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Higher break-even price for Saudi oil sets new normal for auto fuel

In 2003, the breakeven for Saudi crude oil was $30 per barrel. It’s now reported to be $85 and expected to rise to $110 by 2015, according to the latest MarketWatch article.

Now the really bad news from a trader‘s perspective: Seldom do prices trade below breakeven; and, if they do, not for very long. That goes for any commodity unless a competing commodity takes center stage or a new supply is found.

Considering that Peak Oil has already been reached in the world, or at least cheap Peak Oil, that also means you will never see $30 oil ever again in your lifetime; likewise, $85 and lower is probably a long shot, too, unless America wakes up and goes like a steam engine with balls-out on its use of natural gas, thus upsetting the supply-demand scenario.

For the record, there are indeed alternatives to oil like coal and natural gas. America has lots of coal. Coal, unfortunately, is not clean despite the “clean-coal” ads on television; and it cannot be burned directly in automobiles.

Natural gas, on the other hand, can be burned directly in vehicles, especially trucks. Furthermore, it is plentiful in America, but the auto industry has somehow shot itself in the foot by selling its soul to the electric-car phenomena which must be subsidized. Go figure, unless we use nat-gas for the grid and everyone buys a subsidized EV.

By definition, a “break-even” oil price defines the amount of money the Saudis must make from each barrel of oil to avoid fiscal deficits. And word has it that a higher national debt would jeopardize their fiscal soundness by requiring the Saudis to take on more national debt or risk drawing down their sovereign wealth funds which have been accumulated over many years.

What a novel idea, though - avoiding fiscal deficits! So, that means we in America are subsidizing American debt AND the Saudi spending spree.

And low oil prices means a Saudi failure to fund new commitments which could lead to domestic spending cuts, which could further lead to social and political unrest. Read war here. So that reads like damned if we do; damned if we don’t!

Oil Futures Monthly Chart

Now that we know the fundamental perspective on oil thanks to MarketWatch, let’s review the oil futures charts to find support and resistance levels.

Although I have used the monthly chart to see the most history, be apprised the 200-day moving average, the standard measure for trend bias by market technicians, shows oil trading at 100.54, above the MA200 level of 90.75.

On the upper end of the monthly chart, we see 147.27 high in 2008. On the lower end, we see 33.20 during the extreme swing of the global economic crisis. Since that time we see oil trading above that mid-point of 90.

We also see price support at 67.10, the monthly low of May, 2010.

Of course, oil can and may trade to that level again. However, based on the fundamental report by MarketWatch, the probability of that happening is low; but if it does, it won’t trade there very long.

It’s also interesting to note the February, 2011 low of 83.85 is just below that break-even price of $85.

And while we honor our fallen military veterans this Memorial Day, I would hope our government leaders would make the right energy choices for America so we don’t have to constantly be at the mercy of foreign powers for our own energy needs, including our military.

Full Disclosure: Frank trades oil futures but not at the time of this report.

About the Reporter: After 39 years in the auto industry as a design engineer, Frank Sherosky now trades stocks, futures and writes articles, books and ebooks via, but may be contacted here by email: [email protected]

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Chris (not verified)    May 30, 2011 - 8:34AM

Great time to be short oil. Heading into a soft spot for the global economy. I love articles that say it is different this time. Break even assumes that OPEC can control demand. Oil will be at 30 bucks within the next 2 years. Really given historic lows in demand right now and historic highs in supply no real reason it should not be there right now. Besides do you really think if gas prices sit at 5 bucks a gallon the world won't convert to natural gas? What will be the price of oil when we make that conversion?

Frank Sherosky    May 30, 2011 - 9:27AM

In reply to by Chris (not verified)

I can agree with your short of oil in the short term from the recent peaks. However, the Saudis play great poker like the Chinese. A recent call by a Saudi prince for lower oil doesn't agree with calls today by Goldman-Sachs predicting $5 gasoline this summer. That won't happen if oil goes to $30; plus a drop to that level seldom if ever happens in a few months; only when gasoline prices rise and demand curtails; an unlikely scenario with China and India demand.

You say OPEC cannot control demand. Well, they can in the short run if they control supply by throttling it and the price wisely; hence, the Saudi prince's call for lower oil prices, which I suspect may be a smokescreen. Of course, they cannot control it in the long run; nobody cannot despite all the efforts. Too high of prices for too long by the Saudi's hurts demand and their internal agenda. They want gradual price rises and thus price stability. It's the rise and fall shocks that kill them.

They know nat-gas is on the horizon, too; but the American auto industry has opted to follow the other path - full electrification. It's disconcerting to see Honda as the only auto manufacturer in the U.S. with a viable nat-gas vehicle for the general public.

Frankly, I'd like to see America take the lead with nat-gas automobiles as well as trucks. Imagine the effect on oil then! It may drop in the short run until China and India ramp up their auto production; for they are potentially a bigger auto market than America, and will have a greater impact on oil demand and thus price.

Thanks for the respectful comments! Great discussion.

Frank Sherosky    May 30, 2011 - 11:09AM

To the gentleman who wrote the critical email about the term "balls out" within the article and thinks it is inappropriate by stating, "What place does gutter talk have here?"

