In the wake of one of history’s largest oil price declines in a single day, a Rystad Energy impact analysis shows that US drilled but uncompleted wells (DUCs) will be the first assets to be threatened by the newly formed low price environment, as their breakeven costs are now only dollars away from market prices.
Around 80% of shale DUCs currently have break-even oil prices below $25 West Texas Intermediate ($30 Brent), Rystad Energy’s data show.
“If nobody blinks in this supply war, prices may have to go this low in order to properly reduce production and get supply-demand back in balance,” says Artem Abramov, Rystad Energy’s Head of Shale Research.
“This could turn out to be one of the greatest shocks ever faced by the oil industry, as coronavirus containment measures will add to the headache of producers fighting for market share. And OPEC has clearly stated that it won’t be coming to the rescue in the second quarter of 2020,” adds Abramov.
The only hope on the immediate horizon is for OPEC countries and Russia to capitulate and tighten the supply valves at their next meeting in June.
Russia’s hard “no” to further production cuts last Friday did not come as a big surprise, Abramov said, but the size of Saudi Arabia’s discounts to all export markets over the weekend certainly did.
As the market searches for a floor, Rystad Energy believes prices will experience extreme levels of volatility in the coming days and will have to go even lower than the current $35 Brent, as the potential 2 million barrels per day (bpd) surplus in the market in the second quarter of 2020 may grow even larger depending on the production response from OPEC and Russia.
However, we suspect that the OPEC+ alliance could still survive this impasse. Russia has successfully made the point that it is prepared to face the consequences of a “no-deal” scenario. As the effect of the virus outbreak on the global economy becomes increasingly clear, we find it likely that OPEC+ will meet again in June and try to reach a new agreement to balance the market.
Rystad Energy’s shale team has modeled three alternative price scenarios reflecting how the US shale industry could respond to lower WTI prices. In this analysis, under the $30 WTI scenario, which is the one closest to the current price levels, oil production in the Lower 48 states would continue to grow towards July-August by around 200,000 to 300,000 bpd versus current output levels.
Production would then start to decline during the year’s fourth quarter. The volumes at risk versus our previous base case grow by as much as 1 million bpd for December 2020 production if oil prices stay at $30 WTI a barrel. In this scenario, Lower 48 oil production would end the year more or less flat from where it started.
It remains to be seen whether OPEC+ will return to the negotiating table before the next scheduled meeting in June, but until that happens, the market will evidently be left on its own to clear out an unprecedented supply-demand surplus that could surpass 3 million bpd in the second quarter of 2020. Buckle your seatbelts as the market moves into unchartered territory.