Due to a lack of growth in North American shale production and increased decline in mature fields, a Brent price as low as US$50/bbl is not sustainable beyond 2016, shows recent oil market research undertaken by Rystad Energy.
Around ten thousand shale wells would need to be drilled each year in order to keep North American shale production flat. Assuming balanced cash flows, costs would need to be decreased by 20% in 2015 vs 2014 at a price of $50/bbl to drill those wells according to conducted well-by-well breakeven modelling.
While $70/bbl is likely too high an average price for 2016, it is too low an average price beyond 2017 as the additional effect of non-sanctioning of projects reduces the global supply potential longer term.
“Our current market view is neutral to bearish in the short-term as we see a production floor at $30/bbl. At such a low price, the supply response in US shale production coupled with already visible drops in infill drilling in the Gulf of Mexico and North Sea will be so severe that the price cannot remain that low for long,” says Nadia Martin, senior analyst at Rystad Energy.
Although the oil market is currently well-supplied and oil stocks remain high, Rystad Energy remains bullish in the longer term, with foreseeable price spikes for Brent already in 2016. The current futures curve is trading too low for marginal producers to hedge their future production.
Image: Supply and demand graph/Rystad Energy