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US Foreign Policy (Dr. El-Najjar's Articles)
Are US Shale Drillers Actually Making a Comeback?
By Nick Cunningham
Oil Price, Al-Jazeerah, CCUN, May 25, 2015
Is US shale about to make a comeback?
Oil prices have
rebounded strongly since March. The benchmark WTI prices soared by more
than 36 percent in two months, and Brent has jumped by more than 25
percent. There is a newfound bullishness in the oil markets – net long
positions on Brent crude have hit
multi-year highs in recent weeks on a belief that US supply is on its
That was backed up by recent
EIA data that
predicts an 86,000 barrel-per-day contraction for June. The Eagle Ford (a
loss of 47,000 barrels per day) and the Bakken (a loss of 31,000 barrels
per day) are expected to lead the way in a downward adjustment.
But that cut in production has itself contributed to the rise in prices.
And just as producers cut back, now that prices are on the way back up,
they could swing idled production back into action.
A series of
companies came out in recent days with plans to resume drilling. EOG
Resources says it will
head back to the oil patch if prices stabilize around $65 per barrel.
The Permian is one of the very few major shale areas that the EIA
thinks will continue to increase output. That is because companies like
will add rigs to the Permian basin for more drilling later this year.
In fact, Oxy's Permian production has become a "sustainable, profitable
growth engine,” the company's CEO Stephen Chazen said in an earnings call.
Oxy expects to increase production across its US operations by 8 percent
this year. Diamondback Energy, another Permian operator, may
add two rigs this year.
Other companies – including Devon
Energy, Chesapeake Energy, and Carrizo Oil & Gas – have also lifted
predicted increases in output for 2015.
In the Bakken, oil
actually increased by 1 percent in the month of March, a surprise
development reported by the North Dakota Industrial Commission.
Taken together, momentum appears to be building in the US shale industry.
But let's not get ahead of ourselves.
The US oil rig count
plummeted since October 2014, falling from 1,609 down to 668 as of May
8 (including rigs drilling for gas, the count dropped from 1,931 to 894).
That is a loss of 941 rigs in seven months. Just because a few companies
are adding a handful of rigs does not mean that the drilling boom is back.
It takes several months before a dramatic drop in the rig count shows up
in the production data. The EIA says production will start declining this
month – but further declines in production are likely.
even if US producers do come swarming back to the oil fields and manage to
boost output from the current 9.3 million barrels per day, that would
merely bring about another decline in oil prices. Lower prices would then
force further cut backs in rigs and spending. The effect would be a seesaw
in both prices and the fortunes of upstream producers.
Kemp over at Reuters notes, that is
not an enviable position to be in. Much has been made about the
geopolitical and economic influence that shale drillers have snatched away
from OPEC. The oil cartel has lost its ability to control prices, the
thinking goes. Now, the US is the new "swing producer,” and with it comes
influence and prosperity.
But if oil companies oscillate between
cutting back and adding more rigs as the price of oil bobs above and below
the $60 mark, they won't exactly be raking in the profits. Worse yet, EOG
and Oxy may be profitable at $60, but there are a lot more drillers in the
In other words, there is still a supply overhang. In order
for oil markets to balance, a stronger shake out is still needed. That
means that the least profitable sources of production – drillers that have
loaded up on debt to drill in high-cost areas – have yet to be forced out
of the market. The drilling boom is not back yet.
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