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All is quiet on the Eastern Front!

N0V 10 2014: crudenow: The sudden increase in U.S. Shale oil production, could reach five million barrels a day by 2017, it spells disaster forThe global Market,and would leave the world awash in crude, and threatens the global oil prices.

If the oil prices are in such a danger, then one would expect the Major oil producers to wage a war and meet the challenge. But why is it all so quiet on the Middle Eastern front?

In Washington this April Mr.Naimi(the Saudia Arabia Oil Minister) commenting on shale gas and oil said: Why is there so muchTalk about shale oil now, this is not the first time new sources of oil are discovered, don't forget history, he said. There was oil from the NorthSea and Brazil, so why is there so much talk about shale oil now ? .Since then the price plunged from $ 110 to $83 per barrel.Most investors, were complaining , earlier this year, That the price needle is just not moving and yet the world is awash with oil.

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We reported three months ago that the crisis which is haunting the Middle East is camouflaging the weakness of the market.The oil supply was boiling over ,it had to blow lid .and there were talks going on to lower the prices,but All OPEC ministers ,declared "$100 as fair price".( see our past news pages)

There are limits to what the Gulf countries not just Saudi Arabia are willing to make room to accommodate more 0il supplies from other sources. Saudi Arabia has already projects to increase oil production capacity to 15m barrels a day. But in Washington this April MrNaimi said production capacity would not increase beyond the current 12.5m b/d in the next 30 years Mr Al-Falih, Armco CEO," We are ready to start producing our own shale gas and unconventional resources in the next few years," Saudi Armco chief said.

For the rest of OPEC, this situation is disastrous . None of the other OPEC countries has the excess capacity enjoyed by Saudi Arabia. Still worse,OPEC has limited options , the outcome of the next OPEC November meeting is also expected to be indecisive . While, the USA is still debating the implications of encouraging domestic oil production, and sort out the difference between energy security and energy independence,

But there is a good reason why all is quiet on the front?

It turns out that we failed to look at the market pressure gauge resulting from the very active shale oil rig boom.This activity already pushed down oil prices.Simply,the free fall in the price has forced the producers of newly found gas and oil in the USA to drill out more oil to cover their cost, the accumulated debts, and boost their stocks on the stock exchanges (see company balance sheets of the 14 largest companies engaged in shale drilling, Source: UPS);They are in effect flooding an already flooded market with their crude (see the graph of USA production).

History

This situation is reminiscent of what happened during the Reagan administration back in 1980s during the stripper well crisis(wells producing 1-to 12 barrels per day!!!),and the windfall profit gain When the rush to drill more and more of stripper wells to close the loss of 2.5 mbd due to the Iranian revolution and the Iran/Iraq War doubling oil price from $14 in 1978 to $35 Per barrel in 1981.Fueling,the stripper well boom, "The Texas Oilwell and Billy goat".

from 1974 to 1978 world crude oil prices were relatively flat. The price ranged around $14 per barrel. OPEC was producing 28 million barrels daily (51% 0f world production) and the rest of the world were producing 27 million barrels.New individuals became investors in the oil business, the rate of borrowing drove the interest rate sky-high .Thousands of new wells were drilled in Texas from 1979 thru 1986, see graph of USA rig count.click the graph to enlarge and as a result, OPEC market share of crude dropped to 15 million barrels (only 25% of world market ), and the non-OPECproduction reached staggering 38.4 million barrel. From 1982 to 1985 OPEC attempted to set production quotas low enough to stabilize prices, which made more room for the new oil barons to increase their market share. A wave of quota violations inside OPEC ended with Saudia Arabia,in August of 1985,linking their oil prices to the spot market for crude ( Net back Formula) and by early 1986,the crude oil prices plummeted below $10 per barrel . The crude oil price was fixed and brutally forced at $15 dollar to save the situation , at a time , when President Reagan lifted also oil price control.Prices on spot market reached even $ 7 per barrel on the spot market from $59 . While ,OPEC was busy imposing voluntary quotas on its members to protect the price the new oil barons were making windfall gains and capturing market shares .

That move by Saudi Arabia was the most sensible and fearless strategy in the history of the oil industry, because the collapse of oil prices in 1986wiped out many of the stripper wells barons,and the independent oil operators. They could not validate money fast enough, leaving thousands of holes in the ground, some orphaned some plugged and abandoned, with oil at the bottom of most. This was the onset of the banking crisis of the 1980's.That action resulted in the closure of most of thestripper oil fields in USA (2 million barrels daily of crudes had to be plugged).

