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Has OPEC Underestimated US Shale Once Again?


The U.S. shale cowboys are back on their horses and leading a strong recovery in the oil patch that is not expected to falter even as WTI prices dropped last week below $50 per barrel for the first time in more than two months.

With lessons learned from the oil price crash and budgets streamlined and focused on the most prolific shale plays, U.S. drillers are giving OPEC a hard time by raising output and hedging future production. Meanwhile, the cartel members are trying to cut supply and fix the price of oil at such a range that would allow them to reap higher oil revenues, but not allow the shale patch to recover too much too fast.

Two and a half months into the supply-cut deal, it looks like OPEC is losing the campaign to prop up oil prices. The drop in prices that began last week saw them retreating to almost exactly the same level as on November 30 – just below $52/barrel for Brent – when the OPEC deal was announced, the International Energy Agency said in its monthly report on Wednesday.

At the same time, reduced breakeven prices in many shale plays and forward locking-in of production is allowing the companies currently drilling in the U.S. to turn in profits even at a price of oil at $40 a barrel.

The U.S. shale patch has not only emerged leaner and more resilient from the downturn, it has also hedged future production with contracts guaranteeing the price of the crude they will be pumping a year or two from now, Bloomberg reports, citing industry executives and analysts.

According to Katherine Richard, chief executive at Warwick Energy Investment Group that holds stakes in more than 5,000 oil and gas wells, many of the U.S. drillers would not see their profits reduced unless the price of oil drops to the $30s or lower.

So the drillers that have locked in their future production—and those include Parsley Energy, RSP Permian, Diamondback Energy, and Harold Hamm’s Continental Resources—probably didn’t worry much when the price of WTI dropped below $50 last week.

This is a sign that OPEC may have underestimated—yet again—the resilience of the U.S. shale patch when the cartel decided to collectively curtail oil supply.

Last week Saudi officials told American oil producers that there would be “no free rides” and that they should not expect OPEC to extend or deepen the output cuts to make up for the jump in shale production in the U.S.

And U.S. shale output has been steadily growing in the past few months, thanks to, and quite ironically so, OPEC’s cuts that have been supporting WTI prices at above $50 (or at least above $48 this past week). The U.S. shale patch is expected to lift its April oil output by 109,000 bpd, the EIA said earlier this week.

According to Michael Webber, deputy director of the University of Texas’ Energy Institute in Austin, who spoke to Bloomberg:

“The cowboy spirit is back. Hedging is playing a big role.”

The drilling spirit is indeed back, and the break even prices in the best shale areas are now below $40. According to Bloomberg Intelligence analyst William Foiles, in the Eagle Ford, for example, drillers in LaSalle County break even at $36 oil price, and at $39 per barrel oil in Gonzales County.

In the Permian (and what’s a shale recovery without the Permian), wellhead breakeven prices in the Permian Midland have dropped from $71/barrel in 2014 to $36/barrel in 2016–a 49-percent decrease–the steepest among the main U.S. shale plays, Rystad Energy said in its Permian Midland review. The average wellhead breakeven price decrease in the main shale plays has been around 46 percent since 2014, Rystad Energy noted.

So, in order for the U.S. shale to start thinking of idling rigs en masse again, oil prices would have to drop and stay at even lower for longer, at below $40. The leaner, meaner and more resilient U.S. shale is basically wiping out OPEC’s efforts to achieve higher oil prices with the output deal. The cartel seems to be caught between a rock and a hard place — extending and/or deepening cuts and losing precious market share to U.S. shale, or ditching the price-fixing policy and letting the next oil price war begin.

12 Comments on "Has OPEC Underestimated US Shale Once Again?"

  1. Coffeeguyzz on Thu, 16th Mar 2017 10:53 am 

    The recent production numbers out of the Permian should prompt observers to ponder …to say nothing of the tens of billions pouring into the area from the industry’s most prominent players.

    The uptick in production from the Cotton Valley …
    The planned near ten thousand wells in the emerging Uinta basin …
    Marcellus output about to exceed 19 Bcfd …

    Something important and paradigm changing is happening right before our eyes, folks.

    Sure, one can hope for more wind and solar.
    One can eagerly plan on coal burning cars to populate the roadways.
    One can, with stupefying obstinance, claim ‘we’re running out’ of hydrocarbons because … and fill in the blanks with some discredited du jour ‘rationale’ that will assuredly be buttressed by graphs, charts, analysis by historically erroneous prognosticators and displayed before a shrinking audience of True Disbelievers.

    Sorry, people, but the vast, VAST amounts of recoverable hydrocarbons, especially in gaseous form, will continue to be unleashed for generations to come.

    The Utica, Trenton Black River, Rogersville, Mancos, the stacked Powder River Basin, and many, many more resources continue to enter the economically viable realm based upon these past 20 years developments.

