Monday, December 7, 2015

Oil’s drop below $38 may cause a world of hurt for U.S. shale....

Oil's drop below $38 may cause a world of hurt for U.S. shale

As crude-oil futures are descending toward seven-year lows, U.S. shale-oil producers are getting walloped.

West Texas Intermediate crude-oil futures for January delivery dropped 5.4% to below $38 a barrel Monday and were looking at their worst levels since 2009, after the Organization of the Petroleum Exporting Countries decided last week to keep crude-oil production at its current levels despite a price plunge of more than 60% from the 2014 summer peaks.

We believe Saudi Arabia will stay the course, forcing high-priced production out of the market.

Since the November 2014 OPEC meeting, the Saudis have made their strategy to defend market share regardless of price very clear. And it is a strategy that appears to be working. Production is declining in the United States. Producers have different breakeven price points, but under $40-a-barrel oil will force some out of the market.

Refiners are likely to benefit in the spring "when crude is widely available and refinery maintenance begins." Refinery maintenance tends to choke supplies of refined products, such as gasoline. In the mid-February to mid-May period, expect retail gasoline prices to climb by 60 cents to 80 cents a gallon from prices possibly in the $1.75 to $1.99 range.


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