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PART 1: Oil Argument Starts and Dave Makes Wildly Ridiculous Claims With No Backing

it all started with Roger sharing an article on Saudi oil production cuts and Dave said "that could hurt the economy a lot" which triggered me arguing that shale production would keep increasing as prices increased which would keep a lid on oil prices.

Dave: Shale is more expensive tho. Any less supply means higher prices"

Jason: shales price isn't above the current price so they keep producing more as prices go up they are already profitable on each barrel they match supply reductions with more output and they are very nimble, can spin up and down and build in months not years"

Dave: "You don’t think they will raise prices to meet demand?"

Roger: "the prices were very low....its really hurt a lot of the large companies they are forced by the markets to collaborate"

Dave (confusing point #1): "Maybe Russia and Iran economies will start buying more things again? Raw materials. Those currency valuations might increase from their oil output"

Roger: "correct me if im wrong Jason, but i believe the saudis usually dont make these concessions on output...it is a pretty huge signal"

Dave: "Even if it doesn’t effect the US directly, prices for everything aka inflation will rise"

Jason: "only if oil prices rise, anyways it's conjecture, we'll see but I think it's capped no matter what OPEC does [because of shale]"

Dave (what really set me off): "It’s not all because of shale. It’s because a few years back the Saudi’s helped us with Venezuela Iran and Russia.

Jason: "huh?? what deal?"

Dave (here's where I go ballistic): "The deal I guessed exists. I’m pretty sure I’m right and I haven’t even done any research. It just is what is obvious."

Jason: ok let's hear the argument because it makes no sense

David: Nah not right now


PART 2: The Real Discussion

Dave: Saudi’s are #1 producer of oil. It’s also the cheapest form of oil US is #2 producer. Saudi’s are strong allies. We sell them military hardware. Back in 2009 they started raising production drastically

Jason: we produce more than anyone, happened last year, we became #1 as a result of shale, anyways this is all irrelevant. our increasing production of oil is a direct threat to 90% of their economy we have no oil production deal with them, i guarantee that this is the worst thing that has happened to Saudi/OPEC in their entire oil production history they controlled the market for a century and now they dont

Dave: Well, we entice them with military hardware, And keep the regime in power

Jason: entice them to do what and what does that have to do with oil prices and OPEC/Saudi output (hint: nothing)

Dave: How do you know?

Jason: the same reason you think they have a deal, intuition and more importantly, what is this deal and what does it have to do with oil production/output they have no power over russia/venezuela and minimal effect on Iran all 4 are linked in their desire to have oil prices higher

Dave: Yes, agreed

Jason: so that has nothing to do with the US. their oil production cut is a move to boost oil prices, that's all

Dave: They have more money and their economy improves more relative to the US

Jason: but they've been doing it for 4 years and that has nothing to do with these other countries and it only works if prices actually go up every other cut they've made, shale has increased production and drilling and kept a lid on prices

Dave: Prices have been going up

Jason: yes, barely and that will continue but each increase in the price will spur more and more shale this is not something new its happened multiple times in the last 4 years and there's no reason to think this time is any different shales breakeven is $25 or something, each incremental dollar over that is more impetus to produce

Roger: yah this discussion on energy production is difficult with all these factors, before introducing military, diplomatic issues prices have been going up but crude oil hit huge lows several years ago in 2016 there were substantial bankrupcies to oil and gas companies....not mainly due to low prices but that played a major part

Dave: shares an article saying Saudi is inking $50b in oil deals with the US

Roger: Jason to your point: shares an article saying OPEC chief urgers US shale producers to cut output

Dave: I think the cuts will be good for red states bad for blue states

Roger: overall - my reasoning on putting a position in RDS - royal dutch shell is due to the overall trend in increase prices, their huge upstream diversification with oil and natural gas production and their solid retail structure (gas stations/refinery systems) Jason isnt as bullish as i am


PART 3: Demand

Dave: Everyone still needs oil it seems solid

Jason: yes solid is one thing but prices going up is another which is what im arguing against and again, what do those $50-100b worth of oil deals have to do with Aramco's decisions to cut output thats politics/business, unrelated to the oil price market and their recent moves

Dave: We can agree oil prices, given the increase demand, CAN go up right? You are saying that this particular case won’t make it go up?

Jason: before i answer what is making demand go up?

