Despite Saudi Arabia and Russia, the world's two largest oil producers agreeing to freeze oil output, benchmark Brent crude oil fell another 3% overnight to US$32.30 a barrel.
The two countries, along with Qatar and Venezuela have agreed to fix their oil production at January levels, but the move is likely to have little effect in halting the oil price plunging further. There are several reasons for that…
- Both countries are close to peak output anyway, and it's not the cut in production that many investors had hoped for.
- No other countries have agreed to freeze production levels, and Iran (OPEC's fifth-largest producer) has already ruled out any curbs on its production. Iran expects to boost output and exports by 1 million barrels a day in 2016 after international sanctions were lifted in January.
- For the big producers, cutting production and even freezing production could see oil prices recover enough to allow plenty of US shale oil companies struggling with US$30 a barrel oil to quickly return to the market. Goldman Sachs Head of Commodities Jeff Currie recently told Bloomberg that these producers can get oil online again in 80 days, making any type of price rally 'self-defeating'.
US producers and output are crashing
An estimated 74 North American oil producers face significant debt difficulties according to credit rating firm Moody's. We also reported last week that 60 oil and gas producers have already filed for bankruptcy and another 150 are headed that way.
The following chart shows that US oil production growth in Texas and North Dakota has come to a screaming halt, oil rig counts have plunged. North Dakota is home to the Bakken formation, while Texas hosts the huge Eagle Ford and Permian basins.
Should oil prices manage to rise to US$50 a barrel, shale output is likely to come back, according to Ian Taylor, CEO of the world's largest oil trader Vitol Group BV. An estimated 4,000 fracking wells have been drilled but are just sitting there waiting for oil prices to increase according to Bloomberg.
Where to from here for oil?
It seems likely that oil prices are headed lower or at least, staying at these levels in the low US$30 a barrel range for some time yet. Bad news for Australian oil and gas producers including Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL), BHP Billiton Limited (ASX: BHP) and Origin Energy Ltd (ASX: ORG). Santos, in particular, said in November 2015 (PDF) that it was aiming to be cash flow positive with oil prices at US$50 a barrel and the Australian dollar at US 70 cents.
Look out below.