For the oil industry, $50 a barrel is a nice start. The big question is what comes next.
Crude prices in New York and London briefly breached that long-anticipated barrier on Thursday, helped by supply disruptions from Canada to Nigeria and a decline in US production. But it will likely take a rise to at least the mid-$50s – and signs the rally has staying power – before oil explorers start feeling secure again, analysts have said.
“This is a psychological milestone,” Michael Wittner, the New York-based head of oil-market research at Societe Generale, said in a telephone interview. Still, “some Nigerian oil will be back and all Canadian, and the big question is whether it will matter. The market might not care.”
The world’s 50 biggest publicly traded oil companies need an average price of $53 a barrel to stop bleeding cash, oilfield consultant Wood Mackenzie Ltd said in a report last month. For US shale producers, oil may need to rise into the mid-$50s before drillers respond with a “significant ramp-up” in well completions, Bloomberg Intelligence analysts led by William Foiles said in a May 3 report.
After shaving billions of dollars off capital budgets this year, those companies have a backlog of thousands of wells that have been partially completed but not yet tapped. In the mid-$50s, activity could rise to hundreds of completions each month. With prices below $50, those wells will be put to use at “a more measured pace,” Foiles wrote.
Producers will tread carefully after last year, Foiles said. Some poured more money into drilling as crude rallied above $60 only to see prices crash below $40 by August. “A lot of these companies were kind of fooled last year,” he said on Thursday in a phone interview. “They are much more cautious now.”
Even members of the Organization of Petroleum Exporting Countries, which generally have lower costs than US explorers, won’t get much of a break from topping the $50 mark. Most need much higher prices to balance budgets that have been shredded by the price slump since 2014.
West Texas Intermediate for July delivery touched as high as $50.21 on Thursday before settling at $49.48 a barrel on the New York Mercantile Exchange. Brent for July settlement closed at $49.59 on the London-based ICE Futures Europe after earlier touching as high as $50.51. The global benchmark sank to the lowest since 2003 in the first quarter and has since surged about 80% on signs the world’s oversupply will ease.
Oil has not yet settled above $50 this year, but when it does, the markets are going to respond – at least temporarily, Wittner said. “There may be a pullback but it’s only going to be temporary if it occurs, because the second-half rebalancing is almost at hand.”