U.S. Needs $70 Oil to Keep 18-Year Output High

Oil near $70 a barrel would “significantly curtail” decisions to invest in new U.S. supply, said Hussein Allidina, head of commodities research at Morgan Stanley.

Projects in areas such as the Bakken region of North Dakota needs West Texas Intermediate crude prices from $70 to $75 a barrel to break even, Allidina said in an interview in Singapore today. Production from areas there and the Eagle Ford tract in Texas have pushed U.S. output to an 18-year high, which he called “stellar production growth.”

“Supply growth is magnificent in the U.S., but you’re not going to get that supply growth if oil prices are $70 a barrel,” he said. “That’s not to say that you would see production fall materially the day we hit $70. But the decision to invest would be significantly curtailed.”

U.S. crude production climbed to 6.68 million barrels a day in the week ended Nov. 2, the Energy Department reported yesterday. It was the most since Dec. 23, 1994. Improvements in horizontal drilling and hydraulic fracturing, or fracking, have unlocked oil trapped in deep underground rock formations in states such as North Dakota, Texas and Oklahoma.

Oil for December delivery rose as much as 71 cents to $85.15 a barrel in electronic trading on the New York Mercantile Exchange today. It lost $4.27 yesterday to $84.44, the lowest close since July 10. Prices are down 14 percent this year.

Faster production decline rates, or the speed at which a well runs dry, boosts the capital costs for non-conventional oil projects, Sijin Cheng, a analyst at Barclays Plc said to reporters in Singapore today.
‘Well-Supported’

“The downside is very well-supported for oil prices if you’re just looking at non-conventionals,” she said. “If WTI goes below $85, that’s going to be very painful for a lot of the non-conventional producers.”

The re-election Nov. 6 of President Barack Obama over challenger Mitt Romney won’t have a significant impact on oil prices, Allidina said.

“On the margin, there might be some nuances, but nothing I would trade on.” he said.

Brent crude traded in London will average from $110 to $115 a barrel next year, he said, maintaining a call he made in September. “From a global point of view, the production picture is not as constructive,” said Allidina.

Bloomberg