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Key U.S. oil plays still profitable at $65 oil

A pumping oil rig.

JOHN LEHMANN/GLOBE AND MAIL/JOHN LEHMANN

Imagine for just a second that in the next year or two, crude production explodes, the political tension around Iran subsides and the global economy continues to limp along.

In that scenario, some U.S. crude analysts at Raymond James think it's very plausible to see $65 (U.S.) oil -- so much so that they've even made it their official forecast price for 2013. Sound crazy? Keep in mind this is the same team that called for a bottom for oil in 2002.

In a new research note, analyst John Freeman admits that he's received a lot of flack for making the call. But he doesn't back down. Instead, he simply came back with a new analysis of whether the U.S. industry will crumble at such a price -- which is something we often don't see because we tend to focus on Canadian plays up here.

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The key finding: the three biggest drivers of oil supply in the U.S. -- Eagle Ford, the Bakken, and Permian -- are all profitable at $65 oil. Break even costs for these three regions fall between $50 and $60 per barrel. Eagle Ford has the lowest, while Permian has the highest.

For those wondering, this analysis assumes that the producers won't drop rigs as price fall, even though they probably should. Mr. Freeman assumed that "as prices start to hover at levels where rigs should get "whacked," E&Ps are more prone to ride out the storm for what could be perceived as a temporary price drop rather than risk losing efficiencies by dropping a rig and cancelling an already trained completion crew."

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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