At its low for the day Tuesday, WTI crude oil for February delivery traded at $29.93 before settling at $30.25. That’s the first time WTI crude has traded below $30 a barrel since 2003. Through the first seven trading days of 2016, crude prices have dropped 18%.
We’ve already noted today that the U.S. Energy Administration is forecasting an annual average per barrel price for WTI crude of just $38 a barrel in 2016 rising to $44 in 2017.
In November analysts at Rystad Energy said that the average U.S. cost to recover a barrel of oil was $36.20. At the time WTI was trading around $40 a barrel and Brent traded around $44. Today, the differential between WTI and Brent is less than 50 cents.
How can U.S. producers continue to pump crude if they are going to lose about $6 a barrel by doing so? The answer is that they can’t, at least not for any extended period of time because most of the smaller producers have already leveraged their reserves and will not be able finance any further losses unless they are willing and able to sell some assets.
Large producers like Exxon, Chevron, and ConocoPhillips may be in a slightly better position because their credit ratings are higher due to their larger reserves. But like anything else, that can’t last forever, especially if prices don’t come back up. The big guys, too, will see the value of their reserves drop as the price of crude slides.
The price of a barrel of WTI has moved up to around $30.40 in electronic trading Tuesday afternoon. That’s better than nothing, but not much.