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Who will survive?

Posted by: Richard Madden
17/01/16
In my article I will try and convey my thoughts and reasoning on the current state of the oil market, the battle for oil share, potential consequences, and my thoughts on where it will end. I think the details are important to Subsurface Global as we need to be focused on the countries and companies that have the strength to survive. Please comment on my article using the comments section below.

Who would of thought the oil price/bbl would be below $30 USD in 2016? History tells us that the oil business like many others is cyclical but not many predicted this.

Bloomberg Chart - 17/01/2016 - www.bloomberg.com/energy

It is clear that there is a supply and demand issue, it is also clear that Saudi Arabia and other Middle Eastern countries are determined to battle for market share.

The battle is well under way but who will win?

OPEC produces roughly 31.5 million/bbl per day. OPEC's purpose is to unify the petroleum policies of its member countries and to provide stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum to customers, a steady income to producers and a fair return on capital for those investing in the petroleum industry. 

My view is that Saudi Arabia and others are taking the opportunity to cut out high cost producers. This may be the US Shale but I think this also includes OPEC countries such as Venezuela where production costs are much higher than those in the Middle East.

Suhail Al Mazroui (UAE Energy Minister) stated the OPEC strategy was working and "We have seen reduction in the yearly gradual increase in production from non-Opec nations. It's working for the customers, with the customers allowing the market to balance itself."

I'm sure the intent from OPEC is to drive the oil price low so big producers outside of OPEC - America, Russia, etc put a clear cap on production but what about the high oil producers in OPEC? What will this mean for them? Is it their desire for those countries who have high costs of production to break away from OPEC? or do OPEC want rid of them? I'm not sure if we are there yet but the pressure is mounting. 

Other factors? Saudi's burning through their savings? What about Iran?

Saudi Amarco - IPO? Borrowing on the markets? I believe Saudi can keep it going for a lot longer than what is read in the International press. Borrowing money at low prices makes complete sense to me and it makes me think Saudi are bunkering down for the long term and are prepared to take the pain. I suspect if prices do reach $20 they will continue and persist until the high cost producers lose.

Iran is also a major factor in the months and years ahead. This week it was announced that Iran sanctions will be lifted -BBC Article. If Iran adds between 0.5 - 1 million/bbls per day do demand fundamentals shift? They must. 

Where will it end?

I'm sure, eventually the market will sort itself out. Demand for fossil fuels will remain and the cyclical commodity as we all know it will return stronger than ever. Let me leave you with an interesting chart published by Alliance Bernstein in October 2014. Hold on to your hats, 2016 is set for a storm.


Alliance Bernstein



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