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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.

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  • Andrew Allison

    To paraphrase an old quote, the punditatiat has predicted nine out of the last zero collapses of the fracking industry. Production has declined by less than 5% in the face of $30-$35 oil. The frackers are getting leaner and meaner by the day. Why would anybody in their right mind think that renewed capex requires a price of $40-$45?

    • f1b0nacc1

      A big piece of fracking is tied to big data analysis, and that is seeing price collapses that will tend to drive some of these gains in efficiencies as well.

      • Kevin

        Access to capital might be a problem – investors and lenders may become reluctant to commit more money.

        • f1b0nacc1

          Perhaps, but I wonder. There is always some money sloshing about looking for a home…

  • Jacksonian_Libertarian

    Fracking is still in it’s infancy. At the present time 80% of the oil is coming from 20% of the fracked well. This means that there is at “Least” 300% more oil that can be recovered if the fracking technology can be made uniformly efficient over the full length of the well. This would significantly reduce the breakeven point of shale oil development, as well as make old poorly fracked and no longer productive wells targets for “Refracking”, just add them all to the fracklog. If the present technology makes $60 a barrel oil break even, then getting 300% more oil from a well would drop the break even point to $15 a barrel. Shale oil is the lightest sweetest oil on the market, worth much more than heavy sour crude oils coming out of OPEC that require significant cracking and processing. And most OPEC producers can’t produce oil for $15 a barrel, not to mention pay for their parasitic Governments.
    So while this report has shale oil producers saying they will move on low $40’s oil prices. I’m thinking that’s today’s number, not a few months down the road, and certainly not a year from now, by which time that number will have continued to drop. The Shale oil developers don’t want to telegraph this fact, as they are hoping that OPEC and Russia and possibly others will take actions which will boost prices. And they don’t want them to know that they will be the prime beneficiaries. So they pretend they’re the walking dead, lamed and reduced to begging for charity. When in reality, they are ruthless competitors ready to take advantage of any opening. Unlike the bureaucratic Government Monopoly owned Oil Monopolies of OPEC and Russia, who aren’t even trying to cut costs or improve quality or service.

    • Anthony

      Give the numbers some context: 80% by 20%; 300% @ $15.00 (are you inferring 100% increase shaves $15.00 from base).

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