• 2 days U.S. On Track To Unseat Saudi Arabia As No.2 Oil Producer In the World
  • 2 days Senior Interior Dept. Official Says Florida Still On Trump’s Draft Drilling Plan
  • 2 days Schlumberger Optimistic In 2018 For Oilfield Services Businesses
  • 2 days Only 1/3 Of Oil Patch Jobs To Return To Canada After Downturn Ends
  • 2 days Statoil, YPF Finalize Joint Vaca Muerta Development Deal
  • 2 days TransCanada Boasts Long-Term Commitments For Keystone XL
  • 2 days Nigeria Files Suit Against JP Morgan Over Oil Field Sale
  • 2 days Chinese Oil Ships Found Violating UN Sanctions On North Korea
  • 3 days Oil Slick From Iranian Tanker Explosion Is Now The Size Of Paris
  • 3 days Nigeria Approves Petroleum Industry Bill After 17 Long Years
  • 3 days Venezuelan Output Drops To 28-Year Low In 2017
  • 3 days OPEC Revises Up Non-OPEC Production Estimates For 2018
  • 3 days Iraq Ready To Sign Deal With BP For Kirkuk Fields
  • 3 days Kinder Morgan Delays Trans Mountain Launch Again
  • 3 days Shell Inks Another Solar Deal
  • 4 days API Reports Seventh Large Crude Draw In Seven Weeks
  • 4 days Maduro’s Advisors Recommend Selling Petro At Steep 60% Discount
  • 4 days EIA: Shale Oil Output To Rise By 1.8 Million Bpd Through Q1 2019
  • 4 days IEA: Don’t Expect Much Oil From Arctic National Wildlife Refuge Before 2030
  • 4 days Minister Says Norway Must Prepare For Arctic Oil Race With Russia
  • 4 days Eight Years Late—UK Hinkley Point C To Be In Service By 2025
  • 4 days Sunk Iranian Oil Tanker Leave Behind Two Slicks
  • 4 days Saudi Arabia Shuns UBS, BofA As Aramco IPO Coordinators
  • 4 days WCS-WTI Spread Narrows As Exports-By-Rail Pick Up
  • 5 days Norway Grants Record 75 New Offshore Exploration Leases
  • 5 days China’s Growing Appetite For Renewables
  • 5 days Chevron To Resume Drilling In Kurdistan
  • 5 days India Boosts Oil, Gas Resource Estimate Ahead Of Bidding Round
  • 5 days India’s Reliance Boosts Export Refinery Capacity By 30%
  • 5 days Nigeria Among Worst Performers In Electricity Supply
  • 5 days ELN Attacks Another Colombian Pipeline As Ceasefire Ceases
  • 6 days Shell Buys 43.8% Stake In Silicon Ranch Solar
  • 6 days Saudis To Award Nuclear Power Contracts In December
  • 6 days Shell Approves Its First North Sea Oil Project In Six Years
  • 6 days China Unlikely To Maintain Record Oil Product Exports
  • 6 days Australia Solar Power Additions Hit Record In 2017
  • 6 days Morocco Prepares $4.6B Gas Project Tender
  • 6 days Iranian Oil Tanker Sinks After Second Explosion
  • 9 days Russia To Discuss Possible Exit From OPEC Deal
  • 9 days Iranian Oil Tanker Drifts Into Japanese Waters As Fires Rage On
Alt Text

Is The Current Oil Price Rally A “Head Fake?”

Oil prices have experienced a…

Alt Text

Is An Oil Price Correction Overdue?

Oil prices rallied to 2.5-year…

Alt Text

Grading 2017 Oil Price Predictions

Oil and gas had a…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

Are Investors Bailing On U.S. Shale?

Wall Street

U.S. oil production continues to grow, with the EIA reporting a shocking jump in output last week.

Total U.S. production rose to 9.5 million barrels per day (mb/d) for the week ending on August 11, up 79,000 bpd from a week earlier. That puts U.S. output at the highest level in nearly two and a half years. The U.S. shale industry has been adding new supply pretty much uninterrupted since late last year, despite volatile swings in oil prices over the course of 2017.

In fact, the gains continued even through the price downturn in June, which saw WTI flirt with the $40 per barrel threshold, which, at first glance, suggests that the shale industry is doing just fine.

