Why U.S. Shale Will Survive The Oil Price War

By Haley Zaremba

The future of the oil industry, it seems, all depends on who you ask. Many industry insiders and experts are crying armageddon, while others say that United States shale is not only poised for a comeback, it will be better than ever. Early last month, global oil prices experienced their worst single-day setback in almost 30 years thanks to a series of unfortunate geopolitical events and a certain virus you may have heard something about. China was the first country to have to all but shut down its entire economy to stop the spread of coronavirus, and whenever anything happens to the second-largest economy in the world, the rest of the world is certain to feel the aftershocks.

First, the demand for oil plunged. This prompted discussions between the OPEC+ leaders of Saudi Arabia and Russia to enter talks to determine how they would respond to this setback. The talks did not go well, to put it mildly, and Russia and Saudi Arabia’s alliance quickly devolved into an all-out oil price war. All of this came to a head-on March 9, when oil prices crashed by a spectacular 30 percent.

“Brent lost $15.65 from its weekly close to settle at $34.36 per barrel on Monday, while WTI lost $14.6 of its value to close at $31.13” reported the National’s Business section. Since then, the energy industry has been awaiting the stimulus package with bated breath, as the Permian Basin experiences tens of thousands of layoffs.

But some are optimistic about a serious rebound. One such entity is Goldman Sachs Group Inc., which believes that “the bruised and battered U.S. shale industry is poised to emerge from the oil crash a winner,” says Bloomberg. In a March 31 note, Goldman Sachs analyst Damien Courvalin expressed that “shale’s high-pressured wells and short drilling time mean the industry is well-positioned to benefit if the current plunge in oil causes long-term damage to production capacity, resulting in a price jump when demand returns.”

Goldman Sachs is not the only group feeling optimistic about oil. Daniel Yergin, a Pulitzer Prize-winning oil historian and vice chairman of IHS Markit Ltd. told Bloomberg in an interview for an earlier article that “Companies go bankrupt, but rocks don’t go bankrupt,” and that “when this all shakes out, there will be other people to develop shale.”

 

Vincent G. Piazza, Bloomberg Intelligence’s senior oil analyst, even believes that shale will not only bounce back, but it will also be better than ever. In a scenario not unlike Darwinian natural selection, the weakest companies would be weeded out and we will be left with only the strongest, most efficient, and more resilient companies with better technology and better preparedness for future market volatility. The weakest companies “will go into stronger hands,” he said. “The industry is going to be in a lot better shape than in 2014-2016. The balance sheet is in a lot better shape. I wouldn’t underestimate the ability of this industry to re-create itself.”

This scenario is not unprecedented. In the 2014-16 oil crash, oil prices dipped significantly lower than they are now, and, not long after, which was followed by an unprecedented shale rebound that changed the global energy industry. “The American shale industry shocked the world with its rebound after the 2014-2016 bust,” says Bloomberg, “setting records for output that pushed the U.S. to the top spot among oil-producing countries.” Ironically, it was the very same 2014-16 oil crash that prompted the alliance between Saudi Arabia and Russia whose meltdown led to the current crash.

By Haley Zaremba for Oilprice.com