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Brian Noble

Brian Noble

Brian Noble is principal with Financial Communications in Toronto, Canada which specializes in communications initiatives for the Canadian and global financial services industry. Brian Noble MA,…

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As Breakeven Prices Converge An Oil Price Crash Nears

Oil Drilling

No one should underestimate the impact of AI (artificial intelligence) on the future of the entire capital markets complex. The LinkedIn group, Algorithmic Traders Association, has recently been running a series of articles warning of the seismic shift that is and will continue to be felt in the global hedge fund industry as machines take over from people on trading desks.

But what intelligent human being would ever suddenly have turned bullish on the morning of Monday 15 May 2017 just because of renewed jawboning from Saudi Arabia and Russia, indulging in the same old two-step as they did at Doha in April 2016 and Vienna in November of last year. That is however precisely what the machines did. Hallelujah.

In the past couple of weeks, crude oil futures really did a round trip. First, they took a beating. WTI futures fell on May 4th to $45.52 per barrel, coming down from an April peak of $53.40, hitting the lowest point since the deal between OPEC and non-OPEC oil producers was signed last November. Since then, WTI has rallied up above $49 on as confidence grows over an OPEC cut. So is this more noise or a portent of things to come?

Despite the occasional rally, it’s hard to see that the outlook for oil is encouraging on both fundamental and technical levels. The charts look to be screaming double top for WTI, while the fundamentals seem to be saying Economics 101: too much supply, too little demand. The parallel with 2014 is there if you want to see it.

At the heart of the matter is the same old cast of characters that recur again and again. What’s different this time is the rise in cheap U.S. production, primarily shale. While it’s perfectly true that there isn’t enough U.S. shale to flood the world with oil, a lot of what there is is historically cheap to produce so as to give crude from the Middle East a real run for its money; and a solid proportion of that production has been sold forward at attractive levels in the futures market ensuring financial stability for U.S. producers. This growing price competiveness is nothing new. In the Bakken, for example, the average breakeven cost per barrel was $59.03 in 2014, which fell to $29.44 in 2016, a reduction of 50 percent in just two years. Meanwhile, U.S. oil production has risen to approximately 9.3 million barrels a day and is estimated by the EIA to reach 10 million barrels a day by 2018. In the meantime, crude oil inventories remain stubbornly high. Most recent EIA data puts crude oil inventories at 527. Related: Investors Unimpressed By String Of Oilfield Services IPO’s

8 million barrels, stuck at the higher end of the 5-year range.

In a recent and highly informative article in Business Insider originally published in The Motley Fool and using energy industry consultant Rystad Energy research, author Matthew DiLallo shows that it costs Saudi Arabia around $9 per barrel to breakeven, Russia $19 and U.S. shale a little over $23. That said, the simple average of Saudi/Russian breakeven would be about $14, a number which can only go higher, while U.S. shale breakeven is declining significantly, with production also growing significantly. So who’s going to win this one?

DiLallo sums it up nicely: “Saudi Arabia has the lowest oil production costs in the world thanks to two strategic advantages: Abundant pools of oil close to the surface and no taxes on production. Because of that, it can make money in almost any oil price environment. That said, Saudi Arabia made a mistake by trying to use its low costs to kill the shale revolution; it only made shale stronger.”

Let the Saudis and their close allies the Russians do whatever it takes. Because they’re going to have to do a lot more than that.

By Brian Noble for Oilprice.com

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  • Eulenspiegel on May 19 2017 said:
    When shale oil is now at 23 breakeven, why no of these companies makes any money???

    Shure, one or another writes a small plus, but as everybody knows a small plus is more about accounting than earning money.

    There are shale wells that break even at 15 $ - and there are lots that are at > 100. It's a lottery.

    Shale is all about wallstreet money, and low interrest rates. If you get billion of cheap dollars, file for bankrupcy every now and then (http://oilprice.com/Energy/Energy-General/US-Shale-Just-Wont-Die-Bankrupt-Drillers-Rise-Again.html) and get new dollars afterwards, you can drill independend of break even or oil prices. Faked break even prices are to get more money - and you repay it with a filing for bankrupcy. Easy solution.

