Oil prices in London would have to drop below $90 a barrel, adding to a roughly $20 drop from this year’s highs, for oil-producing countries and major companies to begin feeling the pain.
The events of the Arab Spring have helped to drive up OPEC’s budget-balancing needs to near $100 a barrel, compared with above $108 for Brent crude Friday.
At the same time, a rise in steel and other industrial metals has pushed up the marginal cost for extracting the most expensive crude – a level often considered a gauge for the market’s floor – to roughly $90.
For oil companies and producer countries alike, the pain of any fall below that level is cushioned by piles of cash following a price rally last year and in the first half of this year.
“I don’t expect any knee-jerk reaction from OPEC,” said Chris Weafer, chief strategist at Uralsib in Moscow. “I would only expect any action if the price goes below $90.”
Brent Friday recovered from a 10 percent sell-off this week, triggered by fears about the fragility of the global economy.
The annual average price is above $110, up from just above $80 last year but below the year’s high of $127.02.
US Benchmark West Texas Intermediate, which has traded at a deep discount to Brent for months, was off 17 cents at $86.46 a barrel Friday, after falling to its lowest since November.
Ultimately, OPEC’s price requirements and marginal costs for other producers’ most expensive oil, such as Arctic oil or Canadian oil sands, are expected to provide support.
“Long-term oil prices remain well underpinned at $85-$90 a barrel by the marginal cost of oil and the Saudi budget,” Bernstein Research said.
But no one is ruling out the possibility of further short-term selling as economic weakness erodes demand and triggers a sharp reduction in speculative positions on oil markets, which reached record levels earlier this year.
“The marginal cost has gone up since 2008. It’s a good backstop longer term, but it doesn’t mean anything in the short term,” said Will Riley, co-manager at the Guinness Energy Fund.
He pegged the marginal cost at $80 to $90 and predicted an oil price correction for both Brent and US crude to the $80-$100 range.
Canadian oil sands producers -- which account for a growing volume of U.S. supply – are not yet close to suspending multibillion-dollar projects as was the case in 2008 and 2009, when falling oil prices and the credit crunch combined to make financing nearly impossible, said Phil Skolnick, analyst at Canaccord Genuity in New York.
Capital and operating costs have crept up again for oil sands operators as the rush to develop mining and steam-driven projects has gathered steam in the past two years, however.
The break-even WTI price for building the bitumen projects is likely in the $40 to $60 a barrel range, he said.
Steve Laut, president of Canadian Natural Resources Ltd, the country’s largest independent, said Thursday that the company plans its projects assuming $80 WTI, noting that is above break-even.
“The oil price has come down quickly and I don’t think the management of the companies are saying, ‘Yeah, we need to start shelving things’,” Mr. Skolnick said.
In the depths of the recession when oil sank to around $35 a barrel, few producing oil sands developments halted output, as it can be more costly to stop and restart.
The 2010 price levels already were enough to deliver healthy returns to oil companies and OPEC members, according to statistics from the Organization of the Petroleum Exporting Countries.
Richard Batty of Standard Life Investments drew a contrast between the 48 percent gain in GDP across OPEC countries between 2006 and 2010 and the economies of consumer countries.
“For oil importing nations such as the US, GDP was up just 9 percent over the same period, reflecting the effects of the recent financial crisis and recession along with the negative terms of trade effects of importing good and services, most notably oil,” said Mr. Batty.
More than ever OPEC needs its petrodollars as governments, including leading OPEC exporter Saudi Arabia, have allocated billions in social spending to try to contain popular unrest.
Weafer and other analysts have argued that Saudi Arabia needs around $100 a barrel to balance its budget. The kingdom does not issue figures, but $100 could be around double its needs in 2008 when the oil price last crashed.
The late 2008 crash prompted Saudi Arabia to name $75 as the fair price for oil – acceptable for producers needing to invest in new supply and not so high as to damage consumer country economies and depress demand.
It has yet to make public its equivalent figure now.
But at a June OPEC meeting that collapsed in chaos as Saudi Arabia failed to push through a proposed output increase, Oil Minister Ali al-Naimi said the $70-$80 fair range was a thing of the past.
Back in 2008, it took a market slump all the way down to less than $40 for OPEC to pull together and implement record output cuts.