Crude Dives to $30, a Whopping $20 Below Cost of Production

Mish

Crude futures opened down a massive 31% today. Prices have recovered a bit, but price is well below cost of production.

Saudi Arabia and Russia started an Oil Price War on Saturday.

The carnage was far worse than expected. Oil futures opened near $30, down a record breaking 27%.

Crude 15-Minute Chart

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That's the biggest crash in history.

The S&P 500 and Nasdaq futures are down over 4%. Halt limits just hit.

US Cost of Production

A Dallas Fed May 2019 report highlights the Average Cost of Production.

The average breakeven price of oil has fallen 4 percent (or $2 per barrel) over the past year, to $50 per barrel, according to the latest Dallas Fed Energy Survey. The $50 top-line figure masks some important differences. Areas such as the Midland and Delaware basins in the Permian Basin, hotbeds of shale activity, are routinely lower on average than other locations. There is also variability among operators; within the Permian Basin, for example, individual responses to the most recent survey ranged from $23 to $70.

Bloomberg New Energy Finance’s breakeven prices in the Permian range from $46 per barrel in Loving County to $87 per barrel in Reagan County.

While market participants may differ on how much oil is available at a given price, they are all aware of the overall trends. These represent strong forces that should keep long-dated futures prices from rising too high or falling too low.

Given current market prices, U.S. shale production will continue growing this year. Indeed, a recent report by the International Energy Agency highlighted that shale production is likely to be a major driver over the next five years.

Time to Reevaluate

Drillers and frackers that borrowed heavily and are dependent on higher prices to pay interest are now in serious trouble.

Oil exports? Uh... forget about them.

Demand is crashing with people working at home and refusing to fly.

A lot of leveraged drillers and crude suppliers dependent on prices above $50 will see a credit implosion.

That's just a start.

Deflationary Outcome

As noted previously, a Very Deflationary Outcome Has Begun.

Blame the Fed.

Deflation is not really about prices. It's about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

See the previous link for discussion.

Liquidity Crisis in Energy Space

What better time than now to blow up US oil producers heavily in debt as an act of revenge?

The liquidity crisis will quickly spread far beyond energy.

Mike "Mish" Shedlock

Comments (44)
No. 1-15
numike
numike

Trump’s Coronavirus Press Event Was Even Worse Than It Looked
His remarks at the CDC on Friday were misguided, misleading, and show how misinformation could hamper Covid-19 containment efforts. https://www.wired.com/story/trumps-coronavirus-press-event-was-even-worse-than-it-looked/

Max67
Max67

Mish, Is this the start of a commodity crash? Will gold prices crash soon?

Freebees2me
Freebees2me

Bye, bye commodity complex.....

MiTurn
MiTurn

What about North Dakota? Sounds like an epic crisis in the high Plains.

Greggg
Greggg

Depending on who you listen to, BC Canadian oil sand break even is anywhere from 50 - 80 dollars/barrel. I wonder if they are going to subsidize it even more now? Another Trudeau fail.

Mish
Mish

Editor

"Mish, Is this the start of a commodity crash? Will gold prices crash soon?"

Gold does best in deflation - Fed and gov't response to it is the reason

It's a bet on lack of faith in central banks and governments

Realist
Realist

Putin is pissed at Trump’s interference in the Nord Stream pipeline AND the US fracking industry. This is his payback to the US.

Russell J
Russell J

This situation as a whole is turning into the definition of a perfect storm. The wheels are already in motion, there's no stopping this now. Kinda hard to believe it's real...but it is. Buckle up!

Sunriver
Sunriver

Moneterism has failed. The dirty secret of Moneterism is found in its last chapter. An exponential increase in debt. Debt that ultimately consumes the entire economy. Our children will certainly thank us for this disaster.

Herkie
Herkie

HOLY shit monkeys, Dow futures now down by almost 1,300 and oil futures down 25%. RBOB down to a buck 12, jesus there are going to be massive historic margin calls. S&P is going to get hammered not just because it is down 5% in overnight trading but the volume is huge.

And maybe the most important is that the yield curve is inverted again with the 3 month at .48% and the 10 year at .478%. I predicted the half point cut before the March meeting of the FOMC and another half point at the meeting on the 18th, I am now thinking we will see another half point cut this week. They will have zero options with a new inversion. We could be well into negative rates by the third week of March. The 30 year yield is now below 1%. That is not going to end well.

The Aussie is down to 64.5 to the buck remember they also cut rates in lock step with the US, their markets are in chaos at this point.

I think we are seeing truth laid bare at this point, even in the GFC they did not see this kind of absolute shambolic route in a day.

This may well be what we contrarians have waited years for, now, it is time to predict their response to it. I have a sinking feeling that limits on freedom of movement are going to be part of it and with all the emergencies declared national guard units and the military will be out enforcing that. My state Oregon just declared an emergency today, so did New York, the first two cases of CoVid19 were announced in the county today. God help an old smoker like me with death rates that are going to mean I will be triaged out of any care at all.

In the time it took me to write this oil futures are down now 30% not 25.

Stan88
Stan88

Who knows how low crude will go. Hey, if we can have negative interest rates why can't we have negative crude oil prices?

stillCJ
stillCJ

Editor

Dow futures are enjoying a dead cat bounce off limit down at the moment. Crude has been down to 29.71, no limits on crude futures.
Whoops! Oh my, crude under $28 now, down over $13.

stillCJ
stillCJ

Editor

The cure for low prices is: low prices. But these things take time.

KidHorn
KidHorn

If oil bond prices crash, who knows what will be triggered. Expect a lot of calls being triggered in the oil complex.

William Janes
William Janes

Production costs per barrels which is a cost accounting calculation is not the same as cash flow required to keep the doors open in a business which is usually much less. Also as I have said in the past, Debt is not a sacred relic. Banks can roll loans over and use all sorts of techniques to keep someone in business as long as they can make an interest payment. These drillers in Texas and N. Mexico are quite adept at getting costs down.


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