tag:blogger.com,1999:blog-191786838940024989.post8216375044738464520..comments2023-06-26T22:20:04.167+08:00Comments on Rightways: Oil Prices: What’s Behind the Drop? Simple Economics righwayshttp://www.blogger.com/profile/06748606380615647290noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-191786838940024989.post-43743294022038307312016-04-06T20:13:26.344+08:002016-04-06T20:13:26.344+08:00The Saudis are going insure that this low oil pric...The Saudis are going insure that this low oil price drop lasts for quite sometime probably for several years to come. The Saudis are going to attempt to and probably bankrupt many USA shale producers and their investors. USA shale production is the threat that the Saudis are trying to contain.<br /><br />The USA shale producers rely on leverage, borrowed money from the banks, seed capital from investors and moderate to high oil prices to stay solvent.<br /><br />The Saudi induced price drop will last long enough to exhaust oil pricing hedges, last long enough to cause banks to tighten credit, last long enough to cause investors to seek greener pastures and last long enough to reverse the growth of USA shale oil production. The price drop will last until it gets these needed results. This will probably take 6 months to upwards of two years depending on the oil marketplace reaction. Most USA shale oil production is hedged 6 months out dropping steadily to very low levels after 1 year. As these hedges expire there is no place to hide for the higher cost USA shale oil producers who will scale back or shutdown operations.<br /><br />After oil prices rise again, the banks and investors will likely not fund USA shale producers again because they know if they do, the Saudis will screw them again. It is not a question of if but when.<br /><br />The Saudis can not absolutely control the long term price of oil but they can inject oil price volatility into the market which impacts the risk analysis and increases the margin of safety demanded by investors to fund new oil exploration anywhere. For instance now some oil futures contracts are selling in the $30 range which would have been unthinkable 1 year ago. This is because the implied long-term oil price volatility has increased. The Saudis are just trying to contain the growing global production of oil as best they can. This growing global production is negatively impacting future Saudi wealth.Rightways Technologieshttps://www.blogger.com/profile/12675896663803464743noreply@blogger.com