I believe I read that original article which was written by an economist from the CME Group. Apparently there is a cost to production which may be higher in the US than in the desert overseas, but these domestic producers can continue to sell at a loss because they are still producing cash-flow to the business to cover debt. If they stopped pumping, they would have no cash-flow to cover debts and lose more money. I have a feeling producers here as well as in the middle east are not concerned about keeping prices up and will continue to bolster production as fast as possible. It may be a race to the bottom.
That doesn't make much sense and probably is a manifestation of the sunk cost fallicy. You don't get any cash flow by paying someone to take your product, first off (I know the price print was an error, but presumably your going off the original idea). Second, if your marginal production cost is x and you're getting something less than x, you have negative cash flow. The only way you could figure this is if you're somehow taking your sunk costs into account, which would be a pretty rookie error for an economist.
%%% Good point; that's why grocery stores do small loss leaders, maybe small loss leaders every 7 days. Another problem for the bulls, oilve oil tastes much better than TX TEA, or sour crude; parabolic stop + reverse is still a sell signal, donchian channels favor sells. NOT a prediction.
I think you're missing my point. If you're paying someone to take your product, there is no cash flow at all, you're paying them! You can't survive longer, you'd be better off stopping production now in all cases if you have to pay someone to take your product off your hands.
I read somewhere a while back that the Saudi's had a cost per bbl around $6. That's just for the oil, and if they had a normal economy that would be fine. They've since subsidized most of their gov't expenditures from oil revenue. Citizens pay no taxes, gasoline was about 15 cents a gallon but I hear it's now around 60 cents as they've had to implement some "austerity" given the lower income from oil. Health care and college might be free also... They would normally cut production when prices dipped below $40, but they wanted to bankrupt the frackers in the US. If you think they aren't hurting, just look at the massive selling they've undertaken via their sovereign wealth funds in the past month or two. So...to your discussion (Bruce and Sig) - the way I understand it, their cost is about $6 yet they are on the hook for laying out about $40 to keep the gov't running without having to tap reserves. At $26, they're still positive cash flow by $20 but $14 short for the bills they have to pay. Seems like the plan is to tap cash (stock) reserves for a while, then start charging the citizenry for things that have been free - or cut back services. I'm not sure how the North Dakota guys are still going. I thought their costs were north of $50 bbl.
What if you have to pay someone else more $ if you stop pumping? Like, if you have contracts that result in penalties of $5/bbl if you stop pumping? You'd pump and sell at -$.50 wouldn't you?
Sure. No indication that's the case here, not sure why anyone would sign a contract to sell for -.50 with a $5/bbl nondelivery penalty in any case. I suspect the whole thing is part of a bigger deal that makes more sense seen as a whole.
I was surprised to see the negative postings when they happened, but it doesn't surprise me there would be sellers. You sign a lot of take-or-pay contracts at $100/bbl because you never plan to stop pumping and when oil crashes the "pay" portion of the take or pay lowers your production break even under $0. There are a whole bunch of scenarios in the realm of plausibility that would make you hit negative bids instead of paying other contractual penalties.
Just for my own education can you paint a scenario where that happens? My understanding, which could very well be wrong, of take or pay is that the buyer agrees to take, in this case the oil, for price $X or if they decline to take it they pay price $Y. Assuming the $-.50/bbl company had a take or pay contract with another company at $100/bbl take and $5/bbl pay, if they don't take they pay $5.00/bbl. The $.-50 company gets the $5.00/bbl for doing nothing, even if they close up shop and have a marginal cost of running the company of $0 they still get the $5.00/bbl. So it doesn't make sense why you'd then cut the $5.00/bbl you were going to get for sitting around the house in your underwear and turn it into $4.50/bbl and probably even less because you still have operating costs by signing a stand alone $-.50/bbl contract. Or any contract below your marginal cost of production, which may be $6-$50/bbl? I've never been part of a take or pay contract and admit my ignorance on them, which is why I'm asking how it would work in this case?