Cheap oil ‘slams brakes’ on US shale

by | September 14, 2015 12:02 am



Production of US shale oil will fall sharply next year as a result of the collapse in crude prices, the world’s leading energy forecaster said yesterday, in a sign that Saudi Arabia’s attempt to squeeze higher­cost producers out of the market is succeeding.

The prediction was made by the International Energy Agency in its closely watched monthly oil market report, which said the collapse in oil prices since June last year had “slam[med] the brakes” on the US shale industry.

The agency said oil production outside Opec, the producers’ cartel, would fall by nearly 500,000 barrels a day next year, the largest drop since the collapse of the Soviet Union. US shale oil will account for about 80 per cent of that fall.

The US industry has proved resilient in the face of low oil prices, which last month hit their lowest level since the global financial crisis.

But the IEA report suggests that the growing financial pressure on shale operators and the steep fall in the number of rigs drilling for oil is beginning to take their toll on production.

The IEA’s forecast is encouraging news for Opec. The cartel last November made the controversial decision not to cut production, despite plummeting oil prices, in a marked departure from previous policy. Saudi Arabia, Opec’s de facto leader, explained the strategy as an attempt to defend its market share and put the squeeze on US shale and other rivals.

The IEA in effect declared that policy a success. “Oil’s price collapse is closing down high­cost production from Eagle Ford in Texas to Russia and the North Sea,” it said.

The Opec effort “to defend market share regardless of price appears to be having the intended effect”.

The lower price environment is forcing the market to “behave as it should”, the IEA said, curbing production and also pushing up demand. Global oil demand is expected to rise to a five-­year high of 1.7m b/d in 2015, before falling to a still robust 1.4m b/d next year.

Despite the IEA’s forecast of a fall in non­Opec production in the coming year, total supply this year ­ at 96.3m b/d in August ­ continues to outpace demand and inventories are building.

The continuing glut prompted Goldman Sachs to yesterday trim its oil price forecasts, saying that the potential for oil prices to fall to about $20 a barrel was growing.

It said: “The oil market is even more oversupplied than we had expected.”

 

Anjli Raval ­

FT