Shale is the name of the game

Several consecutive weeks of large inventory drawdowns in the US finally pushed the WTI crude oil price back to USD 50/barrel, its highest level since the end of May. Shale oil producer stock prices followed suit to a certain extent.

CrudestocksSource : Bloomberg

At the USD 50 threshold, shale companies operating in the Permian basin, where production costs are the lowest, began selling forward their remaining 2017 production and part of their 2018 production. Alongside doubts regarding OPEC compliance with its promised production cuts and much higher than anticipated output from Libya and Nigeria, this put a stop to the crude oil rally.

Meanwhile, Saudi Arabia and Russia are trying to convince OPEC members to stay put and US shale producers, mainly in the Permian basin, are struggling to keep up their production growth due to the lack in fracking capacity. Many wells are drilled (there is no lack in drilling capacity) but then being left uncompleted (i.e. not fracked). Production from existing Permian wells is also declining faster than foreseen, puzzling engineers. An explanation could be that the drilling of new wells close to existing ones is causing a loss of pressure in the latter.

In the other main shale areas (Bakken, North Dakota) producers are trying to survive at the current oil price level, drilling and fracking only their best wells – just enough to keep their production flat. The best in class need an oil price of USD 60 and above to be able to seriously increase production... All told, if OPEC/Russia can more or less stick to their promised output cuts and demand continues at its current strong pace, chances are very high that excess crude oil inventories will have been eliminated by year-end. Once financial markets become convinced of that prospect, the crude oil price should move towards USD 60-65/barrel, a level high enough to get the Bakken production growing.

(update : 18.08.2017)