• 14 hours Oil Pares Gains After API Reports Surprise Crude Inventory Build
  • 15 hours Elon Musk Won’t Get Paid Unless Tesla Does “Extraordinarily Well”
  • 15 hours U.S. Regulators Keep Keystone Capacity Capped At 80 Percent
  • 16 hours Trump Signs Off On 30 Percent Tariff On Imported Solar Equipment
  • 18 hours Russian Funds May Invest In Aramco’s IPO To Boost Oil Ties
  • 19 hours IMF Raises Saudi Arabia Growth Outlook On Higher Oil Prices
  • 20 hours China Is World’s Number-2 In LNG Imports
  • 1 day EIA Weekly Inventory Data Due Wednesday, Despite Govt. Shutdown
  • 1 day Oklahoma Rig Explodes, Leaving Five Missing
  • 2 days Lloyd’s Sees No Room For Coal In New Investment Strategy
  • 2 days Gunmen Kidnap Nigerian Oil Workers In Oil-Rich Delta Area
  • 2 days Libya’s NOC Restarts Oil Fields
  • 2 days US Orion To Develop Gas Field In Iraq
  • 4 days U.S. On Track To Unseat Saudi Arabia As No.2 Oil Producer In the World
  • 4 days Senior Interior Dept. Official Says Florida Still On Trump’s Draft Drilling Plan
  • 4 days Schlumberger Optimistic In 2018 For Oilfield Services Businesses
  • 5 days Only 1/3 Of Oil Patch Jobs To Return To Canada After Downturn Ends
  • 5 days Statoil, YPF Finalize Joint Vaca Muerta Development Deal
  • 5 days TransCanada Boasts Long-Term Commitments For Keystone XL
  • 5 days Nigeria Files Suit Against JP Morgan Over Oil Field Sale
  • 5 days Chinese Oil Ships Found Violating UN Sanctions On North Korea
  • 5 days Oil Slick From Iranian Tanker Explosion Is Now The Size Of Paris
  • 5 days Nigeria Approves Petroleum Industry Bill After 17 Long Years
  • 6 days Venezuelan Output Drops To 28-Year Low In 2017
  • 6 days OPEC Revises Up Non-OPEC Production Estimates For 2018
  • 6 days Iraq Ready To Sign Deal With BP For Kirkuk Fields
  • 6 days Kinder Morgan Delays Trans Mountain Launch Again
  • 6 days Shell Inks Another Solar Deal
  • 7 days API Reports Seventh Large Crude Draw In Seven Weeks
  • 7 days Maduro’s Advisors Recommend Selling Petro At Steep 60% Discount
  • 7 days EIA: Shale Oil Output To Rise By 1.8 Million Bpd Through Q1 2019
  • 7 days IEA: Don’t Expect Much Oil From Arctic National Wildlife Refuge Before 2030
  • 7 days Minister Says Norway Must Prepare For Arctic Oil Race With Russia
  • 7 days Eight Years Late—UK Hinkley Point C To Be In Service By 2025
  • 7 days Sunk Iranian Oil Tanker Leave Behind Two Slicks
  • 7 days Saudi Arabia Shuns UBS, BofA As Aramco IPO Coordinators
  • 7 days WCS-WTI Spread Narrows As Exports-By-Rail Pick Up
  • 7 days Norway Grants Record 75 New Offshore Exploration Leases
  • 7 days China’s Growing Appetite For Renewables
  • 8 days Chevron To Resume Drilling In Kurdistan
Alt Text

Oil Inches Higher On Saudi, Russian Rhetoric

Crude oil prices inched higher…

Alt Text

OPEC Under Pressure As Oil Rally Continues

OPEC is coming under an…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

Can Oil Prices Go Above $60?

Oil

Oil prices flirted with $60 per barrel a few weeks ago, but stopped short of that key psychological threshold and quickly retreated. What will it take to break above $60?

Brent hit $59.77 per barrel on September 26, but was back to $55 per barrel a few days later. There are many reasons why oil prices are struggling to break above $60 even though OPEC continues to hold back about 1 million barrels of supply per day and tensions in the Middle East have risen sharply. For example, oil inventories are declining, but storage remains elevated. Also, fears that OPEC could flood the market next year have not entirely gone away.

There is also a short-term explanation for the recent fallback in prices. Hedge funds and other money managers built up a massive pile of bullish bets in the oil futures market, hoping to ride the wave up. But, as has happened multiple times in the past, when investors get too far ahead of the fundamentals, the rally ends up coming to a dead end. The music stops, and everyone scrambles for the exits. In other words, speculators bid up prices, but they also sow the seeds of a price correction when things get out of hand. That seems to have played out in late September.

