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Citi: U.S. Shale Beats OPEC At $40 Oil

Citigroup has said that U.S. shale will prevail over OPEC because of its higher resilience to low prices and OPEC's losing strategy of cutting output and losing revenues and market share.

Citigroup's head of commodity research, Ed Morse, told Bloomberg in an interview that OPEC and its partners cannot sustain their current strategy over a longer term, while shale producers have adapted to low prices and can break even at WTI as low as US$40 a barrel.

"In the end, the markets are going to win, and it's going to be shale. If we're in a $40 to $45 world, we'll have enough drilling to add to the surplus in the world as a whole," Morse said.

So far this year, trends have supported the suggestion that cutting production to restore prices to at least some of their previous glory leaves a lot to be desired. Brent is still trading at around US$50 a barrel despite the cuts, not only because compliance among OPEC members has been worsening instead of improving, but most of all because of rising U.S. shale output.

Just yesterday, the Energy Information Administration (EIA) said in its weekly report that U.S. output has hit 9.5 million barrels. This will grow further as all the new rigs shale drillers added earlier this year-and continue to add-start producing.

Yet, not everyone shares the optimism.

Reuters' commentator John Kemp pointed out in a recent column that the breakeven price for the shale patch is in fact more likely to be US$50 than US$40. He said a review of second-quarter reports from 15 of the biggest shale players revealed net losses to the tune of US$470 million--despite the fact that nine of the 15 companies booked positive profits for the period. Related: The Single Biggest Bullish Catalyst For Oil

None other than Harold Hamm of Continental Resources said that US$50 is a more realistic breakeven price for shale oil than US$40.

However, U.S. drillers can't really afford to stop expanding their output as they have considerable debt loads, just as OPEC can't afford to suddenly turn the taps on again as this will sink prices.

By Irina Slav for Oilprice.com

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Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More