The global oil supply finds itself at a precarious predicament at this point in time. We have OPEC and non-OPEC countries competing with one another for market share at the expense of profitability and demand/supply equilibrium. What was once an industry characterised by $115 per barrel of crude oil is now an industry where $30 per barrel or less for crude oil is a reality. This has far reaching ramifications for major oil producers across the world.

As can be seen from the above chart, onshore Middle East producers are in the best possible position to supply crude oil at current prices. But more importantly, countries in the Middle East which form the cartel known as OPEC are best poised to withstand the price pressures being placed on the industry. Onshore Middle East oil clearly has the advantage and countries like Saudi Arabia, Kuwait, Iraq and Iran have massive stockpiles of resources to sustain the short to medium term damage of low prices. This is not quite the case with other countries which produce crude oil such as Shale oil, Arctic oil producers and oil-sands producers.

Defying Logic: Non-OPEC producers hold the line

But somehow, production is being maintained on both ends of the spectrum, as none of the producers is willing to yield to the other side unless absolutely necessary. Make no mistake about it, we have seen an increasing number of Shale oil producers shuttering as costs spiral out of hand. OPEC countries including Venezuela and Nigeria are also feeling the heat, and they would like to see prices rise as much as anyone. But of course the game is rigged. Saudi Arabia is leading the way and it is determined to engage in a medium-term war of attrition against US Shale oil producers at any cost. Saudi Arabia and other OPEC countries have long held the trump card in terms of manipulating oil markets to their own advantage. Now that Shale oil producers are a viable alternative to Saudi Arabian oil, they have resorted to desperate measures. And these desperate measures are evident in every way.

They want to squeeze Shale oil producers out of the market by running up the costs of production to a point where the revenue streams simply cannot allow operations to continue anymore. It is at that point, perhaps even later, that production will cease and lower supply will characterize the oil industry. But this is in and of itself a dilemma that will never reach resolution. If Saudi Arabia waits long enough for oil producers to leave the market and for supply to diminish, prices will invariably rise once again. As prices start rising so the number of oil producers entering the oil market will increase and this vicious cycle continues unabated. It appears therefore we are in a long-term yo-yo pattern of rising and falling prices dependent upon the number of producers involved in the oil markets at any given time. By January 2016, the price of crude oil plunged to $27 per barrel from over $115 per barrel halfway through 2014. This is beyond volatile – it is bordering on ludicrous.

That is a question that depends on which part of the US you’re referring to. If you are the type of trader who is betting on crude oil appreciating (call options), then your point of reference has to be a region in the US where costs of production are low enough so that cheap oil can be produced and profitably sold. The break-even point for crude oil producers in Texas varies from under $30 per barrel to almost $58 per barrel. This wide ranging variation is dependent on multiple factors, but the good news is that within that range are many oil producers capable of filling demand requirements at an affordable price.

These include Eagle Ford (DeWitt), Wolfcamp (Reeves), Bone Spring (Loving), Wolfcamp (Loving), Bone Spring (Loving), Wolfbone (Loving), Spraberry (Midland), Spraberry (Martin), and others. In fact, the average oil well in DeWitt Countycan continue to produce crude oil at prices as low as $22.52 per barrel. Through November 2015, this county was responsible for the production of over 100 K barrels per day. Some 67% of US oil rigs are no longer in operation (temporarily or foreclosure). The declining crude oil prices began in June 2014, but various cost-cutting measures have allowed US oil producers to maintain operations. It is strangely ironic that US oil production recently hit its highest level in over 45 years of 9.2 m barrels.

There are 9 regions which feature a break-even point of under $30 per barrel. Several of those have already been highlighted in the above text, but the graphic presents the full picture of all break-even analysis. The real issue however seems to be whether an oil well has already been fracked or not. If yes, prices as low as $14 per barrel can be justified. But of course this is not widespread across Texas or the US for that matter. Different oil companies have different costs of operations and it is within the purview of the management to decide. In DeWitt County, it has been stated that almost half of the wells drilling in 2014 would still retain profitability with oil prices trading below $20 per barrel however, 5% of wells in DeWitt County require oil prices to be $70 per barrel +. It is precisely this variability in costs of production that makes this such a highly contentious affair. This is what I see happening in the medium to long term: the number of oil rigs across the US will continue to decrease as the price is maintained at current levels or slides.

As the number of oil producers declines, so the price of oil invariably rises. Unfortunately for OPEC countries this will entice WTI crude oil producers back into the game. For consumers this is good news because it means that cheap oil is going to be a long-term reality by dint of the fact that there are so many producers who want in on it. Unless the US government limits the number of oil producers to a specific amount in order to protect the industry, we are going to see the free-market system drive prices down to low levels and keep them there.

What does this mean for the long-term prospects of crude oil as an investment? Probably not very good! However as a binary option trader you should be more focused on the short-term price fluctuations with things like meetings between Saudi Arabia and Russia in terms of cuts to oil production (then you would place a call option on crude oil), news from the US EIA about rig counts in the US (rig counts decline you would place call options or if rig counts increase you would place put options). In other words you move in the opposite direction to the number of oil wells operating!