(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON May 14 U.S. shale producers are the new
"swing producers" in the oil market, as many analysts have
noted, but the status of swing producer is hugely misunderstood.
It is often portrayed as if it confers power and control. In
fact, it often means the opposite. The swing producer often
becomes the passive absorber of shifts in market supply and
Between the 1930s and the 1970s, the role fell to small,
independent well owners of Texas, who were forced to limit their
production to balance the global oil market.
Prorationing orders issued by the Railroad Commission of
Texas and conservation commissions in other states compelled
owners to restrict output to a fraction of the well's maximum,
and it was not a comfortable experience for the U.S. domestic
Saudi Arabia found itself cast in the role of swing producer
in the early 1980s, an experience that traumatised the kingdom's
policymakers, and which they vowed never to repeat.
One reason prices have crashed since mid-2014 is because
Saudi policymakers, having been burned before, refused to
shoulder the burden of balancing the market and have forced it
upon the shale industry and other high-cost producers.
The swing producer role has now fallen to the U.S. shale
sector, which will find it as uncomfortable as the Texas
independents and the Saudis did previously.
Swing status will ensure oil prices stabilise at a level
that brings forth just enough shale production to be consistent
with the global oil market balance.
Following the 50 percent surge in prices over the last eight
weeks, there are indications prices have risen to this level,
allowing shale production to be sustained or grow slowly, but
avoiding the rapid growth reported before September 2014.
North Dakota's shale producers, together with those in
Texas, have become the critical swing producers.
North Dakota's oil production of 1.19 million barrels per
day (bpd) in March was essentially unchanged from the last six
months, records from the state government show (link.reuters.com/puk74w).
There is not yet enough data to conclude that production has
peaked following the near-halving of oil prices since the middle
of 2014. Production growth often flattens during the state's
harsh winter, which makes drilling, well completions and other
One or two months more data will be needed before it is
possible to say prices rather than a seasonal slowdown are
responsible for output stalling. Nonetheless, there is a high
probability that North Dakota's oil production has indeed
levelled off as a result of the sudden collapse in oil prices.
The number of rigs drilling in the state has more than
halved since early October, according to the Department of
Mineral Resources (DMR). There are currently 83 rigs active in
the state, the lowest number since January 2010, the DMR wrote
in its latest monthly report ("Director's Cut" May 2015).
Earlier this year, the DMR's chief told state legislators
producers needed a wellhead price of between $55 and $65 per
barrel to maintain output at around 1.2 million bpd.
In practice, there is no direct way to measure the price
producers actually receive for their oil at the wellhead but it
is possible to specify a range.
The best price producers could receive would be the futures
price for U.S. domestic crude (WTI), which ignores quality and
The worst price would be the posted price for the Williston
Basin area, which assumes they are charged the full cost of
tanker collection from the site.
DMR estimates typical wellhead prices by averaging the
futures price for WTI with posted prices for Williston Sweet
In March, the averaged wellhead price touched a low of just
$35 per barrel but it has since jumped to $55 per barrel.
With posted prices by buyers such as Plains Marketing now at
almost $50, most North Dakota producers will be receiving $50 or
better for their oil (link.reuters.com/ruk74w).
Wellhead prices in North Dakota are now at, or very close
to, levels the DMR identified as being able to sustain
production around the current level of 1.2 million bpd.
If U.S. oil prices were to remain at current levels, or
climb by only another few dollars, it is reasonable to assume
that output from North Dakota and the other major shale plays
There might be a brief decline over the summer as the lagged
effect of critically low prices in February and March works its
way through, but in the second half of the year production
should be broadly flat.
Some shale producers have begun to talk about reactivating
rigs, completing more wells and resuming production growth if
prices hold at current levels or slightly higher.
"If oil prices recover and stabilize at the $65 level, EOG
Resources is prepared to resume strong double-digit oil growth
in 2016 with balanced capital spending and discretionary cash
flow," the company told investors on May 4.
Other major shale producers have made similarly optimistic
comments about their ability to continue growing production if
prices remain at current levels or climb only a little higher.
There is an element of bravado in the claims. The same
producers dismissed the threat from OPEC in September and
October last year and spoke confidently about being able to
weather the downturn in prices without having to cut production
plans at all before being forced to cut their capital budgets
Shale companies must be able to convince investors and
lenders they can maintain and raise output profitably through a
combination of strict cost controls and improved production
efficiency, so they tend to talk up their prospects.
Nonetheless, they are probably correct in thinking prices have
increased to a level that is just about sustainable.
The prospect of further price increases, however, is more
uncertain. The global oil market appears comfortably supplied.
There is no clear need for lots of extra shale output to
meet current and prospective demand, which suggests prices will
settle for a while around current levels, sufficient to maintain
shale production but not grow it very fast.
(Editing by Susan Thomas)