Study Shows Fear Of Oil Industry Collapse Is Overblown

Chris White

Those worried that rock-bottom crude prices might collapse the oil industry have little to fear, according to a report by research group Wood Mackenzie.

Citing analysis of production costs on 10,000 oil fields, Wood Mac said it believes only 4 percent of the global oil supply is unprofitable at oil prices below $35 per barrel, a finding which seemingly runs counter to the dire warnings issued by analysts.

Even most U.S. shale, which itself has wrestled with higher-than-average production costs, droops in the red at oil prices south of $30 a barrel, according to last week’s study.

In a nutshell: Nearly 96 percent of oil produced at or below $35 per barrel is profitable.

For now, oil companies are hedging their bets, hoping to just inch along until oil prices adjust back to their 2014 highs, when crude prices spiked at $100 per barrel.

“Curtailed budgets have slowed investment, which will reduce future volumes, but there is little evidence of production shut-ins for economic reasons,” Robert Plummer, Wood Mac’s vice president of investment research, said in a note. “Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices.”

Wood Mac’s latest study runs counter to a similar report issued by the group last year when it argued that up to 1.5 million barrels of oil output in the U.S. was risked being scuttled at $40 a barrel.

One of the reasons for shale profitability levels maintaining such a high level, despite low prices, is the fact that refinement production methods have gotten better, more efficient. In fact, companies argue they are pulling in higher profits from seemingly lower production outputs.

The study’s findings come on the heels of an International Energy Agency (IEA) report Tuesday showing the price of oil will stay in the cellar for a while thanks in large part to the glut in oil markets.

The IEA’s report tried to stamp out overconfidence in the oil markets following speculators pointing to rumors that the Organization of the Petroleum Exporting Countries may rein in production, as well as an uptick in demand, as reasons to be optimistic about the future of oil prices.

The IEA also pointed out last month that oil output will fall by nearly 600,000 barrels per day this year, which signifies a massive slide from the uptick in production of 1.4 million barrels per day in 2015 and 2.4 million a day in 2014.

Follow Chris on Facebook and Twitter