Oil is crashing. On Thursday, WTI crude oil was falling again, moving back below $61 a barrel.
Much has been made of the "breakeven" oil price for the world's drilling projects. This is the level at which the price of oil covers the cost of extracting the oil.
A simpler way to look at when the biggest oil players will start feeling the squeeze from lower prices is the "cash cost."
"Without OPEC action, an outage, or other response, cash cost is the only true floor," Morgan Stanley analyst Adam Longson said.
Cash cost is basically what it takes to keep oil production going, not what it takes to make oil production profitable or for a government to hit its budget projection. If you drop below your cash cost on a project, you've got to turn out the lights.
As you can see on the far right, the Canadian oil sands and the US shale basins are very expensive to tap. Meanwhile in the Middle East, the Saudis, the Iraqis, and the Iranians basically stick a straw in the ground, and oil comes out.
The recent story in the market has been that a supply glut has pressured oil prices, and in response some expected OPEC to announce a production cut at its Thanksgiving meeting. That didn't happen, and Longson notes that it isn't as simple as slashing production to combat low prices.
"Simply slowing supply growth is usually not enough to balance an oversupplied market in the short run," Longson writes. "In commodities without a cartel, existing production must be shut-in. If true, marginal cost of investment is not the relevant metrics, it's variable operating cost, which is closer to $35-$40/bbl on the high end."
Longson's mention of a commodity without a cartel also comes as Saudi oil minister Ali Al-Naimi said on Wednesday that the market — not the OPEC cartel – was in control of the oil market.
And these comments imply that this chart from Morgan Stanley, showing cash costs for oil projects around the world, might be the place to find out when things will really ugly in the oil market.
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