Falling crude prices may test the resources and resolve of US shale oil producers.
Trying times have returned for the US unconventional oil producers.
A gradual and largely stable recovery of oil prices through most of 2018 had raised expectations among producers and investors that the shale industry could comfortably plan for a $60-$70/bl market heading into 2019. After all, most forecasts were pointing to that range.
But since October WTI crude futures dropped by more than $30/bl, including the drop this week to below $50/bl for the first time in more than a year, bringing the threat of belt-tightening back for the unconventional industry. More importantly, the drop has continued despite Opec and non-Opec partners’ recent decision to reduce output by 1.2mn b/d. It’s become imperative for producers to plan for a muted oil market.
The industry has managed to reduced costs, allowing them to drill economically at much lower prices. And they have a large inventory of drilled but uncompleted wells, which are much cheaper to bring online, to sustain production growth. But if current market weakness persists, a slowdown in output increases may be possible toward the end of next year, which may put a floor on prices.
Indeed, the US Energy Information Administration (EIA) has already tempered its 2019 expectations, lowering both WTI and Brent forecasts by about $11/bl. It sees WTI averaging $54.19/bl, down 16pc from its previous forecast, and Brent at $61/bl, down by 15pc. It has also left its 2018 and 2019 crude forecasts essentially flat, at 10.9mn b/d and 12.06mn b/d, potentially reflecting a slowdown in growth already.
The quick turnaround in prices is raising questions about producers’ ability to maintain their pace of growth heading into next year. WTI Midland prices are just marginally above $40/bl now, a level that’s close to the breakeven for many major producers.
Companies are putting final touches to their 2019 spending plans under that backdrop, with some like Diamondback Energy and Parsley already lowering their rig count. Parsley has pared its guidance to $1.35bn-$1.55bn versus expectations this year of reaching the top of its guidance of $1.65bn-$1.75bn. Others are showing restraint. The world’s biggest independent ConocoPhillips is keeping its 2019 plans unchanged to 2018 at $6.1bn. Key Bakken producer Hess has raised its budget to $2.9bn from $2.1bn set for this year, but that’s marginally lower than the average of about $3bn annually it had flagged out to 2025.
Even so, US producers are far better off now than in 2014 when the market downturn first began. They have deployed a series of strategies to reduce costs and keep any gains in check. Those include acquiring acreage to strengthen their core assets and selling assets where production is higher-cost, and repaying some of the debt with those sales.
If the bearish outlook for prices persist prior cost-cutting strategies will be tested in the new year.