The Doha Dilemma – Prolonging The Agony Deeper & Longer
By Tyler Durden
Our analysis show that more than 3 mb/d of liquid production helped by US$55.5bn in credit facilities may be at risk as the spring re-determinations starts in April. It all comes down to the price deck used for reserve valuations. A 50 per cent increase in oil prices from mid-February thus provide ample ammunition for shale companies arguing their credit facilities should not be cut too much.
Acreage would have to be shut in; producers would have to consolidate or fold; with impairments felt across the US board.
However, at $45/b (probably nudged above $50/b on forward expectations), not only will these players get another six months credit lifeline prolonging the ‘market rebalancing’ agony, the Fed / White House will be pressing banks / lenders extremely hard again to keep the tight oil party going given that gets them all the way to November 2016 US Presidential polls. In the so called ‘shale vs. sheikh’ battle, OPEC is talking the market up at the exact time when it should be letting prices collapse.
Make no mistake, the race to put shale pen to refinancing paper before 17th April is now categorically on in the US, before the creaky Doha floor potentially collapses. By looking at speculative positions in the WTI market it is clear the recent rally has been unconvincing. Long positions hardly budged as prices rallied; coincidently with shorts being covered at an unprecedented pace. This was nothing more than the worst possible timed short squeeze. As the rally now comes to an end, expect prices to drop conspicuously, just as banks make their redetermination decisions on US$40 – 50 oil as compared to US$20 – 30 one month hence. Adding insult to OPEC injury, a flattening contango (we did say longs were unconvinced didn’t we) is destined to flood the market with stored crude, pushing prompt price down just enough to incentivize renewed inventory builds repeating the pattern ad infinitum. Killing shale softly is not the way to go. Aim for $10 /bbl and get the V-shaped recovery that just might save marginal OPEC countries from internal havoc. 
And that brings us to the final point which ultimately leads us onto longer term OPEC post-Doha ‘strategy’. On the one hand, OPEC already showed its interim hand from February meetings that it’s largely unwilling (or unable) to decimate prices below $20/b by increasing volumes to kill US shale. It’s the only chance the group has to orchestrate a classic ‘V shape’ recovery; buying more time to get fiscal houses in order back at elevated prices. Rather, what the freeze discussions essentially do, is make sure if US shale won’t ultimately budge at $40/b, it ensures a long and painful ‘U shape’ recovery where more fragile OPEC producers start blowing out instead on the back of depressed prices.
Whether the likes of Venezuela, Nigeria …read more
Source: The Doha Dilemma – Prolonging The Agony Deeper & Longer
