Touching four year lows, West Texas Intermediate (WTI) light crude and North Sea Brent are creating an emotional divide. While the airlines are smiling…
The big U.S. oil companies are not happy.
Below, you can see breakeven numbers for shale. With prices sliding below $70 for WTI and Brent, high end producers will start to shrink output.
Our Bottom Line: The Law of Supply
And that takes us to a classic law of supply story. When price plunges, the quantity producers are willing and able to provide also sinks. The interesting part of the story, though, is a supply war. It is possible that more powerful OPEC members like Saudi Arabia are not trying to stem the oil price slide because they hope to obliterate U.S. shale operators.
So, while the airlines might be happy from the spillover (a positive externality), a climbing price from fewer producers and inventory depletion could soon eliminate their smiles. But that will be another supply story.