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

OPEC

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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  • Tyler on August 17 2017 said:
    Would it not be better for both parties namely OPEC and US Producers to reduce production to drive down the glut, which in turn would elevate prices. Both parties would benefit from higher prices. They need to stop worrying about market share, because eventually there will not be a market to share.
  • Idon'tknow on August 17 2017 said:
    There is not a single shale producer that breakeven with $ 40 oil. They are going into huge debt to maintain and increase the production (just look at EIA report for Permian in Aug, of $200 k new production, $140 k went toward covering depletion in old wells, I don't think this is sustainable business model). The financials again are ruining other industries (remember sub prime mortgages) and making money by issuing secure depths in the form of high yield bonds, shareholders (like me!!!) are losing money and waiting for a miracle to come and make these producers profitable.
    These are inline with other nonsenses that we have heard before, Pioneer res. CEO - 2016 "Sheffield said that, excluding taxes, production costs have fallen to $2.25 a barrel on horizontal wells in the Permian Basin of West Texas".
    and I remember those days that all" heads of commodities research" in big banks were jumping up and down for such a good news and still shareholders are looking for huge profits. May there are invisible!!!!
  • Ben on August 17 2017 said:
    Citi are just talking their side and book up. I wonder how much they have lent to shale. OPEC wants lower for longer, i.e. until the debt is called in, at which point the shale ponzi will be revealed in all its glory.
  • Dave Mowers on August 17 2017 said:
    The Saudis have no choice but to attempt to bankrupt American producers by flooding the market back down to $30.00 in order to cleave out the shale competitors holding back the price which in turn will eviscerate their IPO if they do not take market share back.

    At $30.00 no one will invest in American oil production.

    Mark my words.
  • Naomi on August 18 2017 said:
    OPEC break even is over $100/bbl because their cost of doing business includes welfare.
  • Marvellous on August 18 2017 said:
    The reported break-even prices of shale are not correct, if they were the Balance sheets would look a lot different than they do. Bur who can blame them, they need more money and they know they won`t get any unless they can create a perception they can make money in this price-enviroment. They probaly leave out cost of lease, infrastructure and other items to conclude this way.

    Furthermore I do not see OPEC and shale as enemies, in many ways they are allies. There is a saying that "the enemy of my enemy is my friend", and that appears to be the case here.

    OPEC don`t see shale as a threat for the future as OPEC`s production cost is much much lower than shale. As a matter in fact the shale hype has been helping OPEC achieve their long time goals dor years now. Because of shale the sentiment is "as soon as prices rise shale will plug the gap and keep prices low". This prevents Investment deepwater all around the world and hurts everybody, but those who suffer the least are the ones With the biggest reserves and oilfields. These tend to be pretty stable so they can delay Investments for some years without too much decline, that`s true for the big OPEC-members. So shale has now become the enemy of OPEC`s competitors worldwide and is thus helping OPEC in the long run.

    In the years to come this will mean more decline from oilproducers worldwide untill you Reach a point where shale is unable to plug the gap. Then we`re back to call and OPEC and those guys call the shots totally. We have allready seen more than three years of lacklustre investment worldwide but because the projects that were initiated before the oil-price crash have been coming online and are coming online now we haven`t felt the consequences yet. But when the projects that were stopped in 14, 15, 16 and 17 don`t come online in the future we will certainly feel it. These are big projects with a lot of oil that take a long time to develop, the time lag is usually around 3-7 years from comittment untill production starts.

    We haven`t seen the consequences of the oil-price bust yet except in shale. But the effects on conventional production will be clear for all to see in the years to come. If we og into a period of undersupply it will take time to turn that situation, probably longer than the duration of the so called oil-glut.
  • Oilracle on August 18 2017 said:
    Tyler on August 17 2017 said:
    --- US Producers to reduce production to drive down the glut, which in turn would elevate prices.....They need to stop worrying about market share, because eventually there will not be a market to share. ---

    Why do we have to care here about the OPEC cartel so much?! Let the US companies provide cheap oil to the US consumers, and stop lowering other parties' prices by sending our military everywhere. How big is our national debt already?!
  • John Brown on August 28 2017 said:
    So if I understand this report a lot of U.S. shale producers can break even at $40 although not all, and even those that can't have to keep trying to lower cost and increase production to service their debt? That means U.S. production will keep rising.
    Meanwhile OPEC has had to idle more and more capacity which is just sitting there, and its members are beginning to cheat more and more.
    So we have a glut of oil, idling more capacity has not reduced the glut, and has actually kept prices around $50 which means U.S. production continues to climb, meaning OPEC has to continue to idle more capacity, rather than cheat, or the glut begins to grow even larger?
    I also just read an article that says Chinese demand has been high this year because they have been filling their strategic reserve, and they may be running out of storage which could mean a drop in demand in the not so distant future even if their economy is growing around 6% which is probably not really the case.
    Meanwhile, renewable energy is propped up by $50 a barrel oil, wind & solar, mostly because of Gov subsidies, but they do continue to increase market share and reduce the need for oil bit by tiny bit.
    When I was taking economics in University that would have been described in my classes as a classic over supply situation that should result lower prices. Of course, that was class and didn't take into account monopolies and collusion to prop prices up, but with OPEC market share falling, and the glut and excess capacity growing, and Chinese demand possibly dropping substantially, its still seems odd that the price of oil can stick at over $30 a barrel? I'd like to see an article that explains how oil stays at $50 or goes higher despite a glut, massive storage, massive increases in idle capacity, increasing non-opec production, slow increases in renewables, and an upcoming demand drop for China?

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