Crude oil prices set to fall further as politics trump economics to foreshorten N. Sea industry lifespan

Oil $40 barrel imageDespite the crude oil price collapse in Summer 2014, global oil production has gone up, not down – confounding ‘normal’ economic supply and demand curve analysis.

But politics trumps economics.

Indeed, since the fateful 27 November 2014 OPEC meeting, aggregate production from the United States, Saudi Arabia, and Iraq has increased 2 MMb/d—far more than global demand.

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Oil markets are increasingly glutted. Last November is also when the United States inadvertently became the swing oil producer.

Yet prices have not yet fallen far enough or for long enough for an appreciable US supply adjustment to occur. But it may not be far off, especially if oil prices fall further with additional Iranian supplies. According to NYSE-listed HIS Energy forcecasts; –

Oil prices will be under downward pressure until there is evidence the glut is shrinking. This will not happen quickly unless prices fall even further from recent levels.

For a decline in US output to appreciably erode the global surplus, prices would need to range in the low $40s or less for several months. In 2014, production from wells with a break-even cost of around $60 for WTI produced enough oil to offset declines from pre-2014 wells and keep US production flat with 2013. The rest of last year’s incredible growth came from higher-cost wells.

But costs are lower this year—by about 20%. A break-even cost of $60 in 2014 is now in the upper $40s per barrel for WTI. This is why only lower prices will catalyse a more rapid supply adjustment.

With lower prices, US crude oil production in the second half of 2015 would record its first significant decline in more than seven years. A severe drop in prices, lasting several months, would then increase the likelihood of a significant price increase in 2016–17.

Production growth from the rest of the world, including Saudi Arabia and Iraq, is unlikely to keep pace with demand growth if US production falls appreciably.

BP chief executive Bob Dudley commented: “When you go to oil conferences, people use shorthand – is the drop shaped like a ‘V’ or a ‘U’ or a ‘long U’ or a ‘W’, or even an ‘L’? We believe this is a ‘long U’. The price may pick up a little over the summer as people travel on vacation – making a bit of a ‘W’ and then fall back.

“The industry has already deferred or re-phased around $200 billion of projects around the world in 2015, which will have a knock-on effect with costs and also, potentially, on supply in the medium term. The oil price cycle is not new. In fact, it’s the fourth cycle I’ve seen in my career.

“We have to plan the organization for lower prices through 2016 and get our books in order.”

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