Concerns are growing that oil prices will hit the lows seen in early 2016 when the commodity fell below $30 per barrel. Part of the problem is that stockpiles of crude continue to grow despite the efforts of producers’ cartel OPEC to reel in output and rising concerns about global economic growth.

The European benchmark Brent crude is south of $45 per barrel for the first time in 2017 as production from Libya and Nigeria, which are exempt from OPEC quotas due to domestic turmoil, surprising on the upside. Prices are down 20% on their recent highs, officially bear market territory.

Because the oil produced from shale in the US is such a significant new source of supply, OPEC’s ability to impact prices is impaired (not to mention the problems created by the diplomatic spat in the Gulf over Qatar). OPEC production cuts were extended at a meeting in Vienna in late May but this has done little to arrest crude’s slide.

WHERE IS THE BREAKEVEN POINT?

Investment bank Goldman Sachs puts the average cost to break even on producing oil in the US at around $50 to $55 per barrel. But in some areas the breakeven level is likely lower and many operators will have locked in at least a proportion of their production at higher prices. Only when it becomes unprofitable for shale oil producers to continue their operations for a sustained period is output likely to drop and oil prices recover.

As we discuss here, $50 per barrel is a key point for investors in the oil sector to watch as below this level it becomes ever more difficult for the likes of BP (BP.) and Royal Dutch Shell (RDSB) to cover their dividends from cash flow even if they continue to make efficiencies.

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Issue Date: 22 Jun 2017