Hunt for shale’s pain threshold
london — Crude prices are likely to remain under pressure until there are signs the number of rigs drilling for oil in the United States is stabilising or reversing lower.
US exploration and production firms have hired 530 extra drilling rigs since the end of May 2016 — 431 to target oil and 99 to focus on gas — according to oilfield services firm Baker Hughes.
As a result, US crude and natural gas liquids production is forecast to increase by 780,000 barrels per day in 2017 and by more than one million bpd in 2018, according to the US Energy Information Administration (EIA).
US producers will seize more than half of the projected growth in global liquids consumption of 1.54 million bpd in 2017 and 1.62 million bpd in 2018.
Experience suggests the Organisation of the Petroleum Exporting Countries and its nonOpec allies led by Russia will eventually respond by increasing their own output to protect market share against the threat from US shale producers.
The prospect of a renewed rise in Opec output and global oil inventories during 2018 has thrown oil prices onto the defensive over the last four months. A continued rise in US output during the rest of this year is unavoidable given the large number of extra rigs put to work in the first half.
The lag between spudding a new well and first commercial production averages about six months, so extra rigs in the first half will ensure continued growth in output during the second half.
But the fall in prices, if sustained, will eventually cause the rig count to stabilise, curbing growth in output next year. The breakeven price for drilling new wells varies considerably among shale plays and even between different parts of the same play.
But a recent survey of producers in the major shale plays conducted by the Federal Reserve Bank of Dallas showed most needed US crude prices of $4550 to break even.
West Texas Intermediate crude prices have already declined more than $11 per barrel, over 20 per cent, since their recent peak and are now below $44 per barrel.
Exploration and production firms have added an extra 145 oilfocused rigs in the last 16 weeks even as WTI prices have fallen.
But the oil rig count typically responds to changes in WTI prices with an average lag of 15-20 weeks so it should stabilise and turn lower within the next four weeks. —