Shale drillers may be digging own hole as oil flirts with $40

new york — US shale is coming perilously close to puncturing its own rally.

Just months after predicting double-digit production increases, largely based on crude prices sitting between $55 and $60 a barrel, drillers are suddenly contemplating the possibility of retrenchment as a stubborn global supply glut is keeping prices near $46.

It’s a reversal that could accomplish what Opec and other global producers have failed to do this year: slow down America’s booming shale industry. Analysts and

The growth outlooks proposed by many oily E&Ps appear tenuous at best and not resilient to prolonged weak oil prices Timothy Rezvan and James Lizzul, analysts at Mizuho Securities USA

company officials say a drop to $40 a barrel could halt rig growth for smaller drillers in less active US shale basins, and undercut efforts by fracking service providers such as Halliburton Co, FTS International and Patterson-UTI Energy Inc to raise their fees.

“The growth outlooks proposed by many oily E&Ps appear tenuous at best and not resilient to prolonged weak oil prices,” Mizuho Securities USA analysts Timothy Rezvan and James Lizzul wrote in a June 11 note.

They cited rising service costs and the industry’s lack of hedging protection for next year.

Drillers at an RBC Capital Markets energy conference in New York last week insisted they were sticking with their spending plans, noting they’d emerged from last year’s oil-market slump with leaner costs and lower debt levels. But they acknowledged the shakier ground their budgets stand on.

Noble Energy Inc has the flexibility to “toggle activity” if prices decline further, Chief Financial Officer Ken Fisher said at the meeting, while EOG Resources Inc Executive Vice-President Billy Helms said the company will “moderate” production if needed, according to summaries published by RBC analyst Scott Hanold. Inventories rose by 2.75 million barrels last week, according to an American Petroleum Institute report on Tuesday, people familiar with the data said.

A $45 barrel “slows most US shale plays,” UBS AG analysts led by William Featherston wrote in a June 9 note. At $40, companies will “hit the brakes” on growth even in the Permian, the prolific oil play in West Texas and New Mexico, the analysts predicted.

Oil has been mired below $50 a barrel by concerns that growing US supplies are overwhelming production cuts. — Bloomberg