A New Swing Producer
U.S. Shale Gets Ready to Take on Price Rebound

After plunging 50 percent from a high of over $110 per barrel, the price of crude has been on the mend in recent weeks, back up to around $65 per barrel from a low of $47 in January. This has been driven in large part by slowing growth in American production as high-cost shale producers struggle to turn a profit in a bearish market. But, as the FT reports, prices aren’t likely to edge up much higher before U.S. fracking booms anew:

While the rebound in oil has been rapid, though, there are good reasons to expect that it will not continue for much longer. The shale oil industry of the US is emerging as the world’s “swing producer”, bringing more crude on to the market when prices rise, and putting a ceiling on its potential price — that will probably now be well below $100 per barrel. […]

[D]rilling activity in the US is likely to be picking up again soon. The prospect that renewed production growth in the US would limit any oil price recovery has been talked about in hypothetical terms for some time, but in the past week we have seen evidence that it is becoming a reality.

In a round of earnings statements last week, some of the leading companies in the US shale oil industry, which have cut their drilling activity sharply since last summer, started talking about stepping it back up again. Harold Hamm, chief executive of Continental Resources, one of the leading operators in the Bakken formation of North Dakota, said: “$70 is the price that turns it on for us.”

Up until last summer the world was getting used to oil at over $100 per barrel, but shale precipitated the last year’s price plunge and looks set to prevent any return to what can now be called the old days.

American shale firms have had to scale back production, true, but as they’ve done so they’ve also been hard at work finding ways to refine processes and cut costs to stay profitable in today’s market. Even as the industry has worked on reducing its breakeven costs, it’s been squirreling away crude in storage tanks and drilled but not yet fracked wells, creating what’s being called a “fracklog” of oil that companies are ready to sell on the market just as soon as prices tick upwards.

The upshot of all of this is that once crude prices rise much higher than where they are, we can reasonably expect U.S. production to rise with it, further contributing to the global supply glut and eventually bringing prices right back down. By choosing not to cut production, OPEC, led by Saudi Arabia, has given up the mantle of the world’s swing producer, and in their own way American shale firms have assumed it.

And while U.S. firms are finding ways to survive, the world’s petrostates must now confront the fact that oil likely won’t be returning to its pre-crash levels. Countries that once relied on high crude prices to balance their budgets must now face prolonged shortfalls, and all the instability and foreign policy challenges those economic woes bring.

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