The oil selloff appears to be permanent. Record-breaking increases in U.S. production, a resurgent Libya, and Saudi Arabia lowering its prices in a bid to keep its share of Asian customers—all of it has combined to knock oil prices down 25 percent since June, and there might be more room to fall.
A “structural transition has been reached,” analysts at Goldman Sachs (GS) wrote this week, and the ability to determine oil prices has shifted from OPEC to the U.S. The report, entitled “The New Oil Order,” argues that it’s time for American oil producers to slow down in the face of weak demand growth around the world and the quick pace of change. Goldman predicts that U.S. West Texas Intermediate oil will hit $75 a barrel during the first half of 2015 and that Brent will settle around $85 a barrel, about where it is now.
The shale boom in the U.S. isn’t likely to pull back until oil gets so cheap that people can’t make money drilling for it. There are a lot of estimates of the break-even price for U.S. shale producers. Some think it’s around $80 a barrel, others think it’s closer to $60, and it’s obviously not going to be the same for everyone. The number changes depending on where you’re drilling and how good you are.
A shakeout in the U.S. oil patch is almost certainly coming in the next few years, especially given the amount of junk bonds that are floating the boom. But those oil fields won’t necessarily go dry. Stronger drilling companies will simply buy them from weaker ones.
For now, there’s no sign of a slowdown. The number of horizontal rigs drilling for oil in the U.S. has quadrupled over the past five years. Last week U.S. production hit its highest level since 1983, back when Alaska’s North Slope was gushing. Maybe the number of rigs will go down over the next year, and maybe the pace of production will taper off. But in the oil patch, leases often come with the requirement to keep drilling: Use it or lose it. See Full Story at BusinessWeek.com
