OPEC’s latest announcement may end up having the biggest regional impact in the US, given the high sensitivity the shale sector has to oil prices and any subsequent changes in oil pricing, according to Fitch Ratings. We believe that the recently announced oil production targets of 32.5m-33.0m b/d at a meeting last week in Algiers are largely symbolic and unlikely to result in a strong rebound in global oil prices.
However, it remains the case that the US is among the most price-sensitive regions for several reasons. These include its high percentage of fast-response shale production, estimated by the Energy Information Administration (EIA) at 52% of total US oil supply as of year-end 2015, and a healthy supply of drilled but uncompleted wells (DUCs), which also can be brought on quickly if conditions warrant. The EIA estimated the supply of DUCs in oil-rich shale plays (Bakken, Eagle Ford, Niobrara, Permian) at approximately 4,100 as of September 2016.
Efficiency gains and deflation in service costs have helped move US shale producers down the cost curve faster than other regions. While there is significant variability in full-cycle costs both across and within US plays, portions of the lower cost shale plays are economic in the $40/bbl WTI range. Fitch believes a more substantial amount of shale oil production could be ‘turned on’ at a sustained $55-$60 level.
This heightened sensitivity can be seen in the recent step-up in the rig count, with the Baker Hughes oil rig count having risen by +109 over the past 14 weeks to 425 despite near-term prices that averaged just $45/barrel. This is up 34% from the lows seen in May of this year, but remains far below the all-time high on the oil rig count of 1,609.
Fitch would note that the forward curve for oil for delivery two years out has been largely range-bound below the $55 level. However, if future developments or news flow around possible OPEC cuts were to push the forward prices for the next two years materially above this level, it would allow many US onshore producers to hedge their production forward at economic levels, potentially leading to an early ramp-up in US production.
While such a scenario might prolong the global price downturn, it could also offer a measure of near-term relief to onshore North American drillers and service providers, which have been among the hardest hit names in the space due to the drop off in drilling activity.
Additional information is available on www.fitchratings.com.