Even before the latest oil price plunge that sent WTI Crude prices to below $50 a barrel, analysts had expected the explosive growth in the U.S. shale patch to cool off a bit next year - at least until the Permian pipeline constraints ease in the latter half of 2019.
U.S. shale is set to continue to raise crude oil production, but as WTI prices dipped to below the psychologically important threshold of $50 a barrel, analysts started to calculate which areas may have already fallen into the red with spot prices lower than breakevens.
To be sure, U.S. oil production is expected to continue to increase next year, but the longer the U.S. benchmark oil price stays below or around $50, the slower the growth will be.
This week’s fresh price plunge could make more U.S. shale drillers cut capital expenditure for next year and more of them may cut deeper, considering that few had anticipated such a steep drop in oil prices just two and a half months ago, when WTI was above $70 when the market feared a supply crunch due to the U.S. sanctions on Iran.
Yet, even in the face of this week’s plunge that sent WTI below $50, some analysts say that the glory days for U.S. shale are not over.
“In short, as much as the recent price slump has injected a fresh dose of uncertainty, it is unlikely to derail the U.S. shale engine,” according to Stephen Brennock, oil analyst at PVM Oil Associates.
“The fact is that U.S. tight oil supply is expected to expand by at least 1 million bpd in 2019. In doing so, it will go a long way to cementing America’s newfound position as the world's biggest oil producer,” CNBC quoted a Wednesday research note by Brennock as saying.
“For now, when it comes to the U.S. shale patch, the glory days are far from over,” said Brennock. Related: Major LNG Shortage Increasingly Likely
The EIA expects the seven key shale regions in the U.S. to continue raising oil production next month. In the monthly Drilling Productivity Report from this week, the EIA estimates that the seven shale areas will boost their combined production by 134,000 bpd from December to 8.166 million bpd in January, with the Permian leading the way, followed by the Eagle Ford and the Bakken.
In this month’s Short-Term Energy Outlook (STEO), EIA sees total U.S. crude oil production averaging 10.9 million bpd in 2018, up from 9.4 million bpd in 2017, and expects crude production to average 12.1 million bpd in 2019.
If oil prices stay stubbornly low, however, the current forecast of 1.2-million-bpd production growth next year may be too optimistic. Many wells in the Permian may still be in the profit at below-$50 oil, but many others outside top-tier acreage—which were easily making money with $60 oil—won’t. Areas in the Bakken and the Eagle Ford will also struggle with oil in the low $50s or below.
This week, while WTI at Cushing is above $45, the price of WTI Midland in the heart of the Permian slumped to $40.
Even before the latest major price correction, analysts had expected U.S. shale drillers to scale back capital budgets for 2019, considering that the price slump could restrain cash flow generation at a time when investors push for more returns at the expense of oil production growth.
Just this week, Diamondback Energy announced its 2019 capital and production guidance, which reflects “an operating plan focused on disciplined growth within cash flow and a growing dividend in the current commodity price environment.” Diamondback plans to operate between 18 and 22 drilling rigs, compared to 24 operated drilling rigs today, reducing rig count by three rigs immediately, the company said on Tuesday. Related: Aramco Fights To Protect Asian Market Share Ahead Of Cuts
“Due to the dramatic decline in oil prices, realized pricing in the Permian Basin is near levels not seen since the end of 2016, while service costs have increased by ~35% during the same time period. As a result, and as a sign of our commitment to capital discipline, we are reducing our planned 2019 activity to levels where we can operate within cash flow,” Diamondback’s CEO Travis Stice said, noting that future activity will depend on the commodity price trend in 2019.
According to Francisco Blanch, head of global commodity and derivatives research at Bank of America Merrill Lynch, WTI Crude will average $59 a barrel next year, which would be sufficient to warrant U.S. shale growth of 1.2 million bpd-1.3 million bpd.
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“If we stay at these levels around $50 a barrel WTI, we’re going to grow sub-1 million barrels a day,” Blanch told CNBC this week.
U.S. shale will still grow next year, but the oil price range will determine the pace of that growth.
By Tsvetana Paraskova for Oilprice.com
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My predictions have played out almost exact. Needless to say, not a doomer.