No surprise from OPEC...looks like crude is gonna stay low for the froeseeable future

Offshore
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missed this from Friday

[B]OPEC to Keep Pumping Oil Amid Glut[/B]

By Reuters 2015-06-05

Oil group OPEC agreed to stick by its policy of unconstrained output for another six months on Friday, setting aside warnings of a second lurch lower in prices as some members such as Iran look to ramp up exports.

Concluding a meeting with no apparent dissent, Saudi Arabian oil minister Ali al-Naimi said OPEC had rolled over its current output ceiling, renewing support for the shock market treatment it doled out late last year when the world’s top supplier said it would no longer cut output to keep prices high.

The Organization of the Petroleum Exporting Countries will meet again on Dec. 4, Naimi said.

With oil prices having rebounded by more than a third after hitting a six-year low of $45 a barrel in January, officials meeting in Vienna saw little reason to tinker with a strategy that seems to have resurrected moribund growth in world oil consumption and put a damper on the U.S. shale boom.

“You’ll be surprised how amicable the meeting was,” a visibly pleased Naimi told reporters after the meeting.

Oil prices rose by nearly $1 a barrel after the decision, paring some of this week’s losses on news that OPEC had not raised its output ceiling to match current output levels that are much higher, as a handful of analysts had suggested.

Friday’s decision defers discussion of several tricky questions set to arise in the coming months as members such as Iran and Libya prepare to reopen the taps after years of diminished production.

Iranian oil minister Bijan Zanganeh had promised to press the group for assurances that other members would give Tehran room to add as much as 1 million barrels per day (bpd) of supply once Western sanctions are eased. But most delegates saw little reason for Tehran to pick a fight now.

“When the production comes, this matter will settle itself,” one OPEC delegate told Reuters. That may not occur until 2016, according to many analysts who question how quickly Tehran will win relief from sanctions and be allowed to sell more crude.

Libya, still afflicted by a crippling civil war, hopes to double production to some 1 million bpd by September if key ports resume working, but past efforts have failed to deliver a sustained recovery in shipments.

U.S. oil is on track for its first weekly decline since March as traders weigh deteriorating physical market conditions. But prices are still $15 off their lows, and some analysts see further gains ahead.

“The markets are moving in OPEC’s favor,” said Dr. Gary Ross, executive chairman of PIRA Energy Group. “Prices are stimulating robust demand growth and slowing capex. This was the objective of the Saudi strategy and it’s working.”

OPEC Secretary-General Abdullah al-Badri, speaking to reporters after the meeting, said he saw the oil market as “very positive”.

“The economy is growing, demand is growing. We see non-OPEC supply is not growing as in the past,‎” Badri said.

DON’T RAISE THE ROOF

OPEC output has exceeded the group’s 30 million bpd ceiling for most of the past year, reaching 31.2 million bpd in May, its highest in three years, according to a Reuters survey.

Notably absent from this week’s agenda were efforts to push for output constraints - even from hawks such as Venezuela, which faces deepening budget woes at prices below $100 per barrel.

While oil ministers have maintained a relentlessly upbeat attitude this week, some analysts see dark clouds gathering.

The U.S. tight oil industry has been more resilient than many had expected, with falling costs helping sustain the revolution and possibly setting up another downward spiral.

“Balances show we are oversupplied and OPEC is in pedal-to-the-metal mode,” said Bob McNally, founder and president of Washington-based consultancy The Rapidan Group. He said Brent crude could fall back to $50 a barrel.

are we headed back to the sub $50/bbl world?

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OPEC will keep pumping the same amount of oil regardless of the price as they don’t want to loose their market share. If they lower production, some other non-OPEC country will just step in and ramp up production to the amount OPEC reduces.

Some OPEC mmembers are in favour of a drop in production, but Saudi Arabia, who pretty much controls OPEC does not.

Saudi Arabia is keeping the oil price low as they want to kill off US shale oil which needs something like $60-70 to break even. So once the US shale oil firms go bankrupt and the US needs to start importing a lot of oil, the Saudis may allow a drop in production to create an artificial scarcity which will drive prices north again.

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[QUOTE=lm1883;163838]OPEC is not increasing production, but keeping the same, as per last meeting. Our Zero Interest Rate policy has allowed the shale producers to keep borrowing money to keep their heads above water, which could really be a problem for our financial industry if there are numerous sector wide defaults. Long and the short is that the two producers will find a way to mutually co-exist as it is in their best interest to do so.[/QUOTE]

I didn’t say that OPEC were going to increase oil production. They are going to maintain their market share so keep it the same. If anything OPEC might increase production if sanctions are lifted on Iran, as Iran are an OPEC member they will dump their oil onto the market as well, so it remains to be seen if OPEC members will reduce their production to fit Iran in or they will just add Iran’s production on top of current rates.

Saudi Arabia’s national budget is based on a price point of $60 per barrel, so they can quite comfortably adjust OPEC’s production to keep the price per barrel constant. That way their books are balanced and US shale oil production is not really economical to continue. When the oil price first went south there were conspiracy theories that it was some kind of back door western sanction against Russia, but in reality it is a more like a Saudi sanction on the US.

