US shale oil firms seek new $40 price target

For leading US shale oil producers, $40 is the new $70.
US shale oil firms seek new $40 price target

Less than a year ago major shale firms were saying they needed oil above $60 a barrel to produce more; now some say they will settle for far less in deciding whether to crank up output after the worst oil price crash in a generation.

Their latest comments highlight the industry’s remarkable resilience, but also serve as a warning to rivals and traders: A retreat in US oil production that would help ease global oversupply and let prices recover may prove shorter than some may have expected.

Continental Resources, led by billionaire wild-catter Harold Hamm, is prepared to increase capital spending if US crude reaches the low-to mid-$40s range, allowing it to boost 2017 production by more than 10%, chief financial official John Hart said last week.

Rival Whiting Petroleum, the biggest producer in North Dakota’s Bakken formation, will stop fracking new wells by the end of March, but would “consider completing some of these wells” if oil reached $40 to $45 a barrel, chairman and CEO Jim Volker told analysts.

Less than a year ago, when the company was still in spending mode, Mr Volker said it might deploy more rigs if US crude hit $70.

While the comments were couched with caution, they serve as a reminder of how a dramatic decline in costs and rapid efficiency gains have turned US shale, initially seen by rivals as a marginal, high cost sector, into a major player - and a thorn in the side of big Opec producers.

Nimble shale drillers are now helping mitigate the nearly 70% slide crude price rout by cutting back output, but may also limit any rally by quickly turning up the spigots once prices start recovering from current levels just above $30.

The threat of a shale rebound is “putting a cap on oil prices,” said John Kilduff, partner at Again Capital.

Some producers have already began hedging future production, with prices for 2017 oil trading at near $45 a barrel, which could put a floor under any future production cuts.

While the worst oil downturn since the 1980s sounds the death knell for scores of debt-laden shale producers, it has also hastened the decline in costs of hydraulic fracturing and improvements of the still-developing technology.

For example, Hess, which pumps one of every 15 barrels of North Dakota crude, cut the cost of a new Bakken oil well by 28% last year.

What once helped fatten margins is now key to survival in what Saudi Oil Minister Ali al-Naimi described last week as the “harsh” reality of a global market in which the Organisation of Oil Exporting Countries is no longer willing to curb its supplies to bolster prices.

While Deloitte auditing and consulting warns that a third of US oil producers may face bankruptcy, leading shale producers say their ambitions go beyond just outrunning domestic rivals.

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