IHS Markit forecasts reaction of US shale oil producers to lower prices

IHS Markit forecasts reaction of US shale oil producers to lower prices

BAKU, Azerbaijan, March 10

By Leman Zeynalova – Trend:

US shale oil production is likely to stop increasing with lower prices for oil, Spencer Welch, director of the oil markets and downstream team in the London-based IHS Markit told Trend.

He was commenting on the possible consequences of the OPEC+ failure to reach an agreement on maintaining the oil market balance.

“It is very hard to know what will happen next, with oil price dropping to $37/bbl it is likely that private discussions are still ongoing between OPEC+ members, because this current price is financially painful to both Russia and Saudi Arabia. It is reported that Russia needs a price around $50/bbl to breakeven, while Saudi needs around $70/bbl,” he said.

Welch noted that fundamentally it appears that there was a disagreement on strategy, Saudi wanted to cut supply by even more (from 2.1 MMb/d to 3.6 MMb/d) to combat the impacts of coronavirus, “Russia disagreed and felt this would not work and would end up being financially more damaging.”

He noted that US shale producers will react to the economics of price, they will reduce/stop drilling, and so US production will stop increasing and is likely to start declining – but it all depends on how long price stays low.

“Oil price could well drop further, even below $20/bbl, it depends on how long the stand-off lasts, we expect oil stocks to start to build quickly, the higher they go the lower price will go. How long can price stay low? Weeks/months but not years, because the low price has such a significant negative impact on oil producers,” said the expert.

Welch believes that the only solution is time, the world needs to deal with the coronavirus and allow oil demand to cover, fundamentally this is the only solution.

In view of the current fundamentals and the consensus on market perspectives, the 178th (Extraordinary) Meeting of the Conference of the Organization of the Petroleum Exporting Countries (OPEC), held in Vienna, Austria, on 5 March 2020, decided to recommend to the 8th OPEC and non-OPEC Ministerial Meeting to extend the adjustment levels agreed at the 177th Meeting of the Conference and the 7th OPEC and non-OPEC Ministerial Meeting for the remainder of the year. It also agreed to recommend to the 8th OPEC and non-OPEC Ministerial Meeting a further adjustment of 1.5 mb/d until 30 June 2020 to be applied pro-rata between OPEC (1.0 mb/d) and non-OPEC producing countries (0.5 mb/d) participating in the Declaration of Cooperation.

However, during the meeting held March 6, OPEC+ failed to reach any agreement on extension of the deal or deepening the cuts further, which led to a significant decline in oil prices.

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Follow the author on Twitter: @Lyaman_Zeyn

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