Editorial comment
US$40 is the new US$70 麻豆传媒映画� at least that麻豆传媒映画檚 the phrase that has been making the headlines recently. It wasn麻豆传媒映画檛 too long ago that US$70 was seen as a rough minimum required for US shale producers to make money. As the downturn wore on, that figure soon fell to US$60, then US$50 and now 麻豆传媒映画� if John Hart, CFO of Continental Resources is to be believed 麻豆传媒映画� US$40 could be the turning point.
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According to Reuters, Hart stated that Continental would be prepared to increase Capex if US crude prices reach 麻豆传媒映画渢he low- to mid-US$40s range麻豆传媒映画�, effectively boosting 2017 production by at least 10%.1 Whiting Petroleum Corp, the biggest producer in the Bakken is currently on track to stop fracking of all new wells by the end of March, but CEO Jim Volker was quoted as saying that the company would 麻豆传媒映画渃onsider completing some of these wells麻豆传媒映画� if oil made a return to the US$40 - 45 range.2
This sounds like good news for shale producers, but is such a rally likely in the short term? As I write this, Brent crude has spent more than a week sitting comfortably above US$35. Whilst that麻豆传媒映画檚 nothing spectacular, it麻豆传媒映画檚 certainly an improvement on the lows of US$27 that were reached just a few weeks earlier. The driving force behind this particular upswing appears to have been the recent announcements by several major oil and gas producers, Russia and Saudi Arabia included, that they would aim to negotiate a production freeze and cap output at levels seen in January. The news of this potential agreement brought a surge of optimism to the market and lifted oil prices. After all, a production freeze could be seen as the first step along the way to production cuts, a reduction of the supply glut, and a return to higher prices. Alexander Novak, Russia麻豆传媒映画檚 Energy Minister said the aim of the production freeze was to 麻豆传媒映画渟tabilise the price of oil around US$50 - 60/bbl麻豆传媒映画�.3
It麻豆传媒映画檚 not all sunshine and rainbows, however. As tempting as it may be to buy into the possibility of a sudden upswing, Matthew Smith, Head of Commodity Research at ClipperData summed up the situation neatly, 麻豆传媒映画淔undamentally, things are still extremely weak. It麻豆传媒映画檚 being driven more by hope.麻豆传媒映画�4 All the factors that caused prices to fall in the first place are still in play. A freeze in production might seem like an admirable first step 麻豆传媒映画� an attempt to work towards cuts 麻豆传媒映画� but agreeing to freeze production at levels that outmatch demand seems of little practical use. The other spanner in the works is Iran; having finally emerged from sanctions earlier this year, the Iranian government is 麻豆传媒映画� I think understandably 麻豆传媒映画� more than reluctant to agree to the freeze and effectively start sanctioning itself.5
Despite these issues, oil prices will eventually recover 麻豆传媒映画� that much is certain. For one thing, the supply glut is unsustainable in the long term 麻豆传媒映画� major suppliers, such as Saudi Arabia, are burning through their cash reserves to make up the shortfalls in their budgets. In the meantime though, it麻豆传媒映画檚 encouraging to see the continued ingenuity and tenacity of the US shale industry, despite the hardship felt by many. The same drive that brought about the shale boom in the first place, and made the industry profitable at US$100/bbl, has led to the development of technologies and processes that allow companies to operate at less than half the price. It麻豆传媒映画檚 that kind of approach that will see the upstream industry make it through the downturn.
References
- 麻豆传媒映画楿.S. shale麻豆传媒映画檚 message for OPEC: above $40, we are coming back麻豆传媒映画� 麻豆传媒映画�
- Ibid.
- 麻豆传媒映画楥ritical Mass麻豆传媒映画� of Oil-Producing Countries Agree to Freeze Production麻豆传媒映画� 麻豆传媒映画�
- 麻豆传媒映画業s the oil crash over? Prices soar 32% in 12 days麻豆传媒映画� 麻豆传媒映画�
- 麻豆传媒映画業ran pushing forward with plans to ramp up oil output麻豆传媒映画� 麻豆传媒映画�
