Shale Storm
Shale oil producers are still trying to ride out the oil storm but there will be cruel cuts by U.S. shale producers. The false narrative that U.S. shale producers are immune to sharp drops in the price of oil has been proven wrong time and time again.
Shale oil producers raising output by record numbers were caught wrong-footed by President Trump’s waiver of sanctions on Iran. The ensuing oil price crash hurt many of those companies and now is having consequences for expectations of U.S. shale oil output. Not only have we seen the U.S. oil rig count continue to trend lower, but CapX cuts in the sector are coming and it is already starting to impact U.S. oil production negatively. On Friday, Baker Hughes reported the biggest one week drop in oil rigs in three years and the FT reports that the number of rigs drilling oil wells in the U.S. has already dropped by about 8 percent since November to 889, according to S&P Global (NYSE:SPGI) Platts Analytics.
The Energy Information Administration (EIA) reported Tuesday it expects U.S. shale production to rise by just 63,000 barrels a day in February, the lowest growth rate in nine months according to the Wall Street Journal. The FT reports that the EIA has forecast that between December 2018 and December 2019, U.S. crude production will rise by about 500,000 barrels a day. That would represent a sharp slowdown from growth of 1.8m b/d over the previous 12 months.
This comes as the FT reports that “Capital raising by U.S. oil exploration and production companies has fallen sharply following the decline in crude prices that began last October, pointing to cutbacks in capital spending budgets and a continuing slowdown in activity.” The FT says that “Companies in the sector have not held a single bond sale since the start of November, according to Dealogic, while share sales have also slowed”. The data suggest that after a record-breaking boom in U.S. oil output in 2018, growth will be weaker this year.
The truth is that many shale companies are saddled with debt and rely on debt to grow production. Lenders and investors are leery of lending many shale operations money when they still must prove that they can make money.
OPEC wants to prove they can make money and reduce the oil glut at the same time. OPEC is ahead of schedule with their cuts as their production fell by 751,000 barrels per day (bpd) in December to 31.58 million bpd, the biggest month-on-month drop in almost two years. OPEC pledged, along with Russia, to cut by 1.2 million bpd, of which OPEC’s share is 800,000 bpd.
Of course, this all hinges on whether the global economy falls apart. We saw both doom and gloom coming out of Davos. Talk of slowdown fears are making the rounds. Yet the good part of that is that global central bankers will move towards more accommodation in policies allowing for oil demand to continue to grow. The oil demand slowdown to this point has been minuscule and with shale producers cutting back and OPEC cuts going full force, the outlook is favoring the bullish side.
Natural gas pulls back as record production is offsetting the winter demand surge. While you may not feel it, the natural gas market is seeing signs of spring with a very well supplied market.