US oil prices decline over weak Chinese factory activity

“It made no sense to me that crude oil hung around $60 per barrel a few weeks earlier this year“.

Algeria is understood to have asked for urgent action, particularly on the oil production ceiling which governs the amount countries are allowed to produce. A rebound followed as bargain hunters rushed in.

“Better tighten your belts and be prepared for relatively low prices over the long haul”, he said. There are some shale oil plays for which this is true, but the costs vary wildly, according to the local geology, and can be as low as $20 per barrel. The logic behind that February projection still seems valid. But that encourages cheating, as cartel members want more than their allotted share and outsiders sell more to take advantage of the artificially elevated price.

So the Saudi strategy is to keep its own production high in order to push the the oil price down.

The worldwide Energy Agency says that Saudi Arabia and Iraq are continuing to put oil on to the market at “breakneck speed”, adding to the global oversupply.

This does one thing for the global market: it disrupts OPEC’s market share.

“The report is bearish, with the focus squarely on crude oil and the large increase in overall inventories, due mostly to a surge in imports”, said John Kilduff, partner at Again Capital LLC in New York. So they effectively abandoned quotas.

OPEC in June pumped 32.5 million bpd, a seven-year high, according to data compiled by Bloomberg.

At the same time, cheap oil is weighing previously-booming oil states like North Dakota and Texas. “Every single SAGD/CSS player [is] bleeding cash on every barrel of bitumen produced at the current WTI” prices, TD Securities concluded.

As long as prices exceed marginal cost, more (not less) production is encouraged to make up for lost revenue. An unexpected price rally in the second quarter allowed some companies to lock in profitable prices for next year and add new drilling rigs. “The benefit of lower commodity prices, in general, is a tailwind for the global economy”. KKR’s 2011 buyout of Samson left it with $3.6 billion in debt.

Even so, the administration said gasoline prices are “elevated” right now because of strong demand in the U.S. and overseas and oil refinery outages in California. The country will not increase production until “late” 2016, it said.

The US Department of Energy yesterday said oil stockpiles rose 2.6 million barrels in the week ending August 14, and reported a 300,000 barrel rise at the closely watched Cushing, Oklahoma trading hub.

While OPEC observed a slight pick up in economic demand for the second half of the year, consumer confidence is sluggish in major markets and the Chinese economy is struggling and coping with the recent currency devaluation.

Not only is there too much supply, but demand has been sluggish. Oil prices and emerging market assets took a hammering, as fears of a China-led deceleration in global growth gripped markets. Collapsing oil prices are clearly deflationary.