Bottom of the barrel

Will oil prices stabilize, and if so, when? A new report provides some possible answers.

How low can oil prices go before producers rein in production or simply fold their operations — a move that will cause supply to shrink and prices to rise? That tipping point stands around US$40 a barrel, according to a report by global energy analysis firm Wood Mackenzie.

The firm’s analysis of 2,222 oil fields throughout the world, which account for 83% of global production, suggests that when the price falls to US$40 a barrel, 1.6% of global supply will be produced at a loss. At that point, states the report, sufficient production will be curtailed to prompt "a significant reduction of global supply.”

It seems OPEC’s strategy is to get to that tipping point, according to a majority of analysts in the field. In the past, when prices started to fall, OPEC producers quickly cut production in order to maintain price levels. This time, they have not done so.

Why? Many believe that the Organization of the Petroleum Exporting Countries (OPEC), although it has never explicitly said so, is keen to edge out US shale oil producers that are currently flooding the market with new oil supply and putting downward pressure on prices. "For months, OPEC officials have signaled they won't rein in prices because doing so would cede market share to non-OPEC producers," says a January article in The Wall Street Journal. "Most OPEC officials have shied away from pointing the finger at shale. But the United Arab Emirates made it clear: only when prices are low enough that shale oil is uneconomic will markets stabilize."

The point where shale becomes "uneconomic" is slowly rising on the horizon. (In the middle of January, according to the Brent index, oil stood at US$48.68 a barrel.) But that doesn't mean oil producers will close the spiggot. The "oil war" could continue for some time still.