China oil output rebound seen unlikely until prices top $60

Aibing Guo 10/10/2016

BEIJING (Bloomberg) -- Oil may need to rally further before China’s producers make enough money to reverse a drop in output to the lowest in more than six years.

Production by the world’s biggest consumer after the U.S. will stabilize with prices around $50/bbl and may not rebound until they are above $60, according to Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein. China, the world’s fifth-largest producer in 2015, pumped 5.7% less crude in the first eight months of the year as state-run companies shut fields too expensive to operate amid the worst price crash in a generation.

“As oil prices recover, we’ll see production start to stabilize,” Beveridge said in an interview. “With break-even costs around $50/bbl for some of the mature onshore fields, to get growth back again you’ll need to get above $60/bbl.”

Oil has gained more than 10% since the Organization of Petroleum Exporting Countries agreed Sept. 28 to cut production for the first time in eight years. Brent crude, the global benchmark, fell 0.7% to $51.55/bbl as of 12:07 p.m. in Hong Kong on Monday. Prices are up about 85% from a 12-year low in January.

China is forecast to lead output declines across Asia, helping tighten the global market as the world’s largest-consuming region relies more on overseas supplies. The country’s production during August dropped 9.9% from a year ago to 16.45 million tons, according to the National Bureau of Statistics. That’s about 3.89 MMbpd, the lowest since December 2009, according to Bloomberg calculations.

The publicly listed units of the country’s biggest onshore producers, PetroChina Co. and China Chemical & Petroleum Corp., known as Sinopec, both expect their domestic output to drop by about 6% this year.

“China would need $60 to see onshore production really start to grow as production costs are high because of the maturity of the resources,” Beveridge said.

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