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Has OPEC Underestimated U.S. Shale Once Again?

Shale Oil

The U.S. shale cowboys are back on their horses and leading a strong recovery in the oil patch that is not expected to falter even as WTI prices dropped last week below $50 per barrel for the first time in more than two months.

With lessons learned from the oil price crash and budgets streamlined and focused on the most prolific shale plays, U.S. drillers are giving OPEC a hard time by raising output and hedging future production. Meanwhile, the cartel members are trying to cut supply and fix the price of oil at such a range that would allow them to reap higher oil revenues, but not allow the shale patch to recover too much too fast.

Two and a half months into the supply-cut deal, it looks like OPEC is losing the campaign to prop up oil prices. The drop in prices that began last week saw them retreating to almost exactly the same level as on November 30 – just below $52/barrel for Brent - when the OPEC deal was announced, the International Energy Agency said in its monthly report on Wednesday.

At the same time, reduced breakeven prices in many shale plays and forward locking-in of production is allowing the companies currently drilling in the U.S. to turn in profits even at a price of oil at $40 a barrel.

The U.S. shale patch has not only emerged leaner and more resilient from the downturn, it has also hedged future production with contracts guaranteeing the price of the crude they will be pumping a year or two from now, Bloomberg reports, citing industry executives and analysts.

According to Katherine Richard, chief executive at Warwick Energy Investment Group that holds stakes in more than 5,000 oil and gas wells, many of the U.S. drillers would not see their profits reduced unless the price of oil drops to the $30s or lower. Related: Deciphering Today’s Oil Markets

So the drillers that have locked in their future production—and those include Parsley Energy, RSP Permian, Diamondback Energy, and Harold Hamm’s Continental Resources—probably didn’t worry much when the price of WTI dropped below $50 last week.

This is a sign that OPEC may have underestimated—yet again—the resilience of the U.S. shale patch when the cartel decided to collectively curtail oil supply.

Last week Saudi officials told American oil producers that there would be “no free rides” and that they should not expect OPEC to extend or deepen the output cuts to make up for the jump in shale production in the U.S.

And U.S. shale output has been steadily growing in the past few months, thanks to, and quite ironically so, OPEC’s cuts that have been supporting WTI prices at above $50 (or at least above $48 this past week). The U.S. shale patch is expected to lift its April oil output by 109,000 bpd, the EIA said earlier this week.

According to Michael Webber, deputy director of the University of Texas’ Energy Institute in Austin, who spoke to Bloomberg:

“The cowboy spirit is back. Hedging is playing a big role.”

The drilling spirit is indeed back, and the break even prices in the best shale areas are now below $40. According to Bloomberg Intelligence analyst William Foiles, in the Eagle Ford, for example, drillers in LaSalle County break even at $36 oil price, and at $39 per barrel oil in Gonzales County. Related: New Oil Price War Looms As The OPEC Deal Falls Short

In the Permian (and what’s a shale recovery without the Permian), wellhead breakeven prices in the Permian Midland have dropped from $71/barrel in 2014 to $36/barrel in 2016--a 49-percent decrease--the steepest among the main U.S. shale plays, Rystad Energy said in its Permian Midland review. The average wellhead breakeven price decrease in the main shale plays has been around 46 percent since 2014, Rystad Energy noted.

So, in order for the U.S. shale to start thinking of idling rigs en masse again, oil prices would have to drop and stay at even lower for longer, at below $40. The leaner, meaner and more resilient U.S. shale is basically wiping out OPEC’s efforts to achieve higher oil prices with the output deal. The cartel seems to be caught between a rock and a hard place -- extending and/or deepening cuts and losing precious market share to U.S. shale, or ditching the price-fixing policy and letting the next oil price war begin.

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • Rosoe Pilsner on March 18 2017 said:
    Few things in this world give me more satisfaction than to see the tables turned on OPEC.
  • DocScience on March 19 2017 said:
    The Saudi's had expected Obama and then Hillary to so increase costs and decrease opportunity for US oil production that it would have raised the lid to $100.

    The election is not what they wanted.
  • Naomi on March 20 2017 said:
    Saudi break even is $98/bbl because 20 million Saudis are on the Aramco payroll. I am not buying a slice of that business.
  • Jerome on March 20 2017 said:
    Precious few, zero to be precise, oil-producing nations have growing and diverse economies with oil becoming less important to them over time. Texas does.
  • middling on March 21 2017 said:
    Ya gotta hand it to the greedy Saudi Arabia and OPEC. If these numbskulls would have been happy with moderate priced oil! It would have taken a lot longer to develop the Fracking method. Instead, the high price of oil encouraged development of smaller fields and the use of fracking!

    The cat is now out of the bag - as shale/oil rich regions develop their own oil fields, OPEC has less clout in the market (as we have seen).

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