This page has been archived and commenting is disabled.
Oil May Drop Under $20 In The Short-Term, But What Is Its Price Floor?
In practice, there is no bottom to how low oil prices can drop: as Canada's Bank of Montreal calculated over the weekend, as a result of an unsustainable supply-demand balance "something has to give", and for that to happen oil may drop to $25, $20 or even $15, as some aggressive put buyers are speculating. This is what the Canadian bank said:
We believe that the weakness in crude oil prices reflects a combination of fundamental factors and financial flows. Fundamentally there is simply too much oil.
Could oil prices collapse to $20?
The short answer is ‘yes.’ We believe that crude oil prices could fall further unless global oil production is reduced. We estimate that the global oil market could be oversupplied by roughly 920,000 bpd in 2016. The key assumptions are year-over-year growth in global demand of 1.2 million bpd, Saudi Arabia, Iraq and Libya hold production at current levels, Iran ramps up production at moderate pace over the course of the year and the U.S. rig count remains at current levels. This would translate to a build in global crude oil inventories of roughly 231 million barrels over the course of the year and potentially result in OECD crude oil inventories reaching capacity by the end of the year.
In theory, however, imploding crude prices, while distinctly probable in the near-term in order to flush out all "pent up" fundamental and financial excesses, will likely revert for several reasons, chief of which is that as we approach the production price floor in an environment where marginal funding for drillers is now practically non-existent, the long overdue series of corporate defaults will ultimately result in much of the marginal production going away (if only for the time being - a simple debt for equity swap means the assets can still perform even as the liabilities are restructured).
That, however, is just the beginning.
Here, again via BMO, are the various oil price floors which make any short-term oil plunge very likely but a long-term oil price collapse not practical.
Where is the floor price for oil?
We believe that the sustainable floor price for oil is a Brent price in the range of $30-35/bbl. Oil prices could temporarily fall below that level; however, companies would begin to shut-in production as variable production costs would exceed cash flow for some projects. Cash operating costs vary materially depending on the type of development, as shown in Chart 30. There are also additional expenses such as cash taxes and interest payments that represent incremental cash costs that vary by company and must be paid out of cash flow. It is also worth noting that the revenue generated for any type of play varies depending on the quality of the oil being produced and its location. For example, in situ oil sands receive a price that is currently $16/bbl less than the price of Brent. That means at Brent prices of $30-35/bbl, in situ oil sands operations on average are not generating enough revenue to cost their cash costs. Companies that rely on trucking and rail are exposed to significant transportation costs that could effectively decrease cash flows by $10-20/bbl. Western Canadian conventional heavy oil producers often incur relatively high trucking costs to transport production. In prior oil price downturns, this was some of the first production to get shut-in.
What oil price is required to sustain production?
We believe that the industry requires a Brent crude oil price in the range of $40-50/bbl in order to sustain production at current levels as shown in Chart 32. Again the level of sustaining capital varies depending on the type of resource. For example, for in situ oil sands operators, sustaining capital is roughly $6/bbl whereas sustaining capital for a conventional onshore oil play is approximately $15/bbl and for shale oil we estimate that sustaining capital is approximately $18/bbl. Accordingly, at Brent prices below $50/bbl we would expect global non-OPEC oil production to decline over time, recognizing that there would be an initial lag.
What oil price is required to encourage new investment?
In order for the industry to grow oil production and deliver a return on capital, we estimate that a Brent crude oil price of $60-70/bbl is required, as shown in Chart 33. We estimate that on average shale oil developments and in situ oil sands projects require a Brent crude oil price of $50-60/bbl to deliver a 10% return on capital. However, averages can be somewhat misleading as many North American shale oil and oil sands projects achieve cost of capital returns at Brent crude oil prices below $50/bbl.
Ironically, just like with forcing a central bank "put" in the form of QE or more easing, the way to get to these modestly higher "floor prices" is by sending the price of oil to even lower lows from here, a move which will precipitate and accelerate the inevitable consolidation in the oil industry. The longer oil drifts lower at a leisurely pace, the lower it will ultimately end up.
