It’s no secret that the shale boom has been unraveling — and that fracking in the U.S. has, in a way, become the victim of its own success.
After a massive rise in U.S. oil production in recent years contributed to tumbling crude prices, oil companies have increasingly felt the squeeze. Rig counts have dropped and major companies have laid off thousands of workers.
As another sign of good times ending, Scandinavian Airlines just announced that it’s cancelling flights between Houston and a Norwegian city considered the capitol of that country’s oil industry, because business on the route has sharply declined.
The Shale Industry’s Last Dance
If this is truly the start of a final funeral procession for US oil producers, you can count on OPEC to happily carry the casket.
Since prices started falling, OPEC — which supplies one-third of the world’s crude — has dug its heels into its market share, stubbornly refusing to scale back its own production to reduce supply and help buoy prices.
Now with forecasts of U.S. oil production calling for dark days ahead, OPEC’s strategy looks to have paid off.
Analysts aren’t holding back anymore on predicting where oil prices could bottom out. Though they’re hovering this week around $44 a barrel, some experts have said the price could continue plummeting to $20 or even $15 if this supply glut continues.
Because of that continued drop, OPEC has now reduced its predicted daily output for non-member states — including the U.S. — to somewhere between 80,000 to 100,000 barrels a day for the rest of this year.
The analysis echoes a report from the International Energy Agency that said by next year the price drop could “stop US growth in its tracks.”
The Biggest Loser
This U.S. still enjoys high supplies of oil in the U.S., with storage generally at capacity — and OPEC didn’t predict a sharp decline in US oil supplies.
But the biggest loser in this whole tug of war is turning out to be smaller U.S. oil producers. As soon as prices dip below $50 a barrel, fewer wells become profitable. Part of this has to do with the high startup costs associated with fracking wells. One recent study predicted that the break-even cost for a hydraulic shale is around $65 a barrel. With prices far below that, the many small players in the industry are struggling to hang on.
Which means OPEC looks to be achieving its goal of edging out smaller U.S. producers and keeping its dominating influence over global oil prices.