Oil prices surged this quarter as Brent crude put in the best performance in 13 years. This comes as oil demand is surging, geopolitical risk is rising and Moody’s warns that shale oil producers will need $50 a barrel plus oil to make any money.
Shale oil producers have shown signs that they are pulling back because many are having a tough time making any money. We have said it before and we will say it again. You can’t lose money on every barrel and try to make up for it in volume. While Moody’s says that producers have driven down costs, their capital efficiency now depends on higher oil and gas prices. The study says they need above $50 for oil and $3.00 for natural gas. Moody’s says that drillers won't be able to make significant returns on the capital they plow into new production unless benchmark U.S. West Texas Intermediate crude oil and natural gas prices cooperate.
Moody’s analysts, Sreedhar Kona and Steven Wood, said the “producers in the U.S. and Canada have made dramatic efforts to cut costs since the collapse of oil prices three years ago, with many delivering higher dividends to investors this year. But with limited wiggle room to reduce costs further, any improvement in their ability to sustain healthy returns will have to come from commodity prices”.
Hopefully, growing global demand will bring back shale play but producers have to be smart. Companies should be rewarded for good well-head economics, not on how many barrels they can produce.
Yet the lack of CapX spending is sowing the seed of a new tight market down the road. Reuters reports that “Higher investments in offshore oil production are critical to avoiding a supply squeeze by 2020, as expanding shale output will not match projected demand increases in the next few years, U.S. oil producer Hess Corp. (NYSE:HES).” The past four years of low oil prices have major producers pulling back on needed offshore investment, and the gap between supply and demand should help prices rebound, Hess Chief Operating Officer Greg Hill said at an energy conference at Rice University's Baker Institute. "The world is going to have to invest in more than shale," said Hill, whose company has projects in offshore Guyana, Gulf of Mexico, and Gulf of Thailand. Expanded offshore production "will play a critical role in avoiding another supply shock."
As global supply tightens. Geo-political concerns have more sway. The void by the Kurdish minority in Iraq is rising concerns of a supply stoppage. Turkish President Tayyip Erdogan called the vote illegitimate and has threatened to break with past practice and deal only with the Baghdad government over oil exports from Iraq. Stay tuned!