Crude oil prices continued to tumble the first week of November as Saudi Arabia announced price cuts to U.S. customers in order to maintain market share. This helped to drive the West Texas Intermediate price down to $78 per barrel (/bbl).

Based on the response by OPEC members toward tumbling prices, it appears that a price war of sorts is taking place in an inverse situation from the 1970s when OPEC first flexed its global muscles. At that time, OPEC declared an oil embargo to drive prices up. We are now seeing OPEC respond to increased oil production out of non-OPEC nations, specifically the U.S. and Canada, by playing a game of Russian roulette. This wouldn’t be so troublesome if it weren’t for the fact that OPEC members have extremely low production costs with Barclays Capital reporting that Saudi Arabia has production costs as low as $4/bbl.

The investment firm said in a Nov. 5 research note that it anticipated most tight oil producers will continue ahead with production through the end of the year, but should prices remain at $80/bbl throughout 2015, “it could compromise the significant potential new volumes that are needed to offset declines from existing wells. This new, higher-breakeven volume is small in 2015, but becomes much larger in 2016,” the note said.

While Barclays Capital anticipates a crude oil price rebound in the second half of 2015, roughly half of proven and probable remaining U.S. tight oil reserves would be challenged if prices fell to $70/bbl for all of 2015 with fewer new volumes being produced in the second half of 2015 and all of 2016.

“On a net basis, that implies a reduction to growth of about 100,000 bbl/d for 2015 as a whole. A growth impact of 100,000 bbl/d is a drop in the bucket in the context of total non-OPEC growth of around 1.5 million bbl/d. Thus, we expect downward price pressure to mount unless OPEC supplies less [oil] or demand rebounds,” according to the note.

En*Vantage said that the downward trend for oil prices is likely to result in upward price pressure as it leads to further instability in the Middle East.

There is still a question over whether lower crude prices could support the U.S. lifting its nearly 40-year ban on crude exports. Although not a certainty of being lifted, there is a very strong likelihood that this topic will at least be debated in Congress next year.

OPEC actions indicate it is seeking to hurt the U.S.’s nascent tight oil industry by lowering its profits on a short-term basis to limit competition. The case can be made that such actions actually support opening up access to new markets for U.S. producers in order to help support the growth of this industry.

Already U.S. crude exports reached their highest levels in 57 years, according to the U.S. Energy Information Administration (EIA) as the country exported 401,000 bbl/d in July, which was also the second highest monthly export volume since 1920. However, these exports are something of a misnomer as the bulk of them are re-exports from Canada.

In a recent research report, the EIA stated that typically crude exports are sourced domestically and sent only to Canada, but since April these volumes have included “modest amounts” of bbl produced in Canada and re-exported to Switzerland, Spain, Italy and Singapore.

There is room for U.S. exports as the report said that companies must obtain licenses from the U.S. Department of Commerce’s Bureau of Industry and Security to export crude. These licenses are generally approved if they seek to export from the Cook Inlet in Alaska; export to Canada for consumption within that country; export in connection with refining or exchange of strategic petroleum reserve oil; exports consistent with international energy supply agreements; exports of foreign-origin crude; exports of California heavy crude up to an average of 25,000 bbl/d; and temporary exports or exchanges.

In addition, the U.S. allows the export of Alaska North Slope crude. For the first time in more than 10 years, the U.S. exported crude from this region as volumes were exported from the North Slope to South Korea last month.

“Alaska North Slope shipments abroad must use U.S. coastwise-compliant ships for transport, and market analysts estimate that [this crude] would need to trade at a discount of $5/bbl to Brent to make such a movement economical. Although Alaskan crude production has recently been declining, the recent retirement of the remaining 79,000 bbl/d crude distillation unit capacity at the Flint Hills refinery in North Pole, Alaska, which had been running North Slope crude, means that North Slope producers may consider sending additional volumes to export markets,” the report said.

Based purely on economics, U.S. crude may have a difficult time competing with OPEC crude in the open marketplace, but when politics are factored in the situation could alter. Additionally, RBN Energy LLC stated in a recent blog posting on its site that some U.S. shale production would remain profitable at $50/bbl.

“So if indeed it is the intent of Saudi Arabia or other OPEC members to starve out U.S. shale production, we suggest this will not be easy. For starters even if drilling slowed dramatically, there would be a lag time before production declined. Second low prices will just encourage more rigs to move to basins where rates of return are higher and that could lead to another surge in production,” the company said.

While the crude market remains in flux, the NGL and natural gas markets showed improvements as heating and crop-drying demand are expected to increase in the coming weeks. In fact, the only NGL to experience a price decrease was C5+ due to its close relationship with crude oil. The product fell 1% to its lowest prices in years. The Conway price of $1.61 per gallon was the lowest at the hubs in more than four years, while the Mont Belvieu price of $1.68/gal was its lowest price in more than three years.

The biggest gainer this week was ethane, which improved 8% at Mont Belvieu and 4% at Conway. However, margins remain firmly negative. This is expected to continue throughout the remainder of the year even as cracking capacity comes back online. Prices and margins should experience further improvements as excess volumes are worked off and balance is restored to the marketplace in early 2015.

The theoretical NGL bbl price improved 3% at both hubs with the Conway price up to $34.77/bbl with a 4% improvement in margin to $21.18/bbl. The Mont Belvieu price rose to $34.31/bbl with a static margin of $20.28/bbl.

The most profitable NGL to make at both hubs was C5+ at $1.20/gal at Conway and $1.25/gal at Mont Belvieu. This was followed, in order, by isobutane at 91 cents/gal at Conway and 75 cents/gal at Mont Belvieu; butane at 74 cents/gal at Conway and 71 cents/gal at Mont Belvieu; propane at 61 cents/gal at Conway and 55 cents/gal at Mont Belvieu; and ethane at negative 5 cents/gal at Conway and negative 3 cents/gal at Mont Belvieu.

The stop-and-start nature of heating demand this season continued the week of Oct. 31, the most recent data available from the EIA, as gas storage levels increased by 91 billion cubic feet to 3.571 trillion cubic feet (Tcf) from 3.480 Tcf in what is ostensibly the heating season. This was 6% below the 3.809 Tcf posted last year at the same time and 7% below the five-year average of 3.832 Tcf.

The National Weather Service’s forecast for the week of Nov. 12 anticipates colder-than-normal temperatures around the country, which should result in both higher gas prices as well as a pull on storage levels.

Comments