Shale boom tested as sub-$90 oil threatens U.S. drillers

The U.S. shale boom is producing record amounts of new oil as demand weakens, pushing prices down toward levels that threaten to reduce future drilling, reports Bloomberg.

Domestic fields will add an unprecedented 1.1 million barrels a day of output this year and another 963,000 in 2015, raising production to the most since 1970, according to the U.S. Energy Information Administration. The Energy Department’s statistical arm forecasts consumption will shrink 0.2 percent to 18.9 million barrels a day this year, the lowest since 2012.

More supply from hydraulic fracturing and horizontal drilling, and less demand, are contributing to the tumble in West Texas Intermediate crude. The U.S. benchmark is down 24 percent since June 20 and fell below $90 a barrel on October 2 for the first time in 17 months.

“If prices go to $80 or lower, which I think is possible, then we are going to see a reduction in drilling activity,” Ralph Eads, vice chairman and global head of energy investment banking at Jefferies LLC, which advised 38 percent of U.S. energy mergers and acquisitions this year, said in an October 1 interview. “It will be uncharted territory.”

The EIA cut 2014 and 2015 crude price forecasts on Tuesday because of rising production and falling consumption. WTI will average $94.58 next year, down from a September projection of $94.67. The outlook for Brent oil, the benchmark for more than half of the world’s crude, was lowered to $101.67 from $103. U.S. output reached 8.7 million barrels a day in September, the most since July 1986, the EIA said. U.S. demand is down because Americans are driving less and using more fuel-efficient cars, according to the EIA.

Shale oil is expensive to extract by historical standards and only viable at high-enough prices, Ed Morse, Citigroup Inc.’s head of global commodities research in New York, said by phone September 23. Oil from shale formations costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa, the Paris-based International Energy Agency estimates.

“There is probably something to the notion that if prices fell suddenly to $60 a barrel, the production growth would turn negative,” he said.

Brent crude could drop to $80 a barrel before triggering a slowdown in investment from U.S. shale-oil drillers, Fitch Ratings said in a report on Wednesday.

As U.S. supply rises and imports decline, the Organisation of Petroleum Exporting Countries may be heading for a price war, according to Frankfurt-based Commerzbank AG. OPEC’s September output rose to a one-year high of 30.935 million barrels a day.

Saudi Arabia, the world’s largest exporter, reduced selling prices on October 1, signaling it is prepared to let prices fall rather than cede market share, according to Commerzbank. OPEC accounts for about 42 percent of world supply, according to London-based BP Plc, Europe’s third-largest oil company.

The SIG Oil Exploration & Production Index, a gauge of the shares of 21 U.S. oil and gas producers, has dropped 19 percent since August 29, compared with a 1.7 percent decline in the Standard & Poor’s 500 Index of equities.
“There is some concern in the market broadly that ultimately the chickens of declining demand and increasing supply will come home to roost,” Bobby Tudor, chairman and chief executive officer of Tudor Pickering Holt & Co., an energy-focused investment bank in Houston, said in a September 23 phone interview. Tudor was previously a partner with Goldman Sachs Group Inc.
Capital market transactions that would have been done three or six months ago will probably be postponed because of the downturn, Grant Porter, vice chairman in Barclays Plc’s energy group, said in an October 2 phone interview. Barclays is the biggest adviser to U.S. energy companies selling shares this year, data compiled by Bloomberg show.