Oil demand is unlikely to soak up the excess supply anytime soon, with Europe stalled, Japan picking up the pieces from its recent sales tax hike and China still trying to control its runaway housing and fixed-asset investment bubbles without pricking its bad debt problem.
The demand situation also has an element of negative self-reinforcement: Bank of America Merrill Lynch analysts note that 50 percent of the global oil demand growth of the last decade has come from oil producing countries. That's a problem, with Russia heading into recession and sovereigns in the Middle East drawing down currency reserves. And besides, they estimate that any response on the demand side would occur with a six month lag anyway.
So to find a price floor, supply will need to be cut from somewhere outside of OPEC. The big state-owned oil producers are an unlikely source, according to the analysts, because they find production is not price sensitive due to price hedging, low cash production costs, tax breaks and currency benefits. At this point, only Canada’s Kearl oil sands project — with a breakeven oil price around $55 a barrel — is at risk. Yet its operator said it would not shut down even if it were cash flow negative. It's all about who can bleed the longest. Brazilian pre-salt fields need just $23 to cover cash costs.
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