Even as oil prices look set to expand their year-long rout, the International Energy Agency (IEA) hopes to see some rebalancing act in the medium term. The energy-monitoring body of 28 industrialized countries said that the collapse in crude prices since June last year will force production outside the OPEC oil cartel – including the U.S. shale – to drop the most in more than two decades in 2016.
The IEA, in its eagerly awaited ‘Oil Market Report,’ attributed the fastest plunge in production since 1992 to the commodity’s sub-$50 price level, which is not enough to support sustained investment required for exploration and production.
The Paris-based energy watchdog predicted that ex-OPEC volumes would decline by 500,000 barrels a day next year to 57.7 million barrels a day. Importantly, of the total squeeze, about 80% (or 385,000 barrels a day) will come from the U.S. shale fields – the force behind domestic production growth.
The Story Thus Far
The U.S. shale industry has proven surprisingly resilient in the face of cheap oil prices. While markets have hoped for long that the companies would trim their output to survive crude’s downward spiral, somehow, they have managed to do just the opposite. True, the shale producers slashed costs and stretched their balance sheets to ride the bear market but seldom have they gone for output cuts. In fact, players like Pioneer Natural resources Co. PXD and Devon Energy Corp. DVN hiked their production guidance as recently as August.
U.S. Shale's Resilience Waning
So, from where will the IEA-predicted production slowdown come from?
Til now, factors like drilling efficiency gains, attractive hedges and cheap credit have helped shale producers repel the onslaught from the price wobbles without compromising on output. But things look like changing.
With hedges on the brink of exhaustion, credit severely constrained and indications that the crude crash will last beyond 2015, the shale companies may have finally decided that it’s time to reduce output. After all, everything comes down to prices.
Shale operators that may slam brakes on production include the likes of EOG Resources Inc. EOG, Continental Resources Inc. CLR and Whiting Petroleum Corp. WLL. All of them have slashed their capital expenditures significantly, while also announcing a cut in drilling.
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Click to get this free report DEVON ENERGY (DVN): Free Stock Analysis Report PIONEER NAT RES (PXD): Free Stock Analysis Report EOG RES INC (EOG): Free Stock Analysis Report WHITING PETROLM (WLL): Free Stock Analysis Report CONTL RESOURCES (CLR): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research