Saudi Arabia strategy appears to be working

  • Saudi Arabia strategy appears to be working

    As reported in an earlier blog article, in their attempt to defend market share, Saudi Arabia decided last month to continue their oil production despite pressure from other OPEC members to cut back. In so doing, Saudi Arabia anticipated that oil would settle at $60 a barrel, and apply pressure to US drilling efforts that cannot break even at that price point.

    Yesterday oil closed at just under the $60 mark, and today it closed at $57.50 per barrel. So the Saudi strategy seems to be happening even faster than some may have thought.

    Already there are US drilling companies who are backing off plans to drill in sites where it costs more than $60 a barrel to extract the oil. Others are looking into capping some drilling locations, though that isn’t always an option based on signed contracts. According to the Wall Street Journal, new drilling permits have dropped sharply. ConocoPhillips announced they will spend 20% less next year on drilling wells, focusing only on the most profitable spots.

    However, there are still spots in South Texas where drilling is still profitable even at $30 a barrel. The Bakken area in North Dakota has a break even point at just under $50 a barrel.

    We can’t attribute the global price drop of crude entirely to the Saudi decision. Weaker anticipated demand in Asia also has a significant impact. But no doubt, as long as OPEC continues with their production levels, and the US stays close to what it’s producing now, we can expect to be awash in oil, and see oil prices the lowest we’ve seen in years.

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