berger shevtsova garfinkle michta blankenhorn bayles
Crude Economics
Shale Prepares to Pounce on Price Rebound

American oil output is tapering off, down 500,000 barrels per day (bpd) from a recent high water mark of 9.6 million bpd last June. This isn’t unexpected—U.S. oil production has experienced a resurgence in recent years on the backs of relatively high-cost shale operations which are struggling to stay profitable in the wake of the collapse in oil prices over the past 20 months. In fact, the biggest surprise is that American output hasn’t dropped more than it already has, as shale firms have defied industry expectations with their resilience. Now, as Reuters reports, the U.S. shale industry seems confident it can start growing once again if prices rise into the $40 range:

Continental Resources Inc, led by billionaire wildcatter Harold Hamm, is prepared to increase capital spending if U.S. crude reaches the low- to mid-$40s range, allowing it to boost 2017 production by more than 10 percent, chief financial official John Hart said last week.

Rival Whiting Petroleum Corp, the biggest producer in North Dakota’s Bakken formation, will stop fracking new wells by the end of March, but would “consider completing some of these wells” if oil reached $40 to $45 a barrel, Chairman and CEO Jim Volker told analysts. Less than a year ago, when the company was still in spending mode, Volker said it might deploy more rigs if U.S. crude hit $70. […]

The threat of a shale rebound is “putting a cap on oil prices,” said John Kilduff, partner at Again Capital LLC. “If there’s some bullish outlook for demand or the economy, they will try to get ahead of the curve and increase production even sooner.”

Back when oil prices were in the middle of their freefall, analysts believed most shale operations needed a high oil price in order to stay in the black. A research director from Wood Mackenzie told the Economist back in January of 2015 that “[w]e used to think everything worked at $80-85 per barrel. Now it’s $70-75.” Back then, oil prices were in the $50s, while today they’re another $20 cheaper, and still U.S. output hasn’t fallen off a cliff, thanks to innovative new techniques and significant belt tightening.

The fact, then, that major shale players are saying they’re ready to start boosting spending if prices rise just $10 says a lot about how remarkably adroit these unconventional producers really are. This ought to be downright terrifying for the world’s petrostates, whose national budgets have been ravaged by the bearish market. The Saudis and the Russians tentatively agreed earlier this month on a plan to freeze production at current levels with the hopes of inducing a price rebound, and while a lack of Iranian cooperation seems sure to scupper that idea, it should be noted that even if this strategy somehow worked in inflating oil prices, U.S. shale producers would be quick to take advantage by upping their own supply. In fact, they’ve been preparing for that eventuality for the past year, drilling but not yet tapping shale wells in preparation for higher prices. That “fracklog,” as it’s come to be called, is large and growing, and it looks like that oil could start coming online once prices edge into the $40 range. Sorry, OPEC.

Features Icon
Features
show comments
© The American Interest LLC 2005-2017 About Us Masthead Submissions Advertise Customer Service