In the wake of OPEC’s decision during its Nov. 27 meeting not to cut the cartel’s oil production, not only did Scotiabank revise downward its 2015 price forecasts for West Texas Intermediate, WTI, and Brent North Sea benchmarks, but WTI fell below Scotiabank’s estimated mid-cycle breakeven cost for Bakken crude.
In its Commodity Price Index report for October, released on Nov. 28, Scotiabank Vice President and commodity market specialist Patricia Mohr said OPEC’s decision “spells a period of low oil prices - at least for the coming year and possibly medium-term.” She said in the absence of a slowdown in U.S. shale development, or production cuts in Russia or Mexico, an over-supply of oil will remain in 2015. “The net result, we have revised down the 2015 oil price forecast for WTI to US$70 per barrel and for Brent to US$75.”
Furthermore, after analyzing more than 50 oil plays in the U.S. and Canada, Scotiabank’s estimated mid-cycle breakeven costs for a barrel of North Dakota Bakken crude range from approximately $54 to $79 per barrel for an average of approximately $69, which includes a 9 percent return on capital, royalties and sustaining capital. On Nov. 29, the day after the OPEC meeting, the WTI price fell 10.2 percent and Brent fell 9.8 percent (see price discussion below).
WTI settled at $66.15 per barrel on Nov. 29, the day after the OPEC meeting. After the weekend, crude oil markets stabilized some with WTI settling at $67.38 on Dec. 3, but still below Scotiabank’s average North Dakota Bakken breakeven. Brent settled at $69.92 on Dec. 3.
“While some producers have hedged forward at higher prices, if WTI oil remains around US$70 for more than six months, it appears likely that drilling activity will slow in more marginal areas of these plays as 2015 unfolds,” Mohr said. “Funding for independent oil producers will also tighten.”
North Dakota’s Bakken breakeven is highest among the major U.S. oil plays reported by Scotiabank, although breakeven in the Permian is on par with the Bakken at approximately $68 per barrel. The Eagle Ford breakeven is noticeably lower averaging $50 per barrel. Even lower yet, Scotiabank estimates the Saskatchewan Bakken at a mid-cycle breakeven cost of $47 per barrel. To put those North American breakeven costs into global perspective, Scotiabank estimates breakeven costs for a barrel of oil produced in Saudi Arabia at between $10 and $25.
However, Mohr added that “Significantly stronger world economic conditions than currently expected would boost demand and market sentiment, allowing higher prices.” Mohr also noted that the U.S. Energy Information Administration is predicting U.S. production growth to slow down in 2015, which she said “may set the stage for moderately higher oil prices in 2016, as would better world economic conditions.”
ND’s own breakeven estimates
Scotiabank’s estimated North Dakota Bakken breakeven range of $54 to $79 per barrel is narrower than the range calculated by the North Dakota Department of Mineral Resources, and Scotiabank’s average breakeven is higher, although the two breakeven estimates are calculated differently and may not be a perfect “apples to apples” comparison.
DMR calculates average well production on a per county basis then uses the average production values to develop breakeven costs at a 10 percent rate of return.
In November, DMR’s breakeven costs for 14 western oil producing counties ranged from $29 per barrel in Dunn County to $104 per barrel in Divide County. However, at $35 per barrel, DMR’s weighted average was nearly half of Scotiabank’s average of $69. But again, the two breakeven estimates may not be directly comparable.
Market response to OPEC
After OPEC’s decision to maintain current production levels, the markets quickly responded with WTI and Brent falling well below Scotiabank’s revised 2015 forecast levels. On Nov. 26, the day before OPEC’s meeting, WTI settled on the New York Mercantile Exchange at $73.69 per barrel and Brent settled at $77.75. On Nov. 28, the day after the OPEC meeting, WTI settled at $66.15, a loss of $7.54 from the previous trading day (Nov. 27 was Thanksgiving in the U.S.). Brent didn’t fare much better losing $7.60 per barrel and settling at $70.15.
After steadily falling for three consecutive weeks beginning in late October, WTI and Brent made some slight gains during the week of Nov. 17-21 on news that China was cutting interest rates, generating optimism that the move would spur economic growth and hence oil consumption. WTI gained back 87 cents settling at $76.51, and Brent gained back $1.05 per barrel pushing it back over the $80 mark settling at $80.36 on the Nymex market. Both benchmarks started the Thanksgiving holiday week on a relatively strong note, with WTI settling at $75.78 and Brent at $79.68 on Nov. 24. But then analysts began speculating that OPEC would not cut production and prices started to soften through Nov. 26, the day before Thanksgiving, the day OPEC met.
US and OPEC output
To what extent production and production projections will be revised following the OPEC decision remains to be seen as the next series of monthly estimates won’t be available until mid-December.
However, in its most recent short-term energy outlook released in mid-November, the U.S. Energy Information Administration, EIA, reported U.S. crude oil production averaged 8.9 million bpd in October, up 3 percent from 8.65 million bpd in September. That September output marked the highest domestic crude oil production since July 1986, and with October output exceeding September, the October production is now the highest since 1986.
EIA also projected U.S. crude oil production to increase further to 9 million bpd in December and to average 9.4 million bpd throughout 2015. While the current 2015 production estimate is down 100,000 bpd from EIA’s October forecast, if U.S. production does hit the 9.4 million bpd mark in 2015, it would be the highest annual domestic production average since 1972.
OPEC’s monthly oil market report, also released mid-November, put the cartel’s October production at 30.25 million bpd, down slightly from OPEC’s September production of 30.48 million bpd. The cartel ramped up production in the third quarter with output averaging 30.23 million bpd, an increase of nearly 2 percent over the second quarter production of 29.76 million bpd.
Global demand estimates
EIA revised downward its 2014 global consumption projection in November and estimated that global consumption would grow by 900,000 bpd in 2014 averaging 91.4 million bpd for the year. That projection is down from the 1 million bpd growth projected in October.
OPEC currently estimates global demand at 91.19 million bpd for 2014 and 92.38 million bpd in 2015, unchanged from the cartel’s October projections.
Likewise, the International Energy Agency, IEA, did not revise its global oil demand forecasts in its November monthly oil market report. IEA estimated 2014 global oil demand will average 92.4 million bpd and forecasts 2015 demand at 93.6 million bpd.
