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Is Shale Still Challenging OPEC's Output Strategy?

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Includes: BNO, DBO, DRIP, DTO, GUSH, IEO, NDP, OIL, OILK, OILX, OLEM, OLO, PXE, SCO, SZO, UCO, USL, USO, XOP
by: Faisal Faeq
Summary

US shale producers are cutting spending for the second year in a row.

Though some shale producers boosted capital expenditure when prices were higher, in October 2018, that rally was short-lived.

In the past, US shale oil has repeatedly defied expectations in terms of output growth.

US shale producers are cutting spending for the second year in a row. That raises questions about shale's medium- to long-term resilience as it struggles with sustaining the key WTI breakeven point of $50 per barrel.

The oil industry used to believe that shale fracking was profitable at well below this level. Now, a number of bankruptcies in the sector are being blamed on low oil prices, even as WTI is above $50 a barrel.

The latest US oil rig count of 671 is down by 215 from the same period last year.

The most recent figures from Baker Hughes show that the most significant declines have been in the Permian Basin, which dominates US shale oil output growth. This growth is now threatened as companies wrestle with stingy capital markets and hawkish investors. Lowering cost structures remain a dominant theme for the US shale oil industry.

The key mathematics of US shale oil growth has become more challenging, partly because of the rapid growth achieved in 2018. Decline rates for existing wells have risen, and production growth means that the decline is applied across a higher base.

Though some shale producers boosted capital expenditure when prices were higher, in October 2018, that rally was short-lived. Oil prices were again on the retreat two months later and the WTI average so far this year is about $57.

At such levels, it appears difficult to make the case for expanding export capacity right now.

Indeed, if it is true that US shale producers are set to reduce capital spending by about 13 to 15 percent next year compared to this year, the outlook for the sector appears especially grim.

The glory days of the industry appear well and truly over - even if the International Energy Agency (IEA) and OPEC see US oil production growing by more than 1 million bpd in 2020.

That is also in line with the US Energy Information Administration (EIA), which still forecasts crude production increasing by 1.3 million bpd this year to average 12.3 million bpd and a further 1 million bpd in 2020.

In the past, US shale oil has repeatedly defied expectations in terms of output growth - which has confounded skeptics.

However, the industry's real test was in the wake of the Sept. 14 Saudi Aramco (ARMCO) attacks when the industry watched to see if US shale was up to the task of meeting any supply gaps.

Right after the attacks on the largest oil processing facilities in the world, crude supplies fetched high premiums and were in especially high demand by the Asian refiners.

All the available barrels in the spot market fetched higher premiums with the exception of US shale cargoes which were still sold at hefty discounts. Demand for US shale was largely unchanged and that tells its own story.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.