EIA estimates
1. China consumption of oil end 2014 at 11Mmbopd (166MBO thus is 15 days of consumption)
2. China imports 5.6Mmbopd
3. Saudi supplies 19% of imports - roughly 1.064Mmbopd
Lower oil price does not "hurt" Saudi in the sense they have over $800B of foreign reserves available to help balance the budget. They can run on sub $50 for a long time.
So apart from slowing the rate of growth of USA/CAN shale (production will still increase in 2015 from US shale, despite the Capex reductions already signaled by CLR, COP, and many more) Saudi defends its China turf (especially since at one time Saudi supplied most imports to USA and now Canada is way ahead).
It's dangerous to assume a possibility is a certainty. Sure a bounce ought to be expected - but its just a bounce you could sell into if you wanted to exit.
The big questions are are the purported Supply/Demand "imbalance" - and whether its a few hundred thousand barrels. Demand is tepid and that can't be denied. Europe is mostly stuck in recession and China seems to be sputtering as does Asia when it comes to ACCELERATING growth in demand. Demand growth seems to be dropping (not absolute demand although that too has fallen in some categories). Supply on the other hand is growing overall (taking into account the natural decline of the large conventional projects at around 8%).
The response from NA suppliers is to reign in Capex. This DOES NOT EFFECT current production. It effects future production only and is only a SUSPENSION of future production and who knows with technological advancement this could be a good thing where future technology makes today's marginal shale quite profitable. (see EOG and their refracking program for existing wells).
Its hard to see an environment where EXISTING PRODUCTION would be shut in (I know in LNR's case their all in total cash cost is $25BoE. SSN says "lifting costs" are $29BoE - but does this include interest costs and G&A costs). The D&C for existing production is sunk cost.
However, if an E&P company had had hedges for 2015 above 2014 production, they also have the option to not extract hydrocarbons and purchase cheap oil on the spot market to sell at their profitable hedge.
IMO this means prices can stay lower for longer than we think before adjusting upwards in a far slower fashion that which they came down. The old elevator down and stairs up.
Place your bets accordingly I guess.
SSN Price at posting:
1.2¢ Sentiment: None Disclosure: Not Held
