One question everyone is asking is “So, how high does the price of oil have to be before we see recovery?” Well, I don’t know. If I knew that, I would be on my now nonexistent 100 foot yacht off the Coast of Tahiti right now scuba diving and drinking beverages served out of cups carved from tropical fruit with little umbrellas in them. But some recent articles give us some insight that may be useful.
Different Plays Different Costs
The first question that has to be answered is how much money does the barrel of oil pumped out of a field have to be worth on the market just for the oil company to break even? Well, it obviously depends on the play because so many factors affect that question. Is there a pipeline close by? Are there useable roads? What type of play is it (traditional vs shale vs offshore). Where in the world, literally, is it?
In other words, there aren’t easy answers. However, according to a Bloomberg article published in February of this year, oil production in eight counties across five plays in Texas and New Mexico remain profitable when WTI falls below $30 a barrel. (http://www.bloomberg.com/professional/blog/break-even-model-cracking-the-shale-enigma)
However, that number seems way too low to me. Analysts disagree with what the break-even point for various basins are; however, most put the breakeven in the Eagle Ford between $52-$59 a barrel (with estimated breakevens different depending where in the basin the well is located), while the Bakken in North Dakota has a breakeven of $67.00 per barrel. So, don’t take these numbers as gospel because so many do disagree, but it gives you some idea. (http://www.thefiscaltimes.com/2016/05/29/Why-Oil-Prices-Are-Moving-Higher)
Similarly, Saudi Arabia claims they are “profitable” at $20 a barrel, as do several other Mid-East producers.
So, we can safely say that some supply will come back online at $50 per barrel. We saw that happen already when prices breached $50 and the Rig Count started increasing again. This to me suggests the price is actually lower – perhaps in some areas as low as the Bloomberg articles suggests.
But what we also saw, again, this week, is more expensive projects going offline because, unfortunately, many areas have much higher costs and therefore we are experiencing additional shutdown of production. For example, a recent article on World Oil discussed the high cost associated with production in North Sea. http://www.worldoil.com/news/2016/7/19/north-sea-field-shutdowns-to-climb-as-brexit-deepens-oil-gloom According to the article $50 per barrel oil leaves approximately 30% of the fields in the UK North Sea unprofitable. The collapse in oil prices, coupled with fears from Brexit, are causing some producers to pull the plug before originally planned. While it was profitable and practical before the collapse in the oil price to technologically upgrade older rigs to keep them useful long past their service life, it is no longer profitable to do so. But I would note this may be ultimately beneficial to oil price stabilization as it keeps overall production in less profitable areas down.
Nevertheless, going back to what we discussed before, a recent Wood MacKenzie report projects that 70% of future oil developments are commercially viable with Brent Crude at $60 per barrel. http://www.cnbc.com/2016/07/13/60-oil-poses-no-problem-for-70-of-future-energy-projects-report.html While the initial collapse left many projects commercially unviable, the industry has adapted and about nine million barrels are available at that price. The report further noted that the place likely to see the most development is in the tight oil plays in the U.S.
So, when do we recover? I’m not sure. I think we see some recovery when prices stabilize above $50 a barrel – particularly in the sweet spots of the Permian, the Eagle Ford, and other areas where the cost of drilling is lower. But I think we see real recovery when the price stabilizes above $60.00. But as always, this is just my opinion and it is subject to change.
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