However, another important force at work is U.S. shale. Obviously, shale output has grown quite a bit in 2017, but one theory put forward in the past year or so is that U.S. shale will trap oil prices within a relatively narrow band of $40 and $60 per barrel. Anytime oil dips below $40, shale rigs vanish and production falls. When prices flirt with $60, E&Ps scramble to accelerate drilling, buying up acreage and deploying as many rigs as possible. The result is higher output and deflated prices, pushing crude back within the $40-$60 range.

Related: Which Of These 3 Hotspots Will Be The Next Big Thing In Oil?

The reason that U.S. shale is the pivotal factor, and not some other source of production, is the short lead times for new supply. An offshore project, an oil sands operation, or an oil field produced by some state-owned company will continue to produce at low prices. Those projects won’t go offline when oil goes to $30. Similarly, when oil jumps above $60 per barrel, it is not as if those kinds of projects can come online immediately – they tend to take years of planning and lots of investment.

Shale, on the other hand, responds quickly to prices. New wells can be drilled in a matter of weeks, and because production declines precipitously, the industry has to continue to drill a lot of new wells. If prices fall too low, they will hold off on new drilling, and the sharp decline rates from existing wells translate into an overall decline in output. In short, shale supply is much more elastic than other forms of oil production, stopping and starting quickly.

Because U.S. shale now makes up about 5 percent of global supply, it represents the marginal barrel in the short run. That much we knew a year or two ago, but with more data to analyze, it now appears that the industry seems to breakeven at about $50 per barrel. Thus, the shale band theory, consisting of a range between $40 to $60 per barrel, seems to be spot on.

But with the market tightening, $40 per barrel is starting to look less likely. That puts extra psychological emphasis on the $60-per-barrel threshold.

“The market is frightened by the shale oil band,” Olivier Jakob of PetroMatrix, who coined the term “shale band,” told the FT. “But it’s not just traders — we’ve seen indications from OPEC and Russian oil companies that even they think going above $60 a barrel right now would be too much and would bring on more oil from shale. They don’t want it.”

That kind of psychology is now baked into market sentiment. When oil approaches $60, oil traders become skittish, expecting prices to retreat. In order not to avoid getting burned, hedge funds and other money managers are more likely to sell off, creating a self-fulfilling slide in prices. “Their positioning is starting to create some headwinds. That risk is there,” Ole Hansen of Saxo Bank told the FT. “Most of the big moves this year have involved traders caught on the wrong side of the positions, so they may be quick to exit if we don’t see any disruptions from Iraq and they refocus on the normal seasonal slowdown in demand.”

Related: This Oil Rally May Be Short-Lived

So, what will it take to break out of the shale band? “It’s going to be difficult to really break $60 a barrel, without some major new event,” Olivier Jakob at Petromatrix, told the FT. “And if we do break $60, it’s going to be even more difficult to sustain it.”

Still, with a return of geopolitical flashpoints in the Middle East, some surprise events are entirely possible. An unexpected outage from Libya, Nigeria, Venezuela, Iran or Iraq should not be ruled out. But until that happens, oil prices might be stuck within the shale band for a while longer.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • Lu Wang on October 25 2017 said:
    Yes it can, Vitol commodity traders are stuck in a short position. They are using all their resources to bring the price down, even fake news, what ever it takes. Those Rolexes don't pay for themselves, all at the expense of OPEC, Russia and Saudia Arabia and the shale startup companies.
  • Mark on October 25 2017 said:
    US Shale Oil - which represents just 6-7% of world oil supply - is exactly the reason why we will have a major oil price spike.

    This article demonstrates this by stating a true fact: more and more conventional oil plays are being delayed or cancelled do to Shale's ability to quickly ramp up production...however, at some point Shale will not/can not fill the gap...particularly when Shale companies are being asked to change their model and drill within cashflow...and conventional oil plays won't be there to fill the gap.

    OPEC + Russia - they can fill some of the gap but at the end of 2018 there maybe a gap as big a 2.5MBD.

    Also, a key figure to look at that is not being talked about (hint, hint Oilprice) is the days of demand in supply. Since demand is going up overall supply needs to be higher (5 year avg skews this)...based on days of demand we are not far off 2014.

    Shark
  • citymoments on October 25 2017 said:
    Nick, have you even been a shale oil field ? Do you understand the difference between heavy oil and light sweet oil ? Shale oil is super sweet oil. Most refineries in USA can not refine light sweet, that is why USA has to export so much shale oil, that is why you see the price gap widens between Brent and WTI, shale oil is something no one want, it is insignificant in the whole global oil supply chain. Also where you get that figure about the $50 break even for shale oil cost? Is it from an independent body or a shale oil producer or promoter who is crying for money for its dying production business?
  • Clyde Boyd on October 26 2017 said:
    As long as shale keeps pumping the supply will continue to rise. This current rally, like every one before it in the last three years, is pure oil trader speculation to jack up prices. As such it is destined to fail.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News