Oil prices need sustainability for U.S. oil production to return to previous high levels, an expert from the U.S. Federal Reserve Bank, FED, said Tuesday.
'For production to come back, oil prices need to be sustained,' Mine Yücel, senior vice president and director of Research at FED of Dallas, told Anadolu Agency.
'Producers in the U.S. need to believe that oil prices will be sustained. If they think it’s just a temporary blip, production and investment will not come back,' she added.
Marking their fastest slump since 2008, oil prices fell around 60 percent between June 2014 and January this year, when they dipped to their lowest level since Dec. 2008.
However, oil prices recovered around 40 percent since then to climb above $60 per barrel in April.
'We will see if the current $60 per barrel price can be sustained. It may bring some oil production back in the shales,' Yücel said.
She noted many oil companies have announced declines in earnings in the first quarter of 2015, stressing 'Capital expenditures in the oil industry have now been cut to 30-40 percent while some small companies have gone bankrupt.'
The U.S.' ExxonMobil, Chevron, Marathon Oil and Noble Energy, Royal Dutch Shell, British Petroleum, French Total, Norway's Statoil and Italy's Eni were some of the big oil firms to announce financial losses in their first quarter results due to falling oil prices.
'Fifty dollar oil is not enough for shale oil producers in the U.S. to recover their costs. That’s probably lower than the breakeven for a majority of shale plays. There are some areas in North Dakota that can produce at cheaper costs, but it’s not the majority,' said the bank's expert.
'Break-even costs from the Bakken, a rich shale oil formation in North Dakota, go as low as $28 per barrel in some areas, but the range is wide - $28 to around $75. The majority of shale oil areas need a higher price to be profitable,' she explained.
- U.S. oil production and rig count
The U.S. Energy Information Administration, EIA, said on April 13 that production of oil in the seven most productive areas in the U.S., including Bakken in North Dakota and in Permian in west Texas, are projected to decline in May.
'Most of the increase in oil production is coming from shale. The majority of production in the U.S. is coming from Texas and North Dakota,' Yücel informed.
Emphasizing that the U.S. has increased its oil production by 4 million barrels per day since 2010, she said half of this increase is coming from Texas.
'Oil production in the U.S. has flattened. We will not see increases unless people believe that higher prices will be sustained for a while,' she added.
EIA's weekly production data shows that U.S. crude oil production stabilized around 9.37 million barrels a day in the last two weeks, while crude oil inventories in the country also decreased for the week ending May 1 after a relentless 16-week rally.
Yücel cautioned that the number of oil rigs in the U.S. peaked at 1,609 last October, but are now at 668.
'We may see a deceleration in the decline of rig counts, but expectations are important. The expectation has to be that higher prices are going to be sustained. If it’s a one or two week blip, it won’t bring back the rig count,' she explained.
The number of oil drilling rigs in the U.S. fell for the 22nd consecutive week to its lowest level since 2010, the oilfield services company Baker Hughes' data showed last Friday.
- U.S. dollar and oil prices
Also commenting on oil prices, Yücel said changes in the value of the U.S. dollar would effect oil importing countries' purchasing powers and demand for crude.
'If the value of the U.S. dollar rises against other currencies, this will make the price of oil more expensive for the countries that buy oil,' she said.
'Any country whose currency has declined against the U.S. dollar will face higher oil prices in their own currency because oil is priced in dollars. This will cause a decline in oil consumption in these countries, eventually putting some downward pressure on the price of oil,' she concluded.
By Ovunc Kutlu
Anadolu Agency
ovunc.kutlu@aa.com.tr