  2. ________________________________________ on Thu, 16th Mar 2017 5:02 pm 

    I give it 3 years max. Then it’s mad max

  3. Mark on Thu, 16th Mar 2017 5:22 pm 

    Done with lots of debt I’m sure
    Lets see what happens if oil prices crater?

  4. John Norris on Thu, 16th Mar 2017 5:41 pm 

    Deceptive graph/chart of the century!

  5. peakyeast on Thu, 16th Mar 2017 6:38 pm 

    Long term sustainability is now two years into the future….. 😉

  6. Nony on Thu, 16th Mar 2017 6:40 pm 

    Shale grew like CARAZY at 100/bbl. I mean historic growth rates. A new Kuwait every 2-3 years type growth. Buttsmashing growth.

    At 40s, 30s and DEFUNITELY at 20s, shale has serious problems.Decline and bankruptcies.

    It is interesting that at 55, it seemed to be able to grow (slowly, but grow). How 48 works out is an open question. I don’t think they like it as good as 55. But it is not the end of the world. Will be interesting to see how US production shakes out at 48. I don’t know if this is below or above zero for growth at that price.

    Coffee: A lot of your post is about gas shales. While there is learning back and forth (how to frack cheaper, better, faster), they are totally different animals in terms of market dynamics. Oil is global. Gas is regional. Oil competes with OPEC (gets shielded at times, but can be destroyed with low cost Arabian cost of mfg if it comes to it). Gas competes in market and earns its capital over time (sooner than oil at least). Gas competes with conventional gas and has killed a lot of it. Has prison shanked Rockman’s offshore gas business. Even at this point has Marcellus knifing Haynesville.

    So don’t mix up shale oil and gas. So different in market completion.

  7. coffeeguyzz on Thu, 16th Mar 2017 8:59 pm 


    Good points, howevuh, oil exports from US may play small, yet impactful role on world pricing.
    10 years out, US-sourced LNG may do the same for natgas in global markets.

    Technical and physical challenges in getting viscuous fluid – aka oil – to flow 2 miles sideways are not so prominent with gas. This is one reason why 20,000 foot laterals are starting to appear in the AB.
    LOEs are a fraction both at the outset and ongoing in gas versus oil unconventionals.
    This single aspect will give gas plays significant operational/economic edge in the future.

    Biggest single distinction favoring natgas over awl 5 years out?

    Adsorbed Natural Gas.

    Technologies are burgeoning amongst a cooperative consortium of companies that will introduce CNG fueled fleets of vehicles way faster than seems apparent today.

  8. GregT on Thu, 16th Mar 2017 10:21 pm 

    “Technologies are burgeoning amongst a cooperative consortium of companies that will introduce CNG fueled fleets of vehicles way faster than seems apparent today.”

    All under the guise of being a clean alternative to gasoline. Initially, methane is some 20 times more powerful as a greenhouse gas, and CO2 is accumulative in the environment.

    We either stop, or we don’t. There is no middle ground.

  9. Nony on Thu, 16th Mar 2017 11:47 pm 

    US LNG is already having an effect on world prices. Basically links things to HH plus transport. Helps drive LNG spot down to about 5.50 (e.g. $3 HH, plus 2.50 compression and transport). Big difference to the old $15 spots. But still ~200% of the HH price itself.

  10. Davy on Fri, 17th Mar 2017 4:58 am 

    Coffee, “Technologies are burgeoning amongst a cooperative consortium of companies that will introduce CNG fueled fleets of vehicles way faster than seems apparent today.” This statement is reaching. Do you really think your CNG is going to scale up as a force of change? You are sounding like your renewable cousins and their fantasy. It will become more important and vital but it is not a game changer and the game is looking over. It will be an extender and a vital one but no transition. It may transform some areas but not the declining global economy.

    Scale on both sides of the ledger are conspiring to halt this possibility. Time is too short with the momentum of decline and the scale up you need. The cost of this change over is too great at a time society is in an economic decline trap. This does not even touch the environmental issues of which a large scale up of gas in any form is just more heating potential.

  11. coffeeguyzz on Fri, 17th Mar 2017 10:45 am 

    Check up on what UPS, Fedex, Frito Lay and other fleet operators – especially goverment owned – are doing with their new transportation purchases.

    The consortium I referred to is amongst manufacturers of the components of the system including absorbed material, related hardware, engine and even vehicle makers.
    Most recent was an Ohio company that makes lightweight, high strength containers from composit material.

    As it is now technically possible to fuel the equivalent of a 17 gallon of gasoline tank using absorbed CNG under 500 psi, residences that have natgas supplied for heating will be able to fuel their vehicles with that same supply.

    Day is coming sooner rather than later.

  12. Davy on Fri, 17th Mar 2017 11:04 am 

    “Another “Recession Dead Ahead” Indicator Just Hit”

    “Today we got some more weakness-confirming real-time ‘hard’ data confirming the facts that the US economy is anything but as strong and resilient as Yellen proclaimed it. Industrial Production has never declined on a 24-month basis without the US economy being in recession…”

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