Just a fraction of the world's oil supply isn't profitable at $35 a barrel

Oil prices are at a level not seen in over 10 years.

On Thursday afternoon the price of West Texas Intermediate crude oil hit a low not seen since 2003.

However, a tweet from a Wall Street Journal reporter indicated that the oil cartel OPEC may be considering production cuts.

On Friday, oil prices were up about 10% in response with West Texas Intermediate crude, the US benchmark, trading near $29 a barrel.

Brent crude, the international benchmark, was sitting near $32.

And according to a report from energy research firm Wood Mackenzie, just 4% of the world’s oil is unprofitable at $35 per barrel, a price oil was trading near just a few weeks ago.

Wood Mackenzie’s report, cited by energy news service Platts, said about 3.4 million barrels per day is not profitable below the $35-a-barrel threshold. According to the International Energy Agency, the world’s supply is 97.07 million barrels a day.

And so while today’s oil prices are below this threshold, the report indicates that the price at which US shale and other producers would be forced out of the market is lower than previously thought.

As Platts writes, “For many producers, being cash negative is not enough of an incentive to shut down fields as restarting flow can be costly and some are able to store output with a view to selling it when prices recover.”

This falls in line with a report from Citi in December that showed most producers’ cash cost point — or the amount per barrel producers need to receive just to keep the lights on — is well under $30.

And as we wrote earlier this week the way these projects are financed likely has an impact on the stubbornness of production levels.

Given that so much of US shale production has been financed by debt, not equity, companies are incentivized to continue getting whatever cash they can for their production in order to meet debt repayments.

In theory, losses from production pauses that were aimed at goosing prices higher could be inflicted on equity investors over a period of time.

And all this comes at a time that OPEC, the 13-member oil cartel that has been a major contributor to oversupplying oil markets, seems quite far away from announcing the kind of coordinated production cut that could provide serious relief to the market.

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