The European Union’s plans for a phased ban on Russian oil imports leaves a sizeable hole in global supply. This comes as price inflation has kept crude above US$100/barrel in a world seeking to end its reliance on Russian oil. Energy executives and analysts, highlighting anxiety over supply risks, had already noted in the weeks following bans by the United States and United Kingdom that more than 1 million barrels a day of Russian crude exports had “gone missing” as some tankers went dark—possibly avoiding radar systems to skirt sanctions. That amount may even soon double, they added, as major oil importing economies such as India and China snap up discounted supplies.1
Even with the historic release of 1 million barrels of oil per day from US strategic petroleum reserves—an effort to tamp down gas prices and combat inflation—longer-term fears over production shortfalls and lofty crude prices persist. Underlying oil profits are impacted not only by expenses such as capital spending on infrastructure, transportation costs, taxes and royalties, but also by complexities like long operational ramp up times, Organization of Petroleum Exporting Countries (OPEC)2 output and demand uncertainties (think China).
So, what should investors pay attention to in trying to leverage oil gains? First of all, profits vary widely across countries, partly due to the levels of difficulties or ease of extraction from different types of oil fields. But even when oil prices are high and breakeven prices are low, there are a host of other considerations for those seeking to home in on energy market bets.
Breaking down breakevens
Variations in distinct methods of oil extraction—such as conventional, offshore, Arctic drilling, shale oil fracking and the energy-intensive work of separating heavy crude from oil sands—result in differing exploration and production costs and therefore factor into an oil producer’s breakeven price, also referred to as its technical breakeven.
An oil-producing nation’s “fiscal breakeven” point, on the other hand, is the minimum per-barrel price required for the economy to meet its expected spending and balance its budget. This is typically distinguished from an “external breakeven” point, which is calculated by looking at the oil price that clears a country’s current account.