The U.S. shale industry is in danger of killing of the very rally that it had hoped to take advantage of.
Shale production is up more than 700,000 bpd since bottoming out in September 2016, rising steadily to 9.33 million barrels per day (mb/d) in June, according to the latest weekly estimates from the EIA. The International Energy Agency says that U.S. oil production could end 2017 up 920,000 barrels per day (bpd) from a year earlier. Most analysts expect the production gains to continue into next year – the IEA says shale could grow by another 780,000 bpd.
Those figures, if they came to pass, would likely prevent any rally in oil prices. But the industry might not get that far because they could push down prices this year, which could potentially choke off their ambitious production plans.
“The growth outlooks proposed by many oily E&Ps appear tenuous at best and not resilient to prolonged weak oil prices," Mizuho Securities USA analysts Timothy Rezvan and James Lizzul wrote in a research note. Many shale companies are already in the middle of their drilling campaigns, which could mean that a certain amount of growth is already locked in. But they could suspend future growth plans if prices continue to fall.
Bloomberg reported that the Bakken would see a lot of wells fall below profitability with WTI at $45 per barrel. Less attractive parts of the Eagle Ford and the Niobrara also become less viable. The SCOOP play in Oklahoma and parts of the Permian start to come under serious pressure at $40 per barrel. “The Permian keeps going," James Williams, president of WTRG Economics, told Bloomberg. “It doesn’t collapse, but I don’t think at $40 it grows." UBS AG analysts said that $45 oil “slows most U.S. shale plays.” Related: Is China Inflating Its EV Sales?
There are other problems for U.S. shale. Although shale drillers have boasted about declining breakeven prices and cost savings, drilling productivity is starting to decline. Drilling costs are actually on the rise again because the market for oilfield services (rigs, equipment and fracking crews) is growing tighter. Shale companies also gambled earlier this year on higher prices, declining to secure hedges for their 2018 production at the same volume as they have in the past. That leaves many companies exposed to lower prices, a situation that could ultimately force them to throttle back on drilling.
Those problems are running headlong into a market that looks like it is once again oversupplied. The futures market has made a dramatic shift towards contango in recent weeks, a situation in which near-term contracts trade at a discount to deliveries further off. A contango reflects concerns about near-term oversupply. The contango is especially concerning given that OPEC’s best hope was to induce backwardation into the futures market. Backwardation is the opposite of contango, a downward sloping curve that has crude for immediate delivery trading at a premium. That would allow inventories to drain because it would become costly to buy and store crude.
The market is now at the steepest contango since November. It might not be a coincidence then that oil traders are once again turning to floating storage. Reuters reports that a growing number of old oil tankers have been contracted out to store oil in Southeast Asia. The contango allows traders to pay for storage and sell their oil at a higher price at a later date. "Too much unsold oil is headed to Asia," Oystein Berentsen, managing director for oil trading company Strong Petroleum, said in a Reuters interview. Related: Oil Prices Up, Still Poised For Longest Weekly Lossing Streak Since 2015
Contango, backwardation and floating storage may sound like a bunch of arcane industry jargon, but the basic point is that oil is getting stored on tankers because there is too much of it on the market at the moment.
“There were all those expectations that inventories would go down and that would lead to a tighter market this year and in following years,” Olivier Jakob, managing director of consultancy Petromatrix GmbH, told Bloomberg. “Right now it has been delayed and the expectations of a re-balancing are starting to evaporate.”
In short, there are growing signs that the oil market is still woefully oversupplied. Ultimately, that could put a damper on U.S. shale. Reuters says that eight prominent hedge funds have recently cut their investments in ten top shale companies, reducing their exposure by $400 million. The reason seems to be growing concerns that oil prices will tank because of too much drilling. The moves by the hedge funds are even more eye-opening because they pared back their positions in companies that are drilling in the Permian, the most attractive shale basin in the country.