»
- 45 reads
- Printer-friendly version
- Send to friend
- advertisements -
It's a reallocation of wealth, from the producers back to the consumers.
Beats the hell out of reallocaton of wealth by government,.
And it will end when it ends...
After blackmailing the economies of the world for the last 15 years, I hope the money changers choke. They have to find a way for all of the oil they have floating in storage, and everywhere else they have it stashed, to become gainful as well the turnip needs a transfusion before they can squeeze any more sheckels out of it.
These experts didn't see the collapse last year and I have little faith in their predictions moving forward.
That said, there is a point where companys just wont drill for a certain price. Higher for some, lower for others. I don't doubt this could drop hard based on some geopolitical or macro event, but the balance is somewhere near $35 I would guess.
Break even for the towel heads is $15bl
Do the math
What if the experts are behind this? What if the money printers, in their final effort to jump start the economy have decided to subsidize some of the major oil players behind the scenes, and have promised not only to make them whole, but to run off their fracking competition?
Why else would otherwise rational producers keep producing all they can without profits?
If thats the plan, they dont need to do anything. MLP and frackers going homeless and their assets will be bought on the cheap to make bondholders back some money.
Russia. You need to destroy some more of that ISIS Oil stat.
Prices are falling too rapidly for this Natural Resource, which is being depleted into extinction.
Blow up those Tanker Trucks stat.
We need to accelerate the process.
I think if you saw a few Saudi "nephews" bite the dust, that would change Saudi's mind about marketshare and production.
Putin is nice until he can't be nice anymore. Ruble at $72 on its way to $100 is prob the gating factor
Please, these markets have become so distorted that nobody know the price of anything. Thanks to the central planners of the world price discovery has been destroyed.
Yes Doc.Not the way we all thought that the supply lines would break, but hey,
this lack of price discovery is going to do it.Somebody is going to say fuckit, leave it in the ground,
and everyone will follow suit.
That would work if they didn't need the money to service debt and expenses. For now the only way to stop it is with bankruptcy
Markets are what we used to have, but not to worry, our betters at the central banks have a fix. Now if you'll just sign this contract with your own blood.....
And take it from me: there WILL be blood.
All this bearishness about oil is making me all irrationally exuberant.
Oil, like gold and silver, is going to $0.
(slow clap) Thanks for your shrewd analysis.
On a long enough timeline, perhaps?
"from here, a move which will precipitate and accelerate the inevitable consolidation in the oil industry."
I see someone has stepped out of the cave for the first time.
How would a couple of nukes dropped on Saudi affect the price?
in the hypothetical, fantasy world and scenario of a couple of nukes on Saudis... various retaliations would follow, up to the extinction of humankind
so the price would be zero, as in "free oil for everybody". just that nobody would be there to enjoy it
but any Saudi would be very, very angry about your comment. not only for your suggestion. for the fact that it's the fracking US that drove prices down, in their eyes
Not sure there'd be many Saudis reading ZH, but if there are and my comment upsets them...good. Fuck the wahhabi, head-chopping, kiddy fucking, pieces of shit.
Also...not too sure about that 'extinction of humankind' comment. What if the U.S. were to nuke Saudi, who would nuke the U.S. in return?
And, thanks for your reply, Ghordius, you'd make a great politician...you managed to say a whole lot, without answering my question.
How about I try another, far less hypothetical and fantasy, question.
If Saudi Arabia to were to descend into a full on civil war, Arab spring, revolution...whatever, whatever...how would that affect the price of oil?
Snake, I heard you were dead.
A revolution has been on the plate for at least 40 years. During the Arab spring the royal family financed and gave away billions to insure they stayed in power. There may be one hell of a revolt on the horizon. I think in the chaos the price of oil would go thru the floor boards where it belongs.
Pliskin, you want an answer, you get an answer:
if anything can be taken away from the mess in Iraq and Syria is that the spice will flow
in both cases, no amount of civil war really currently hinders the delivery of oil, just the opposite
meanwhile, retaliation can take many forms. biological warfare vengeance comes to mind. but go on with your fantasy of nuking others... without consequences
Pliskin, Where is your virtue of discrimination? Is it just hidden under your hat or is it nonexistent? A wholesale "nuking" of lives of others in a given geographic location, just as much as ignoring the savagery of murderous individual deeds always destroys the innocent.
