PIRA Energy

(This graph already accounts for currency devaluation and cost deflation in calculating USD breakeven costs. This is the most recent graph in this series, it was published on October 22nd):

Rystad Energy (posted before on BRY):

BNP Parisbas

Energy Aspects

Douglass Westwood

WoodMac(posted before on BRY)

Morgan Stanley

Bernstein (using 2014 data)

The above graphs have been produced by independent sources between January and October 2015, and they represent countless man hours of work, and hence this information is highly relevant to oil investors. Out of these eight sources there is a clear agreement that the $50 to $60 Brent range is the average price to extract a barrel of oil today, however oil prices are not set by the average, at $50 Brent only 70m out of the 95m barrels required can be produced according to PIRA (1st graph). In order for the market to meet demand the industry needs to produce the marginal barrels as well, which according to the above graphs is around $80. Sanford Bernstein research indicate that over the last 20 years Brent oil prices have always reverted back to the marginal cost of production:

It is worth noting that Bernstein believes that the current marginal cost of production is $85, this is more or less within the range of the other 7 sources displayed here. The extent of the deviation from the marginal cost of production today stands at an extreme and thus prices are bound to correct upward in 2016 if they were to follow the marginal cost of production. According to SB oil prices have rebounded by an average of 70% within 12 months of hitting the trough in the last four oil price recessions:

If history is to prove true, WTI would trade at $62 by next October and Brent would trade at $67, the above is consistent with my own expectations and does indicate that oil prices will likely trade at $70+ in 2017 as they approach the marginal cost of supply.

One caveat is that in previous oil price recessions OPEC has intervened, which means they have removed cheap oil supply and accelerated the reversion of prices to the marginal cost of production. The fact that OPEC is on the sidelines today could change the dynamics of the rebound; and I believe this is why it will take until 2017 before we hit the lower range of the marginal cost of production ($70) and possibly it would take until 2018 before we move to $80 and above. There is also the risk that shale oil production will pull down the marginal cost curve, however all key research I have seen indicate that for shale oil to grow meaningfully (500k+ per year) WTI needs to trade in the $70 to $80 range. For shale to grow, marginal shale needs to be developed as well. PIRA makes a distinction between core US shale and marginal US shale (non-core) in this graph about sources of future oil supply:

 

The above information is intended for oil investors only, if you are a speculator or a short term trader, the above information has little value to you.

Nawar