The end of the shale boom has been called before, but it may finally be about to become a reality in light of this year's oil price slump, which has reignited talk of peak shale oil output.
Such a development would have wide-ranging repercussions for global oil market balances, since the shale revolution not only sent the US to the top spot among the world's biggest producers and secured US energy independence, but its short-cycle flexibility has frequently tested the resolve of the Opec+ group.
The sector was already maturing rapidly even before this year's price rout, with investor returns long favoured over growth. But the fallout from President Donald Trump's trade wars that have increased the risk of a recession, and from Opec's decision to ramp up output faster, has accelerated shale's slowdown.
The largest pure-play producer in the prolific Permian basin, Diamondback Energy, sounded the alarm earlier this month with a stark warning that US crude output is at a "tipping point" at current prices, with onshore production having likely peaked already and expected to start declining this quarter. The company argues that geological constraints are now offsetting gains from operational efficiencies and technology improvements.
For now, most of the listed independents that have announced plans to cut spending and drop rigs as a result of recent market volatility have been able to keep their production guidance for the year largely the same — but that might change if prices sink further. Still, the prospect of peak shale does not necessarily mean output is likely to fall off a cliff anytime soon. And key to the outlook will be the future trajectory of oil prices. A potential decline back into the mid-$50/bl range on a sustained basis would likely trigger steep output declines as soon as next year. But some further growth cannot be ruled out if prices push higher.
Recent consolidation has concentrated ownership of the shale patch in the hands of the largest listed operators, which are better equipped to handle a downturn than smaller rivals. And US majors, which are powering ahead in the Permian, will be able to deploy their scale and bargaining power to their advantage. ExxonMobil plans to significantly ramp up output from the region by the end of the decade, buoyed by its $60bn takeover of Permian giant Pioneer Natural Resources. But the US majors' push for efficiencies of scale reflects their much longer-term view of shale, seeking to maximise value, not volume.
Opec's willingness to maintain its new production policy is likely to be critical to shale's wider production outlook. A Saudi budget breakeven price estimated at up to $90/bl has been key to assumptions that US shale will remain a collateral beneficiary of Opec+ production restraint. But the uncertain oil demand outlook means a push for market share might suddenly hold more appeal for Riyadh. "One reason for Saudi to bring barrels back now is that much of the incremental crude supply that will come into the market over the next five years is offshore, as opposed to the more price-sensitive US shale," Bank of America says.
Trump's "energy dominance" goals are unlikely to be realised when it comes to US oil production, given his preference for lower oil prices and the industry headwinds he has contributed to. The president who campaigned on a platform of "drill, baby, drill" could see US shale output decline during his term.
