Rystad Energy recently reported that average U.S. Shale breakeven is now $46 Brent, i.e about $36 WTI. So why is shale output growth falling through the floor?
The number to watch is the initial production net of legacy loss, which is a measure of the change in output capacity; explained in more detail here.
Cup half full, OILPRICE.Com just reported, "The Star Permian” is sending shale production Up-and-Away. The idea that the shale-boom will go on forever is pervasive, perhaps because no one is looking at the right numbers?
What you ship this month is a function of what happened one year, two years, ago. What you will ship next year will depend on what’s happening now. The Permian line of IP-net-Legacy went down 66% in less than a year, even HAL 9000 would concede, that’s not Up-and-Away.
Notice how (1) IP-net-Legacy started to go down three months before the Iran waivers pushed the price down, temporarily; but (2) when oil prices went back up, shale IP-net-Legacy kept going down.
The other number to watch is Initial Production per Completion:
There is a myth that the recent shale boom was thanks to improved technology. In 2014, Baker Hughes re-designed the drilling bits so you could go longer and faster, that's it. That was yesterday, in the past year IP/Completion was uniformly flat, the trend in the past three months is down.
Leaving aside geopolitics, the price of oil next year, and the year after, will depend only on (1) how fast U.S. shale oil grows, and the evidence right now is that's not happening, and (2) how much new oil is found offshore, which is still a big question mark, up to now the big players, that depend on investment in that sector, Transocean (RIG) and ENSCO (ESV) are still struggling to stay alive.
Oil prices have a habit of changing direction suddenly, it's hard to imagine $100-oil, or more, next year, but unless there starts to be better news on the shale front, there are good reasons to consider that scenario in the risk analysis.
Betting on shale is looking like a risk, whether offshore stocks are a buy is a tough call, one problem there is that in the last boom, a lot of new supply was ordered, just in time to be delivered in 2016, at the bottom of the bust. The work is coming back, but day-rates are still through the floor. There are other sectors opening-up perhaps, for example, real estate in oil-producing regions, down 45% in some places that feed on oil prices; such as Dubai, Abu Dhabi, and Bahrain, could be a bargain if oil prices go up, and rest of the world dislocates. On the other end of the scale, there are always options.
Bigger picture, FT's Martin Wolf recently wrote a thoughtful article about how the long debt cycle might end. It's a long-debated subject, "Will it end in the ice of deflation, or the fire of inflation, or just where it is now, somewhere in-between?" He points out the worries about both deflation and inflation common over the past ten years, were clearly overblown, although austerity has caused political instability in some areas. He seems to think nationalism, and a breakdown of global cooperation is the main worry.
What he didn't mention was the possibility of an oil spike triggering inflation; which, as he points out, central banks know how to control, by raising rates; the danger there is that real estate and stock markets could collapse.
Looking back, in 2010 there were worries that QE would trigger inflation. It didn't. Or did it? Oil prices jumped to 50% higher than their long-term fundamental, and there is little evidence that was caused by shortages of supply, more likely by demand, driven by countries subsidizing oil consumption to kick start their economies, and they could do that because cheap debt was available. Another word for that is inflation caused by easy money, which caused what some can call malinvestment.
Cheap debt also fueled the shale boom. Could it be that the slowdown in shale output growth might be because that's not so available? This time around, cheap debt will not be there to pay for the imported oil developing economies have become addicted to.
It's always an idea to keep one eye open for the possibility of sudden change.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.