The latest newsletter from Absolute Return Partners suggests that the fall in oil prices is temporary and oil will soon recover to around $100/barrel:
“All I know is that the price of oil won’t stay below the production cost for a long period of time (as in years). Hence I think we will see the oil price at $100 again, and it won’t take many years, but it could be an extraordinarily bumpy ride.”
The chart below depicts crude oil prices (WTI) from 1987 to 2014, adjusted to current (November 2014) prices.
What it shows is that, prior to 2004, crude oil prices seldom exceeded $40/barrel. If, for most of the 17-year period, prices were below $40/barrel and supply continued unabated, then production costs must be even lower. Some of the more accessible oil fields may be nearing the end of their life, but production costs for major producers such as the Saudis could not have changed much (in real terms) over the last 10 years. That means true production costs are a lot lower than ARP’s estimate.
I tend to side with Anatole Kaletsky who views $50/barrel as the likely ceiling for crude oil prices — and not the floor.
It’s Not going back to $100 a barrel anytime soon. I believe a reversal of the last few days will come and oil back to around the 39-42 dollar mark. Daytraders and profit takers will play this for the next year.
Completely agree Colin and I think this is missed by most in the market, just look at the other commodities. $80/t was supposed to be the floor in iron ore and we’re at $60/t today and heading lower. Producers will always find ways to optimise production and save costs.
It will be interesting to see. Group psychology at the moment (as shown by the market price) seems to say that the price will continue to drop. On the other hand the proposition is that the ceiling is below any price paid for the last ten years, which seems a bit dumb on the surface.
IMHO, many (including Kaletsky) grossly underestimate the speed of the supply response from N.Am. shale oil & tight oil producers. Unless global demand weakens further, prices will recover to ‘marginal cost of production’ of $60~$70 within several months, not years. The exceptionally high depletion rate of fracked wells guarantees the supply response will be rapid from this sector. Add in another few % drop from depleted wells being abandoned and EOR efforts curtailed which were economic at $100 and are just not economic at $40-$50-$60.
One analysis estimated the ND Bakken decline rate at the end of 2013 was somewhere between 55,000 b/d/Mth and 75,000 b/d/mo (which was more than made up by new drilling). Use the lower rate for ‘drilling stops’ scenarios 1-2 yr out.
Say, 60,000 bopd for 6 mo = 360,000 bopd just for the ND Bakken only if drilling stops completely. Many 1Q15 wells were ‘committed’. Then comes ‘Spring Breakup’ with fewer wells drilled anyway. How many CFO’s will commit drilling for 3Q15 & 4Q15 at $3.00 is needed for ‘wet gas’ at 10% IRR without a big NGL credit. So add Permian, add Eagle Ford. (Marcellus is dry gas).
Will drilling stop completely? No, but….
US onshore oil rig counts are down 258 just in the last 7 weeks. Now at ~1238 versus 1400 in Dec.2014. Was over 1600 in Oct/14. One CEO guessed an 800 rig drop by the end of the year but he also believes a return to ~$65 is expected.
IMHO, a return to ‘cost of marginal production’ pricing (i.e. $60~$70) will be sooner than many think.
The N.Am. fracking industry is curtailing drilling quickly and, as I said earlier, this will impact the supply response much faster than in the past.
Both IEA & EIA have production forecasts for USA crude production in 2015 that are were ‘flat’ over 2014 or a mild decline. All I can say is “Dream on!”.
Global demand reductions can be “inferred” by looking at the price of Brent in Euros.
So I suggest you link to The Price of Oil in 2015 by Jim O’Neill in addition to your link to A New Ceiling for Oil Prices by Anatole Kaletsky
Why do you hold that the marginal cost of production is $60 to $70/barrel?
How did producers survive with prices below $40/barrel (adjusted for inflation) prior to 2004?
I agree that exploration will slow, but will current production slow?
Bear in mind that many of the producers are hedged and unaffected (or less affected) by current price fluctuations.
And true marginal cost is a lot lower than current prices.
