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Oil Prices Keep Falling

December 2, 2014

For the past three months, oil prices have been falling sharply – leaving huge implications for not only the U.S. energy market but the world marketplace.  However the events of Friday can possibly continue to send oil prices to tumble.

On Friday November 27th, OPEC – a cartel of oil producers that includes Saudi Arabia, Iran, Iraq, and Venezuela – met in Vienna.  Prior to the meeting, critics of OPEC and investors have been clamoring for OPEC to cut production in order to stabilize the falling price of oil.  At the meeting however, the members of OPEC could not come together and agree on how to respond to current market situation.  While OPEC in effect has chosen to “do nothing,” Saudi Arabia has continued to maintain its level of production despite the waning prices.  This is their attempt to keep their current market share.

The falling oil prices is detrimental to the U.S. shale boom.  When oil prices rose to highs of $100 per barrel between 2011 – 2014, oil companies in the U.S. suddenly found it profitable to extract oil from harder-to-drill areas.  They began employing fracking and horizontal drilling to extract oil from shale formations in North Dakota and Texas leading to boom in “tight oil” production.  The U.S. has been able to add an extra 4 million barrels of oil to the global market since 2008 and even began the world leader in liquid petroleum production, beating Saudi Arabia.

However, with the rising oil prices this could affect crude extraction operations in the U.S.  About 4% of U.S. shale projects need a crude price of $80 per barrel or higher in order to remain afloat.  With the current oil prices falling to $70 per barrel and even lower level, this is disconcerting problem.  But many projects in North Dakota’s Bakken formation are profitable so long as prices are above $42 per barrel. With OPEC’s indecision to cut production and the continued tumble in oil prices – we’re about to find out how vulnerable the US oil boom is to low prices.

Below is a 1 year chart of WTI crude.  The fall in prices began towards the end of August and fell sharply in this past week due to the OPEC meeting.