The new oil war

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Does anyone remember the oil price prevision of 200 usd/bbl? Well, they were common among the operators years ago, when in 2008 reached the maximum price of  147.25 usd/bbl, but they were retracted today by the market evolution. On august 20th Crude Oil reached its minimum after 10 years, closing at less than 41 usd/bbl despite the relative demand increase and the short term prevision continue to push a bear trend.

It seems incredible that, in few years, it has been recorded a trend inversion of this dimension: what caused this? We say that, between the 1970 and today numerous new crude oil producers were added to the historic Opec members: North Europe, South America and Russia markets were open, making the oil offer constantly grow along with the demand.

40 years ago the end of global reserves was hypothesized within the end of XX century, today instead, after 5 years from the dead line, the possibility to extract oil seems limitless, also thanks to the new technologies. But the price of extraction is not the same everywhere.

Because of this fact, the bear trend is probably begun. The opening of new oilfield makes the refueling in area with a greater political stability more convenient, such as North Sea, Somaliland and Usa that, with the shale oil revolution, could extract also from oilfields not economically usable before. This led to a mayor pressure on the main producers and those countries, such as Russia, which have an economy especially based on hydrocarbon extraction and export.

It’s not a coincidence that the price collapse began with the sanctions to Russia, probably to tire out the colossus guided by Vladimir Putin but, seizing the moment, the thing presented the occasion for the OPEC to get rid of some competitors. Saudi Arabia increased the production and flooded the market with its oil, exploiting a low price of extraction, 5/6 usd/bbl in order to block the extraction from the new American mines which, initially, indicated the price of 60 usd/bbl as the minimum convenient.

But technology is not statics, as production prices which can count on relevant economies of scale, once the system is in motion. Now the modern American companies esteem that the new minimum crude oil price to reach before blocking the extraction through fracking techniques is around 20/25 usd/bbl, as Gazprom, the main Russian producer, indicates its convenience to operate up to 30 usd/bbl before the profit is reduced to zero.

New horizons are open to the possibility of price decrease, even though we hardly see the 90’s 10 usd/bbl, because of this “war of prices” of these last months. If 140 usd/bbl were exaggerate, we need to remember that last year, on November, price was around the 70 usd/bbl and it is now reducing. Many global player risk to leave the stage, as Venezuela, which is on the cusp of default because the political economics of the socialist regime wanted by Chavéz and now by his successor Maduro, counted on a price that would be increased more than 180 usd/bbl, while producers with a more efficient extractive system increase the offer exploiting this decreasing price level in order to obtain greater commercial and political placements

A long time ago, in an article for “The Fielder” I wrote that “it is convenient to buy oil on the market rather than conquer it with arms”, as war should be led at commercial level, with prices rather than with arms; less risks and more profit in the medium/long term. This as long as the rope, always more stretched, doesn’t break and so the scenario would change in an unexpected and unconceivable way.



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