U.S. Shale Producers Face Reality, Cut Output

John Brueggeman

         The growth and profitability of US shale producers grew the US market share to 10% of the world's daily needs. The 10% puts US production on par with Russia and Saudi Arabia as oil prices dropped from over $100 a barrel to below $30. Shale production, was not as profitable during the beginning and peak of oil prices as the drilling techniques were still fairly new. Oil needed to be around $50 a barrel to be profitable. However, with improved techniques the cost of drilling in shale has dropped, only needing oil to be about $40 per barrel to maintain profibility. Even with improved efficiency in shale drilling in Oklahoma, Texas, and North Dakota the producers couldn't maintain profitability with OPEC's continued production at full tilt.

        According to Ali al-Naimi, Saudi Arabia's oil minister, the supply problem created from excess in production worldwide will only be resolved when companies stop producing the oil that is most expensive to extract. (WSJ Erin Ailworth). Many companies such as Marathon Oil will drop production by as much as 10% in 2016. While many companies will cut production, smaller organizations will not be able to cut production in order to pay the high interest of their corporate bonds. Other companies must produce to satisfy lease obligations and hedging contracts on oil prices.

        Along with cutting production, many companies have drastically cut spending. Whiting, a large producer in North Dakota and Texas is cutting its 2016 budget by 80%, while many other are cutting spending by as much as 50%.

        IHS estimates US oil output could fall to 8.3 million barrels a day from 9 million by this summer. This drop in production should lead to a rise in oil prices, potentially up to $40 a barrel. However, this could lead to another sharp fall in price if many companies start producing again. As seen in early 2015 prices rose to $60 per barrel, then many companies started producing more causing an immediate drop to around $40 per barrel. Mr. Webster of IHS said,  "It wouldn't surprise me if it were single digits" if a similar drop took place in the summer of 2016.

         The oil market is a global market, with the US production depending heavily upon the actions of OPEC and global consumption. With Saudi Arabia continuing full production to protect their market share many US companies have been forced to cut spending and production to change the supply curve in hopes of raising the price per barrel. A significant increase in price will not come within the year or maybe even 18 months, but with the improving drilling technology and efficiency in the shale, US companies will be ready for when oil prices rebound.


http://www.wsj.com/articles/u-s-shale-producers-cut-back-production-amid-global-oil-glut-1456795120