Can I just claim the old 'Albright Defence'....'It was worth it!'
I like the original question...and the follow up...and it is kind of hard to come up with a nuclear power that would retaliate on anybody hitting the Saudis...with the exception of a couple Muslims nations that have or are in the process of acquiring nuclear weapons going apeshit if their unholy centers of Satanism like Mecca or Medina were wiped out or contaminated. As for the price of oil without the Saudis it might pop up a bit for while but have little long term impact...until all the Middle Eastern wells go dry. Then we will see what Sandland does to survive. Should be fun...pump away!
This idea of not hurting civilians was born after the bombing of Germany in ww2. Take a look at our 1959 nuke plan. Gee....I guess the other side is suppose to adhere to idiotic rules.
"How would a couple of nukes dropped on Saudi affect the price?"
Not the right tool. I would bet that either destablizing the Royal family or regime or forming an "alliance" are prob better options. Saudis have big issues with Iran. Russia can help with that. Or make it worse.
Might replace Saudis with puppet govt. Who would cry for the royals? Certainly not OPEC or middle east
Royal family cant count on US to be their backstop anymore. Obama would tell you we have plenty of oil here.
Nukes not necessary to produce big change.
They did manage a little price bounce for the holidays.
First it was NIRP, now it is NEGAPRICES. I filled 'er up at the corner gas station this morning. Cost? NOTHING! Not only that, but they gave me a $20 gift card and a case of Coca Cola!
If Oil is what backs the US 'Petrodollar', and the Fed has been busy conjuring Dollars by the trillions, then said Petroleum needs to soak these Dollars.
You cannot go from $100+ oil to $25$ oil, w/o causing Tectonic pressures and dislocations in the world of fiat money. What size earthquake should we expect, when the fiat-making 'pressure plates' can no longer be contained?
Russia runs out of money.
Get a loan, Putin’s unpaid firemen toldRussian firefighters and other emergency services employees face a bleak Christmas after they were told that their salaries would go unpaid.
The workers were advised to take out bank loans. “The ministry has no money,” an unnamed accountant at the emergencies ministry told Russian media. “We should get some money in January but how much, we don’t know.”
Russia’s economic woes are causing discontent and undermining President Putin’s assertion of financial stability.
Firefighters in the far East were left without salaries before the New yearEmployees of the Federal fire service in the far East had not paid wages for December. In the far Eastern regional emergency center (far Eastern regional center) to»Interfax» has informed that to solve the financial issue fully succeed until after the holidays.
«The situation with the delay of salaries of firemen emerged on the background of complex
the economic situation in the country. Financiers departments make all
facilities to employees are not left without money in the New year’s eve.
The issue was brought to the level of the Ministry of Finance», — said the Agency head of the press service of EMERCOM Sergey Viktorov.
According to Viktorova, salaries are trying to solve for
through the reallocation of funds, but the budget is strictly regulated and
the probability that fire will still be without the December payments
remains high.
«If until December 31, the money the firemen will get them in any
the event will be paid the full amount after January 11. The budget for 2016 already
defined and problems will arise. A small part of the salary of a firefighter in
December still paid,» — said the head of the press service. Call the number of employees who have lost wages, the Department found it difficult.
Earlier it was reported that the situation with the delays of salary structures
The MES is observed in several regions of the country, in connection with which Department officials have offered to borrow. In the Perm edge the information checks the Prosecutor’s office.
The head of the Ministry Vladimir Puchkov «froze» leadership award to address all the problematic issues with finances.
back in the day,
even the smell, on your property, would be considered as an impairment....
Having an open tar pit would be bad, bad news.
About the only good thing about it would be as a repository for politicians, or, perhaps, in conjunction with a cooperative chicken, as a way to dress them ....
Oh I suspect U$D about 14-16 @ bbl, from what I got of the Wolfe Wave Analysis I did earlier this year.
http://denaliguidesummit.blogspot.ca/
Bottom line
I <3 cheap gas.
Floor? What does that word mean? Or shall we say they don't build em like they used to....