May 6, 2015 / 4:11 AM / 5 years ago

U.S. shale firms, new oil swingers, may put a $70 cap on prices

(Reuters) - U.S. shale drillers, widely seen as having taken over from OPEC as the swing suppliers to the world, quickly adjusting production as prices ebb and flow, may have just put a $70 a barrel lid on oil.

A pumpjack brings oil to the surface in the Monterey Shale, California, April 29, 2013. REUTERS/Lucy Nicholson

Just months after slashing spending and cutting back on rigs in response to a 60 percent price rout, major domestic producers including bellwether EOG Resources Inc and top Bakken producer Whiting Petroleum Corp are already starting to talk about the price at which they would ramp up production.

Others, such as Devon Energy Corp and Noble Energy Inc., are pumping more oil than expected this year after the industry’s deepening drive for more efficient and productive wells yielded better-than-expected results.

For some analysts, these are signs of a new price ceiling forming in oil markets and serve warning to traders that a new wave of shale supplies could be quickly unleashed if crude pushes much higher. For others they suggest that a second deep price slump may be looming as soon as next year.

“If oil prices recover and stabilize around $65 WTI, EOG can resume strong double-digit growth,” the company’s chief executive, Bill Thomas, told analysts on a conference call on Tuesday.

Jim Volker, Whiting’s chief executive, said last week, “You’d probably see us put a couple of rigs back” if U.S. crude reached $70 a barrel. Pioneer Natural Resources Co told Reuters last month it may add new rigs in June if oil prices improve a bit, but didn’t specify a price.

The comments provide the first insight of a possible new ceiling for oil markets, forcing traders to shift gears after months of scrutinizing fracking firms for signs of deep spending cuts that would curb oversupply and stop the price rout.

The turnaround has arrived more quickly, and more violently, than many expected: U.S. crude oil futures have surged 45 percent since hitting a six-year low in mid-March, topping $60 a barrel on Tuesday for the first time since Dec. 11 - just weeks after the pivotal meeting at which the Organization of Petroleum Exporting Countries agreed to refrain from cutting production.

The comments may also reinforce the view that the U.S. shale industry is the new “swing” producer, able to ramp production up and down quickly enough to temper the peaks and troughs that have long afflicted the oil market.

Unlike the OPEC of old, however, it takes shale drillers months, not days, to turn the taps back on, raising the risk of a “longer and messier” - and more volatile - period of adjustment for markets, according to Mike Wittner, global head of oil research at Societe Generale.


As oil prices spiraled down more than 60 percent late last year and early into 2015, oil analysts and traders struggled to figure out when - and at what price - shale firms would cut back drilling, curtailing an unprecedented production boom that has nearly doubled U.S. output in five years.

At under $50 a barrel, those cuts seemed to appear, although production has been more resilient than some firms expected.

Devon said Tuesday that it pumped a record 272,000 barrels per day (bpd) of crude in the first quarter, beyond the top limit of its forecasts. It said full-year output may rise by as much as 35 percent, much more than expected.

Now, traders are considering a ceiling for prices - and starting to ponder the perils of potentially premature optimism.

“If prices at $65 to $70 get shale to turn on, it will exacerbate or prolong the oversupply, and send prices down into another down leg,” Bob McNally, president of the Rapidan Group said. “If we build a new ceiling at $70, we may have to find a new floor, lower than $45 in January.”

Anadarko Petroleum Corp’s CEO, Al Walker, expressed “some concerns that as we achieve higher prices we could see activity increase, and prices, unfortunately, could suffer as a result of higher production.” He did not specify a price that would encourage the company to drill more actively.

For some executives, it’s better not to talk about it.

“I will tell you - everybody wants to know at what oil price would you spend more,” said Tim Leach, CEO of Concho, which raised its production guidance a few percentage points on Monday. “And that’s not really the way we think about it.”

Reporting by Terry Wade, Ernest Scheyder, Anna Driver and Jessica Resnick-Ault; Writing by Jonathan Leff; Editing by Leslie Adler

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