If the margins in the Permian are no longer looking that great, then the shale boom could really be in trouble.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
- Yemen War Threatens Crucial Oil Chokepoint
- Iraq Dethrones Saudi Arabia As India’s No.1 Oil Supplier
- Are Hedge Funds Growing Weary Of The Permian?
Why the dishonesty? Confirmed figures show production from horizontal wells was 3.675M in Sept 2016, and 3.716M in Feb 2016. You believe in March/April/May that horizontal well production went up over 650k to 4.375M?
Typical American greed.
In athletic competition, one usually is allowed one false start. The second one gets you disqualified. They better cut the rigs back or there will be a second round of bankruptcies and the bankers might not be so lenient with the reorganization option this time.
"The breakeven cost per barrel, on average, to produce Bakken shale at the wellhead has fallen to $29.44 in 2016 from $59.03 in 2014, according to consultancy Rystad Energy. It added that in terms of wellhead prices, Bakken is the most competitive of major U.S. shale plays.
Wood Mackenzie said technology advances should further reduce breakeven points."
Lower prices mean lower future shale production in USA, but cost are far lower and new technology means it takes only months, not years to rein the spigot back on. There is no reason for oil to be above $30 a barrel.
Or maybe the solution is, lets all seat together and lets make a plan, lets make an accord and lets all produce only what the market is needing, lets balance because the market still give us the chance to make a fixing of what should be the price for the society can live in pace, the science has the chance to make its job and we to make a grate profits!!.
If it is contango, you buy and hold... If it is backwardation you would do reverse if possible...!
But... That's not the case I guess...?
I strongly doubt that the Saudis increase/decreased their production "in the last years" by 2.5 million barrels per day... this would be than less than 8mbpd and they would have lost the title of largest oil producer (later only exporter as Russia produced more but also consumes more of course), the US produced ~9.3 mbpd, on the way to a new Peak.. Hubberts old 1970 peak would have been blown away according to 1st half of 2014, but the oil price crash did prevent Hubbert from this, but it will happen... the day will come when the US will produce a bit over 10 million barrels like in 1970 and they will beat that number....
its "smart" for the geopolitical effect to put on every production which brings in at least the investments, so the US companies doing this do not really make cash, they might even lose some, but I'm sure they are "backed" by Trump... (omg he is really the guy in the White House now, still strange to write Trump and meaning the President of the once most important country on this planet :X), however like Putin (ab?)uses Rosneft and its companies abroad to "buy" friends (Armenia would have been overrun in the conflict with the muuuch larger and oil- and natural gas rich Azerbaijan, both ex soviet republics, but Armenia is nothing compared to the petrodollars which Azerbaijan made, but Armenia gets the worldwide cheapest gas from Russia! They gave a local Rosneft daughter company the controll of I think 50.1% of the whole Armenian (not very large, but still in a important geopolitical place) pipeline system which is only used for the country itself since Azerbaijan of course does not use the shorter route through Armenia, they use the route through Georgia, which even has another side-effect which one day could get important, so they reach the Black Sea... but first it goes to Ceyhan, deep in asian part of Turkey the City is the major turkey oil hub for oil from Iraqi Kurdistan, former smaller Syrian exports, and of course the pipeline from Baku... also there are several Russian pipelines as Putin and Erdogan made many deals in the fossil fuel sector... Turkey for example puts sooo heavy taxes on gasoline that it has the most expensive gasoline prices in EUrope! (They are counted as Europe because of the small western part and because half Istanbul is in Europe, you pay over 1,70€ per liter usually, maybe now with the very low prices, depending on the exchange rate for Turkish New Lira to US-Dollar it is around ~1,60€... that would be very high for Germany, France, Netherland etc... but for Turkey..... but I think strong taxes on diesel exist too, and some ships and trucks crossing turkey have no choice to pass it without visiting the gas station..... Turkey was under the Next-Eleven, they still are but Erdogan and Syria makes it hard......