OIL REVERSES LOSS AS U.S. SENDS MISSILE, TROOPS TO SAUDI ARABIA

(Bloomberg) -- Oil reversed declines after the U.S. announced it would send air defense systems and troops to Saudi Arabia following attacks on the country’s oil production facilities that shut half of its output.

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REAL CRUNCH FROM SAUDI ARABIA'S OIL OUTAGE HAS YET TO BE FELT

While Saudi Aramco is optimistic about when it's full production capacity will be restored, questions remain about the viability of their optimism.


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THE PROBLEM WITH IRAN

The U.S. and most of the world believe the drone and Cruise missile attack on the largest oil facility in the world was conducted by Iran. Despite abundant saber-rattling, Saudi Arabia and the United States are left with few options in which to retaliate. President Trump has put new sanctions on Iran but it is hard to imagine that they will inflict any more pain than the sanctions already in place. What’s stopping the U.S. from declaring all-out war against the Iranians?

A simple analogy explains the situation. The U.S. is like a man in the desert with a rattlesnake wrapped around his leg. He has a bullet in his pistol and he can surely kill the snake, but not without the risk of injuring himself in the process. What is the risk of attacking Iran? A chaotic disruption in the oil market which could propel the world economy into a dangerous downward economic spiral.

The stakes are high and the U.S. doesn't want to shoot itself in the foot.

OIL PRICE PREDICTION - SEPTEMBER 20 THROUGH 27

By now, everyone knows the world's largest oil facility at Abqaiq in Saudi Arabia was damaged by a drone and Cruise missile attack. The Saudi's second-largest oilfield, Khurais, was also attacked and damaged. The oil markets responded by sending the price of Brent crude over $70/barrel and W.T.I. over $65/barrel. This knee-jerk reaction didn't last long and the price of Brent and W.T.I. declined the following day. At the time of this post, W.T.I. is at $58.79 per barrel and Brent is $64.93 per barrel.

Before the attack, there was little or no margin built into the price of oil to allow for chaotic global disruption. This past weekend's drone and Cruise missile attack have changed all that. The new floor for W.T.I. is $58 per barrel and $64 per barrel for Brent. Traders going below this floor should do so with caution.

So how has the attack impacted production?

1) 5.7 million barrels of production per day was taken offline

2) 2.0 million barrels of production per day has been restored

The Saudis are working diligently to restore the remaining 3.7 million barrels of production and believe they can do so by November. For the week ending September 27, the almost 30 million barrel shortfall will likely go unnoticed because the Saudis will draw down their storage to fulfill their contracts. Barring further chaotic events, the shortfall for the week will likely go unnoticed.

MY PREDICTION:

The price of oil will rise, but not by much. Closing price on September 27 - 

W.T.I. - $61.23

Brent - $68.75

This is just a prediction

HOW DO YOU MAKE A PROFIT DRILLING HORIZONTAL WELLS?

How do you make a profit drilling horizontal wells? It all begins with a guess. What will the average price for a barrel of oil be during the drilling and first few seminal years of production? Sound easy? It’s not. Just ask any of the 196 North American oil companies that have filed for bankruptcy since 2015. The price of West Texas Intermediate crude is anything but stable and has fluctuated more than $70 per barrel since 2014. Betting what the price of oil will be six months from now is like playing Russian roulette with two bullets loaded. You can employ the best statistical information at hand, and it still comes down to a wild-ass-guess.

Say you decide that oil prices will average $50 per barrel for the next three years. If the horizontal well you are drilling, including land, taxes, royalties and operating overhead, costs $6,000,000 then the well must produce 120,000 barrels of oil to get your money back. If you factor in the time value of money, even this is a net loss. The well must produce 240,000 barrels of oil to double your investment. In many horizontal plays, this is an unlikely scenario. What horizontal drillers have learned is the subsurface isn’t homogeneous, and a very good horizontal well can easily be offset by one that is marginally productive, or worse.

Horizontal drilling was once called a resource play because the technology supposedly eliminated dry holes. Since all horizontal wells aren’t created equal, the premise of a resource play failed to take into account non-commercial producers and mechanical failures, both of which equate to costly mistakes. The result is 9 out of 10 horizontal drillers are cash flow negative. Put another way North American horizontal well drillers have totaled 200 billion dollars in negative cash flow.

What is occurring now in the oil patch is the mid-majors have lost, or are rapidly losing their sources of funding. Horizontal wells have a decline rate of around 70%. Without continuous drilling, our 12.5 million barrels of oil per day will begin declining rapidly, as will our dream of energy independence.

None of this is news to those actively drilling for oil in North America. To make a profit and ensure economic growth, the stable price of oil needs to be $75 to $85 per barrel. Anything less is a lie. The scenario begs the question, how do you make a profit drilling horizontal wells at an average price of $50 per barrel? The short answer is you don’t.

CRUDE OIL CAN TOP $80; SPEED OF RECOVERY BY SAUDIS WILL BE KEY

Read the article at Economic Times

HAS THE OIL MARKET BEEN WRONG THIS WHOLE-TIME

Ed Morse, commodities expert at Citi says, “oil should have been a good $10 a barrel higher than it has been for months.”

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DID SAUDI ARABIA SABOTAGE ITS OWN MASSIVE OIL FACILITY?

Saudi Aramco is poised to become the biggest-ever IPO. Saudi Arabia sees its value at 2 trillion dollars but the price of oil that seems bent on staying below $60 per barrel is knee-capping that valuation. Despite global conflicts in Venezuela, Libya, etc., natural disasters and production cuts by both OPEC and Russia, the price of oil stubbornly refuses to rise. This is because the oil markets believe there is an endless supply of oil and totally discount the possibility of political unrest affecting production capacity. Saturday's attack on Saudi's massive oil facility may change all that. The question is, who is responsible. Let me throw out a conspiracy theory.

Who has the most to gain by the rising price of oil? The answer to that question is simple. It's Saudia Arabia itself. Did they sabotage their own huge oil facility to raise the price of oil and greatly enhance the value of their upcoming IPO? Only time will tell.