quote:
My money is on a short squeeze.
http://www.zerohedge.com/news/2015-01-14/opec-who-us-crude-oil-production-hits-record-high
Maybe someone on the production side can chime in here... As long as you are above your break even cost of production, you will pump. Obviously, as the oil prices decline, profit margin declines.
Do operators try to pump more, operating on a lower margin but increased volume, attempting to maintain revenues? Would this be an accurate scenario? Seems like a pretty standard deflationary spiral.
I could see a few scenarios working out with this 50% drop in oil prices.
1) Producers keep producing their existing wells assuming they are above break-even costs, and turn on 0 new wells.
2) Same as above but they turn on new wells and choke them back.
3) Same as above or they produce the crap out of their new wells.
I think we will see a lot of 1 and 2 here in the US. Companies don't want to drain their high producing areas at $40-$50 oil if they can help it. But, at the same time, if you're going to still drill, you need high production to pay off wells. It's a double-edged sword and I don't know the right answer. I know that producers won't be shutting in existing wells if they can help it. Most of the shale wells that have been producing and make up the base of a company's production are paid for. Those wells will probably be the only "cash flow" many companies realize during this down turn.
Production will fall off. With shale plays, if you want to grow volumes you have to turn on more wells every year. We won't be turning on as many this year and even fewer nearing 2016.