The oil market is still way oversupplied.
As a result, prices haven’t been able to recover after falling about 70% in the last year.
In the last few weeks as oil prices have collapsed to post-crisis lows a number of factors — both technical and fundamental — have been working against the market.
In the background of the oil decline over the last year-plus has been the standoff between the 13-member oil cartel OPEC and US shale oil producers. Earlier this month, OPEC declined to curb its production and instead maintained its status quo as it works to defend its market share against a surge in production from US shale producers.
And it is this production from US shale producers, also called the swing producers in the market, that has been fingered as the main culprit behind the price collapse.
But this chart, which comes to us from analysts at Citi, makes it clear that prices are going to have to go lower still to get production entirely halted.
Cash costs, or the absolute minimum amount producers need to get for their oil just to keep their operations up and running, have declined over the last year. This is due in part to the tailwind US-based producers have gotten from the strong dollar as well as continued technological advances making oil drilling cheaper and more efficient.
Additionally, energy-related companies have been seen as the epicentre of the high-yield bond stresses that has rattled financial markets in recent days. And if you’re a small oil producers with a lot of debt who needs to continue paying creditors at all costs, you’ll be motivated to keep producing oil as long as prices remain above your cash costs.
Right now, it looks like most US-produced oil is still produced — all-in — for less per barrel than market prices. Citi, however, notes that reports have indicated that production in Mexico and western Canada has been selling for less than $30 a barrel, below the current benchmark prices of $37 and $39 for WTI and Brent crude, respectively.
But on the whole the average producer will still be incentivized, at current prices, to continue producing and selling oil at prevailing prices.
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