Why nothing has changed for oil prices

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…

  1. Both countries are close to peak output anyway, and it’s not the cut in production that many investors had hoped for.
  2. 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.
  3. 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.

US oil output stops

Source: Bloomberg

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.

BRAND NEW! Our Top Dividend Stock for 2016

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.