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Has OPEC Defeated Shale Oil?

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Has OPEC Defeated Shale Oil?

As "lower for longer" continues to be the catchphrase in the petroleum industry, Saudi Arabia's war on shale oil may finally be bearing fruit.

Shale oil producers have surprised everyone by hanging in for so long. Technological advances and capping marginal wells helped fracking companies compete on the global oil market, even as prices hit $30 a barrel. It seems though, that more and more US oil drillers have reached the end of their ropes.

it's always been a question of who was going to bleed out first in this oilpatch knife fight: the Saudis or the shale oil producers. The large foreign reserves of Saudi Arabia were balanced against social unrest from cutting benefits. On the shale drillers' part, finding ways to lower expenses were counteracted by shrinking balance sheets and an inability to attract additional investment.

Fight For Survival

Shale oil producers have cut expenses by anywhere from 50% to 70% since OPEC's "War on Shale" began. Concentrating on the most productive wells and using new technology to "refrack" existing wells allowed many companies to hold on at $40-$45 oil. Once US crude prices fell below $40, though, the shakeout began.


While some drillers can make a (tiny) profit at $20 oil, that doesn't include debt service. Many of these companies borrowed heavily on premises of $80 oil, and now can't meet their debt payments. Last month, fully 1/3 of oil drillers were at risk of bankruptcy. The approximately 175 companies have over $150 billion in outstanding debt. As wells are mothballed and shale oil companies slash operations, US crude production has finally started falling.

Empty Wells, Empty Promises

Any jump in oil prices can be summed up by the phrase, "empty wells, empty promises." In the US shale fields, wells that reach the end of their productive lives are not being replaced with new ones. This is leading to lower total production. On the other side, oil ministers from Russia and OPEC are routinely making announcements of meetings and possible deals, in order to influence oil prices. Desperate for any good news at all, oil traders latch onto these pronouncements with both hands, at least until new global oil stockpiles reports are released.

Baker-Hughes-2014-feb2016US shale oil production was steady and even increasing last year, as the total number of active oil wells fell. However, once oil hit $30 a barrel, many of those remaining wells closed shop. Capping half-completed wells and ending production on others have sent the number of operating rigs down to lows last seen in 1999, This has finally led to the declining US oil production that everyone was waiting for.

The question is: will it be enough?

It Isn't Over Yet

While US shale oil production has fallen to 9 million barrels a day, OPEC and other non-OPEC oil producers are still pumping as fast as they can. As a result, there is still 1.5 million barrels more than demand pumped every single day. The much talked-about agreements among Russia and OPEC to freeze production levels would still mean much more oil being pumped than is being used. Even those insufficient agreements haven't actually been made yet, and the global oil glut continues to grow.

oil stockpiles

Demand is even lower than normal recently, as refineries close for spring maintenance, leaving millions of barrels of oil stranded at oil terminals such as Cushing, OK. A mild winter has meant much less demand for heating oil and natural gas. Natural gas, which is also produced by shale fracking, is seeing its lowest prices in years.

Crude stockpiles in the US grew by 10 million barrels last week, to push total stocks to a new record 518 million barrels. This is only in the US. Petroleum stockpiles in Europe and Asia are also bursting at the seams.

Even if the Saudis could completely wipe out the US shale oil industry, it would still see low prices for a fairly long time. Those drillers remaining are determined that it will be the Arabs crying "uncle" before they will give in.

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product

About the Author

Everett Millman

Steven Cochran

Precious Metals Market Analyst
BS University of South Florida (2002)

A published writer, Steven's coverage of precious metals goes beyond the daily news to explain how ancillary factors affect the market.

Steven specializes in market analysis with an emphasis on stocks, corporate bonds, and government debt. He writes a monthly review of the precious metals markets for SurvivalBlog.com.

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