WTI prices showed remarkably stability in July, as prices closed between $39.64 and $41.88/barrel. This data is consistent with what we’ve written before: crude prices face a hard ceiling, a soft(er) floor, and a narrowing range. There’s a hard cap on prices until a vaccine unlocks demand, downside risks could send demand lower, and supply/demand balances are stabilizing, albeit not at the level many in the industry would prefer.

Let’s assume this dynamic continues to play out and prices trade within a range of $35-45, at least until a vaccine is deployed. Will U.S. oil production come back online at those levels? We think that few oil producers will risk drilling new wells at such low prices, although some shut-ins may come back online and offshore assets are relatively well-positioned. Additionally, Wall Street does not want to see producers boosting output that is not supported by free cash flow, and access to capital will likely limit output. U.S. crude production will remain highly constrained at $40/barrel.

Offshore holds steady at $40/barrel, but Permian?

The Dallas Federal Reserve Bank collects information on reported break-even prices by shale basin. We’ve summarized results below, but before we jump in let’s note some qualifications. First, the simple average (black line) isn’t weighted by production, and the Dallas Federal Reserve Bank doesn’t provide the volume-weighted break-even price. Second, this data was collected in mid-March, and a LOT has changed since then. Anecdotally, we’ve heard that some costs have fallen due to greater labor availability, but also that many investors are requiring higher rates of return for U.S. oil companies.