To be sure, some shale drillers have breakeven prices well below the prevailing market price, allowing them to make money even during those tough times.

But in the aggregate, the industry needs something around $50 per barrel to be sustainable, or perhaps even $55 per barrel. If that is the case, how is it that the U.S. oil industry continues to add new supply, even when some companies are not even making money?

The short answer is that they have been given a long leash by Wall Street. Generous financing, high levels of debt, and repeated equity issuance has given shale drillers a lot to work with. Many of them have seen their debt levels climb, but major investors have been patient, hoping that the growth-before-profits model will eventually pay off. Related: Tech Guru Unveils New Battery To Challenge Lithium-Ion

That approach was more sensible when it was assumed that oil prices would rebound, the idea being that the massive cost reductions have allowed these companies to breakeven at today’s price, which would lead to huge profits when oil prices eventually rebounded to, say, $70 or higher.

But there are several problems with that. First, the conundrum for shale E&Ps is that they have not successfully lowered the breakeven price on a structural basis. A lot of the “efficiency gains” were the result of cyclical – and temporary – declines in the cost of labor and services. The market downturn led to price deflation for oilfield services – equipment and rig rates, completion services, frac sand, etc. Those costs are rising again as activity picks up. Oilfield services companies will demand higher prices, labor shortages will inflate wages, and so on. As the price of oil ticks up, so will breakeven prices.

In other words, “it appears the breakeven points for shale are actually a function of the past price of oil itself,” Ellen R. Wald, a historian and scholar of the energy industry, wrote in Forbes earlier this month.

The second problem is that most analysts do not see oil prices really staging a rally, at least anytime soon. Just to take one example, Citigroup estimates that WTI will not average $52 per barrel…until 2020.

The third, and perhaps most glaring, problem with the growth-first shale model is that shale companies were burning through cash when oil prices were $100 per barrel, and they are still burning through cash even after the much-heralded efficiency gains achieved over the last three years. According to Bloomberg and Bloomberg Gadfly, the free cash flow after capex for a collection of 33 shale E&Ps has been profoundly negative over the past 12 months. More worrying for investors is that the cash burn in the Permian has been particularly large, and worse, it has accelerated over the past year.

As Ellen R. Wald puts it in Forbes, “when the financiers lose interest, the Shale Revolution will be over.”

Related: The Single Biggest Bullish Catalyst For Oil

And there are some early signs that investors’ patience is starting to wear thin. A long list of shale companies saw their share prices savaged after the latest earnings reports, even as oil prices have regained ground. In a warning sign for the industry, Goldman Sachs reported that it has fielded calls from major investors looking to “reallocate capital across the energy industry” after souring on shale E&Ps.

Meanwhile, equity issuance for E&Ps has fallen substantially this year after spiking in 2016. According to Liam Denning of Bloomberg Gadfly, the industry is on track to issue just $10 billion in new equity this year, the lowest since 2010. There could be perfectly sensible reasons for this – Liam Denning suggests that the rally in oil prices at the end of last year led shale drillers to hedge their production, allowing them to grow without the need of new sources of finance. But, the plunge in new equity issuance could also be the result of shale drillers tapping the Wall Street well too many times.

Ultimately, investors will catch on and the game will be up. If shale drillers cannot turn a profit at today’s prices, they will need to cut back on production and spending, and some will be forced out of business. That means that overall U.S. production will have to cap out, and perhaps even decline, which should eventually force up oil prices.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment
  • Randy Verret on August 18 2017 said:
    I tend to agree. All the "hoopla" about the Shale revolution is almost as "hyped" as EV's and 100% renewables by 2050. I have a feeling that market conditions will make needed corrections in each case...
  • zorro6204 on August 18 2017 said:
    Even though Andy Hall admits he can't call the oil market anymore, he knows a thing or two, and he indicated $50 was a sufficient price the other day. Citi thinks so too, and believes shale will respond any time the price goes up even a little, keeping oil range bound. Pick and expert, get an opinion.

    We're not going to know what price level oil needs to be at in order for production to fulfill demand until after the fact, there's no way to predict. We do know the rig count and production started to increase when WTI recovered to the high $40's, and we know shale drillers backed off after WTI fell closer to $40. We're still in the range, it looks like, but where that range will be two years from now, no one knows.

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News