrel, or a quarter since June.
Prince Alwaleed, noting the kingdom’s 2014 budget was 90 per cent dependent on oil revenues, said belittling the impact of lower prices was a “catastrophe that cannot go unmentioned”…The prince expressed similar concerns last year over the rise of shale oil, which, with weakening Asian demand, has contributed to the rapid slide in oil prices – despite geopolitical uncertainties in Iraq, a major producer.
His public broadside against the veteran oil minister came as analysts said the Gulf members of Opec, the oil producers’ cartel, led by Saudi Arabia, seem prepared to drive down oil prices to retain market share and fend off the threat of rising US production, despite the risks to their hydrocarbon-dependent economies…
Gulf oil producers, most of which have large cash reserves, seem to be betting that the short-term pain of declining oil revenues from lower prices will close off competing supplies and revive the lowest global oil demand since 2009.
Oil prices are reaching levels that, if sustained, threaten the ability of some Gulf states to meet domestic spending commitments, forcing a drawdown on reserves or debt issuance.
Saudi Arabia needed an oil price of $89 a barrel in 2013 to balance the budget, up from a “fiscal break-even” of $78 a barrel in 2012, according to the International Monetary Fund.
But Riyadh’s regional political rivals, such as Iran and Iraq, as well as other Opec members such as Venezuela, have much higher fiscal break-evens.
That bolded paragraph is the new reality, the ME is being driven from relevance.
Crude oil futures settled down 4.6 percent at $81.84 a barrel, the biggest percentage drop since November 2012 and the lowest settlement since June 28, 2012.
Brent crude for November slid earlier and lurched lower toward the end of the day, dropping by more than $4 a barrel to dip below $85 a barrel for the first time since 2010. It was the biggest one-day drop in prices since 2011. The benchmark settled at $85.04, $3.85 lower on the day.
Oil dived more than $4 a barrel on Tuesday, its biggest drop in more than two years as mounting evidence of slackening demand and unrelenting U.S. shale output left traders struggling to peg a floor for crude’s four-month rout.
The abrupt acceleration of an over 26 percent slide in prices since June was triggered by three news items that epitomized the market’s turn: a downgrade in global oil consumption forecasts; projections for another big boost in shale oil; and reluctance by OPEC members to cut output.
Oil is struggling to find a floor after Saudi Arabia made clear that it was focused on maintaining market share, not supporting prices with unilateral production cuts.
Other members appear to be taking a similar tack. A source familiar with oil policy in Iran, normally one of the first in OPEC to call for production cuts, followed Kuwait in saying there was no need to rein in supplies.
“I think it’s just continued the rationalization that all signs continue to suggest that OPEC is not going to do much,” said Dominick Chirichella, senior partner at the Energy Management Institute, New York.
The slide began early in the day after the International Energy Agency, the West’s energy watchdog, cut its estimates for global oil demand growth by 250,000 barrels per day for this year and by 90,000 bpd for 2015. It said demand for OPEC oil would be 200,000 bpd lower for both years.
The diminishing outlook for consumption is colliding with an unrelenting rise in U.S. shale oil, leading to a glut of crude that has knocked Brent lower since June.
Losses deepened in mid-afternoon after the U.S. Energy Information Administration projected that fast growing shale basins would increase output by some 106,000 bpd in November from a month earlier.
The down side? This can be deflationary and the Fed does not have much room to move on interest rates. This could cause QE again here as Europe heads for another recession. Low $ oil shuts off the Shale wells in America at,I think $80 a barrel. Weak expected demand and the march toward American Energy independence is going to be an interesting ride.