Some Crude Oil is Already in the 20s

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When oil dropped below $35 a barrel, on Wall Street, it was a big story, but several oil producers have already been living with much lower prices.

Iraq’s heaviest oil is being sold to Asia at $25 a barrel. One Mexican crude mix trades at an 11-year low, less than $28 a barrel. Western Canada has some of its producers sell at less than $22 a barrel. “More than one-third of the global oil production is not economical at these prices. Canadian oil producers could have difficulty in covering their operational costs,” according to Ehsan Ul-Haq, senior consultant at KBC Advanced Technologies Plc.

A global supply glut has caused oil to drop to levels seen during the global financial crisis in 2009. Brent and West Texas Intermediate (WTI) oil are light and low in sulfur that makes it easier to refine. That’s why it has been able to command higher prices. The thicker, blacker oil varieties contain more sulfur and are harder and costlier to refine, and producers of these varieties have been trying to survive on price levels in the $20s. A blend of Mexican crude is down 73 percent over a period of 18 months and was trading below $28 last week, a level not seen since 2004. Venezuela is experiencing similar problematic prices. Western Canada Select, characteristically heavy and sulfurous, dropped 75 percent to $21.37, its lowest level in almost eight years. Varieties like Ecuador’s Oriente, Saudi Arabia’s Arab Heavy and Iraq’s Basrah Heavy are selling below $30.

Crude Discount Prices

Bitumen, though technically not crude, is a black and heavy viscous oil that makes up the tar sands together with clay, sand and water trades around $13 a barrel, representing a drop of more than 80 percent since June 2014. In contrast, global benchmark Brent still trades above $37.87 a barrel on the London-based ICE Futures Europe exchange.
“Most places in the world, a lot of the producers they don’t really get the Brent price, and they don’t get the WTI price. It’s really a dramatic situation that really cannot continue for a very long time for many producers,” says Torbjoern Kjus, an analyst at DNB ASA in Oslo.

Mexico is insulated from the oil slump because it hedged 212 million barrels of planned exports for 2016. It used options contracts to secure an average price of $49 a barrel. This oil hedge provided it with a bonus of $6.3 billion.

However, not all oil producing nations are as protected. Venezuela’s national budget for next year needs a price of $40, but its crude is trading at just above $30. Its dollar reserves have fallen by 32 percent this year to $14.6 billion. Venezuela is not the only OPEC member in trouble. OPEC, which supplies roughly 40 percent of the world’s crude, has seen its prices trade below the two main benchmarks, around $33.76 a barrel last Monday, a seven-year low. What’s worse is that producers selling at the lowest prices have more incentive to pump, thus furthering the risk of aggravating the global oil glut, since prices could be even lower in the coming weeks. Christophe Salmon, chief financial officer at Trafigura Pte Ltd., the world’s third-biggest oil trader, thinks the bottom of the cycle hasn’t been seen yet.

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