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Tuesday, April 28, 2015

Oil Price Is Going Nowhere For A While

The original post is from the Economist :

From The Economist
Otherwise digest these points :
  • Fall in oil price has not curbed fracking as expected in America.
  • Fracking is getting "unconventional" oil out of shale, tar-coated sand.
  • New techniques to drill oil (horizontal drilling and hydraulic fracturing).
  • High production costs & heavy debts, more vulnerable to price shocks.
  • But more flexible, can quickly respond to any price rise.
  • Saudi refused to cut output to put American firms out of business.
  • 6 months later, little sign of bust in America's shale basins.
  • Saudi's plan failed, oil price to remain low.
  • Fracking have lead to a boom in oil and gas production recently.
  • American oil production is still growing, in March it rose by 120,000 barrels a day.
  • Frackers able to cut costs (labor, steel and other inputs has fallen).
  • Frackers also improved productivity and drilling efficiency - helped by technology.
  • America is replacing Saudi as world's swing producer.
  • America drilled lots of well and then plugging them, waiting for price to rise again.
  • Potential of 300,000 to 800,000 barrel per day may be started up when needed.
  • Unconventional oil gaining increasing share of capital investment.
  • Oil price picture - unlikely to rise sharply.
  • America will stop importing energy between 2020 and 2030.
  • Message from America - finance and technology more than a match for Saudi.
  • OPEC says America's oil boom will be over by year-end. Wishful thinking.
  • Shale revolution is marching on.

My thoughts : US is no longer dependent on Arab oil anymore. This is clear as we are witnessing a partial withdrawal of the US from the Middle East, hence the chaos. 

Meanwhile in Saudi, they have shown reluctant to cut output in order to maintain market share. In the long run this strategy will probably backfire. Why?

Currently the supply glut is supported by restocking activities (oil being stored in hopes that demand and prices will pick up later). [1] Demand will sap because China is growing at its slowest in 20 years. [2] Prices will likely tumble because storage facilities in Europe and Asia are already 80-85% full. Much more and they will overflow.  

Oil and gas income is still the backbone for the Malaysian economy. It accounts for 30% of government's total revenue. Again we are the spectators, too small to make a difference. Don't expect our budget to be people centrist for the next few years. We need to be prepared for a prolong spell of cheap oil.

Our weakening MYR (due to capital outflows) will more than offset any gains we get from cheaper oil. So yea, I'm not that happy either, I've said that before:

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