Shale 'Sweet Spots' Still Viable At Current Prices

Oil price volatility returned last month on worries of slower economic growth, weakening oil demand and an unexpected rise in Libya’s output. Saudi Arabia also indicated it would not cut oil production despite weaker oil demand. However, the oil price decline is more of a reaction to possible future weakness in oil demand rather than a sudden change in supply and demand fundamentals. While true short-term demand is lower than expected, the longer-term outlook is still positive, according to Wood Mackenzie.

Wood Mackenzie reported last month that, when using U.S. tight oil breakeven prices as a metric, Brent prices are unlikely to be sustained below $80 per barrel beyond 2015 because of the effect on U.S. tight oil growth.

“Current production in most areas of the world, including U.S. tight oil, is economic well below current oil prices and not likely to be shut, except for a few unusual cases such as U.S. extra heavy and ‘stripper’ well production,” said Ann-Louise Hittle, head of Macro Oils at Wood Mackenzie.

The bulk of new U.S. tight oil developments are economic down to $70 to $75 for West Texas Intermediate (WTI) crude or $80 to $85 for Brent. However, if prices fall below this threshold and stay there for much of 2015, approximately .6 million barrels per day of U.S. tight oil supply growth would be under serious threat by year-end 2015. This volume would increase each year with low prices.

Wood Mackenzie noted that loss of growing U.S. tight oil volumes would rebalance the market and stabilize oil prices. While development of high cost future supply is at risk in a low price environment, the impact will occur over a three to five year timeframe. Wood Mackenzie said it anticipates that the global economy will remain stable in 2015 and support oil demand gains.

Falling global oil prices have raised the question of whether shale exploration and production will be viable at lower prices, the Financial Times reported last month. According to Times, Saudi Arabia’s apparent willingness to let crude prices fall to damage its competitors will test the capital markets’ support for U.S. producers.

Brent crude prices continued to fall Tuesday on news that Saudi Arabia, the world’s largest exporter, has slashed its contract price for its U.S. customers in a further sign of an escalating war for control of global energy markets, The Telegraph reported Tuesday. Brent crude declined to $82.62 in mid-morning trading in London.


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