Lower oil to test US shale drillers


Some US shale producers claim they can produce oil profitably with prices well below $50 per barrel or even $45 per barrel; the oil market is likely to put those claims to the test.

Shale firms have hired an extra 425 rigs to drill for oil since the end of May 2016, more than doubling the active rig count, oilfield services company Baker Hughes says.

Producers have continued adding rigs even though benchmark oil prices have fallen almost $10 per barrel since the middle of February and are now almost $4 below year ago levels.

Rigs have been added at rates comparable to the height of the shale boom between 2012 and 2014 ensuring output will continue growing significantly through the rest of 2017 and into 2018.

The US Energy Information Administration forecasts onshore production from the Lower 48 states will grow by 340,000 barrels per day (bpd) in 2017 and another 500,000 bpd in 2018.

As a result, US shale producers together with other non-Opec suppliers are expected to capture all of the increase in global oil demand in 2018 and raise their share of the market significantly at the expense of Opec.

Shale producers and Opec are now on a collision course, with Opec curbing production to try to raise prices and shale drillers adding rigs to boost output.

The contradiction will likely be resolved through a drop in oil prices to rein in shale growth.

Oil prices have already declined significantly to curb the drilling boom and put output on a more sustainable trajectory.

Past experience shows changes in the US oil rig count typically lag 15-20 weeks behind changes in WTI oil prices.

The decline in WTI prices since February should cause the rig count to level out or even start to fall sometime between the middle of June and the end of July.

If the rig count starts to level off or fall in the next few weeks, it could offer some support to beleaguered oil prices.

However, if the rig count continues rising relentlessly, fears about overproduction will grow, and prices are likely to come under even more pressure.

Many shale producers hedged a large proportion of their planned production in 2017 at prices above $50 per barrel.

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