Oil Market Uncertain As US Shale Boom “Goes Bust”
21 April 2015
Oil market is uncertain as the US shale oil output is expected to fall for the first time in four years, and the coming months are likely to see a continuing price war between OPEC producers. Deutsche Bank, Goldman Sachs and HIS are now projecting that US oil production growth will now end. The global oil price rose slightly in the morning of April 14.
Citing the April 13, 2015 US Energy Information Administration prediction on the US shale production Andy Rowell writes in Oil Change International:
The production would fall by 57,000 barrels per day in May this year.
The report says:
“The EIA forecasted that the seven major shale formations in the US: Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica will produce a total of 5.56 million barrels of crude oil daily next month, down from 5.62 million barrels per day in April.
“These seven regions have accounted for 95% of domestic oil production growth and all domestic natural gas production growth over the last few years.
“Although the most productive formation, Permian, will see a slight increase in production by 11,000 barrels per day to 1.99 million, the output at the next highest producer, Eagle Ford, will drop 33,000 barrels daily, while the output from Bakken will decline by 23,000 bpd next month.
“The production of shale gas is due to decrease by 23 million cubic feet of gas per day as well.”
The Oil Change International report headlined “US Shale Boom ‘Goes Bust’” (April 14, 2015) says:
“The news is extremely interesting as it could mean that finally we are seeing the Saudi strategy of allowing global oil prices to plummet as a way to undermine US shale production as paying off.
“But even with US shale production now declining, do not expect any let off from OPEC. As an article on Oilprice stated on April 13, 2015 the price war between OPEC and US shale producers is likely to continue.
“It stated: ‘the oil price war between OPEC and U.S. producers could last longer than initially expected, with oil prices remaining at levels of around $55 per barrel or lower for the rest of 2015, and potentially well into 2016.’
“What this means is that the continuing price war could signal the beginning of the end of the US shale boom, which has helped boost US oil output by more than 4 million bpd since 2010.
“Indeed, Deutsche Bank, Goldman Sachs and HIS are all now projecting that US oil production growth will now end.”
Andy Rowell cites already seen widespread lay-offs and jobs cut as companies cut back production, and adds:
“Indeed, last week the number of drilling rigs in play declined by a further 42 to 760, the lowest number since December 2010.
“‘We’re going off an inevitable cliff,’” because of the shrinking rig counts, Carl Larry, head of oil and gas for Frost & Sullivan LP, told Bloomberg on April 13, 2015. ‘The question is how fast is the decline going to go.’”
In another report Oilprice.com (http://oilprice.com/Energy/Oil-Prices/Price-War-OPEC-Versus-U.S-Shale-Likely-To-Continue-Despite-Iran-Deal.html) said:
“The recent agreement on Iran’s nuclear program exacerbated fears that the price of oil will continue to slide downwards once Iran’s vast oil reserves start to flow onto the global markets without restriction. However, there are signs that the process will at best be a gradual one, and that it will not dramatically affect the price of oil in the short term.”
The report said:
“A comprehensive deal, meant to be reached by June, is still far away, with many obstacles still present between the international community and Iran. In addition, much will depend on reactions from the U.S. Congress, where the Republican majority will most certainly try to boycott the final agreement.”
The report headlined “Price War: OPEC Versus U.S Shale Likely To Continue Despite Iran Deal” said:
“It is highly unlikely that Iran will be allowed to start exporting its oil freely before June, and even if this happens, it will take at least six months or more before a full capacity production and export chain is re-established.
“The swing in oil prices is likely to come from a different side.
“Ever since OPEC decided not to cut its production quotas in November 2014, U.S. shale producers have been struggling to cope with low oil prices, and there are growing signs that this is finally taking its toll.
“The key reason for this lies both in high production costs that in many cases significantly outpace current oil prices, and in U.S. producers’ increasing difficulty to raise money to continue with the investment cycle. Shale oil is a highly demanding industry in terms of capital investment, and it requires a constant influx of money to sustain its activities.
The report by Ante Batovic for GlobalRiskInsights said:
“During the period of ‘easy money’ supported by the Federal Reserve’s quantitative easing (QE) policy and high oil prices, investing in U.S. oil and gas sounded like good advice. However, it seems that with prices below $60 per barrel, this argument is not entirely valid.”
The report discusses the junk bonds in the shale oil venture:
“Since 2012, the U.S. shale revolution was driven not only by high oil prices, but also by high-yield junk bonds issued by many smaller shale companies. As the low oil prices slash the value of their oil and gas reserves, and as the yields on their bonds have almost doubled, many smaller producers will struggle to keep their heads above the water.
“According to JP Morgan’s forecast, up to 40% of U.S. energy companies that issued junk bonds could default by 2017 if the period of low prices continues. Barclay’s estimates show that the total debt of the U.S. exploration and production companies makes up to 17% of America’s junk bonds market.”
Mentioning the Saudi strategy to “kill” the U.S. shale sector with low prices the report said:
The strategy “will most certainly have a strong impact, and in the long term will probably stabilize oil prices at around $70-80 per barrel. At the same time, it will make the U.S. oil sector more consolidated and resilient to price fluctuations, with technology innovations and processes that will drive production costs down and help to make the industry a sustainable part of the global energy market.”
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