$30 Oil Is a Whopping $20 Below Cost of Production for US Shale
The average fracking operation needs $50 oil to break even
Crude futures opened down a massive 31% today. Prices have recovered a bit, but price is well below cost of production.
Saudi Arabia and Russia started an Oil Price War on Saturday.
Futures now open
*BRENT CRUDE DROPS MORE THAN 31% AFTER OPEC+ COLLAPSE
WTI = $30.07, -$11.21 (-27.16%)
Brent $33, -$11.85 (-26.18%)
DJIA futures down 1059, -4.11%
S&P futures down 122.25, -4.12%
— Jim Bianco (@biancoresearch) March 8, 2020
The carnage was far worse than expected. Oil futures opened near $30, down a record-breaking 27%.
Crude 15-Minute Chart:
That’s the biggest crash in history.
The S&P 500 and Nasdaq futures are down over 4%. Halt limits just hit.
US Cost of Production
A Dallas Fed May 2019 report highlights the Average Cost of Production.
The average breakeven price of oil has fallen 4 percent (or $2 per barrel) over the past year, to $50 per barrel, according to the latest Dallas Fed Energy Survey. The $50 top-line figure masks some important differences. Areas such as the Midland and Delaware basins in the Permian Basin, hotbeds of shale activity, are routinely lower on average than other locations. There is also variability among operators; within the Permian Basin, for example, inpidual responses to the most recent survey ranged from $23 to $70.
Bloomberg New Energy Finance’s breakeven prices in the Permian range from $46 per barrel in Loving County to $87 per barrel in Reagan County.
While market participants may differ on how much oil is available at a given price, they are all aware of the overall trends. These represent strong forces that should keep long-dated futures prices from rising too high or falling too low.
Given current market prices, U.S. shale production will continue growing this year. Indeed, a recent report by the International Energy Agency highlighted that shale production is likely to be a major driver over the next five years.
TIME TO REEVALUATE
Drillers and frackers that borrowed heavily and are dependent on higher prices to pay interest are now in serious trouble.
Oil exports? Uh… forget about them.
Demand is crashing with people working at home and refusing to fly.
A lot of leveraged drillers and crude suppliers dependent on prices above $50 will see a credit implosion.
That’s just a start.
As noted previously, a Very Deflationary Outcome Has Begun.
Blame the Fed.
Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and inpiduals.
See the previous link for discussion.
LIQUIDITY CRISIS IN ENERGY SPACE
What better time than now to blow up US oil producers heavily in debt as an act of revenge?
The liquidity crisis will quickly spread far beyond energy.
Source: Mish Talk