Lower prices set to test US shale drillers: Analyst

Dhaka,  Thu,  24 August 2017
Published : 16 Jun 2017, 21:14:57

Lower prices set to test US shale drillers: Analyst

Oil bounces but stuck near 2017 lows on supply overhang
LONDON, June 16 (Reuters): Some US shale producers claim they can produce oil profitably with prices well below $50 per barrel or even $45 per barrel; the oil market is likely to put those claims to the test.

Shale firms have hired an extra 425 rigs to drill for oil since the end of May 2016, more than doubling the active rig count, oilfield services company Baker Hughes says.

Producers have continued adding rigs even though benchmark oil prices have fallen almost $10 per barrel since the middle of February and are now almost $4 below year ago levels.

Rigs have been added at rates comparable to the height of the shale boom between 2012 and 2014 ensuring output will continue growing significantly through the rest of 2017 and into 2018.

The US Energy Information Administration forecasts onshore production from the Lower 48 states will grow by 340,000 barrels per day (bpd) in 2017 and another 500,000 bpd in 2018.

As a result, US shale producers together with other non-OPEC suppliers are expected to capture all of the increase in global oil demand in 2018 and raise their share of the market significantly at the expense of OPEC.

Shale producers and OPEC are now on a collision course, with OPEC curbing production to try to raise prices and shale drillers adding rigs to boost output.

The contradiction will likely be resolved through a drop in oil prices to rein in shale growth.

Oil prices have already declined significantly to curb the drilling boom and put output on a more sustainable trajectory.

Past experience shows changes in the US oil rig count typically lag 15-20 weeks behind changes in WTI oil prices.

The decline in WTI prices since February should cause the rig count to level out or even start to fall sometime between the middle of June and the end of July.

If the rig count starts to level off or fall in the next few weeks, it could offer some support to beleaguered oil prices.

However, if the rig count continues rising relentlessly, fears about overproduction will grow, and prices are likely to come under even more pressure.

Many shale producers hedged a large proportion of their planned production in 2017 at prices above $50 per barrel which has given them some protection from the recent downturn.

Shale firms have benefited from the plentiful availability of fresh capital from private equity investors taking an optimistic long-term view of the prospects for both prices and output.

But only a small proportion of output has been hedged for 2018, which will leave shale producers progressively more exposed to low prices as existing hedges mature.

Another report from London adds: Oil prices edged up from 2017 lows on Friday but an ongoing supply excess put them on track for their fourth consecutive week of losses despite OPEC-led production cuts to support the crude market.

Brent crude futures were up 42 cents at $47.34 per barrel by 0755 GMT. US West Texas Intermediate (WTI) crude futures were at $44.74 per barrel, up 28 cents.

"The market took a breather yesterday and is trying to recover somewhat this morning. It is by no means bullish," said Tamas Varga, analyst at brokerage PVM Oil Associates.

Both benchmarks remained roughly 13 per cent below where they stood in late May, when producers led by the  organisation of the Petroleum Exporting Countries (OPEC) extended a pledge to cut production by 1.8 million barrels per day (bpd) by an extra nine months until the end of the first quarter of 2018.

Rising US oil output has undermined the impact of OPEC-led cuts. Data from the US Energy Information Administration (EIA) this week showing growing gasoline stocks and shaky demand, despite the peak summer driving season, sent prices tumbling.
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