Rising oil prices could bring some marginal US production back on line

24 March 2016, Week 11, Issue 396

The Paris-based International Energy Agency (IEA) said last week that it believed US oil production would decline by 600,000 bpd this year. It added, however, that if crude prices kept rising, some of the marginal production in that forecast could be switched back on.

Head of the IEA’s oil market division Neil Atkinson said it was almost impossible to know how much an uninterrupted oil market bounce could affect the IEA’s production forecast. “If prices keep rising, we could find that because of the cost cutting and the technology improvements, some of this marginal production is switched back on,” he said. “But how long does it take to reassemble crews, get the labour, the equipment and all the rest of it? This is what we don’t know.”

Oil markets have rallied by more than 15% since early February, mostly on speculation that key OPEC and non-OPEC oil producers would agree to a cap on new production. Market fundamentals and the ongoing supply glut that has repressed prices since mid-2014, however, have largely remained unchanged.

Atkinson also said that US oil producers had not hedged half as much of their crude production as they do in normal years to protect themselves from falling prices. However, Fuel Fix said last week, citing Morgan Stanley, that oil hedging was “already rampant,” and US producers were becoming more confident they can lock in US$45 per barrel now for production in 2017. Atkinson said that hedging could encourage some struggling oil producers to “turn to their bankers and say: ‘the worst is over, call off the bailiffs’.

“What’s the lag between companies saying ‘Hey, we’re back in business,’ and then actually producing oil? Is it six months, is it nine months? This is the uncharted territory,” he said. “There’s nothing to model it against because there’s nothing quite like this. It’s a moving target because these guys are coming out with swifter, smarter, more efficient ways of doing it.”


Edited by

Anna Kachkova


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