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Oil prices will remain low
As oil production has recently increased, demand growth has
weakened slightly. In Europe, Brexit dampened the outlook for
economic growth in the UK, while in Asia, Japanese manufacturing
activity contracted in July, with new export orders falling by the
sharpest amount in more than three and a half years. Moreover,
China’s economy is slowing; however, with policy loosening,
growth should remain stable in the near-term. Along with steady
demand from the rest of Asia and other emerging markets, this
stability should buoy global demand for oil for the rest of 2016.
Nevertheless, according to the EIA, global supply of oil will continue
to exceed demand in 2016 and 2017, before evening out in 2018.
Although oil price forecasts vary, in general they are expected to
remain below $60 per barrel through 2017, and most forecast below
$70 through 2020.
Profitability to improve but remain low
Low oil prices, coupled with stable extraction costs, transportation
costs, and taxes on profits have resulted in the erosion of net profits
for oil companies since the $100 per barrel oil price high in July
2014. As prices slowly improve, profitability should also improve,
but remain low. On a country basis, the UK currently is the most
expensive place to produce oil. This is due to the offshore, deep-
water location of most wells as well as an aging infrastructure
requiring much maintenance. Saudi Arabia, however, remains the
most inexpensive place to extricate crude oil because fields are
sizable, on land, and lie close to the surface. The breakeven point
for most oil production globally is roughly $50 per barrel, so as oil
prices rise to this level — as we are seeing now — drillers begin to
return, which boosts supply again and places downward pressure
on pricing.
GLOBAL OIL PRICE
Source: EIA, EIU, Chicago Mercantile Exchange, Haver Analytics, Cushman &
Wakefield Research
OIL PRODUCTION COST & BREAKEVEN POINT
August 2016, $ Per Barrel
Source: The Wall Street Journal, Cushman & Wakefield Research
$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60
Saudi Arabia
Iran
Iraq
Russia
Indonesia
U.S. non-shale
Norway
U.S. shale
Canada
Venezuela
Nigeria
Brazil
U.K.
Brent Crude ($49.23 per barrel – 8/17/16)
Loss
Profit
$0
$20
$40
$60
$80
$100
$120
$140
2010 2011
2012 2013 2014 2015 2016 2017 2018 2019 2020
$ per barrel
Brent Crude WTI
Forecast