Shilling: Oil Is Still Heading to $10 a Barrel

Gary Shilling writing at Bloomberg View:

Back in February 2015, the price of West Texas Intermediate stood at about $52 per barrel, half of its 2014 peak. I argued then that a renewed decline was coming that could drive it below $20, a scenario regarded by oil bulls as unthinkable.

But prices did fall further, dropping all the way to a low of $26 in February. Since then, crude rallied to spend several weeks flirting with $50 per barrel, a level not seen since last year.

But it won't last; I’m sticking to my call for prices to decline anew to $10 to $20 per barrel...

But the world continues to be awash in crude, and American frackers have replaced the Organization of Petroleum Exporting Countries as the world’s swing producers.

The once-feared oil cartel is, to my mind, pretty much finished as an effective price enforcer.

Even OPEC’s leader, Saudi Arabia, is acknowledging the new reality by quashing recent attempts to freeze output, borrowing from banks and preparing to sell a stake in its Aramco oil company as it tries to find new sources of non-oil revenue...

The price at which major producers chicken out and slash production isn’t determined by the prices needed to balance the budgets of oil producing nations, which are as high as $208 per barrel in Libya and as low as $52 per barrel in Kuwait. Nor is it the "full cycle" or average cost of production that includes drilling costs, overheads, pipelines, etc.

In a price war, the chicken-out point is the price that equals the marginal cost of producing oil from an established well.

Once fracking operations are set up and staffed, leases paid for, drilling underway and pipelines laid, the marginal cost of shale oil for efficient producers in the Permian Basin in Texas is about $10 to $20 per barrel and even lower in the Persian Gulf.

Furthermore, fracking costs continue to fall as productivity improves.

The number of drilling rigs operating in the U.S. continues to drop. But the rigs taken offline are mostly old vertical drillers that drill only one hole per platform, while horizontal rigs -- able to drill 20 to 30 wells per platform like the spokes of a wheel -- increasingly dominate. So output per working rig is accelerating....
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Link: http://www.bloomberg.com/view/articles/2016-06-28/why-oil-is-still-headed-as-low-as-10-a-barrel