Breakeven Prices of U.S. Oil

bigbadwolf

December 11, 2014

By Editors

The Permian Basin is still in pretty good shape as the price of oil comes down. Of the 22 drilling sites in the Permian, all are below the current marginal price of $80 a barrel. Most of the sites, including the Wolfcamp, which is just being developed, are below $60 a barrel. And of course the Bakken Core, the Utica and the Eagle Ford East are well below $40 which means they will be pumping oil for a long, long time.

Oil works on the principle of supply and demand, as does every economic commodity. If supplies get below $60 per barrel then some of the most expensive fields will stop pumping. This cuts the supply, which pushed up the price and establishes a new equilibrium. The price of oil is expected to settle around $70 per barrel, which means all these fields will continue pumping and there will be enough oil to go around.

源济

谢谢！

bigbadwolf

One catalyst today is the International Energy Agency's release of its latest Oil Market Report, which lowered the agency's forecast for global oil demand growth in 2015 by 230,000 barrels per day. This means that demand in 2015 is only expected to exceed demand this year by .9 million barrels per day, a sluggish 1 percent rate of growth.

The report could not be more plain that the fundamental cause of the sharp oil price decline -- whose knock-on effects include markedly lower gas prices in the U.S., and soon, perhaps, lower airfares -- is an imbalance between supply and demand.

Or as IEA puts it: "Several years of record high prices have induced the root cause of today’s rout: a surge in non‐[Organization of Petroleum Exporting Countries] supply to its highest growth ever and a contraction in demand growth to five‐year lows."

The report provides this telling figure -- showing a gulf opening between levels of global oil supply, and global demand to consume that oil:
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Credit: International Energy Agency, Oil Market Report, December 12, 2014.

The IEA also goes into great depth about which countries are creating these imbalances. Demand in Europe, Japan, and China is slack or less than expected -- even as production in the United States is way up, and the OPEC nations are keeping production steady.

The biggest country-level headline from the report, though, involves Russia.

The report issues what it calls a "severe downgrade" in its forecast of Russian oil demand, due to the fact that economic activity is expected to decline markedly in the country -- itself partly a result of oil revenues decreasing as oil prices have slumped (as well as international economic sanctions).

And according to IEA, there may be no letup any time soon to the downward economic pressures on oil prices. "It may well take some time for supply and demand to respond to the price rout," writes the agency.