With tepid growth in worldwide oil demand expected this year and next, and with Libya and Iraq both in desperate need of cash due to the unfortunate circumstances the countries find themselves in, the questions now are:
- Who will blink first? Russia? Saudi Arabia? Iran? Or the US?
- Are the US and Saudi Arabia in a pact to drive oil prices lower to punish Putin and Russia, as well as the Iranians?
- Ironically, will the domestic shale frackers, who have almost single-handedly pulled the US out of recession, have to cut back on production first, despite the fact that the US is still importing oil?
- If so, at what price will American oil frackers cut back cap-ex and production?
Question #4 is key, and I believe it is the question Saudi Arabia wants to know the answer to.
Note, oil prices had no problem staying above $100 in Q2, when Libyan production was only 228,000 bpd. Yet, by September, Libyan production had grown by a massive half million bpd (see below), basically flooding a market that was already trying to figure out what to do with over 1 million bpd of Nigerian light-sweet. Saudi Arabia has refused to cut production and give up market share, and Iraq and Libya need the oil revenue, so down we go.
(click to enlarge)
It is clear Libya has played a pivotal role in the current oil price collapse: unexpected, quick and massive changes in oil production. For those wondering when oil prices will rise again, please note that despite rumors that Libyan oil production is closing in on 1 million bpd, remember – Libya was producing 1.45 million bpd before the civil unrest hit. That means it could conceivably add another ~400,000 bpd of supply to market over the coming months. In other words, somebody is going to have to cut production, or we could see much lower oil prices for quite some time to come. Years, in fact.
Now I’m not saying Libya alone has caused the price drop in oil prices – there are obviously many factors involved. However, I believe the rapid near-step function moves in Libyan production – first off-line, and then back on-line – was the single biggest contributor to the sharp move down in oil prices.
via How Libya Sunk The Oil Frackers’ Stocks, Plus The Conoco Story – ConocoPhillips NYSE:COP | Seeking Alpha.