Dave: Increase in cars, consumption, eating out, travel, factories, etc etc etc

Roger: emerging market increase consumption

Dave: Especially in developing nations And they all seem a decade or more away even with the huge investments in solar

Jason: yes but all developed nations are decreasing oil usage many predictions for peak demand are in the next 5-10 years

Dave: agree with you 10+ years I mean China is trying to kill coal right now

Jason: ok so yes demand is still going up but wont be forever, at least not for the medium term future

Dave: I think I’d be surprised if everyone can afford or can drive electric in the US within 10 years. Maybe electrics will be 50% by then. At best.

Jason: lets assume you are right and its 15 years what im saying is that is irrelevant to the current price situation demand is only one side of the equation Shale has shown no limit to how much it can produce and that is why im saying it will keep prices down or keep price growth very slow, like it has been over last 2 years

Roger: i think shale will put a cap on prices

Jason: ya, basically

Dave: You are saying supply will keep increasing because people will invest even more?

Jason: yup, until they tap out, its capped Shale is not even near full production yet and there's tons of shale production areas that are idling just waiting for prices to unstick as soon as they move they start production and supply bumps up quickly putting a quick cut on price

Roger (great theory): but the trends to me are that prices will rise and oil/gas companies are working together more as a response to these substantially low prices

Dave (a great point): In the short term, wouldn’t you expect to see an increase in prices though? Like one lasting 6 months?

Roger (exactly what we are seeing now): once it hits a certain price level.... participants will start participanting,...go against their deals

Jason: i dont know enough about the nitty gritty details but it depends a lot on the amount of idled shale production, which I believe is large

Roger: my prediction is that shale oil, crude oil prices and natural gas prices will rise.... many market forces signaling this trend...thus raising increase investments, on top of that the large companies will capitalize from the recent bankruptcies of the hundred plus companies the thing thats hard for us to factor in until after the fact.... and is a big wild card are the huge investment funds and capital that puts large position or bets in oil/commodity future contracts, etf, companies....

Steve (finally joins the fray): Im predicting oil going down short intermediate term We r one disagreement in the middle east from reneging on the supply cut deal And nat gas has been dead forever price wise

Jason: nat gas is never going back up imo, there's an insane amount of new nat gas available and more coming online and nat gas supplies are predicted to be going out 400+ years unlike oil which will run out in 100 or something and Roger that's totally true, price of oil isn't entirely determined by supply/demand speculators and anyone who is hedging will be changing the price and @Steve you mean OPEC countries internally renegging on supply cut deal? nothing to do with US production right? if so, agreed thats one way prices can change for sure


PART 4: Geopolitical

Dave: shares article saying Saudi is ceding market share and how thats good for US oil producers

Steve: It does if they drive prices down Shale isnt cheap to do

Jason: shale production price is $25-$40 depending on where it is thats not Saudi cheap but its relatively cheap "Saudi oil ministers want higher oil prices in preparation for a partial IPO of state oil giant Aramco." we'll see if they get what they want, its a shitty game they have to play, they are fucking their countries finances for the IPO

Steve: And after the ipo They can slam it down

Jason: yup and its not even clear they will get the price increases they are going for "I just cannot think of another reason for Saudi to walk away from lucrative business in China and India except a desire to support crude prices." there is no reason for them to be doing any of this, its not US lead and has nothing to do with any "deal" [what Dave was referring to] other than to increase prices in the short term

Steve: They want to hurt iran too

Jason: if that was a reason they would have done it earlier at any point their production costs are barely above their own

Steve: That is one of their key points Hurt iran

Jason: if they want to hurt iran then they should let prices tank 🙂

Steve: Sauds still have lower cost points

Jason: yes, barely


My Conclusion

Jason: also my entire argument re: oil summarized in this blurb about the last OPEC cuts

"Russia’s Rosneft, for example, anticipates shale oil output will increase by about 1.5 million bpd in 2018, close to the entire cut targeted by OPEC and its allies, including Russia5. Certainly OPEC’s production cuts announced last September failed to encourage a recovery in prices, with output from US shale producers surging on the back of reduced operating costs."

^^ this is exactly what happened except Venezuela failed and cut 1m+ bpd of production which ruined the entire effect of shale increases. So basically what I predicted came true but prices still rose because of an unrelated geopolitical event. Aka nothing to do with what Dave argued and his phantom "deal" which is still unexplained and makes no sense :) and they are very nimble, can spin up and down and build in months not years"

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