The price of oil won’t stop dropping, and it’s starting to affect the American shale boom. The benchmark crude price for West Texas Intermediate (WTI) has plunged 30 percent since June to a four-year low, affected by weak demand and an oversupply in the global market. While in the past OPEC has cut production in similar bear markets in order to help stabilize falling prices, this time the cartel has stayed put, seemingly content to compete for market share.The Saudis seem to be playing a game of chicken with U.S. shale, and we’re now seeing the WTI drop below levels that many American producers require to drill profitably (as you can see in the graph above). Fewer wells are being drilled, and cash-strapped producers are revising down their outlooks for 2015, as the FT reports:
Halcon Resources, which operates in the Eagle Ford shale of south Texas and the Bakken of North Dakota, said on Monday it planned to run just six rigs next year, compared with the eight it is running now and the 11 it had previously planned for 2015. Other leading shale oil companies have announced reductions in their capital spending plans: Continental Resources cut its 2015 budget from $5.2bn to $4.6bn; Rosetta Resources said it would spend about $950m next year, down from $1.2bn in 2014; and ConocoPhillips said it planned to spend less next year than the $16bn it is spending this year.
The second and third biggest drilling services companies are discussing a merger, and some see the contraction as a response to falling oil prices and the decreasing margins in American shale.But amidst all of this gloomy news, U.S. producers are still expecting to grow production next year, as they continue to refine the still relatively new pairing of hydraulic fracturing and horizontal well drilling to get more output per drilled well. The IEA reported that the U.S. produced a record 12.2 million barrels of petroleum liquids per day last month, noting that “[e]fficiency gains in light, tight oil production have been constant, and price pressures would only provide more impetus for producers to cut costs further.”Today’s oil price makes it difficult to profitably tap some of the more expensive American shale plays, and it raises some questions about the debt loads of producers who, until recently, enjoyed much higher product margins, but this boom is still a long way from going bust.