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U.S. Unconventional Oil More Immune to Global Crude Price, Says IEA

Even if crude oil prices were to drop to $80.00/bbl, U.S. unconventional oil from tight fields should remain profitable, according to the International Energy Agency (IEA).

Global oil demand is expanding this year at its slowest pace in five years on weak economic growth, while a "staggering" increase in supplies is slamming prices, the IEA said Tuesday in its October Oil Market Report. The Paris-based agency, which advises 29 governments, reduced its forecast for 2014 global oil demand by 0.2 million b/d from September to 92.4 million b/d on lower expectations of economic growth. Annual demand growth for 2014 now is projected at 0.7 million b/d, rising tentatively to 1.1 million b/d in 2015 as the macroeconomic backdrop improves.

Because it costs less to produce U.S. unconventional oil supplies, domestic oil should remain more profitable if crude prices continue to drop. The monthly report indicated that "further oil price drops would likely be needed for supply to take a hit" because tight oil "remains profitable at $80 a barrel."

IEA Executive Director Maria van der Hoeven said close to "98% of crude oil and condensates from the United States have a breakeven price of below $80, and 82% have a breakeven price of $60 or lower."

Lower crude prices may lead to a pause in some of the booming onshore areas, according to analysts (see Shale DailyOct. 9). Third quarter results, and the forecasts for the rest of the year, are being issued beginning this week. West Texas Intermediate (WTI) fell below $90.00/bbl on Oct. 2 for the first time in 17 months, and crude oil prices in the Bakken Shale have been several dollars lower on transportation bottlenecks.

Sterne Agee analysts Tim Rezvan and Truman Hobbs said in a note Wednesday there's a "sea change" in the risk appetite for exploration and production (E&P) companies amid the sharp decline in commodity prices.

"First, a sea change in risk aversion from investors is not a short-term fad. Second, OPEC's lack of constructive jawboning illuminates real concerns on oil demand. Third, indiscriminate selling is unfairly dragging down gassy E&Ps into winter." They lowered estimates and price targets going forward, adjusting for a $90.00/bbl price "or below crude world into '15." WTI prices are expected to be below $90.00 through 2016.

The Sterne Agee analysts said they will be looking at 3Q2014 reports for updates on 2015 hedges. The "budget sensitivities are largely unanswerable now, as we do not have a complete information set on company hedging for 2015. After speaking with several managements, we believe (but do not know with certainty) that many have layered on hedges. While a sub-$85.00/bbl 2015 New York Mercantile WTI strip offers a less compelling form of insurance, we believe it will be imperative for operators, especially smaller cap companies, to provide certainty to the investment community that it can support stated near-term growth objectives."

Referring to the latest IEA report, Tudor, Pickering, Holt & Co.'s Dave Pursell said Tuesday oil supplies outside of OPEC are growing the most, particularly in North America. Of the 1.7 million b/d in non-OPEC growth, 1.4 million b/d was estimated to be from North America, he said. IEA's 2015 estimated oil growth is slightly lower at 1.2 million b/d, with 1 million b/d expected to be from North America.

"Lower oil prices from current levels put 2015 growth at risk but we're not there yet," Pursell said.

Analysts J. Marshall Adkins and Kevin Smith of Raymond James & Associates in a note Monday attributed some of the oil fundamentals to the sharp rise in the U.S. dollar.

"Longer term, we still maintain a fundamentally bearish oil outlook given that core global oil supply is (and has been) growing roughly twice as fast as core global demand," they wrote. "Additionally, we maintain our long-standing view that the market's attention will shift to the fact that U.S. oil production is quickly saturating North American refining demand -- ultimately forcing domestic prices (WTI) lower until exports are allowed..."

As to when the "near-term pain will stop" is a question mark. The duo believe WTI prices may have hit a near-term bottom last Friday at just below $84.00/bbl. "If this near-term oil bottom pans out, we would expect the energy stocks to rally with firming short-term prices over the next few weeks."

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