Shale oil companies aren’t in the clear

Oil prices are back at almost $40 per barrel of WTI crude oil. The current future for July delivery was below $20/bbl. just two months ago and the May delivery contract famously went negative for a while. 

Yet, many oil companies still won’t breathe a sigh of relief about this recovery because most likely they are still not making any money on their oil production even if oil prices are where they are today. The analysts at Bloomberg New Energy Finance have estimated the current production costs for US shale oil companies and came up with the chart below.

Estimated production costs for US oil companies

Source: BNEF.

While many shale oil producers can break even at oil prices of c. $30/bbl. (e.g. Chesapeake Energy, PDC Energy) many more need oil prices at or close to $40 to break even (e.g. QEP Resources, Highpoint Resources). And some, like Oasis Petroleum or Whiting Petroleum, need oil prices of $50/bbl.

Let’s remember that Saudi Arabia dumped oil on the market earlier this year to discipline Russia for defecting from the OPEC+ supply agreements. This is a similar tactic than what Saudi Arabia has done in 1985 when it started to flood the oil market for many years to hurt other OPEC members who were violating production limits. Because Saudi Arabia, together with Iran has the lowest production costs for oil anywhere, it can survive a price war much longer than any other country. And thus, oil prices remained low for many years in the late 1980s and into the 1990s.

Similarly, because Russia needs oil prices of c. $40/bbl. to break even, it seems likely that Saudi Arabia and its OPEC partners will keep oil prices below that level to hurt Russia and teach it a lesson. And if that means that some unwanted competition from US shale oil producers will disappear as well then that would just be a welcome side effect.

In the end, we should expect oil prices to remain range-bound between $15/bbl. (i.e. roughly the production costs of Saudi Arabia) and $40/bbl. for the foreseeable future. And that will mean that the weaker players in the shale oil business will likely face bankruptcy or need to sell themselves to competitors who can produce at lower costs.