Has the oil price stabilised?

Oil prices may have stabilised, according to Saudi Arabia and OPEC.

The Brent crude benchmark price was US$49.68 a barrel on Friday, after falling 1.8%, but has been trading around US$50 a barrel since early May. Six weeks is a long time in oil land.

That was after prices rose strongly, following a sharp plunge from above US$50 a barrel in November 2015, to less than US$30 a barrel in January 2016. Since then, oil supply appear to be slowly retracting.

Last week the US Energy Information Administration (EIA) reported that while US production remains resilient in the face of lower oil prices, April 2016 saw the largest drop in monthly production since the start of the downturn began in July 2014.

Production was 2.4% below March’s and 8% below the same month last year – as the chart below shows.

US oil production Apr 2016

Source: EIA

Last week, the energy minister of Saudi Arabia, the world’s largest oil exporter, and the secretary general of the Organisation of the Petroleum Exporting Countries (OPEC) agreed that the global oil market was heading towards a balance and that prices were starting to settle.

Back in March this year, the EIA said it was seeing signs that prices may have bottomed out. The agency said production from both OPEC and non-OPEC countries was continuing to fall, while demand growth had decelerated sharply.

The low prices experienced earlier this year may finally be having an impact – with higher cost producers forced out of the industry. However, there are still fears that stable oil prices of around US$50 a barrel may encourage more US shale producers to increase drilling and output.

Stable prices are good news for the likes of Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL) and BHP Billiton Limited (ASX: BHP). The oil companies were sort of caught ‘with their pants down’ when the oil price plunged and had to immediately shore up their balance sheets and focus on cutting their production costs to more sustainable levels.

Santos said it expected to be cashflow positive this year with oil prices at US$50 a barrel and the Australian dollar at US 70 cents. Unfortunately for Santos, oil is slightly below that, and the Australian dollar is around US 74-75 cents suggesting the company is not yet at breakeven.

Foolish takeaway

Stable oil prices might be welcome news for the oil producers, but at these levels may still be challenging for the likes of Santos.

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

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.

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