Fall in US shale production could herald oil price boost

When the oil price initially plummeted in late 2014, Shale producers were the most vulnerable, particularly those in the US, were huge volumes of shale production have helped the US economy partly alleviate its over-reliance on foreign producers.

Now, it seems, that US shale production has entered its end game. Drilling has dried up and, finally, operators are unable to continue working under the strain of ever-tightening profit margins. Banks are foreclosing on shale companies standing on verge of bankruptcy. The industry cannot survive under these conditions.

Last year shale output in the US was in the region of 9.5 million bpd, but output has since slipped, falling to 9.1million bpd, and new forecasts predict a further slip, with production being around 8.5 million bpd July and then 8 million bpd in the September quarter.

ANZ bank said to Forbes “we believe the rate of falls in weekly US oil production is about to accelerate as the impact of the falling rig count will be compounded by forced closures and low prices biting.”

Globally, oil output has seen record breaking highs. In late 2015, oil tankers were full and the low demand (largely due to a warm winter in Europe) has meant dwindling sales. This has led to a glut, and with Iran ramping up production and eager to regain lost market share, the world can expect to see more oil on the market.

Saudi Arabia has also driven up production, hoping to drive out smaller competitors are fall back on years or oil money savings to cushion the blow within its local economy. Saudi Arabia has in recent months refused to come to terms with other OPEC producers and Russia, stating that the oil price will even itself out over time. In reality, Saudi wants to see high-cost producers pushed out of the business. The strategy has worked, and the count of rigs in the US is falling. Active and new rigs have fallen from 1600 to 316 (in May).

We can expect to see shale production losing out as low oil prices push out high-cost producers. However, with slowing rates of production and less growth in the US oil industry, we may see some small increases in the price of oil, leading to a sustainable market int he near future.