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Global Risk Insights

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Who Really Won The Oil Price War?

The rise in oil prices over the past six months has come as a blessing for the battered U.S. shale producers. Oil prices have risen more than 50 percent since January, giving a glimmer of hope to the U.S. oil industry that the worst of the oil crisis might finally be behind them. Moreover, it forced the shale producers to adapt by reducing production costs and increasing efficiency.

According to data publicized by Reuters, the decline rates of oil wells in the most productive fields in the U.S. – the Permian and Bakken Basins – were almost halved over the past several years. In practice, this means that shale people will get more bang for their buck; due to slower decline of the wells, they will have to drill fewer new wells to sustain output and therefore lower their capital demands.

After months of consecutive falls, the number of rigs has been increasing since May and companies expect additional growth if oil prices remain at $50 levels. In addition, Norwegian energy consultancy Rystad Energy’s newest estimates reveal that the U.S. holds more recoverable oil reserves than Russia or Saudi Arabia. More than 50 percent of reserves belong to unconventional shale oil.

Low oil price has been both a blessing and a curse for the shale industry

The key for the survival of the U.S. shale industry currently lies in its ability to raise money to finance its renewed activity. One of the shale’s weak spots was always its dependency on capital inflow and high level of debt. In the world of high oil prices and lax capital markets this did not matter so much. However, since the oil price crashed two years ago, financing has become the industry’s central problem. Bond sales of U.S. independent energy companies is currently at its lowest level in more than a decade, and the markets are still not convinced enough to devote fresh capital to new energy projects, despite the brighter outlook that came with higher prices of oil. Related: Is Oil Going Back Under $40?

A breath of fresh air could come from another side though. After the slump in prices, many oil giants such as Exxon and Chevron mothballed expensive offshore and Arctic projects and turned their attention towards cheaper and more feasible shale projects in the United States.

No clear winner of the oil price war

So who has won in this war of oil giants after all? It is probably a tie. Although the Saudis caused damage to the U.S. shale, they also hit to global oil industry hard, while they managed to preserve their market share, they paid a heavy price in terms of oil revenues. The real question however, is not whether the House of Saud is able to keep oil prices (and consequently U.S. shale production) subdued for a prolonged period of time, but how long they can do it without endangering fiscal and social stability of the Desert Kingdom and other OPEC members. Despite its ambitious Vision 2030 programme, Saudi Arabia will stay dependent on oil income to subsidize its social programmes for many years to come. Achieving restructuring at $50-60 price levels without swift and potentially painful reforms would prove a real challenge to the Saudi regime.

On the other hand, Riyadh has done a huge favor to the U.S. shale industry by forcing it to adapt and change its business philosophy. OPEC will remain an important, and hopefully responsible, factor in oil markets, but it will have to accept the fact that the circumstances have changed over the past five years. Both the ascent of shale oil, and initiatives to reduce global carbon footprint will impose an enormous strain on the Cartel and its members, which are still a long way from having diversified economies.

By Ante Batovic via Global Risk Insights

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  • Lee James on July 19 2016 said:
    Oil producing countries have maintained production levels ... and this is termed "war on shale." Shale is the sore looser upon falling short on free cash flow and going bankrupt. Good luck with extracting with borrowed dollars.

    Sovereign-nation producers will sell national energy assets, or adjust national budgets in the short-term.

    Increasingly tough-to-extract oil is hard on all oil producers, everywhere. Time to do something different -- besides such an emphasis on burning fossil fuel.

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