A brilliant move by U.S. shale oil producers has given them a great hedge. How long it can hold is anyone’s guess as OPEC is sure to try and counter it. The good news is that the U.S. remains one step ahead.
Since OPEC announced the production cut deal at the end of November, industry analysts have been warning that rising production from producers outside the deal—U.S. shale in particular—is effectively capping the oil price gains from that agreement.
Four months after the OPEC/NOPEC deal took effect, oil prices dropped to the levels preceding the agreement, amid concerns over still stubbornly high inventories and rising U.S. output.
Shale production has been gaining ‘significant momentum’, and there is a limited downside risk in the short run, Norway-based consultancy Rystad Energy said in a report last week.
Oil production in the Lower 48 excluding the Gulf of Mexico is expected to rise until the end of the year even if the price of oil plunges to US$40, Rystad’s analysis shows.
The U.S. operators have built up a new inventory of drilled uncompleted wells (DUCs) as the rig count recovery has been outpacing completion growth since the second half of 2016. If the price of oil was to crash to US$40 or even US$30 per barrel, a major part of those DUCs would still be commercially viable for completion, due to the fact that “drilling costs are sunk”, Rystad said.
“Therefore, a drastic downward shift in the market conditions will not lead to a rapid collapse of the U.S. oil production,” the consultancy noted.
The U.S. operators are expected to relatively quickly adjust even to $30 per barrel oil, and they will rely on hedging gains or just outspend more in the short term.
According to Rystad Energy, no more than 500,000 bpd of December 2017 production are at risk should the WTI price drop to US$30.
“If the prices go down to 30 USD/bbl and we assume that operators behave rationally, we should observe relatively quick adjustment of activity, which will result in a temporary contraction of output with stabilization in 4Q at the level 100 MBbld lower than the current output as base production gets more mature,” Artem Abramov, Vice President Analysis at Rystad Energy, said in the report.
U.S. producers rushed to lock in oil prices above US$50 after OPEC’s deal was announced, and most of the new oil derivatives since Q4 2016 have been added at strike prices between US$50 and US$60 a barrel, Wood Mackenzie said in an analysis at the end of March.
U.S. shale survived the oil price crash with cost cuts and lower breakeven prices, and emerged more resilient from the slump. According to a Rystad Energy analysis, since 2013, the average wellhead breakeven price (BEP) for key shale plays has dropped from US$80/barrel to US$35/barrel.
Full article: U.S. Shale Is Immune To An Oil Price Crash In 2017 (OilPrice)