Oil supply/demand by the numbers

The difference between a cartel and a free market is that in a free market the high cost producer modulates supply by varying his production in response to price while in a cartel all members (in theory) vary production irrespective of cost. How this worked in the case of OPEC is that the low cost producer, Saudi Arabia, alone varied its production in response to price while the high cost producers always produced at capacity. 

The oil market has now flipped from a cartel to a free market. Price will be determined by the costs of the high-cost producer; oil will be priced at the cost of the highest cost producer whose production is needed to meet demand. Lower cost producers will produce at full capacity at all times.

So now that we are in a world where the high cost, not the low cost producers will have to adjust production to bring the market into equilibrium, let's consider the numbers of the high cost producers.

• The EIA says that excess production is about 1.5 million per day. Iran will add another 500,000-1,000,000 BPD in 2016
• The high cost producer is the Canadian oil sands, producing about 2.5 mn BPD.
• The next highest cost producer is the US shale oil industry, producing about 4.0 mn BPD.
• The marginal cash cost of producing WCS (West Canadian Select) is about $27/barrel (according to Suncor). (TD Securities says all-in breakeven averages $44.) This oil sells for $15/barrel today. (Producers have hedged to some unknown degree, however.)
• Already shale oil production is declining at a monthly rate of 100,000 BPD, so the reduction in the daily rate will be at least 1.2 mn BPD by year-end due to the lack of drilling.
• I don't know how fast Canadian production is declining, but since hedged producers can cash out of their hedges at any time and shut down, it could be precipitous or gradual depending on their expectations of future oil prices. (They move slowly because it is difficult and expensive to stop and restart production.)
• Demand ought to rise by 1.5 mn BPD by year end.
• Given the Canadian cost structure, I am guessing the equilibrium price is somewhere around $50/barrel.
• Conclusion: Assuming Saudi Arabia, Iran, Russia, et al continue producing as much as the can, the production trends are already in place that will bring the market back to equilibrium, perhaps by the end of this year. In the meantime, the price will be volatile.