Shale Oil Producers Continue to Challenge OPEC's Pricing Power

For the past four months in a row, there have been increases in shale oil production of more than 100,000 barrels per day, according to data compiled by the U.S. Energy Information Administration. These continued increases have challenged the Organization of the Petroleum Exporting Countries (OPEC) and its ability to control oil prices on a global basis. Oil prices have remained consistently around $50 per barrel, which is half of what a barrel of oil was commanding in mid-2014.

Just a few months ago, there were concerns that this significant crash in prices would decimate shale oil production in the United States and lead to the collapse of the industry. While there have been bankruptcies, consolidations and mergers and other pain within the industry, shale oil has survived the downturn and has challenged OPEC’s ability to dictate prices. In addition, it has led to Russia, which is not a member of OPEC, to agree to certain production cuts to try to stabilize the global oil market price.

However, shale oil may continue to be play spoiler well in 2018 for OPEC and other oil-producing nations. The U.S. Energy Information Administration expects shale production to rise by another 700,000 barrels per day, which will put pressure on OPEC and other oil-producing nations on how to balance the global energy production and price.

This means that producers shouldn’t expect increases in pricing anytime soon. Producers will need to continue to careful in selecting drilling locations and analyzing the return on capital at a much lower price than just a handful of years ago. Producers will need to continue to evaluate their overall cost structure as it becomes more likely that $50 per barrel is the new $100 per barrel, at least for the immediate future. Lastly, producers need to continue monitoring wells for impairment and evaluating when wells become uneconomical. 

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