No ‘magic number’ to make US oil production unprofitable

IEA again cut its forecast for oil demand next year, revising it down 230,000 barrels per day to 93.3 million bpd.

The idea of choking off surging oil US supplies is unlikely to provide a quick fix to plunging prices, according to industry analysts.

The Paris-based International Energy Agency again cut its forecast for oil demand next year, revising it down 230,000 barrels per day to 93.3 million bpd, which would put output next year at 900,000 bpd above this year’s average daily demand.

“There is no single ‘magic number’ for the oil price below which enough North American production becomes unprofitable for supply cuts to start to bite,” said Julian Jessop, an analyst at Capital Economics. “Indeed, short-term operating costs for many US shale firms may be as low as $10 to $20 per barrel.

“There is widespread confusion over the level of oil prices at which production becomes unprofitable and investment is likely to be curtailed,” he said.

On the supply front, the IEA said in its latest oil market report it expects non-Opec growth to slow from this year’s record level of 1.9 million bpd but to still grow by 1.3 million bpd in 2015, with new output coming mainly from North America.

That means the “call on Opec” supply would average 28.9 million bpd next year, the IEA forecast, revising that down by 300,000 bpd.

That is more than 1 million bpd lower than Opec is currently producing and all signs still point to the conclusion that Saudi Arabia will not budge from its position of maintaining output levels – and market share.

It is widely believed that the kingdom’s aim is to ride out a period of lower oil prices to force higher-cost producers to delay or cancel projects.

However, the IEA reckons this approach will take time and may lead to some severe pain, especially from the weaker oil-dependent economies, in the meantime.

“The short-term outlook for US light tight oil production remains unchanged at current prices as long as producers maintain access to financing,” the think tank’s report concluded. “Only in Russia is oil’s plunge, along with sanctions and a collapsing currency, likely to trim 2015 production plans. A lower forecast of Russian supply is offset, however, by upward revisions to North American projections in view of the latest production data.”

Brent prices last week lost 6.5 per cent, pushing their slump from a June peak above $115 to more than 46 percent.

Brent fell US$1.83 to settle at $61.85 a barrel, while US crude settled down $2.14 to $57.81, its weakest since May 2009.

The IEA also regards any hope for a big boost in demand, which would be partly spurred by lower oil prices, as misplaced: “Oil price drops are sometimes described as a ‘tax cut’ and a boon for the economy but this time round their stimulus effect may be modest,” the report goes on.

“For producer countries, lower prices are a negative: the more dependent on oil revenues they are and the lower their financial reserves, the more adverse the impact on the economy and domestic demand. Russia, along with other oil-dependent but cash-constrained economies, will not only produce less but is likely to consume less next year.”

Oil projects will eventually be ditched if prices stay low, the IEA concludes, but not for some time. Meanwhile, the excess oil being produced is being put into inventories. But if it continues as forecast, the IEA warns, then OECD storage capacity may be reached in the first quarter of next year.

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