Are oil prices reaching a floor?

December 7, 2014

By: Syed Ahmed

Quite lately, the sliding of oil prices by 9% in the past month has created a cause of concern in the global markets as to how much the prices could fall. With weaker global economic outlook by IMF and world bank coupled with increasing supply from US as well as OPEC nations have caused the prices to fall drastically. US is currently producing 8.95mn bpd as of week ending Oct 10th (source bloomberg) with OPEC also maintaining its supply of oil ~31mn bpd.

Such decrease in crude prices have also brought on question of Oil rigs being profitable at low prices. The cost of extraction from natural reserves come about USD5-10/bbl while the methodology used for Canadian Oil sands and horizontal cracking, the cost jumps by almost 4-5x. This will likely impact the future production of oil from certain rigs. This brings to the question as to how low the prices could go. Technical data suggests that the support level for crude hover around USD75, which is also quoted by some of the analysts where the rigs would still find it profitable to continue to produce. However, if the prices fall below USD70/bbl, the rigs may hinder production going forward.

Furthermore, stance from OPEC is yet to be seen in terms of cutting its supply. The 12-member group will likely meet on November 27 to decide the price and production outlook. At the same time, Iran another important player in the gulf countries is currently facing sanctions and is unable to export oil, however, the country is expected to meet US and other world powers to discuss the possibility of removing the sanctions. If that goes through, Iran would then be able to export its oil in the international market further increasing the overall supply of the OPEC bloc. This may further weaken the crude prices. As shown in figure 1 (source: bloomberg), the lowest the oil prices have is USD34/bbl in 2009 after the peak of USD145/bbl due to the fall in commodity prices post financial meltdown.

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