Oil prices creeped above $50 per barrel recently, and already we’re seeing encouraging signs in the American shale industry. Fracking shale rock is a relatively expensive process, so when crude prices tumbled from a high of more than $110 per barrel two years ago to a nadir of under $28 per barrel this past January, America’s oil output correspondingly flagged as companies were forced to halt production, awaiting an uptick in the market. Thanks to supply disruptions abroad that have helped to ease the glut that precipitated oil’s price collapse, the market has somewhat rebounded, and as the FT reports U.S. companies are taking advantage:
The rebound in activity in the US is so far only modest…The rigs that are being put back to work, though, reflect decisions taken a few weeks ago, when oil prices were lower than they are today. If prices remain stable for a while at about $50 per barrel — and still more if they move higher — more companies are likely to join in the revival. […]
The prospect of the US resuming its position as a growing supplier to global crude markets creates what Paul Sankey of Wolfe Research describes as a “soft ceiling” on prices…Scott Sheffield, chief executive of Pioneer Natural Resources, one of the most active shale drillers, expects a long-term oil price of about $60 per barrel. It will fluctuate around that level, he says, and at times could go to $40 or $80. But any producer that needs oil to be consistently above $60 will be in trouble. […]
Some costs of large projects have been coming down. A global glut of offshore drilling rigs means their rates have plummeted, for example. But it is much harder to achieve efficiency improvements in a handful of multibillion-dollar projects that each present their own unique challenges, than it is in thousands of similar shale wells that are repeated over and over again.
That last bit gets to the heart of one of shale production’s greatest strengths: the fact that the size of fracking projects are tiny relative to most conventional operations, and the relatively quick decline in output that necessitates continual re-drilling, both make for an environment that fosters innovation and encourages companies to discover new ways to adapt to today’s difficult market conditions.
American oil production has been down recently, but you’d be a fool to count it out. If demand grows—as OPEC predicts will happen in the second half of this year—or supply contracts further on more disruptions like the ones we’ve seen in Nigeria or Canada, prices could spike higher to $60 per barrel. That seems to be the price point most U.S. shale firms are hoping for, and if we see that the shale boom would once again hit its stride. That effectively puts a soft cap on today’s oil market, because the higher prices rise, the more American crude we’ll see.
And finally, keep this in mind: $60 may be the desired price for shale today, but that will continue to come down with time. In October 2014 the majority of shale production was believed to require an oil price of $75 to profit, but innovative new techniques and more streamlined operations have brought that breakeven price down significantly and, in true American fashion, will continue to do so.