The Price Will Never Be The Same Again

US-producer’s message to Opec: ‘Above 40 – we are back!’

Over the last few days, the price for Brent-crude climbed regularly. On March 1st, 2016, it reached a new year-high of over 37 USD/barrel, that’s quite a rise from the January-lows of 29 USD.

Could this be the beginning of a rebound of oil to price-levels from a year ago, when Brent was traded at 63 USD/barrel on March 1st, 2015?

Well, the dreams of traditional oil-producers will most likely not come true for reasons far away from the oilfields in the Middle East or Russia.

Half way around the globe, the US-shale-producers (the ‘frackers’ – see Info-box) could become the party-crashers once again. Just a year ago, they announced, they needed oil in the range of 60 to 70 USD/barrel to produce more. Now, they will settle for far less.

Thanks to remarkable efficiency gains and cost-cutting, for some leading US-shale producers 40 USD/ barrel is the new 70.

‘Above 40, we are back!’ – The message of US-shale highlights the industry’s resilience and serves as a warning to rivals and traders: Don’t bet on a retreat in US-oil production that would help ease global oversupply and let prices recover.

In other words: Even if the demand for oil picks up, the oil price could remain in the range of 40 to 45 USD per barrel for a considerably longer time than initially expected.

A big US-player is Continental Resources, led by billionaire wildcatter Harold Hamm (a ‘wildcatter’ drills in unproven areas not known to be oil-fields). Continental is prepared to increase capital spending if US-crude (that’s WTI for ‘West Texas Intermediate’, currently traded at 33 USD) reaches the low- to mid-40s USD range, allowing it to boost production ‘by more than 10%’ next year, CFO John Hart said according to Reuters.

A similar message comes from Whiting Petroleum, the biggest producer in North Dakota’s Bakken formation. Initially, the company announced a stop of production at the end of this month, but Chairman and CEO Jim Volker now considers completing some of these wells, if oil reaches 40 to 45 USD/barrel. This is somewhat different than just a few months ago, when Volker said it might deploy more rigs if US-crude hit 70 USD/barrel.

The second message to traditional oil producers – incl Russia – is how the ability to cut costs and the remarkable efficiency gains have turned the US-producers – once seen by Opec as a marginal, high cost producer – into a major player and a thorn in the side of traditional producers like Saudi Arabia or Russia.

As an example, Hess Corp., which pumps one of every 15 barrels of North Dakota crude, cut the costs by 28% last year. However, resuming drilling quickly may prove hard after firms laid off thousands of workers. According to CEO John Hess said, the producers might need up to a year to stop or restart production.

Maybe this restart won’t be necessary at all. To the horror of Opec, Russia or Mexico (who’s state-owned oil giant Pemex or ‘Petroleos Mexicanos’ lost more than 30 billion USD in 2015), it’s anything but sure, that oil-prices will reach levels clearly above 40 USD/barrel any time soon.

The oil-analysts at Morgan Stanley and ANZ (Australia and New Zealand Banking Group) for instance expect average prices in the low 30 USD/barrel for the full year of 2016.

And there is also the ‘offshore-front’ that could keep prices low. The US-government will open nearly 45 million acres along the Gulf-Coast to oil and natural gas development later this month.

Unlike the onshore production, which has been tapering off as oil prices decline, offshore production in the Gulf – off the coast of New Orleans – is on its way to setting a record. The projected daily-production will average 1,6 million barrels in 2016 and 1,8 million in 2017.

The main price-driver, the oversupply, will therefore not go away very soon and it’s also affecting the shipping of oil.

Desperate producers started to send ships carrying oil and oil products from the Middle East on longer routes to Europe. The oil tankers sometimes skip the shortest route via the Suez Canal and set sail for the long journey all around Africa (see map), hoping that demand in oil will spike while ships are at sea for 40 days instead of 20 days on the Suez-route.

It’s seems, this strategy is failing too. Right now, up to 50 fully loaded oil tankers are waiting to unload their cargo into the ‘Euro Tank Terminal’ storage hub in Rotterdam, Europe’s busiest port.

Middle-East oil-producers now send some tankers on the long way hoping prices will rise till the cargo arrives in Western Europe.

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*Info-box: Fracking

• ‘Fracking’ is short for ‘High-volume hydraulic fracturing’ – a well-stimulation technique in which rock is fractured by a pressurized liquid. The process involves the high-pressure injection of ‘fracking fluid’, primarily water, containing sand to create cracks in the deep-rock formations through which natural gas and petroleum will flow more freely. The birthplace of the US-shale boom is the Bakken Formation, a 200’000 square mile region of North Dakota, Montana and Saskatchewan. It is estimated to hold over4 billion barrels of oil. Another important fracking site is Texas while the state of New York has banned fracking for environmental- and public health issues.