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The
monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended
its retreat for a fourth month, tumbling $8.16 to $85.05 per barrel. That price
drop coincided with a strengthening U.S. dollar, the lagged impacts of a 112,000
barrel-per-day (BPD) increase in the amount of oil supplied in August (to 19.3
million BPD), and an abrupt turnaround in crude oil stocks. The monthly average
price spread between Brent crude (the predominant grade used in Europe) and WTI
narrowed by $1.11 in October, to $2.77 per barrel.
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“So
far,” wrote ASPO-USA’s
Tom
Whipple, “the two major reactions to the precipitous decline in oil prices
have been the price war which seems to have broken out within OPEC as some members
move to retain their market share, and the issue of whether some of the
higher-cost U.S. shale oil production remains an economic proposition. A new survey shows that OPEC’s production
increased by 53,000 BPD in October at the time when it should be declining to
counter falling prices. Some members are unhappy, but the indications suggest
that there will be no major changes at the 27 November OPEC meeting.
“The
issue of whether the drop in oil prices will curtail U.S. shale oil production
is beginning to attract more attention. Initially shale oil production
operators were running around denying that there was a problem and that prices
could drop another 20 percent and shale oil would still be profitable. The
people who are saying this are already running at a cash flow deficit and need
constant infusions of new Wall Street capital to keep drilling. Other larger
oil companies which are now exclusively in the shale oil business, however, are
beginning to suggest that some planned production may be curtailed next year.
Transportation difficulties and the requirement to reduce natural gas flaring
are adding significantly to production costs on Bakken shale oil so that we may
see some production curtailment in the coming year if oil prices remain lower
than they have been in recent years for an extended period.”
Futures
traders apparently see oil prices staying in the low $80s for the next two
years.
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The foregoing comments represent the
general economic views and analysis of Delphi
Advisors, and are provided solely for the purpose of information, instruction
and discourse. They do not constitute a solicitation or recommendation
regarding any investment.
