Where is the Bottom for Oil?

Arnold DiLaura, Managing Director, AUA Capital Management
December 2014

We have found some interesting charts regarding the outlook for oil as we head into 2015. The first is from Scotiabank, and shows the break-even price for various US and Canadian oil fields. They range from over $80 to the mid-40s. Crude is currently trading between $55-60 a barrel.


The second chart below is from the IEA and shows a time-series of world production and demand for oil from 2009 projected through 2015. We currently have a 2 million b/d over-supply which is contributing to the price weakness.


The implication of the two charts is that if the Saudis want to take 2-3 million b/d of production capacity out of the market, oil should stabilize at a price in the mid-50’s.  There is however, an additional geopolitical factor to consider:  One of Saudi Arabia’s arch enemies, Iran, and a key adversary, Russia, both depend on high oil prices to fund their governments and activities which are antithetical to Saudi (and other Gulf Arabs’) interests.  If the Saudis (and their allies) were to continue to drive the price of oil down, they would further reduce marginal production capacity worldwide. However, this capacity would not be Iranian or Russian, as they have an imperative to produce almost no matter what the price. The goal would be to curtail funding for the governments that engage in acts (e.g., support for Assad in Syria) which the Saudi’s oppose.

In any event, we had originally thought that prices would need to go lower (between $40-50/barrel) to shake out the higher price producers. Clearly prices could go that low, but if the implications of these charts are correct, then the floor might be at current levels in the mid-50s.  If so, we could expect oil to trade in the $50-60 range over the next 6 months to one year.

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