It’s the classic story of the chicken and the egg — it seems that US shale operators are finding it increasingly difficult to secure third-party financing, which is largely dependent on strong oil market conditions that need healthy operators. Can the larger international oil companies – which don’t rely as heavily on third-party funding – come to the rescue?
Perhaps more of a question mark over the sustainability of US production growth comes from reports that operators are finding it increasingly difficult to fund their ongoing investments. Finance is getting harder to come by and most companies are having to fund investment from cash flow. This has been compromised by lower crude prices since April, while labour shortages and rising costs are not helping either. Price volatility is making it difficult for US companies to plan ahead or to pursue an effective hedging strategy. And the constant fear of further sharp falls in crude prices may be dampening investment spirit.
As yet, there are only tentative signs that lower, more volatile prices and tighter financing conditions are having any material impact on investment in US shale. Of 160 firms that responded to the latest Federal Reserve Bank of Dallas survey, only 24pc expected to reduce capital expenditure this year, with just 13pc saying it would be significantly lower. In the short term, the likelihood of US output growth continuing is reinforced by the high level of drilled but uncompleted (DUC) wells. At the end of June, there were 8,248 DUCs, representing a significant number of assets that can be brought to market quickly and cheaply, even if investment falls.
Activity in the US shale industry is becoming increasingly dominated by the larger international oil companies, and this will tend to make output not only more resilient to lower prices but also less dependent on third-party financing. The outlook is for US production to continue growing steadily and for exports to continue rising, especially to Asia-Pacific and Europe. Last year, Middle East supplies made up 45pc of global crude trade. By 2021, it is possible that the region’s market share will be as low as 35pc.
The resulting impact on worldwide crude trade will be considerable, not just in terms of flows but also pricing:
- US and Canadian wellhead pricing will improve as the export bottleneck is released
- The premium paid for Opec barrels in Asia-Pacific is unlikely to persist
- US crude, specifically WTI, can be expected to play an increasingly important role as a global benchmark, potentially even sidelining Brent in Europe
- Heavy crudes will gain value relative to light
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