Just a fraction of the world's oil supply isn't profitable at $35 a barrel

Reuters/Supri Supri

Oil prices are rebounding Friday after hitting a low not seen since 2003. But a new report suggests oil producers may not be hurting as much as the historically bad prices suggest.

The report, from the energy research firm Wood Mackenzie, says just 4% of the world's oil is unprofitable at $35 a barrel, a price oil was trading near just a few weeks ago.

Oil prices were up about 10% Friday after a tweet from a Wall Street Journal reporter indicated that the oil cartel OPEC may be considering production cuts.

In response to that news, WTI crude, the US benchmark, was trading near $29 a barrel, while Brent crude, the international benchmark, was sitting near $32.

Wood Mackenzie's report, cited by the energy news service Platts, said about 3.4 million barrels' worth of oil a day was not profitable below $35 a barrel. According to the International Energy Agency, the world's supply is 97.07 million barrels a day.

While today's oil prices are below this threshold, the report suggests the price at which US shale and other producers would be forced out of the market is lower than previously thought.

As Platts writes, "For many producers, being cash negative is not enough of an incentive to shut down fields as restarting flow can be costly and some are able to store output with a view to selling it when prices recover."

This falls in line with a report from Citi in December showing that the amount per barrel that most producers needed to receive just to keep the lights on, referred to as the cash cost point, was well under $30.

Reuters/Supri Supri

And as we wrote earlier this week, the way these projects are financed most likely has an impact on the stubbornness of production levels.

Because so much of US shale production has been financed by debt, not equity, companies have a reason to continue getting whatever cash they can for their production to meet debt repayments.

In theory, losses from production pauses that were aimed at goosing prices higher could be inflicted on equity investors over a period of time.

All this comes at a time that OPEC, the 13-member oil cartel that has been a major contributor to oversupplying oil markets, still seems quite far from announcing the kind of coordinated production cut that could provide serious relief to the market.

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