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Oil Price Slide Puts The Brakes On U.S. Shale Growth

Tsvetana Paraskova

While U.S. President Donald Trump continues to call on OPEC to keep oil prices low, because “The World does not want to see, or need, higher oil prices!”, one corner of the world may need WTI prices higher than the current low $50s to keep pumping crude at the record pace it has been doing so far this year—the U.S. shale patch.

The recent price slide, by around 30 percent from four-year highs in early October, has brought down WTI Crude prices dangerously close to the wellhead breakeven prices in many U.S. shale areas.

The lower prices may lead to a slowdown in drilling activity and lower investments in the shale patch, U.S. oil industry executives and analysts say.

U.S. shale drilling may soon start to show slowdown in activity, Gary Heminger, Chairman and CEO at Marathon Petroleum Corporation, told FOX Business on Wednesday.

“If you look at the Canadian producers, when you’re looking at the wide spreads of the Western Canadian Select versus WTI, you look at some of the real cost to get some of the crude out of the Bakken because the pipelines are full – I think we are going to start seeing a slowdown in drilling if they don’t see some prices turn around,” Heminger warned, but noted that he doesn’t expect the slowdown to be “dramatic”.

The U.S. shale patch has managed to significantly cut wellhead breakeven prices since the oil price crash of 2014. Yet, its capital expenditure plans for 2019 may be derailed by $50 oil—a reality few had conceived of just two months ago, when the market was spooked by Iranian oil supply plunging to zero, or at least to much lower than the currently some 1.2 million bpd still being exported out of Iran.

According to an analysis of Rystad Energy ShaleWellCube, carried by Reuters, the wellhead breakeven prices for 2018 are on average $47.68 in the Eagle Ford, $44.13 in the Bakken, $42.76 in the Permian Midland, $37.94 in the Permian Delaware, and $32.22 in Niobrara.

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Although the market believes that wellhead economics offer attractive returns in many areas of the U.S. shale patch even at $50 WTI Crude, the financial markets are not yet convinced that “a typical shale oil E&P is able to grow in a self-sourced manner,” Rystad Energy said in an analysis last week.

More than 75 percent of dedicated U.S. shale firms continue to report capital expenditure exceeding their cash flow from operating activities, the consultancy has estimated on the basis of company reports and its own research and analysis.

Activity across the shale patch has also started to slow down. According to the world’s largest oilfield services provider Schlumberger, fracking in Q2 soared, especially in the Permian, then it leveled off in Q3, and is declining in Q4, “which will show up in the first half production numbers for 2019.”

Schlumberger expects U.S. activity and investment to recover during the first half next year and continues to see the weakening in fracking as temporary.

“However, depending on the financial markets, the recovery will likely be measured initially and more closely aligned with cash flow, with the activity surge we experienced in the first half of 2018 unlikely to repeat,” Schlumberger Executive Vice President, Wells, Patrick Schorn said at an energy conference in New York on Wednesday.

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WTI Crude prices at $50 are scaring the U.S. shale patch, according to Price Futures Group analyst Phil Flynn.

“The reality is a lot of them get scared at $50, and their bankers get scared at $50,” Flynn told Reuters.

“They want OPEC to make a cut, and they kind of want Donald Trump to stop tweeting about oil.”

Yet, shale production can still grow at oil prices that are not sufficient to balance the budgets of OPEC producers, Texas oil and gas economist Karr Ingham told Reuters.

According to Ingham: “OPEC can wait from now until kingdom come, but they won’t get … a production decline” in the Permian.

By Tsvetana Paraskova for Oilprice.com

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