uploads///Cost For Producing Crude Oil Per Barrel

Crude Is Approaching the Break-Even Rate for the US


Dec. 11 2015, Published 8:55 a.m. ET

Break-even for different countries

Crude is below $40 per barrel. It’s already below the break-even rate for Brazil and Canada. The break-even rate for the US is near $36.20. The costs only include the capital expenditure and operational expenditure. Rystad Energy compiled the data. It published the data on November 23, 2015. Crude oil mainly fell due to oversupply in OPEC (Organization of the Petroleum Exporting Countries) nations. However, this made life difficult for US-based upstream companies.

The likely impact can be seen in the decreased capital expenditure and budgets for different upstream companies. It will also include laying off employees.

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The above graph shows the break-even rate for some of the world’s largest crude oil producers. OPEC’s prominent suppliers like Saudi Arabia and Kuwait have costs below $10 per barrel. Saudi Arabia accounts for 15.7% of the world’s total crude oil reserve. This shows how far the price war can continue to retain market share.

Oil below $40 means that production isn’t economically viable in countries like Canada and Brazil, according to the available statistics.

Imperial Oil (IMO) and Suncor Energy (SU) represent the large-cap Canadian ADRs (American depositary receipts) in the oil and gas sector. Petrobras (PBR) represents large-cap Brazilian ADRs in the oil and gas sector.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell by 21.5% on a YTD (year-to-date) basis. The United states Oil Fund (USO) fell by 36.5% on a YTD basis.

Hedging can minimize losses to a certain extent

Upstream companies usually hedge their open position with available crude derivatives. This minimizes the impact due to fluctuating crude oil prices. If crude remains below $40 for a longer period, it can increase the stress on upstream companies’ financials.

In the next part of this series, we’ll look at upstream companies’ 100-day moving averages. We’ll start to interpret what these figures mean for the industry.


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