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Why Oil Prices Could Dive

Oil prices are at multi-year…

Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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U.S. Shale Patch Welcomes OPEC Deal – But Needs $60 Oil

Oil rig

Although OPEC’s decision to take 1.2 million bpd off the market as of January is undoubtedly good news for the U.S. shale patch, companies would likely wait to see if oil prices would materially stabilize next year before resuming en-masse drilling, analysts polled by Platts reckon.

“The OPEC deal puts a fairly strong floor in $40s instead of leaving a trap door in the $30s without a deal,” according to Fred Lawrence, vice president for economics for the Independent Petroleum Association of America.

U.S. drillers would continue to reign in capital spending next year and prepare for higher prices, which they expect in 2018, Lawrence said.

In addition, OPEC is likely to closely watch U.S. companies as they increase spending and add rigs in the first months of 2017 before deciding at its May meeting whether to extend the cuts past the initial six months, the analyst noted.

Should oil prices remain around US$50 per barrel, U.S. shale production may start recovering, with the low-cost Permian offsetting declines elsewhere, Stephens analyst Matt Marietta told Platts. Oil at US$50 would mean that the Eagle Ford and the Bakken production drops would begin moderating, he added.

However, Marietta warned investors to “avoid sharp recovery hype” for U.S. output, given the fact that even a 1-million-bpd cut in supply would take a year and a half for The Organisation for Economic Co-operation and Development (OECD) inventories to stabilize. Related: Fitch Talks Down OPEC Optimism - Oil Prices To Flatline In 2017?

Oil priced near US$50 means U.S. onshore output would remain flat next year, and while the Permian could still rise even if prices drop, the Bakken and the Eagle Ford need oil at US$60 to raise their production in 2017, Garrett Golding, vice president at The Rapidan Group, said.

According to Wood Mackenzie, oil prices need to be higher than US$55 and stay at that level for several months before we see a rise in U.S. shale activity.

As for offshore drilling activity, its recovery is still years away, but the OPEC deal (if it materializes) could speed up supply-demand rebalancing by a year, and offshore recovery may start a year earlier than previous expectations, which was that a recovery would take place in 2019-2020, Marietta said.

By Tsvetana Paraskova for Oilprice.com

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