“Low prices are now driving a supply side response in the US free market,” Lee said. “The average onshore American producer needs an oil price in the high $50 per barrel range for a new well to be profitable. Even the most economical US oil-producing regions struggle to break even at $35 per barrel. Plans for new wells are therefore being cancelled. Although production costs are coming down, at current prices levels, new US supply will dry up.”
Lee said he is confident that prices will end 2016 at a much higher level than today, and while it may take several more months for the price to start a climb back he believes the time for investors to buy is nearing.
“We expect the supply of oil to stabilise from here. Production by OPEC will likely plateau in the first half of 2016. North American production, on the other hand, will likely fall in the second half of the year. Meanwhile, demand growth will likely remain robust, supported by cheap prices. These factors combined should result in demand and supply eventually moving back into balance,” Lee added.
If this does come to pass, a lot of rethinking will be required by investors who are counting on cheap fuel to put extra money in consumers’ pockets.