Plenty of data out there and a wide cost range depending on quality of zone, gas/oil ratio, etc. One cost number from recent Forbes article that I found quickly: “On average, the “all-in,” breakeven cost for U.S. hydraulic shale is $65 per barrel, according to a study by Rystad Energy and Morgan Stanley Commodity Research.” A MS note from Oct/14 claims the Eagleford “cash breakeven” is $35~$55 (exhibit 10):
http://shaleseguro.com/wp-content/uploads/2014/10/Morgan-Stanley.pdf
One small, competent Bakken producer I know a bit more about (I own some Enerplus shares) has full-all-in costs of ~$58/bbl. Drilling costs have been improving over time as well as decline rates with improved fracking & completion. Shale production is all about well cost recovery ASAP and typically <1 year. New wells are added to maintain production, often from the same well pad, to match infrastructure capacity. Op cost might be $10~$15/bbl but the wells are very expensive. A lot of progress has been made on well cost reductions & higher initial production rates giving lower $/initial flow as well as fracking & completion to 'stretch out' production curves (reduced decline rate).
A 'single well' type curve from 2011 can be seen here:
http://peakoilbarrel.com/wp-content/uploads/2014/02/AAA-Ovi1.png
Pre-2004 there was very little fracking. There was also very little new conventional production that could come on line for ~$40/bbl. So the next plateau of production needed higher prices to actually happen. At this point, crude was priced by the cost of the 'marginal barrel' and the costs of 'old' production became irrelevant to the current price. The Saudi's producing at $6?, $10? per bbl from 50 year old super-giant reservoirs does not enter the current price equation (unless they alone can supply global demand). So the average or real cost of production might be <$40 for existing production. Existing conventional production will decline at typically 6%-12%/yr. Expressed in different terms, with no drilling and EOR, global conventional crude production will drop by ~9-ish million bbl/day in one year.
Current production will continue to flow as long as the price exceeds op. cost. Op. cost might be in the $10~$20 range. Once the demand exceeds supply, then things get 'squirrely' again. Even the 'perceived' future shortfall of production rate (aka "peak oil") drove the 'speculation peak' to $147 in 2008.
Make no mistake. Fracking oil shales became attractive ONLY after the price rose. When I refer to high depletion rates, I mean on the order of ~4%/month versus on the order of ~9%/year for giant fields (after 'plateau'). For the 'new production', the 'stuff' will still be there but no one will drill it if $40~$50 holds for a significant length of time.
As for hedging, any CFO wants well costs recouped and hedging ensures this. The shale plays can pay back well costs in a year or so and the hedges in place can ensure capital recovery. That's about it.
New wells at $40~$50? CFO: "Nope." COO: "OK. I understand."
New wells at $50~$60? CFO: "Nope." COO: "I'm going to loose people and contractors. It will be hard to get them back."
New wells at $60~$70? CFO: "Maybe. I still need cash flow to cover ongoing expenses but I will have to add debt" COO: "OK. I understand. Only the really good ones."
So current price around $50/barrel will slow establishment of new wells but unlikely to harm existing production? Which means gradual decline of supply as existing wells depleted. But will demand grow or is this also likely to shrink over time as switch to renewables and LNG grows?
From Jim O’Neill:
Jim O’Neill must have written in early December because the price of December 2020 crude oil futures fell sharply and is now ranging between $66 and $72 per barrel.
Hard to tell whether that is the bottom or just a mid-point consolidation.
Couldn’t the current oil price depend upon political rather than economic factors ? As for istance, a penalization of Russia’s and ISIS’s production and revenues.
Possibly. But if politicians are able to control oil prices, why were prices high for so long, inhibiting recovery from the GFC? Surely they would have moved earlier to correct this? Especially ahead of elections.
OIL price prospects: To me, it’s mostly about the US Dollar … it’s last nine-month $ rise and the correspond oil fall is just far too strong to ignore. So, if you see the $ higher = lower oil.
Also, predictions now may, respectfully, simply amount to ‘gambling’, given especially the exhibition of extreme variability over above-mentioned period. Why not just wait till the trend changes, say 10 month moving average changes = less of a gamble then, I think, maybe, could be wrong, who knows, play somewhere else in the meantime, you know what I mean.