The U.S. shale boom is producing record amounts of new oil as demand weakens, pushing prices down toward levels that threaten to reduce future drilling.
Domestic fields will add an unprecedented 1.1 million barrels a day of output this year and another 963,000 in 2015, raising production to the most since 1970, according to the U.S. Energy Information Administration. The Energy Department’s statistical arm forecasts consumption will shrink 0.2 percent to 18.9 million barrels a day this year, the lowest since 2012.
More supply from hydraulic fracturing and horizontal drilling, and less demand, are contributing to the tumble in West Texas Intermediate crude. The U.S. benchmark is down 18 percent since June 20 and fell below $90 a barrel on Oct. 2 for the first time in 17 months.
“If prices go to $80 or lower, which I think is possible, then we are going to see a reduction in drilling activity,” Ralph Eads, vice chairman and global head of energy investment banking at Jefferies LLC, which advised 38 percent of U.S. energy mergers and acquisitions this year, said. “It will be uncharted territory.”
WTI declined to as low as $87.39 a barrel on Tuesday on the New York Mercantile Exchange, heading for the lowest close since April 17, 2013.
Shale oil is expensive to extract by historical standards and only viable at high-enough prices, said Ed Morse, Citigroup Inc.’s head of global commodities research in New York. Oil from shale formations costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa, the Paris-based International Energy Agency estimates.
“There is probably something to the notion that if prices fell suddenly to $60 a barrel, the production growth would turn negative,” he said.
Brent crude could drop to $80 a barrel before triggering a slowdown in investment from U.S. shale-oil drillers, Fitch Ratings said.
As U.S. supply rises and imports decline, the Organization of Petroleum Exporting Countries may be heading for a price war, according to Frankfurt-based Commerzbank AG. OPEC’s September output rose to a one-year high of 30.935 million barrels a day.
Saudi Arabia, the world’s largest exporter, reduced selling prices on Oct. 1, signaling it is prepared to let prices fall rather than cede market share, according to Commerzbank. OPEC accounts for about 42 percent of world supply, according to London-based BP Plc, Europe’s third-largest oil company.
U.S. output is rising as companies are now getting more wells out of each rig and more oil out of each well, said Eads, whose team includes 26 technical experts. In the Permian basin of west Texas, the country’s largest onshore field, there are twice as many rigs but five times as many wells, according to Eads.
Each rig in the Permian added a record 171 barrels of new oil a day in October, up 21 percent from a year ago, EIA data show. In the Texas’ Eagle Ford, each rig is getting 536 new barrels a day, up 20 percent, according to the agency.
The slowdown is “nothing short of remarkable,” the IEA said in a Sept. 11 report. It attributed the decline to slowing economic growth in China and Europe. Higher U.S. production and Libyan exports are contributing to ample supply, the agency said.
The U.S. has approved four facilities to liquefy gas for exports. While the U.S. prohibits most crude exports, finished products such as gasoline trade freely. Producers are lobbying to loosen the rules for crude too.
The last time the U.S. had a domestic oil boom was in the 1980s, following the Arab embargo. It ended when new supplies overwhelmed the market. Prices dropped to $9.95 a barrel in April 1986 from $32.35 the previous August, and the annual average stayed below $30 a barrel until 2000.
“What always happened is you’d get too much oil and gas and the price gets too cheap and you quit drilling – can’t make money,” T. Boone Pickens, founder and chairman of BP Capital LLC in Dallas, said in a Sept. 15 phone interview. “You break the price down and you’ll stop the boom right quick.”