Came across this article, can anyone verify those sentences highlighted in bold?
Can US shale producers withstand a price war with OPEC?
Jeff Ronne, scientist at heart
No, the Saudis are going to attempt to and probably bankrupt many USA shale producers and their investors.
The USA shale producers rely on leverage, borrowed money from the banks, seed capital from investors and moderate oil prices to stay solvent.
The Saudis are going insure that this low oil price drop lasts for quite sometime maybe a year or two. Enough to exhaust oil pricing hedges, enough to cause banks to tighten credit, enough to cause investors to seek greener pastures. The price drop will last until it gets the needed results.
Then after oil prices rise again, the banks and investors will likely not fund USA shale producers again because they know if they do, the Saudis will screw them again. It is not a question of if but when.
This is how business and economics works in the real world. If you have the time read on please because these concepts are useful in investing and personal finance. Understanding key, it is not hard, just requires a few minutes.
We have a glut of oil supply, guaranteed glut courtesy of the Saudis and OPEC.
Simply because Saudi Arabia, the key player in OPEC, will not reduce production in the face of increasing global production for an extended period of time.
The most important fact is the cost of Saudi production is between $10 and $15 a barrel.
Many usa shale fracking operations have costs approaching $60 to 70 / barrel funded with borrowed money.
These highly leveraged players will likely fold in the coming years as investment capital flees and banks do not ante up.
This is the sole reason why the Saudis will deliberately leave prices low for a few years to caution future investors in funding new USA shale fracking operations.
This is how the capital markets function, they operate on risk, reward and the expected future returns.
The Saudis have let everyone know that they will not tolerate high cost producers in the oil market.
They want to fiscally punish usa shale oil producers which is working well given the collapse in energy stock prices.
So when prices trend back up to $100 barrel expect the shale oil producers to be sleeping with one eye open.
Until usa shale production costs come down to a level lower than the Saudis are willing to produce at, the Saudis will remain in control.
More details are found in the enclosed article below
Sheikhs v shale
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