• 4 minutes Europeans and Americans are beginning to see the results of depending on renewables.
  • 7 minutes Is China Rising or Falling? Has it Enraged the World and Lost its Way? How is their Economy Doing?
  • 13 minutes NordStream2
  • 13 hours Monday 9/13 - "High Natural Gas Prices Today Will Send U.S. Production Soaring Next Year" by Irina Slav
  • 3 hours California to ban gasoline for lawn mowers, chain saws, leaf blowers, off road equipment, etc.
  • 21 hours "Here is The Hidden $150 Trillion Agenda Behind The "Crusade" Against Climate Change" - Zero Hedge re: Bank of America REPORT
  • 22 hours GREEN NEW DEAL = BLIZZARD OF LIES
  • 2 days An Indian Opinion on What is Going on in China
  • 2 days "A Very Predictable Global Energy Crisis" by Irina Slav --- MUST READ
  • 48 mins Nord Stream - US/German consultations
  • 2 days Can Technology Keep Coal Plants Alive and Well?
  • 3 days Two Good and Plausible Ideas about Saving Water and Redirecting it to Where it is Needed.
  • 3 days Succession Planning in Human Resources for Vaccinated Individuals in the Oil & Gas Industry
  • 5 days Perfect Energy Storm in Europe: turning our back on fossil fuels is easier said than done!
  • 2 days U.S. : Employers Can Buy Retirement Security for $2.64 an Hour
  • 2 days Storage of gas cylinders
Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

U.S. Shale Is Determined Not To Kill This Rally

Oil prices moved closer to a two-month high on Friday, closing out the week with some of the strongest gains in 2017. Market sentiment has turned “cautiously optimistic,” as Goldman Sachs put it, with rebalancing efforts starting to become more clear.

Crude oil inventories continue to decline, and the latest EIA figures show a massive 7.2 million-barrel drawdown for the week ending on July 21, suddenly plunging U.S. inventories back into the upper end of the five-year average range. Data from the past month or so has dispelled fears that the oil market was poised to suffer another meltdown, perhaps below $40 per barrel.

Instead, Brent is back up above $50 per barrel for the first time in two months, and WTI is hovering just below that range as well.

"While OPEC's production path remains uncertain, recent fundamental oil data have come in even better than we had expected," Goldman said in a research note last week. "If sustained, these trends would help achieve the normalization in inventories by early next year."

Goldman also says that inventories are declining not just in the U.S., but around the world. The investment bank says a combined 83 million barrels have been pulled out of storage in Europe, Singapore, Japan and the U.S.

The demand side of the equation also looks bullish, with the IEA having recently revised up its figures. Goldman says that the inventory declines will be “sustained” through the third quarter. With inventories already dipping into the very top of the five-year average range, more declines will tighten the market significantly. Related: Shell Posts 700% Rise In Earnings, Prepares For ‘Lower Forever’ Oil Prices

Goldman projects that continued drawdowns could push the oil futures market into a state of backwardation, which the bank has consistently said would be necessary in order to achieve the “rebalancing” that OPEC has long sought. Backwardation – a state in which near-term oil futures trade at a premium to contracts further out – would make storage uneconomical, forcing more rapid drawdowns. It would also scare away shale drilling to some degree, if drillers saw future-dated oil prices lower than they are today. Moreover, Wall Street might be reluctant to lend a lot of money to indebted shale drillers for the same reason, growing skittish if they see that prices might decline over the course of a year or two.

The shale industry has repeatedly drilled itself into a whole, deploying rigs at such a frenzied pace that they have killed off several oil price rebounds. This time, perhaps, might just be different. Investors are a bit more cautious, pressuring companies into slashing spending and improving profitability. Last week we saw a flurry of spending cuts, from Anadarko Petroleum, Whiting Petroleum, ConocoPhillips and Hess Corp. More are likely in the offing.

That occurred because many companies have questionable economics at today’s oil prices, despite the boasts of so many shale executives over the past few years. "Most investors shared our view that U.S. onshore growth is unsustainable in the $40-$45/bbl price environment and that activity would need to be reduced to better balance corporate cash flows and" spending, according to analysts with investment firm Stifel. "Our end conclusion is we need less rigs and more capital discipline."

Other analysts have come to the same conclusion. "By prioritizing production growth over profitability and margins, investors and producers are at risk of killing their goose before it lays a golden egg," Benjamin Shattuck of Wood Mackenzie said in a recent report. Related: Aggressive U.S. Oil Sanctions Could Bankrupt Venezuela

The latest oil price downturn in June might have finally sent the message to oil executives that the appearance of a sudden price rally should not be trusted. The EIA recently revised down its growth projects for U.S. oil production in 2018 from 10.0 million barrels per day to 9.9 mb/d.

Meanwhile, Goldman says that while the Permian Basin has been hot for a while, it is finally starting to differentiate itself from the rest of the shale industry, for two reasons. New frac sand mines are being proposed in close proximity to shale drillers in the Permian, which could lower well costs by as much as 5 percent, translating to lower breakeven prices by about $1.50 to $1.75 per barrel. Second, Goldman says productivity improvements in the Permian are likely to be at the upper end of its forecast 3 to 10 percent.

As such, Permian drillers will probably continue to proceed with their growth plans, although the exuberance with which they do it is starting to calm. Having been hit by so many false rallies, the shale industry is finally starting to show some restraint.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment
  • Kr55 on July 30 2017 said:
    Try to tell that to the EIA. They were already >200k of daily production high in their estimates based on the most recent confirmed data for April. They don't seem to care though and keep ramping up their fudged production numbers.

Leave a comment




EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News