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The scaling can slow down oil priming

Can the US Slate Bomb continue if WTI stays below $ 50 a barrel? Much has been done about the dramatic cost reductions that slate drillers have carried out in recent years with impressive breakeven prices that should ensure drilling Frenesi continues no matter where oil prices go. On the income conversations with investors and analysts, the CEOs repeatedly repeated extremely low breakeven prices. But these numbers are sometimes cherry picked or otherwise misleading. They fail to include the cost of land acquisition and other costs, or they only reflect cost structures in just the best area. The sudden drop in prices – the oil fell almost 8 percent on Tuesday &#821 1; could re-examine the point at which many slate wells are broken. The problem for many companies is that they do not necessarily earn the entire WTI price. West Texas oil in Permian Basin continues to trade with a steep rebate compared to WTI, even when the difference has decreased in recent months. With WTI of about $ 47 or $ 48 a barrel, oil-based in Midland trading is less than $ 40 a barrel, the lowest point of more than two years, according to Bloomberg. Bloomberg NEF data provides more clues in the complicated breakeven debate. Wells in Spraberry (within Permian Basin) can breakeven when prices range between $ 32 and $ 47 a barrel. Digging deeper, Bloomberg NEF notes that some of the best wells can break even in the low 30's, but the worst quartile…

Can the US Slate Bomb continue if WTI stays below $ 50 a barrel?

Much has been done about the dramatic cost reductions that slate drillers have carried out in recent years with impressive breakeven prices that should ensure drilling Frenesi continues no matter where oil prices go. On the income conversations with investors and analysts, the CEOs repeatedly repeated extremely low breakeven prices.

But these numbers are sometimes cherry picked or otherwise misleading. They fail to include the cost of land acquisition and other costs, or they only reflect cost structures in just the best area.

The sudden drop in prices – the oil fell almost 8 percent on Tuesday &#821

1; could re-examine the point at which many slate wells are broken.

The problem for many companies is that they do not necessarily earn the entire WTI price. West Texas oil in Permian Basin continues to trade with a steep rebate compared to WTI, even when the difference has decreased in recent months. With WTI of about $ 47 or $ 48 a barrel, oil-based in Midland trading is less than $ 40 a barrel, the lowest point of more than two years, according to Bloomberg.

Bloomberg NEF data provides more clues in the complicated breakeven debate. Wells in Spraberry (within Permian Basin) can breakeven when prices range between $ 32 and $ 47 a barrel. Digging deeper, Bloomberg NEF notes that some of the best wells can break even in the low 30’s, but the worst quartile wells are breaking an average of $ 65.54 per barrel.

In other words, a large number of wells in Permian – as being clear, are often held as the world’s best slate pool – are currently unprofitable, because WTI is priced at the high $ 40 a barrel. The problem is even worse for areas outside Permian, on average, the breakevens are much higher. Probably only the best wells in Bakken, Eagle Ford and Niobrara can earn money right now.

It poses insecure production profiles from SMEs by 2019. The agency expects the US to increase production by 1.2 million barrels per day (mb / d) in 2019, another very large annual increase. However, this growth is due to higher oil prices. “If WTI remains around current levels (~ $ 50 / bbl), US growth should start slowly,” writes Morgan Stanley analyst in a new listing.

There are some attenuating circumstances that could protect the slate producers from the worst. Shale E & Ps secures its production routinely for the coming year. A few months ago, some of these hedges saw a bad bet – producers had locked prices of $ 50 or so much in 2018, even though the price of oil over the summer was much higher than that. For example, Anadarko Petroleum said that it was missing $ 298 million in revenues as it was hedging at price levels that were below the current spot price. Related: The race is on: Large oil peaks to deliver 1 billion disconnected

On the other hand, for those locked in sales for 2019 production in, for example, $ 60s per barrel, it may feel pretty good if that’s right now. To the extent that a slate company has already secured hedges for 2019, they can not change their drilling plans for the next year so much.

Unfortunately, for many is the fact that the industry has been hedging for next year, provided that prices could climb even higher. “Manufacturers have a lower share of the next 12 months of oil production hedged for this season compared to recent years,” said Morgan Stanley analyst in a listing.

Another reason that the supply can not really be severely limited despite low Prices are that slate companies could simply keep their drills in 2019 and take on more debt just as they did for so many years. The assumed increase in production may not change so much, even though the balance sheets deteriorate.

Related: Saudiarabian Oil Ministers: Commodities Should Fall Very Soon

Standard Chartered gives a little more insight, with an overview of how well the completions are: “We appreciate the 374 finalists per month is currently required in Permian to compensate for downsides. The number of Permian supplements in November was 65 higher than the completion rate at 439, “the investment bank wrote in a note. “The number of additions would then have to fall by about 17% before the Permian exit stopped growing. While we expect a decline in the completion of the WTI Midland Texas, Texas price would remain close to current USD 42 / bbl, we would not expect a complete decrease which is big enough to stop net growth. “

Finally, sub – $ 50 oil can not be a big problem if reference prices recover in a relatively near future. Saudi Arabian oil minister Khalid al-Falih tried to calm the market this week that we will not see a repeat of the decomposition 2014-2016. “We are still focused on fundamentals, I can say we will achieve balance between supply and demand in 2019,” he told reporters. There will be tremendous pressure on OPEC + to extend the latest production cuts by the end of 2019.

But the longer low prices are stuck, the more significant the impact will be on production. “If band prices remain dull in early 2019 at around $ 50 WTI, we would expect budgets to be set at levels that slow down the growth trend, all the same, which we would expect to be more noticeable in 2020,” concluded Morgan Stanley .

By Nick Cunningham of Oilprice.com

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