ANALYSTS: US SHALE WILL SUFFER MOST FROM LOW OIL PRICES

▶ Trump calls WTI’s slide to $54 ‘a big tax cut for America and the rest of the world’ and thanks Saudi Arabia

US shale is likely to hit a rough patch if oil prices continue their slide, even as Opec and its allies look to slash production to bring inventory levels down and shore up prices, analysts said.

Thanks to shale, US oil production surged to a record level of 11.6 million barrels per day earlier this month, according to Energy Information Administration figures.

The record output outpaced sovereign producers Saudi Arabia and Russia’s 10.7 million bpd and 11.4 million bpd respectively.

“We are at the point where lower oil prices will start to hurt the US shale industry,” said Ellen Wald, president of Transversal Consulting and author of Saudi Inc. “Even if some firms can break even at the well head with $30 per barrel, transportation and other costs have risen.”

Brent oil prices, which reached a four-year high of $86 per barrel in October, have since lost about 27 per cent of their value due to the supply glut.

The oil price rout was welcomed by the US administration, with Donald Trump tweeting on Wednesday that the slide in the West Texas Intermediate benchmark to $54 per barrel was a “big tax cut for America and the world” and thanked Saudi Arabia, which together with its allies had boosted output in May, for the slump.

Opec+, as the alliance is called, in May reversed oil output cuts that had trimmed 1.8 million bpd from the market since January last year under an agreement struck in 2016, when prices plunged to less than $30 per barrel in the first quarter of that year.

The alliance turned on the taps in the run-up to the November 5 reimposition of US sanctions on Iran, a move that was supposed to create an oil shortage. However, the US granting of waivers to eight countries importing Iranian crude and worries about global demand have pushed prices lower.

Any further slide in prices could actually work against the interests of the US energy industry, particularly shale which consists of independent producers, analysts said.

“If sub-$60 continue for WTI for a while we may see more mergers, acquisitions and possible bankruptcies,” said Ms Wald.

“However, this also depends on whether banks keep the money flowing into the shale patch and when new pipelines come online, making transportation cheaper.”

Infrastructure and transportation have been choke points preventing further inflow of US shale into world oil markets. Lower prices would in turn be detrimental towards further investment along the US energy value chain.

“We expect the US supply growth [month-on-month] to slow down over the coming months in light of pipeline constraints in the Permian [Basin],” said Giovanni Staunovo, a commodity analyst at Swiss bank UBS.

“US shale companies will start to suffer if prices continue to tank – prices in North Dakota are already around $40 per barrel.”

The Swiss lender maintains its view that oil prices will rebound over the next three months, with Brent back to $80 per barrel by the end of the year, following anticipated cuts by Opec and its allies.

“[We] would expect a production cut of at least 1 million bpd, but it remains unclear if they will define an overall group target [total Opec+ production] or define individual country targets,” said Mr Staunovo.

Opec+ could cut up to 1 million bpd next year if needed, Saudi oil minister Khalid Al Falih said earlier this month, with Saudi Arabia expected to lower exports next month by 500,000 bpd.

Libya and Nigeria, which have struggled to ramp up output due to ongoing conflicts, are likely to be exempted from Opec cuts similar to the 2016 agreement.

The US granting of waivers to eight countries importing Iranian crude and global demand woes have pushed prices lower