FYI: It's a steam engine term, where the metal balls of the throttle operate under centrifugal force. When the balls are out, the machine is operating at 100%. In this case I was careful to explain within the article for those who may not be aware of that fact.

Anonymous (not verified)    June 2, 2011 - 8:22PM

my question is if Saudis jump the price of oil up to 100$ a barrel why do we pay 100$ a barrel for oil drilled in the US???????????????????? they sell oil at high prices but they pay 50cents per gal for their gas. they say 80% used in the US is from the US but we pay almost and in some cases 4$ a gal . also why is oil drilled in the US called world oil

Drake Titusville (not verified)    June 5, 2011 - 2:12PM

Peak Oil means a thousand times more problems than just pricey gasoline.

Today, in June of 2011, there are 7 billion sets of hands cupped upward into the air in anticipation that today's allotment of oil will be filled for them. And today it probably will for all 7 billion of them. But if Peak Oil kicks in, then tomorrow perhaps only 6.3 billion will get their daily allotment while the other 700million get turned away. So, some will get to drive, and others will have to want and come back the next day to see if they can maybe drive then. But beyond just the automobiles ........

Peak Oil means not all of the plastics manufacturing plants around the world (many of them in China) will have access to the needed shipment of the petroleum feedstock that they ordered last month I order to convert that feedstock into plastic.

It means an entire highway department somewhere doesn't get a delivery of hot asphalt for the day (or the week) because there wasn't enough asphalt coming out of the bottom-end of the nearest oil refinery this time around to satisfy the asphalt orders of all the different DPW's in the region.

It means a farmer cannot plow his field because he has no diesel for his tractor this week.

It means a crop dusting pilot cannot spray some other farmer's field with pesticides because there is no aviation fuel available in his region this week.

It means a pharmaceutical manufacturer cannot ship this month's supply of latex gloves to a hospital because there was no plastic latex available this week for them to synthesize the gloves into existence.

It means the mayor of a mid-sized town cannot supply the needed fuel for all the police cars, fire trucks, ambulances, school buses, sanitation trucks, and other municipal vehicles in that town because their regular fuel vendor came up short this week on bulk deliveries.

It means a regional electrical generating plant which runs on diesel cannot supply enough electricity for the whole region because they didn't get this month’s diesel delivery, so they must now stage "strategic load sheddings" (pre-planned brown-outs staggered throughout the day) upon different parts of the grids they service.

It means the just-in-time (JIT) trucking system which endlessly and reliably delivers food and goods to the many thousands of supermarkets and retail stores across the country will start to become tragically unreliable as truckers wait for days at a time at truck stops across the country for the next tanker load of fuel to be delivered to the empty pumps.

It means perishable food will sometimes arrive at the market rotten because a trucker wasn't able to keep the refrigeration on in his refrigerated tractor trailer for the full duration of the trip.

It means "up-stream" parts manufacturers that normally create sub-components and ship them to "down-stream" assembly plants will come up short in their ability to fill orders for their "down-stream" customers.

It means those "down-stream" assembly plants, where the workers normally put together perhaps three or more different sub-components purchased from multiple "up-stream" manufacturers to complete a finished product will have substantial down-time waiting for all the needed parts to arrive from the no-longer-reliable “up-stream” plants, and also have to wait upon the no-longer-reliable trucks.

It means sporadic shortages of vital goods.

It means half-empty supermarket shelves and half-empty big box-store shelves.

It means parts and supplies needed for cars, plumbing, electrical work, roofing, carpentry, telephones, appliances, electronics, computers, etc, will be on perpetual back-order.

It means certain key medicines will start to become scarce.

It means a domino effect of financial mini-collapses of whole segments of certain industries.

It means a domino effect of financial mini-collapses of whole regions of the USA.

It means even the ability for a given municipality to keep their sewage treatment systems going could very well be threatened.

It means the spread of disease, the overburdening of under-stocked hospitals, the shut-down of power grids supplying those hospitals, the failure of diesel-run emergency backup generators that are supposed to help keep those hospitals online, and an overall downgrading to our quality of life.

To claim that we will simply switch over to natural gas misses the importance that oil plays to so much else in modern society. Oil is the key to the entire technological platform holding up our whole civilization. And that claim also overestimates how much natural gas we currently have in the ground, and also overestimates our ability to suddenly triple how much we are able to take from the ground each day. And worst of all, it assumes that converting to natural gas whole segments of deeply-embedded and many-generations-old societal infrastructure will be as quick and effortless as changing a few light bulbs, when it will take easily 10+years and trillions of dollars.

Nani Kinunc (not verified)    August 25, 2011 - 5:32AM

A war affecting worldwide oil industry.The rebel assault on Tripoli Sunday, which overthrew Libyan strongman Gadhafi, could soon lead to lower gas costs in the U.S. and abroad.Confusion remains, however, as to the extent of the rebel victory. Price control amidst challenging economic situation.

Trevor (not verified)    September 21, 2011 - 4:30PM

Most of the cheap oil has already been pulled out of the ground. At the same time you have that Idiot Bernanke printing dollars like crazy. What you think is gonna happen to the price of crude oil in a few years time. You thought $145 oil is bad, you just wait.