OPEC finally blinked in its two-year price war with U.S. oil producers. Whether that translates into a financial victory for the American shale industry remains to be seen.
Oil prices and the shares of U.S. drillers kept climbing on Thursday, a day after the Organization of Petroleum Exporting Countries promised its first production cut in eight years. The U.S. companies will need oil to hold above $50 a barrel for months before they commit to more spending, according to analysts at firms including S&P Global Platts and Oppenheimer & Co.
OPEC’s surprise announcement still represented a “capitulation” to drillers in U.S. shale basins, who proved much harder to eliminate than their opponents expected, said Katherine Richard, chief executive officer of Warwick Energy Group, a privately held investor in thousands of U.S. oil wells, including new plays known as the Scoop and Stack in Oklahoma.
“They are saying, ‘We can’t grow and we can’t fund our economies at $40 and $50 oil,”‘ Richard, based in Oklahoma City, said in a telephone interview. “It’s the opposite in the U.S., where producers in the Permian and the Scoop and Stack are making 20 percent-plus returns.”
The 14 OPEC nations agreed to cut as much as 700,000 barrels a day from daily output, seemingly ending an effort led by Saudi Arabia to flood the global crude market and push higher-cost shale companies out of business. Details over which countries will cut what won’t be completed until a Nov. 30 meeting in Vienna, the group said. OPEC produces about 40 percent of the world’s oil.
Taking that much supply off the market could make “a significant improvement” in crude prices, said Jenna Delaney, senior oil analyst for S&P Global Platts in Houston. But it’s far from certain OPEC can enforce the new cap, she said, especially with Iran, Nigeria and Libya demanding room to grow.
U.S. shale drillers will greet the news with “skeptical optimism, with a heavy emphasis on the skeptical,” Delaney said in an interview. “I don’t think I would stake any bets with my company’s investment on this being the end of the story.”
OPEC’s strategy took its toll. More than 60 oil companies declared bankruptcy over the last 30 months, Fadel Gheit, Oppenheimer’s senior energy strategist, said in a note to clients Thursday. Worldwide, oil and natural-gas companies cut about 350,000 jobs since prices peaked in mid-2014, industry consultant Graves & Co. estimated in May.
Yet drillers endured, selling off assets, retreating from less promising shale plays and improving efficiency. The U.S. is expected to produce about 8.77 million barrels a day this year, just above the output in 2014, according to data compiled by Bloomberg Intelligence.
Total production from the three biggest U.S. shale oil plays — the Permian and Eagle Ford in Texas and the Bakken in North Dakota — may rise by 30,000 barrels a day next year if explorers can set their budgets with $50 crude. If crude trades between $55 and $65 next year, the three plays may add an additional 700,000 barrels in 2018, the BI analysts said.
The price collapse from more than $100 “forced companies to reduce cost and spending, improve operating and capital efficiency and live within their means,” Gheit wrote in the note. “We expect time and technology to make shale production even more resilient to low oil prices, and both are not on OPEC’s side.”
If prices can stay above $50 to $60 a barrel, shale producers will still need at least six months to begin replacing all the personnel and equipment they let go during the bust, said Philip Chladek, a Bloomberg Intelligence analyst.
At Newfield Exploration Co., an explorer based in The Woodlands, Texas, the OPEC news was greeted with “cautious optimism,” said Stephen Campbell, the company’s vice president for investor relations. Producers are starting their fall meetings to plan spending and strategy for 2017 and “a more constructive view of prices would certainly be helpful,” he said.
A $10 increase in oil prices would raise returns on Newfield’s central Oklahoma wells to 55 percent, up from 40 percent now, Campbell said.
“You start to see something north of 55 percent in Oklahoma and we would want to lean into that, in terms of increased activity,” he said in a telephone interview.
The roughnecks and geologists who frequent The Bar restaurant and tavern in Midland, the unofficial capital city of Texas shale country, aren’t popping champagne corks yet, said Scott Gunn, the owner.
“People are hopeful but around here we know that what they say and what they do are two different things,” said Gunn, the son of an oilfield geologist who’s lived in West Texas since 1970. OPEC “hasn’t done enough yet to stir up any activity just yet,” he said.
With assistance from Meenal Vamburkar and Sony Kassam