    Shale is all about wasting other peoples money.
  • Disgruntled on May 19 2017 said:
    Herr Eulenspiegel, you have it about right in my opinion. It's the same old oil business. Nothing's changed because they drill horizontally. About the same proportion of wells drilled horizontally will make money as they did when they were drilled vertically. Now, though, it's all about the EUR and the ROR. Whatever happened to the actual CUM?! The guys wearing suits at all the "banks" love a good bedtime story. Especially ones with unicorns.
  • CrazyUncle on May 19 2017 said:
    What constitutes "break even"? Does it include land costs, drilling costs, completion costs? How about the cost of money? 200,000 barrel at $45 US dollars is 9,000,000 gross. What about production taxes and royalties? I think they could be as high as 20%. So now that leaves 7,200,000 for the company. What does it cost to drill and complete a well? $6,000,000? I think these wells are good for executives that get bonuses based on production, royalty and minerals owner and some landmen with overrides. If you own stock or debt? I think your days are numbered. You'll get thrown under the bus in the next round of financing or bankruptcy workout.
    Good Luck.
  • JustMeNS on May 19 2017 said:
    This author should not be writing any articles on oil as he has no expertise in the area. He is a communications consultant. He is believing the nonsense about shale breakeven costs without understanding there is a lot of misinformation in this area.
  • Jim Eberle on May 19 2017 said:
    I agree with the above comment. A respected petroleum expert did an analysis of operators in the Bakken some time ago and found that even at $100/barrel, 12 of the 15 top companies had a negative free cash flow. So how can they make money at $50/barrel? What is really meant by "breakeven" price anyway? According to this individual (whom I won't name), the primary reason for the reduction in breakeven price is because all the oil field service companies have had to take huge cuts in their contracted service fees in order to continue operating in the Bakken. Improvements in technology have only been marginal in the last few years, and have contributed very little to the reduction in again so-called "breakeven" prices.
  • Lee James on May 19 2017 said:
    The author casually puts out:

    "In the Bakken, for example, the average break-even cost per barrel was $59.03 in 2014, which fell to $29.44 in 2016 ...."

    His "for example" is the best possible case for his argument. Is the Bakken a unique formation -- a stacked formations play -- not typical of other plays. The author's seems to be stacking his deck to make a point and generalize an impression across the entire U.S. shale industry.

    Are we entering an age of "tough oil"? Is oil becoming more expensive to bring in, and the politics of oil supply more militarily and strategically problematic? Are alternative energy sources looking increasingly attractive, even in the near term?

    Major oil producers in the Mid-East, including Saudi Arabia, are ramping up significant investment in solar energy. Why does the U.S. seem so behind in envisioning its future? Are we so ruled by short-term profit?
  • petergrt on May 22 2017 said:
    The author is absolutely correct.

    It's essentially a case of brains over matter, where the technological
    ingenuity trumps passive freeloaders every-time.

    But it is not all about the US shale. The residual break-even costs from North See for example are about $18/pb.
  • Bill Turnbull on May 23 2017 said:
    The term "Artificial Intelligence" often misleads. There is still no such thing as an intelligent computer (as far as I know). The computer applies rules to situations and humans define the rules. The main advantage is that the machines compute much more quickly than a human brain. There is still plenty of scope for human fallibility in aspects such as programming errors, errors in the rules or sudden new circumstances that were unforeseen when the rules were created. Computers aren't fortune tellers any more than humans but there is, of course, scope for AI to be influential in the short term and to appear to have it right even if it is wrong when humans believe in its conclusions and act accordingly. That however simply makes the eventual market correction even greater. There is therefore still room for a perceptive human to beat AI over a longer period. If you are a real conspiracy theorist you could even conjecture that AI could be used as a smokescreen for manipulation (perish the thought).

    The article also relies on a "break even" point without taking account of the difference between the business requirement for a profit margin and the requirement of a government that is dependant on oil income to balance its national budget, particularly if the government has not been prudent with its past oil revenues. That difference is being dramatically displayed in Venezuela right now and Iran is an example of how an oil industry can go into decay very quickly if it can't attract investment because of political factors.

    For a commercial enterprise, once start up capital has been spent any profit on sales is better than nothing as long as it is enough to cover running costs and pay off debt. Even if not then bankruptcy can be an exit. Governments substantially reliant on oil are in a much worse position if they can't balance their national budgets over a long period of time and that can spiral downwards very quickly if they become destabilised. Some of the largest oil producers are dependent on oil income and are among the potentially least stable nations.

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