Scenario In January 2015 :Oil prices have fallen to below $50 a barrel, down from a high of $115 in the past year. American drivers and consumers are cheering at cheaper prices, but the news isn’t great for everyone.
The price drop is squeezing profits at oil and gas producers, forcing them to shut down wells and lay off employees from the North Sea to North Dakota. Schlumberger, the world’s biggest oilfield services provider, said Thursday that it is cutting 9,000 jobs, or about seven percent of its workforce.
The contraction is creating knock-on effects throughout the economy — for example, reducing loan growth at banks in energy-producing states. The oil and gas industry generated around 15 percent of Wells Fargo’s investment banking fee revenue last year, and around 12 percent for Citigroup, according to data from Dealogic.
As long as oil remains below $50 a barrel, the majority of the world’s oil projects will struggle to break even. The chart below, created by Ed Morse and team at Citi Research, shows the break-even cost – the price that a barrel of oil needs to cost for the project to remain profitable – of the major oil projects expected to be online in 2020. The break-even costs for the major oil exporting countries and U.S. shale plays are noted at the left.
The graph 1 suggests that the break-even price for most of those projects is somewhere between $45 and $95 a barrel. At current prices, most of the world’s oil and gas producers are hemorrhaging fantastic amounts of money. Current oil prices are too low to cover the costs of even the world’s cheapest oil producing countries, like Qatar and Kuwait.
Here’s another visualization (graph-2) of break-even costs by Carbon Tracker, a think tank. The bars represent millions of dollars of capital expenditure, broken down by oil type and break-even price. (For example, the column on the left shows that $3.97 billion of capital expenditure would be at risk in the conventional industry with an oil price above $150 a barrel; if the price falls to between $120 and 150 a barrel, an additional $2.14 billion of investments would be at risk.) Overall, almost $10 trillion of investments are at risk with an oil price below $60 a barrel.
It’s hard to say what will happen to these investments. As The Washington Post’s Steve Mufson points out, there is always a significant delay between price signals and actual changes in production and demand in the oil market. The oil industry is like a container ship: massive, expensive and bad at changing directions. According to a note from Barclays, the oversupply could continue to increase in the next several months by as much as 1 million barrels a day.
But if oil prices remain low, companies will eventually respond by cutting exploration and production. Whenever that happens, prices will trend upward once again.
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Info Credits : The Washington Post
Current scenario :
NEW YORK : – Oil markets settled up as much as 6 percent on Monday as speculation about falling U.S. shale output and a rally in equities fed the notion that crude prices may be bottoming after a 20-month collapse.
Prices began the week with a rebound in Asian trade, reacting to Friday’s U.S. rig count data. The number of oil drilling rigs in operation fell to a December 2009 low after nine straight weeks of cuts. [RIG/U]
Oil got a further boost after the International Energy Agency, the world’s oil consumer body, said U.S. shale oil production could fall by 600,000 barrels per day (bpd) this year and another 200,000 bpd in 2017.
IEA executive director Fatih Birol told CERAWeek, an industry gathering in Houston, that crude oil at $80 a barrel would be good for both producers and consumers, although the agency said in a report a strong price rebound was unlikely under present market conditions.
U.S. crude futures CLc1 settled up $1.84, or 6 percent, at $31.48 a barrel, rallying above $32 at one point.
The rally benefited from bids to narrow the discount of the expiring front-month contract in U.S. crude to the second month, traders said. The March CLH6 contract settled almost $2 a barrel lower than April CLJ6, which would be the front-month from Tuesday. On Friday the discount was more than $2.
Futures of Brent LCOc1 finished up $1.68, or 5 percent, at $34.69.
Higher equity prices on Wall Street also supported oil, as shares of oil companies such as Chevron (CVX.N) rose. [.N]
Oil prices have been in a recovery mode since last week after Saudi Arabia and fellow OPEC members Qatar and Venezuela agreed with non-OPEC member Russia to freeze output at January’s highs.
But Iraq, a key member of the Organization of the Petroleum Exporting Countries, said on Monday it planned to raise production to above 7 million bpd over the next five years, and export 6 million bpd of that. Iran, OPEC’s fourth largest producer, has repeatedly pledged to raise its output too to pre-sanctions levels.
OPEC Secretary-General Abdullah a-Badri told CERAWeek that OPEC and non-OPEC producers might take “other steps” to reduce the global supply glut, and that he was willing to speak with U.S. officials.
Despite (23rd Feb’16) gains, some analysts said market conditions were weak, citing weakening demand for crude.
(Info/Research credit : Barani Krishnan/Reuters)
Mohit K Sharma 