U.S. oil companies have quickly become the new swing factor on the world energy stage, and their ability to handle price volatility could be key in determining future oil prices.
“This is a market that’s far from settled down, and it’s a market that’s going to be a lot more volatile,” said Daniel Yergin, vice chairman of IHS. “What kind of prices do you need to keep it going?” Yergin said. “What does it mean when you say the U.S. is the new swing producer? It’s much easier to swing down than swing up.”
Following Saudi Arabia’s lead, OPEC put the onus on U.S. shale production when it declared last November that it would not cut output unless its high-cost rivals did. Oil prices, already in decline, plunged.
“The shale industry produces 4.5 million barrels a day, exceeding the combined production of Kuwait and the United Arab Emirates,” said Fadel Gheit, Oppenheimer & Co. energy analyst. “It did not exist 10 years ago. That’s why OPEC and Saudi Arabia could not figure out what shale was all about. They missed the shale revolution. Finally, they had to make room for shale and frackers at the big table.”
Oil prices have recently rebounded from a more than 50 percent decline since June, and the question now for the industry is whether prices have found a bottom and what the new reality will be for crude prices. West Texas Intermediate crude futures were trading at about $55 per barrel on Monday morning.
“People forgot that cycles mean that prices go down as well as up. The longer we had $100 oil, the more people thought it was well grounded and was the new norm, and they were counting on Chinese economic growth and growing demand to maintain it and assuming that OPEC would do what it had done in the past and cut production,” Yergin said.
“Oil prices will recover, but they are unlikely to go where they were before the collapse. Near term, it’s very slushy … but the dust has not settled yet, because the fracking industry is young. It has not gone through a crisis before.”
Even with a dramatic more than 50 percent drop in rig count, U.S. oil production remains close to 40-year highs. The industry exceeded 9 million barrels in November, and production has been about 9.3 million barrels a day recently. While U.S. production remains high, Saudi Arabian output has increased to 10.3 million barrels, and Russian output reportedly has remained steady, a bearish formula for prices.
Hundreds of global industry executives, regulators and other officials will convene in Houston this week for the annual IHS CERAWeek Energy Conference. Last year the U.S. shale industry was the youthful upstart at the influential conference, taking the stage as high oil prices fueled unprecedented growth. This year in Houston the industry has faced its first bumps, and the discussion for U.S. oil producers—some profitable, others not—will be how to control costs in an uncertain price environment.
Gheit said low prices are an advantage for some companies and a hardship for others. For instance, a cash-rich major likecould be well placed to do a major acquisition in a low price environment.
and , the two biggest producers of liquefied natural gas, announced this month that they are hooking up in a near-$70 billion deal in a weak LNG pricing environment.
More deals are expected in the oil sector. “The longer oil prices remain low, the more likely more and more companies will throw in the towel. The reason we haven’t seen a lot of mergers and acquisitions is, the potential seller is eyeing $100 oil, and the potential buyer is thinking oil prices could get stuck at $50,” Gheit said.
Gheit said oil will probably settle in the $70-a-barrel range, and the U.S. unconventional industry will emerge from the collapse in prices as a changed industry.