U.S. shale output reduces oil prices close to profitability level

Downward graph
Source: DollarPhotoClub

The U.S. domestic oil output has risen to highs unseen since 1970, according to the U.S. Energy Information Administration, pushing crude oil prices close to levels of profitability.

“If prices go to $80 or lower, which I think is possible, then we are going to see a reduction in drilling activity,” Ralph Eads, vice chairman and global head of energy investment banking at Jefferies LLC, told Bloomberg.

The EIA cut 2014 and 2015 crude price forecasts yesterday because of rising production and falling consumption. West Texas Intermediate (WTI) will average $94.58 next year, down from a September projection of $94.67. The outlook for Brent oil, the benchmark for more than half of the world’s crude, was lowered to $101.67 from $103. U.S. output reached 8.7 million barrels a day in September, the most since July 1986, the EIA said. U.S. demand is down because Americans are driving less and using more fuel-efficient cars, according to the EIA.

Shale oil is expensive to extract in comparison to conventional resources and it might be uneconomical to explore once the price falls below a certain level. What is this level, however, analysts cannot agree.

Oil from shale formations costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa, the Paris-based International Energy Agency estimates.

According to Wood Mackenzie, an industry consultant based in Edinburgh, around 70 per cent of U.S. reserves would remain economic with global prices at $75 a barrel, while Ed Morse, Citigroup Inc.’s head of global commodities research in New York, told Bloomberg that there is a belief that the production would turn negative if prices fell to $60 a barrel.

Will they fall so low, though? Frankfurt-based Commerzbank AG suspects that OPEC, accounting for about 42 percent of world supply, may be ready to enter into a price war rather than cede market share. On 1st October, in an effort to keep their Asian clients, Saudi Arabia lowered their prices, sending a message that it would be comfortable with prices as low as $90 per barrel, and perhaps down to $80, for as long as a year or two – according to Reuters.

Meanwhile, rumours about OPEC countries cutting their production in an effort to shore up the prices have been put to rest by Ali al-Omair, oil minister of Saudi Arabia’s core Gulf ally Kuwait, who said: “I don’t think today there is a chance that (OPEC) countries would reduce their production,” adding that prices should stop falling at around $76 to $77 a barrel, citing production costs in places such as the United States.

According to Bloomberg, however, many OPEC countries might not tolerate the price dip well, given their commitments to social spending. Saudi Arabia needs $87.63 a barrel to balance its budget, compared with $66.50 for the United Arab Emirates and $92.96 for Iraq – the International Monetary Fund estimates. Price-sensitive Venezuela has already called for an emergency action to push prices up above $100 per barrel.  Foreign Minister Rafael Ramirez said “it doesn’t suit anyone to have a price war, for the price to fall below $100 a barrel”.

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