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The U.S. oil juggernaut is beginning to stumble as producers start pulling back spending plans in reaction to the steep drop in crude prices.
Several companies have already indicated they will cut their exploration and drilling programs as they brace for leaner profits. U.S. production has expanded by about 1.1 million barrels a day in the past year, but won’t match that pace in the next 12 months.
Oil prices have plunged 37 per cent since peaking last June, with the most dramatic drop coming after OPEC last week decided to maintain its 30 million b/d production quota. OPEC leader Saudi Arabia signalled it is prepared to wait out the slump to flush some of the highest-cost producers from the market, and at least some of those will be the smaller oil companies producing in the prolific tight oil, or shale, plays in the United States.
In trading Tuesday, the benchmark West Texas Intermediate fell $2.12 (U.S.) a barrel to $66.88. Some analysts believe markets have overshot on the downside, but few expect prices to roar higher any time soon.
Raymond James Financial Inc., for example, expects WTI prices to stabilize at around $75 a barrel.
“At those levels, companies are going to reduce their capital expenditures,” Raymond James analyst Carlos Newall said Tuesday. “Production is not going to slow to a halt, but it is going to slow. You’ll see a reduction in rig count and then there will be a six- to nine-month lag when you’ll see a reduction in production.”
The three key U.S. shale oil fields are the Bakken in North Dakota and the Eagle Ford and Permian in Texas. Scotiabank economist Patricia Mohr has calculated that the average break-even price in the Bakken and Permian is $69 and $68, respectively, but with individual wells ranging from $54 to $82 a barrel.
But even if prices are above the break-even mark, companies will have to cut their drilling operations as their cash flow plummets from heady levels this year, and financing from banks and capital markets gets tighter.
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