The Permian is Percolating

29 Sep 2017;

The rollercoaster ride of U.S. shale production continues.  Drilling activity and production of U.S. light tight oil (a.k.a. shale) started to decline in 2015, a direct consequence of the oil price collapse that commenced in the summer of 2014.  Oil prices weakened further in November 2014 when OPEC decided not to cut output but confront the threat of U.S. shale head-on and compete for market share.  The price of the U.S. benchmark crude West Texas Intermediate (WTI) fell from $106/barrel in June 2014 to $28.50 in January 2016.  U.S. shale producers clearly felt the pain as oil prices fell (and stayed) well below the breakeven prices that they needed to turn a profit.  An analysis of RBN Energy showed that the 43 U.S. exploration and production companies that they follow, racked up $160 Billion in losses in the period 2015-16.  According to production data from the Energy Information Agency (EIA), shale oil output fell from 4.7 million barrels per day (mb/d) in March 2015 to 4.1 mb/d in September 2016.  The OPEC strategy seemed to be working.  However, the costs were too high and the cartel reversed course in the fall of 2016 and decided on production cuts starting in January 2017.  These cuts have been extended through March 2018 and further extensions are possible.  Prices seem to have stabilized in the $45 – $55 per barrel range, well below the levels OPEC is targeting, but high enough for U.S. shale producers to stage a comeback.  In August of this year U.S. shale output reached 4.75 mb/d, exceeding the March 2015 record of 4.7 mb/d.  The outlook for shale oil remains bright, with fields in the Permian Basin (representing 40% of current output) doing particularly well.

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