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How Far Can North Dakota Crude Fall?

April 17, 2013
By: Davis Michaelsen, Pro Farmer Inputs Monitor Editor

North Dakota crude plays by its own rules. Recent declines in both Brent and WTI crude futures demand a response from global producers. Lackluster demand for U.S. gasoline and less than encouraging economic data from China pressed Brent crude to a fresh low below $100/bbl.

WTI crude has followed a similar path, opening today at $88.08/bbl and trailing most of the day, closing at $86.76. Supply and demand fundamentals are in the driver's seat of this market as well, and as world crude prices fall, OPEC producers typically curtail production until demand can catch up with supply, widening margins back to a profitable level.

North Dakota oil producers are subject to the same supply/demand fundamentals, but function at lower operating and transportation rates. Because of these lower rates, U.S. crude producers will continue to drill and frack until WTI prices fall to near $50.00. Somewhere around that number, producers feel the pinch and cut back their output until prices become more favorable. Some would be able to withstand pricing closer to $40.00/bbl, while others would simply hold leases at that point as the oil is more valuable in the ground than in a barrel.

A Tuesday report from the American Petroleum Institute shows U.S. crude supplies declined by 6.7 million barrels during the previous week while gasoline inventories rose 253,000 barrels. EIA's Short-term Energy Outlook expects Brent pricing to average around $110/bbl during 2013 and WTI to run roughly $10/bbl below that. But improvements to U.S. pipeline capacity and an increased LNG presence in the transport sector could allow WTI to fall farther without damaging margins upstream.




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