The full article is here-> http://www.daily-times.com/story/money/industries/oil-gas/2017/08/27/hedging-threat-and-venezuela-oil/580510001/
“How can Saudi Arabia and OPEC behind them strike a second blow against shale oil producers in the Southwest? The first was the 2014-2017 price and market share war in which they raised production to put the higher cost Americans out of business.
This was partially abandoned at Algiers in a reversal to opt for a higher price for crude oil from $26 to the high $40 range. The marketing tool is lowering their production by 1,800,000 barrels per day.
The second blow is process.
The Saudi Arabian Oil Ministry and its state company, Saudi Aramco, negotiated in London with Glencore (world’s largest trading combined with mining), banks and hedge funds to see if they could reduce the liquidity necessary for American oil and gas shale producers to hedge forward to obtain a higher price.
Without access at only financial transactions costs to the “strip” or the forward price of oil at at least 10 percent higher than current prices “spot,” WPX and all the Permian-Delaware significant producers would not have survived the recent downturn in their current form.
If there is no difference between the price oil today and September 2018, which is called the “contango,” this would be a problem of liquidity – no entity taking the other side against the oil and gas producer on a contract. No cash would be bet against the oil and gas producer who sells forward one year. One side, for example, sells 70 percent of 2018 oil production at June 2018 prices in the present while the other side buys or covers, as the counterpart, the contract.
Saudi Arabia correctly followed data which demonstrated that despite the decline in the price of oil from $100 in 2014 to a low of $26 per barrel, oil producers hedged against the fall and largely survived. Without hedging the producers would have negative cash flows and serious problems of debt to keep going.”
Dr. Daniel Fine, associate director of the New Mexico Center for Energy Policy and policy lead for the New New Mexico Energy Policy, explains how an oil price war led by Saudi Arabia impacts the prospects for drilling off the N.C. coast. Fine offered these comments during a May 21, 2015, speech to the John Locke Foundation’s Shaftesbury Society. Video courtesy of CarolinaJournal.tv. Access full-length videos of JLF presentations here:
Editor’s note: This is an abridged version of Daniel Fine’s column. Read the full version in The Daily Times’ Energy magazine, which will be available in the April 27 edition of our newspaper and online.
For the complete abridged article use this link–> http://www.daily-times.com/farmington-opinion/ci_27941975/column-mexico-and-shale-oil-north-america-strategy
Since the Organization of Petroleum Exporting Countries has imposed a price war upon Southwest shale oil producers, there have been efforts to come up with a counter-strategy. Since San Juan Basin oil is light and tight, is there a market in North America for it?
Projects are underway for the export of natural gas to Mexico for Liquid Natural Gas conversion for overseas markets primarily in Asia, but, until now, no parallel strategy surfaced concerning oil. Mexico is prepared to take the ultra-light crude oil for blending purposes into its Mayan heavy and sour.
So far, the discussion is over Mexican ocean-based refineries taking 100,000 barrels of our light oil in a swap for 100,000 barrels of their heavy for U.S. East Coast refineries.
The swap can be a physical exchange with tankers delivering to Mexico and picking up cargoes of Mexican heavy.
Any heavy Mexican oil purchased by U.S. refiners displaces foreign overseas imports from Saudi Arabia and Venezuela. This emerges as a North American counter to the OPEC oil price war. Now Mexico and the United States have a common market interest in a swap of oil between them. There are historic and strategic origins that surround the swap transactions. First, the change in Mexico towards oil and gas ownership and investment is itself a significant, if not radical, shift from exclusive, anti-foreign government control towards an opening to private foreign exploration and production companies. American companies are prominent among applicants to the first auction. PEMEX, Mexico’s state monopoly company is prepared to take partners who deliver capital and technology to increase production.