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$25 per Barrel Fracking Breakeven, Means Permanent Low Prices

The Energy Information Agency (EIA) most recent Drilling Productivity Report (DPR) showed the U.S. drilling rig count in the four major “tight-oil” regions of Permian, Eagle Ford, Bakken, and Niobrara fell 32% to 780 from their October peak of 1160. Despite a 65 percent crude oil price decline and the rig count at the lowest level in almost four years, EIA predicts production from these four regions were 500,000 barrels per day higher than in October. But with about a $25 per barrel break-even, U.S. crude oil prices will remain low.

Since hydrocarbons are lighter than water, they migrate upwards due to buoyancy. But movement is stopped when they reach a low permeability layer of rock that forms a “hydrocarbon trap.” U.S. boom is about artificially fracturing shale to provide a flow path for oil. So far, the U.S. is the only country with significant oil and gas shale production.

The six largest U.S. “tight-oil” producers’ costs for exploration, production and non-income-related-taxes are about $25 per barrel of oil. This very low breakeven point does not include the some companies’ huge interest or principal debt payments and/or the huge profits they made from using derivatives to sell future production at higher prices.

Despite any cash flow trouble, creditors want oil companies to continue production until the oil price falls below their break-even cost. This explains why the contract price at the well-head for North Dakota’s Williston Basin Sweet (low sulfur) is only $27.19 per barrel.

Historically, oil consumption falls in a recession and rises in an economic expansion. But U.S. consumption fell last year, despite GDP rising and an oil prices collapse. This explains the shocking growth of U.S. crude oil inventories over the last nine months.

Inventories grew last week by a spectacular 10.5 million barrels versus a 5 million barrel build expected by the American Petroleum Institute. The inventories at 65 percent of capacity are at their highest point in U.S. history. It is expected that capacity will be completely full within 90 days and any further surplus must be liquidated.

The latest Drilling Production Report indicates an interim peak in American “tight-oil” production should be expected next month.

Closing down production at a vertical oil well usually results in substantial “stoppage of the pores of the oil-bearing rock.” This reduces “bottom-hole” pressure that forces oil up through the well tube to the surface and limits the future well production capability.

But since shale producers inject water and solvents to free oil from shale and create their own pressure to push oil up through a cement-lined casing, shale wells can be capped and uncapped with virtually no future production loss. Drilling rigs will not vanish and a labor force can be re-assembled rapidly anytime the price of crude oil rises.

From an annual low of $1.21 a barrel in 1970 to an annual high of $108.90 in 2012, OPEC, through member restricted production quotas, has tried to parasitically bleed its customers to the fullest extent. Although the current $44.77 price may seem shockingly low, it is substantially higher than the average of $32.75 a barrel average since 1973.

For the forty years after the 1973 oil embargo, the OPEC cartel predatorily bled the economies of its customers. But OPEC’s greedy strategy over the last decade created incentives that powered the U.S. shale oil production boom. OPEC is now facing an epic structural shift in pricing power where production cut-backs to force prices up will only incentivize more American production.

Gears Spinning?

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