Regardless of the wisdom behind the Reagans administration policy and Saudi move ; today we are witnessing the same situation.These new operators of shale gas and oil , are drilling more and more and the price is going down even faterAnd eventually these new oil barons will find more debt than crude and gas .

The Major oil players are quietly watching with confidence ' The Rise and the Fall of the independent operators of shale gas and oil, It is history repeating itself. If the net back pricing formula,In the stripper well crisis , 1979-1986 , forced the prices brutally down to $7 per barrels in 1986, and pushed the new oil baron out .today , the oil price ,will fall freely only if the Major oli playe just abstained from defeding the Magic 100 per barrel ".which is the the root of all the evils that motivated the new Shale drills in the first place to jamp into the oil industry fast and out faster than they the way they came in.

These new independent driller , certainly are more efficient than the majors, .Helped by low rateof interest, and getting the licience dirctly from the owners and not from investment banks , and with very low over head cost, can turn millions into billions, if worse comes to worse they follow the example of PReston Baron ( the father Of Gas Frack" who,owned a gas well of 100 feet deep in 1820s and had to drop some gun poweder in his well to free the trapped gas. The major oil companies who have to do things properly with high over head cost, lost billions so far in the shale business, Shell company is an exmpl("It is hell , shell")'.

We should realize that the structured of the oil industry has been preserved and protected in the past ,through the " unique pricing structure" of the industry which is set and defended by the Major player.this structure by itself is a barrier for small independent oil companies to have direct access to crude oil and gas.Today, the major producer are not behind the fall, but they are just abstaining from defending the price fall and they are not targeting Iran, or Russia as some media wrongly report , they aim at the new Oil Boys. However, if the Russian and the Iranian are caught in the cross fire , then that may be welcomed by some but not by the Major oil companies.It is not the question of the cost of shale extraction against the cost of conventional , it is the failure of the present price structure to respond to changes in the availability of new sources of oil and gas .

The fall in Oil and gas prices could not have come at a better time than this when most countries are experiencing an economic recession.A fall in oil price could help a quicker recovery at the expense of the oil producing countries and the major oil companies, and for sure they will not come to the rescue of the shale oil companies at this stage.It is more than likely that OPEC in its November meeting will come out without any decision on quotas

No decision is the best decision

Coming back to the next OPEC meeting,all the new shale oil operators are waiting impatiently for OPEC to rescue them by Imposing lower production quota on its members to protect the prices .They are waiting to capture more market share. The best strategy in the Medium term for OPEC and also for the major oil companies (telling grand mum how to suck egg) is Wait and see . The shale empire is falling, much like the drilling boom of 1980s. They will leave behind many holes, though a bit larger than the first boom of 1979, however not larger than the debts they have created. (see the balance sheets of the 14 major independent companies who are working in shale gas and oil (source UPS) and soon their stocks become a good buy for the majors.

But can some OPEC members stand the prolonged fall?The options for OPEC are Either /Or .Either accept the loss of market share and $70 per barrel for long time , Or $ 70 dollars per barrel for a while then back to $ 85 per barrel.The "$100 magic" , will be difficult to materalise and defend.... the Shale gas is a reality, it is global, if not epidemic, it is at least endemic.Even, india is trying it outIt is 1980s repeating itself.It will be very sad indeed if OPEC imposes lower quotas on themselves to protect the price and repeat the Mistake of the 1980s.

The best decision that OPEC can come up with in its next meeting is not take any decision... Just wait and accept ..... The free fall of prices to stop the fracking boom .

The Magic $100 per barrel

Finally,the magic $ 100 per barrel as fair price, uttered by all opec ministers during the course of this year , against others who wanted $70 as Fair Price is apparently going to settle at $85 per barrel .which is the mid range.this will stay for a while until these new shale oil barons sell out to the Major or leave with their rigs else where

But we must remember that the price of oil is just about what The Major Players want it to be.

the fair ! price will settle at "$85" ,that is 2.1 gram of gold per barrel ( .... The magic flute.. see the Golden Constant, it is remarkable that it stands at 2.1 grams of gold per barrel since 1900 see below and the graphs)

Jabbar al-Jaf former OPEC Econometrician Analyst

Opec Meeting-Ban or not to ban , in the next week