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[QUOTE=lm1883;163961]I would agree with you there. $60 /bbl still keeps US shale in play, especially with our Zero Interest Rate Policy. I read an article somewhere that pretty much went like this: world demand was tanking (China slow down, global slow down etc…) so the Saudis asked the Russians and USA to cut production to maintain $100 a barrel. Both parties declined and the Saudis said OK then we pump to maintain market share. Not sure if it’s true or not, but it seems plausible. As long as the Saudis need our protection and military gear they are going to play ball. On a side The Saudis have increased domestic spending by over $120 billion in the last year so as to avoid any fallout from the Arab spring, the Kuwaitis have as well. It will be interesting for sure.[/QUOTE]

Looks like Saudi Arabia’s plans are progressing.

"The Shale Industry Could Be Swallowed By Its Own Debt

The debt that fueled the U.S. shale boom now threatens to be its undoing.

Drillers are devoting more revenue than ever to interest payments. In one example, Continental Resources Inc., the company credited with making North Dakota’s Bakken Shale one of the biggest oil-producing regions in the world, spent almost as much as Exxon Mobil Corp., a company 20 times its size.

The burden is becoming heavier after oil prices fell 43 percent in the past year. Interest payments are eating up more than 10 percent of revenue for 27 of the 62 drillers in the Bloomberg Intelligence North America Independent Exploration and Production Index, up from a dozen a year ago. Drillers’ debt ballooned to $235 billion at the end of the first quarter, a 16 percent increase in the past year, even as revenue shrank.

“The question is, how long do they have that they can get away with this,” said Thomas Watters, an oil and gas credit analyst at Standard & Poor’s in New York. The companies with the lowest credit ratings “are in survival mode,” he said.

The problem for shale drillers is that they’ve consistently spent money faster than they’ve made it, even when oil was $100 a barrel. The companies in the Bloomberg index spent $4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year earlier, while pushing U.S. oil production to the highest in more than 30 years.

“There’s a liquidity issue, and you start looking at the cash burn,” Watters said.

Distressed Debt

Continental borrows at cheaper rates than many of its smaller peers because its debt is investment grade. S&P assigns speculative, or junk, ratings to 45 out of the 62 companies in the Bloomberg index.

“Our cash flow easily covers interest costs, and we expect to continue maintaining our investment-grade credit rating as commodity prices recover,” said Warren Henry, a spokesman for Oklahoma City-based Continental.

Almost $20 billion in bonds issued by the 62 companies are trading at distressed levels, with yields more than 10 percentage points above U.S. Treasuries, as investors demand much higher rates to compensate for the risk that obligations won’t be repaid, data compiled by Bloomberg show.

“Credit markets have played a big role in keeping the entire sector alive,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd., a consulting firm in London.

So far this year, S&P lowered the outlook or downgraded the credit of almost half of the 105 U.S. exploration and production companies that it rates, according to a May report.

Financial Drain

Companies have reduced spending to cope with lower prices, but those cuts will eventually lead to production declines, further shrinking revenue, Watters said.

West Texas Intermediate, the U.S. benchmark grade, lost 11 cents $60.34 a barrel in electronic trading on the New York Mercantile Exchange at 1:04 p.m. Singapore time on Friday.

U.S. oil production will begin to fall this month and will continue to slide until early 2016 as shale drillers reduce spending, the Energy Information Administration said in a June 9 report.

Interest expense can drain a company’s finances. At this time last year, Quicksilver Resources Inc. was spending more than 20 percent of its revenue on interest. The company missed a debt payment in February and has since filed for bankruptcy. Sabine Oil & Gas LLC missed an interest payment in April and another this month.

Representatives of Fort Worth, Texas-based Quicksilver and Sabine, based in Denver, didn’t return calls or e-mails seeking comment. Sabine shares fell 96 percent in the past year to 8.5 cents, and its bonds are trading for less than 23 cents on the dollar.

Corporate Defaults

Oil and gas companies accounted for one-third of the 36 corporate-debt defaults worldwide this year, and missed interest payments are the leading cause of default, according to a May 14 S&P report. Companies including SandRidge Energy Inc., Breitburn Energy Partners LP and Halcon Resources Corp. have raised cash by taking on new debt or issuing new shares.

The new debt issued by Halcon and SandRidge is secured by oil and gas assets, making it less likely that unsecured bondholders will get repaid in a default. Both companies’ older, unsecured bonds are trading at distressed levels. Halcon’s are going for 72 cents on the dollar or less and SandRidge’s for 62 cents or less, according to data compiled by Bloomberg.

The new borrowing can be expensive. Oklahoma City-based SandRidge issued $1.25 billion of second-lien debt this month at 8.75 percent interest, more than all but one of their existing bonds, records show. The company paid $24 million in fees and will add $109 million a year to interest payments, which are already eating up 29 percent of its revenue.

“It provides us with liquidity we otherwise wouldn’t have had,” said Justin Lewellen, a SandRidge spokesman. “It bought us some significant time.”

SandRidge’s shares fell 84 percent in the last year to $1.08.

The financial troubles of the smaller players become amplified with lower oil prices, Sen said.

“We haven’t seen the worst,” she said.

Source: www.offshoreenergytoday.com"

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Middle eastern oil is so cheap to extract from the ground that they have the lowest break even point in the world at about $25 per barrel, compared to US shale at $65 it is a big difference. So Arab states can easily afford to manipulate the price downwards.

Couple of links below give more details.

http://marketrealist.com/2015/01/breakeven-price-crude-oil-important/
http://finance.yahoo.com/news/why-breakeven-price-crude-oil-194354497.html