Shale Storm

Shale oil producers are still trying to ride out the oil storm but there will be cruel cuts by U.S. shale producers. The false narrative that U.S. shale producers are immune to sharp drops in the price of oil has been proven wrong time and time again.

Shale oil producers raising output by record numbers were caught wrong-footed by President Trump’s waiver of sanctions on Iran. The ensuing oil price crash hurt many of those companies and now is having consequences for expectations of U.S. shale oil output. Not only have we seen the U.S. oil rig count continue to trend lower, but CapX cuts in the sector are coming and it is already starting to impact U.S. oil production negatively. On Friday, Baker Hughes reported the biggest one week drop in oil rigs in three years and the FT reports that the number of rigs drilling oil wells in the U.S. has already dropped by about 8 percent since November to 889, according to S&P Global Platts Analytics.

The Energy Information Administration (EIA) reported Tuesday it expects U.S. shale production to rise by just 63,000 barrels a day in February, the lowest growth rate in nine months according to the Wall Street Journal. The FT reports that the EIA has forecast that between December 2018 and December 2019, U.S. crude production will rise by about 500,000 barrels a day. That would represent a sharp slowdown from growth of 1.8m b/d over the previous 12 months.

This comes as the FT reports that “Capital raising by U.S. oil exploration and production companies has fallen sharply following the decline in crude prices that began last October, pointing to cutbacks in capital spending budgets and a continuing slowdown in activity.” The FT says that “Companies in the sector have not held a single bond sale since the start of November, according to Dealogic, while share sales have also slowed”. The data suggest that after a record-breaking boom in U.S. oil output in 2018, growth will be weaker this year.

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