Why $65 per barrel oil looks like a ceiling, not a floor

June 1, 2015

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Additional reporting and writing by Kevin Allison. The authors are Reuters Breakingviews  columnists. The opinions expressed are their own.

Big Oil is too confident about crude prices. After a 40 percent rally from January’s six-year low, the momentum has been on the upside. But the current prices – $65 a barrel for Brent and $60 for WTI – look more like a ceiling than a floor.

That is not what many insiders seem to think. Some oil service companies expect mid-$70s Brent by the end of this year. Anglo-Dutch Shell assumed oil will rebound to $90 by 2018 in its $70 billion takeover of the UK’s BG Group. Some believe that the steep cut in capex costs will affect supply, including shale, and boost prices again.

But such predictions may underestimate shale’s potential. Lower drilling and pumping costs, among other efficiencies, have pushed the breakeven cost of shale down to about $60, Goldman Sachs estimates. Lower oil prices have also helped cut costs, since shale drilling is energy-intensive.

The broker sees room for further cost declines in the three main shale basins in the United States: Eagle Ford, Bakken and Permian. If these materialise, shale could reach a $50 per barrel breakeven by 2020. Costs could keep falling as drillers gain more experience with shale, which is more akin to a manufacturing process than traditional oil drilling.

For Saudi Arabia, OPEC kingpin and a low-cost producer, resilient U.S. production is likely to redouble its determination to maintain market share while restraining high-cost competitors. More expensive crude would only spur more shale investment, potentially in other nascent shale-rich provinces, like Argentina’s Vaca Muerta region.

Under its optimistic scenario, Goldman reckons that additional production from OPEC and U.S. shale would be enough to cover the expected growth in global oil demand through 2025, without the need for any new non-OPEC deep water, heavy oil and LNG projects. Consultants at IHS think bringing shale techniques to mature conventional oil fields could unlock up to another 140 billion barrels of potential production worldwide – the equivalent of adding another Russia to global oil reserves.

Lower prices will stimulate some additional demand, but it looks like the oil industry faces years of oversupply. That means more downward pressure on the price.

7 comments

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The economy slowed down as consumers don’t spend money on new vehicles ,freight movement in US fell some 40 % compared to the same period last year. At oil prices this low I am keeping my clunky V8 that gives me 10 MPG.

Posted by Macedonian | Report as abusive

The oil prices are manipulated by few big oil buying companies much less than by producers or by market forces.They can manage world prices as per their convenience.

Posted by gentalman | Report as abusive

All good stuff, but Libya is the joker in the pack…

Posted by Garnetthesiger | Report as abusive

Glut. Oil is replaceable.

Posted by Solidar | Report as abusive

No comments so far? Maybe the comments just don’t fit this version of reality.

Posted by brotherkenny4 | Report as abusive

Agree with your assessment of oil prices here as domestic US production has remained steady despite falling rig count numbers. The fact is our production is getting more efficient and will continue to lower its break-even point. This may actually lower the “ceiling” in the medium term.

Of course, this is all discounting some pretty serious geopolitical unrest in the Middle East. Is a disruptive event in Saudi Arabia truly a black swan at this point? I’m not sure some $100 call options aren’t wise despite the production overhang at this point.

Posted by EKTInteractive | Report as abusive

Gas is back around 3.20. So I’m not sure what the news is…

Posted by ajz | Report as abusive