Breaking News

Shale's growing profits at the mercy of OPEC cuts and Trump's tweets

CommoditiesDec 05, 2018 08:34AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
2/2 © Reuters. FILE PHOTO: The Elevation Resources drilling rig is shown at the Permian Basin drilling site in Andrews County Texas 2/2

By Jennifer Hiller

HOUSTON (Reuters) - The recent nosedive in crude prices came just as shale producers had started delivering healthy returns after years of heavy spending to boost production and market share.

The shift has pleased investors who had grown weary of waiting for a payoff while watching the frenetic west Texas shale boom make the United States the world's top oil producer and a major exporter.

The 29 percent drop in U.S. oil prices since October now threatens those improved margins, and sustained prices below $50 could dent the value of shale reserves, which banks use to determine borrowing power.

Activity in the largest U.S. oil field could fall 10 to 20 percent next year if prices stay down, said Steven Pruett, chief executive of shale producer Elevation Resources LLC. The price retreat sparked a sell-off of shale firms' shares and another setback could sour investors on the sector for years.

The dynamic leaves shale producers hoping for a rescue in the form of production cuts from The Organization of the Petroleum Producing Countries (OPEC) when it meets on Thursday - and at odds with U.S. President Donald Trump, who has pushed OPEC to keep the taps wide open.

Although Trump has generally been a boisterous booster of fossil-fuel firms, he has ridiculed the prospect of OPEC production cuts as "ripping off the rest of the world" by artificially inflating consumer fuel prices.

In November, Trump praised Saudi Arabia on Twitter for high production that helped push oil prices down about 30 percent to near $50, calling it "like a big Tax Cut."

Such tweets are an "irritant" to a U.S. oil industry trying to solidify its profitable position.

Trump's "leaning on" Saudi Arabia, the most influential OPEC nation, "has had a great effect," Pruett said.

"To me, it's a lot of meddling," he said.

Trump's campaign against OPEC cuts comes after he stood by the kingdom and Saudi Crown Prince Mohammed bin Salman despite U.S. politicians calling for sanctions over the October killing of journalist Jamal Khashoggi at Riyadh's consulate in Istanbul. Prince Salman wants to avoid confrontation with Trump, Saudi watchers say, including over oil production cuts and prices.

While shale producers have made strides in recent years at turning profits with lower oil prices, they are nearing a threshold where some would scale back investment, said Phil Flynn, an analyst at Price Futures Group in Chicago.

"The reality is a lot of them get scared at $50, and their bankers get scared at $50," said Flynn. "They want OPEC to make a cut, and they kind of want Donald Trump to stop tweeting about oil."

U.S. oil production will rise 17 percent this year to average daily output of 10.9 million bpd, and hit 12.06 million bpd by mid 2019, according to U.S. government estimates. After years of increasing capital spending, companies including Anadarko Petroleum Corp (N:APC) plan to freeze or cut those budgets, passing the savings to investors.

Even if OPEC pulls back and global prices stabilize at current levels, it may not be enough for shale to regain investor favor, said Bruce Campbell, president of advisers Campbell, Lee & Ross Investment Management Inc. The firm owns Royal Dutch Shell (LON:RDSa) shares because of its strong dividend and balance sheet, but no longer sees a reason to invest in shale.

Shale companies can cut costs further, "but it takes 12 to 18 months to roll through the system" and get profits rising again, he said. Without higher crude prices, it will be tough for investors "to find a place to get excited about," Campbell said.


Since the 2014-2016 price war between OPEC and shale producers - when soaring global supply pushed per-barrel prices down into the $20s - west Texas shale drillers have learned to wring profits at prices as low as $38 a barrel, down from about $71 in 2014, according to consultancy Rystad Energy.

But breakeven prices in other U.S. fields range from about $43 to $48 per barrel, not far from November's low.

Meanwhile, Middle East producers' costs are about $11 a barrel in Iraq, less than $17 in Saudi Arabia, and less than $21 in Kuwait, according to Rystad.

These countries, however, need much higher prices to finance their state spending. In Saudi Arabia, crude would have to average $85-87 a barrel to cover this year's state budget, an International Monetary Fund official said.

The U.S. industry is still expanding the use of more efficient drilling techniques, and oil majors' BP Plc (L:BP), Chevron Corp (N:CVX), and Exxon Mobil Corp (N:XOM) are expanding shale operations and building pipeline infrastructure to keep production rising.

“Shale is a scale business,” said Shawn Reynolds, a portfolio manager at investment firm VanEck.

He sees an industry just now poised to move out of its costly development phase and into what Reynolds calls "harvest mode," pulling profit from past investments.

But a continued price decline would threaten recent robust earnings. Last quarter, ConocoPhillips (N:COP) profit rose four-fold over a year earlier aided by cost cuts that "significantly improved our resilience to low prices," Chief Executive Ryan Lance said during an earnings call last month.

Anadarko (N:APC) swung to a profit and said it expects to increase production 10 percent to 14 percent next year, assuming "$50 oil,” said CEO Al Walker.

Other producers are counting on a replay of 2016, when OPEC cut output and prices gradually increased.

"I've been through it before," Bob Watson, CEO of Texas shale producer Abraxas Petroleum Corp (O:AXAS), said in an interview. He has told his employees not to worry about the price: "It will come back. You just need to keep executing."

Watson, like other large shale companies, used financial derivatives to lock in some of its future production at $56 a barrel, a move that lets it ride out the recent drop barring a sustained change.


Non-OPEC oil output will rise by 2.3 million bpd this year while oil demand should grow by a 1.3 million bpd next year, projects the International Energy Agency, which advises major oil consumers on energy policy. That could lead again to a market awash in oil, lowering global prices.

OPEC this week must decide whether the global economy will need more oil or less. After months of producing well below the group's target, group leaders increased production last summer and by October had added nearly 400,000 barrels per day over September. Russia also increased its production by about 460,000 bpd above its cap.

"OPEC realizes that in the last downturn, in an effort to grab market share, they got nowhere. They ended up losing market share to some extent," said Muqsit Ashraf, senior managing director for energy at consultancy Accenture (NYSE:ACN) Strategy.

One lesson from the last price war is shale can expand production even at prices that hurt OPEC members' budgets, said Karr Ingham, a Texas oil and gas economist.

Companies in the Permian Basin pumped 1.6 million bpd in June 2014 when prices peaked at $107 and output rose to nearly 2 million bpd two years later as prices fell to $26, according to data from the U.S. Energy Information Administration.

"OPEC can wait from now until kingdom come, but they won't get … a production decline" from the Permian field, Ingham said. Break-even costs for producing oil in major U.S. shale basins - What it costs Middle East oil producers to produce a barrel -

Shale's growing profits at the mercy of OPEC cuts and Trump's tweets

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Suman Jutur
Suman Jutur Dec 05, 2018 2:30PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
not really. very soon opec will be at the mercy of US Shale.
1 0
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email