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Decline in shale oil production is inevitable amid falling oil prices

UNITED STATES (OBSERVATORY NEWS) — The US shale oil sector is showing signs of slowdown as production in major shale oil fields outside the Perm field is declining.

This sector is already suffering some financial stress. FT notes that “after the Japanese attack on Pearl Harbor in December 1941,” shares of oil and gas companies in the US show the worst results in the S&P 500 compared to the rest of the market.

Pressure affects drilling and production. Judging by the latest EIA report on drilling productivity, production in all major shale fields outside Perm began to decline, even the expected growth of the Perm field in March is part of the growth rate observed on the good days of 2018.

Even so, the effect of the coronavirus probably has not yet touched production data. Shifts in drilling and the number of drilling rigs often take several months after a significant change in prices, so another drop may occur in the coming months. With the fall of WTI to $ 50 per barrel, many companies in the shale oil industry are suffering losses.

Drillers are “very sensitive to price fluctuations,” according to a JBC Energy report in mid-February. The company lowered its forecast for growth in shale oil production to 760 thousand barrels per day in 2020, 120 thousand barrels per day less than previously forecasted.

The eternal problem of OPEC + remains associated with attempts to balance the oil market, but after many years of struggling with shale oil in the United States, the problem is no longer associated with the Perm or Bakken deposits.

“Over the past 5 years, growth in US oil production has become a major violation of the OPEC market balance,” writes Standard Chartered. In 2020, everything is wrong, demand is the main driver of imbalance, and US production growth is slowing.”

According to Standard Chartered, the growth of shale oil production in the US this year was 0.6 million barrels per day, and in 2021 – 0.55 million barrels per day, “which is less than half the growth in 2019 by 1.237 million barrels per day day”.

The investment bank noted: “The biggest slowdown is expected in Texas, where we forecast production growth of 309 thousand barrels per day in 2020 compared to 644 thousand barrels per day in 2019.” Bank analysts say that many experts and investors are of the opinion that there is a sharp slowdown, and that “all indicators indicate a further decline in growth.”

It is worth noting that these growth figures are annual indicators, the average value for 2020 should increase relative to 2019, even if production growth stops completely in the future. Annual figures mask a significant slowdown that began several months ago and continues.

Morgan Stanley notes that some of the largest shale drillers have raised dividends. The investment bank took this as a sign of a slowdown in oil production. In the hope of stopping the outflow of investors from the energy sector, large E&P companies such as Devon Energy and Pioneer Natural Resources increased their dividends.

“We consider the shift towards higher dividends to be constructive not only for the sector … but also for the macroeconomy, as this should limit the growth potential of production in the United States in the event of rising oil prices,” the investment bank writes.

Meanwhile, gas drillers are under pressure. US natural gas prices are below $ 2 / MMBtu, few gas companies can make a profit.

“It’s hard for me to understand why the industry is entering the market today,” said Dan Dings, an analyst with Cabot Oil & Gas, on Friday. I think rationalization is necessary in an unstable market with its unstable balance sheets.”

Cabot plans to suspend one of its drilling rigs in March and says production will decline by 3% in Q1 compared to Q4.

EIA expects shale gas production in Appalachia to continue to decline. It could fall 200 million cubic feet per day in March.

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