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Waiting For Goddot

crudenow:3 december 2014.

The statement of 2014: "crude price falls are temporary", says Saudi oil minister. He expects demand for crude to grow when the rebound in the global economy gathers pace. This statement is much stronger than the statement made earlier by HE UAE Minister for Energy, putting an end to wishful thinking. However, we believe that the global recovery is not an illusion, it is a delusion. Read the full article "waiting for Godot". Although today the USA released figures showing a growth of 5% unmatched during the last 11 years, but wait, starting from July 2013, the U.S. GDP is 3% larger due to a change in calculation methodology by the Bureau of Economic Analysis.Now, it includes R&D (research and development) spending (which accounts for around 2% of U.S. GDP), art, music, film royalties, books, theatre and also new items. This change in GDP statistics is not used elsewhere in the world. So the U.S. is the first to accomplish this rewriting of the GDP formula which is a very significant change., GDP = private consumption + gross investment + government spending + (exports − imports)Of course the GDP growth will be higher, but it is misleading.Well, the market bought it and took it on its face value. Also bear in mind that USA imported less oil and exported more, during the 3rd quarter plus the fact that the dollar is stronger, so the same dollar imports more goods and read more.

Also , starting from 2014 Europe changed the calculation of GDP. These changes renders GDP , fragmented stream of data, useless for any time series analysis,

De facto OPEC Oil Production cut and $60 is the Red Line

Dec.14.2014- Week 50:---

On Nov 10, 2014 we wrote that "the best decision for OPEC is to takes no decision on production cut" please see the article below. On Nov 27 2014, OPEC came out without taking a decision on production cuts to defend the crude oil prices, and as a result crude oil prices nosedived since. Now, figures show that there are production cuts, especially in the major gulf countries.This is seen from the USA crude oil imports which increased during this week, showing less crude oil from the Gulf countries, including Saudi Arabia, but more imports from countries like Venezuela, and Mexico who are hit hard by the low oil prices.

It looks that, there was before the OPEC meeting in November an understanding between the major gulf countries, that any production cut should not be announced and avoid the same mistake of 1980s by scarifying OPEC market share and encouraging more drilling and more supply and price erosion.

This time, the calculation was wisely done. Most OPEC countries, Iraq, Libya, Iran, Venezuela…. are not in a position to contemplate any cuts. Therefore, the gulf countries realized that they will have to bear the burden of any call on OPEC to cut production. So it became “Purely a Gulf affair”. “I told you there will be no cut” said Saudi minister to the reporters after the OPEC meeting which was enough to send the drillers to drop the $100 out of their calculations and think of a free fall in crude oil prices and accept the financial consequences. The signal was loud and clear and effective. Had they announced the cut openly, it would have amounted to throwing out the baby with the washing water.

What if Oil prices goes below $60 for a period? It is like asking 'what if cat laid eggs, then it would be a Hen '. Already U.A.E. Sees OPEC Output Unchanged Even If Oil Drops to $40 a barrel and will wait at least three months before considering an emergency meeting, the United Arab Emirates' energy minister said.

The conclusion is … as we said in our report “all is quiet on the eastern front”,in which we gave the reason of why OPEC was quite. The crude oil price to be defended for a while by the Gulf countries, is now set at $60 per barrel.Now, the crude oil price is not without guardian, it is not in a state of free falland the floor is $60, take it or leave it. The idea was later supported by Iran, “ Our views are very closed to Saudis” said the Iranian minister “before” the OPEC meeting , " No one should forget the -heft- of my country said CEO of Aramco in June of this year

However, for the drillers to sweat it out, prices must be pushed down even further over a sustained period before the target of the sweating begins to actually perspire. Options open to OPEC are very limited, as long as the drillers can stick it out, it will be OPEC itself who will have to "sweat it out ".Theoretically, all OPEC member countries, will try to increase export to compensate for the loss of revenue but in reality that does not work for a residual supplier unless they make substantial price cuts for a longer period. Frackers with wells close to USA oil pipeline network, as in Texas even the 50 dollar per barrel will work out fine, but those frackers in the Bakken formation, in North Dakota will find it expensive to shift oil by train The frackers are looking for a signal, which is not there; therefore they see nothing but a free fall of crude oil prices. This is shown in the candlestick graph. The market (-Open-Close) figures are too close to each other and also very close to the daily Market (High and Low) prices. “We let the market decide the price”,said one OPEC minister. Regrettably, the market is also deciding on the level of "Call on OPEC production ". The market is in a state of wait and see, and OPEC cannot save the day by calling for an extra-ordinary meeting. In fact any call for a new meeting would prolong the agony.

Already,in the USA applications for drilling permits fell by almost 40% in November, and the industry’s weak balance sheet is also vulnerability. Total debt for listed American exploration and production firms has almost doubled since 2009 to $260 billion. Low oil prices are beginning to cause debt defaults that have wide ranging consequences. Quite a few may go bust. Meanwhile a new wave of reducing the costs through restructuring and slimming, manpower cost and cancelling many marginal investments has already started to press fast forward on saving costs, but shale crash is imminent. unless they are bailed out. But rebound is more certain in the near future as fracking cost is reduced by new technics . In fact, all are now nursing their wounds , ready for the next round, with de-facto OPEC production destined to fall below the 29 mb/d and prices subject to state of Wait and See ,with The Market Gap between , High-Low-Open-Close very narrow corridor

Jabbar al-Jaf former OPEC Econometrician Analyst