At some point we should go through this blog and mark our beliefs to market: which predictions did we get wrong?
But before we do that, here is some supporting evidence for our prediction that oil prices will stay low for a while. The reason is that tight (aka “shale”) oil production in the United States will not fall as quickly as many hoped. Here is a concrete example. Continental Resources plans to reduce the number of operating rigs by 40% and cut its drilling budget from $5.2 billion to $2.7 billion. At the same time, however, it expects the cost of a well to fall 15-20% and average production to rise 16-20%.
And Continental, bear in mind, is unhedged! Most American drillers are hedged, meaning that the price drop won’t affect them until 2016. Total rig counts are down only 1% in the past week and up by 6% on this time last year.
Add that to Saudi Arabia’s refusal to cut production and you’ve got a situation for a prolonged bust. We do, however, predict that oil prices will be back up near or over $100 within a few years ... but a few years is a few years.
As for why Saudi Arabia wants a period of low prices, well, it isn’t that hard to understand. They have a big enough war chest to withstand the pain. Meanwhile, they get to (a) discipline OPEC; (b) slow down the growth of high-cost competitors; (c) prevent demand destruction; and (d) help out their patron, the United States, in a rough geopolitical time. What’s not to like?