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The Index Investors Need To Watch In This Oil Rally

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More Bad News For OPEC: Deepwater Oil Becomes Cheaper

Offshore

While OPEC made the hard decision to extend the oil production cut to the end of March 2018, offshore drillers were busy cutting costs to bring down their breakeven levels and remain competitive. According to Wood Mackenzie, they are succeeding; deepwater oil is becoming cheaper, much to the chagrin of the international cartel.

Bloomberg’s Dan Murtough quoted the oil consultancy as saying that back in 2014, deepwater oil producers needed international prices of US$75 a barrel to break even, but this has now gone down to US$62. By 2018, the breakeven cost for deepwater oil could drop further to US$50.

What’s more, deepwater oil’s costs will continue to go down, Murtaugh said, and offshore oil will be getting increasingly competitive to shale where costs, according to analysts, may have bottomed out and even start climbing up in the future.

Back in March, Wood Mackenzie said that offshore drillers are undergoing a change in their mindset, switching their priorities to smaller and more efficient projects from the decades-long focus on squeezing every last drop from the well, however much it takes. This, according to Bloomberg, will motivate investors to return to the deepwater segment, and production will increase.

Now, some OPEC officials such as Saudi Arabia’s Khalid al-Falih have warned that lack of investment in higher-cost new projects could tip the market into deficit, but according to Citigroup, this is unlikely.

The bank said earlier in May that OPEC talk about an oil shortage is “overstated and misleading,” since U.S. shale oil output is growing and so is deepwater production. Citi called the shale revolution “unstoppable”, adding that even if breakeven prices fall below a level that can be sustained by the shale boomers, deepwater would compensate. The bank estimates that deepwater oil output could rise by 1 million bpd until 2022.

By Irina Slav for Oilprice.com

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