US shale has emerged as a target of the Saudi-Russia oil price war, and while there may be some short-term pain, the sector is expected to prove resilient
GlobalData analyst Adrian Lara thinks US shale will prove capable of surviving the oil price war (Credit: Wikimedia Commons/Arne Hückelheim)
Financial struggles and even bankruptcies may blight US shale as the Russia-Saudi price war unfolds, but this “unconventional” sector will “adjust to the new reality”, according to an analyst.
The US industry has been suggested as a target of Moscow’s decision to back out of Opec+ negotiations to control crude production amid coronavirus concerns, with hopes that tumbling commodity prices could compete with cheap US shale oil and squeeze producers.
Crude oil prices have tumbled this week on the back of uncertainty clouding global markets and the prospect of a production rush once measures expire at the end of the month — leaving producers free to “pump at will”, as Russia’s energy minister Alexander Novak put it after the failed Opec meeting in Vienna.
Price war could drive US shale producers to bankruptcy
GlobalData oil and gas analyst Adrian Lara said: “There is no doubt the outlook is now quite difficult for indebted shale operators, and although it is too early to say with accuracy which companies will be driven out of the game or into bankruptcy, the count will likely be more than in previous years.
“From a micro perspective, things are looking quite difficult and there will certainly be losing companies.
“But from a macro perspective, the US shale supply has proved that it not only rebalances as needed, but that the producers that remain tend to improve their game.
“This is due to the dynamism of the unconventional sector in the US where this type of external shock is spread over many players that also include the many equipment and services companies.
“Operators tend to demand lower prices for services hired, and this helps to mitigate the negative impact.”
Low crude prices will challenge US shale sector
Prices of crude oil plummeted as news emerged that Russia would not co-operate with Opec plans to curb oil production in the face of coronavirus-weakened global demand — sending shockwaves through financial markets around the world.
Escalating tensions between Russia and de facto Opec leader Saudi Arabia have since driven commodity prices down further — with Brent crude currently trading at close to $35 per barrel and WTI crude near $33 per barrel.
Lara added: “With the current WTI price and with uncertainty around how much lower the price can be, drilling activity will be significantly reduced in the short term, ultimately reducing production.
“For the rest of 2020, operators are to rethink their development strategies in order to reduce expenditure and focus on their best productive acreage.
“There is no doubt that the US Lower 48 operators are now more challenged to manage their debt and stabilise their free cash flow. However, they can always find the way to adjust to the new reality by a mix of increasing cost efficiencies, improved technology or mergers and acquisitions consolidation.
“More importantly, with available undeveloped acreage and with many operators in the US, shale supply won’t go away any time soon, so whenever prices stabilise and move upwards, operators’ growth can resume relatively quickly.”