Global oil prices dipped back below US$45 per barrel earlier this week, prompting Bloomberg to warn that “U.S. shale is coming perilously close to puncturing its own rally.”
If prices hit $40 per barrel, analysts say the unsteady market could force smaller drillers in the U.S. to curtail their activities and make it harder for fracking service providers like Halliburton Co., FTS International, and Patterson-UTI Energy Inc. to raise their rates.
Just months ago, U.S. fossils were “predicting double-digit production increases, largely based on crude prices sitting between $55 and $60 a barrel,” Bloomberg notes. But now, they’re seeing “a reversal that could accomplish what OPEC and other global producers have failed to do this year: slow down America’s booming shale industry.”
Even a price of $45 per barrel “slows most U.S. shale plays,” a team of UBS analysts wrote June 9. At $40, companies will even “hit the brakes” in prolific oil-producing regions like the Permian Basin in West Texas and New Mexico.
On Wednesday, the benchmark price of West Texas Intermediate (WTI) crude fell to US$44.54, capping a 19% drop since January 3. “Oil company stocks followed suit, with the Bloomberg Intelligence Independent E&Ps index, which tracks 56 mostly shale-focused drillers, dropping 4.6%,” writes energy and climate reporter Alex Nussbaum. “The index was already down 21% for the year through Tuesday.”
In a separate mid-week analysis, Reuters points to weak U.S. gasoline demand as a factor contributing to a persistent global oil supply glut. The price slump “underscored the market’s ongoing struggles with weak gasoline demand in the United States, the world’s top consumer of the motor fuel, and rising production, especially from U.S. shale drillers,” the news agency notes.
“Persistent weakness in gasoline demand has taken centre stage among market participants, as this could result in further builds in U.S. crude stockpiles,” said Abhishek Kumar, London-based senior energy analyst at Interfax Energy’s Global Gas Analytics.
And that could be a problem for analysts who’ve spent the last six months waiting for production cuts by the Organization of Petroleum Exporting Countries (OPEC) to stabilize or boost global oil prices. “We need to see a sign that the OPEC cuts are having an impact on world oil supplies and they’re clearly not, at least not yet,” said Nasdaq lead energy analyst Tamar Essner.
The trendline was encapsulated earlier this week in a Bloomberg report on a single “lonely, drifting oil tanker”, stuck with two million barrels of crude oil and nowhere to go.
“Until a few days ago, the 330-meter-long tanker, chartered by Royal Dutch Shell Plc, was steaming at 13 knots toward the Chinese port of Tianjin,” after loading its cargo of North Sea oil at the Hound Point terminal near Edinburgh, Scotland. “Then, it suddenly stopped in the middle of the Atlantic Ocean,” the news agency reports.
“Its problem: China isn’t buying much crude right now, leaving the tanker searching for a customer. While the vessel was floating near Africa last week, Shell offered to sell the cargo in a ship-to-ship transfer all the way back in Scotland. There weren’t any takers.”
Even as supply and demand calculations from the International Energy Agency point toward smaller stockpiles, oil prices haven’t responded to the OPEC cuts. “It’s a buyer’s market,” Petromatrix GmbH Managing Director Olivier Jakob told Bloomberg. In the heavily-glutted Atlantic basin, the news agency notes, future oil price projections out to December 2018 suggest that demand for the product won’t be picking up anytime soon.