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What Will the Exit of US Shale Oil Companies Bring About?

According to the estimation of Weatherford International Plc, about half US companies providing hydro fracturing service would close down or get sold, which reflects that the poor production of shale oil has affected upstream companies.

On April 24th, Baker Hughes data revealed that the number of US drilling platforms was cut to 932 by 22 in that week. Drilling wells keep decreasing in a continuous 20 weeks, recording the fastest cumulative decline.

What made the US shale oil companies continue to close down? Would it inhibit the production growth and lead to higher oil price? Some experts believe that the decline in demand and business failure due to increased cost is a normal phenomenon, which is a reaction process of various interrelated market chains. When oil prices rose to a certain level, these shale oil companies would come back to life; after all, what fundamentally restrains shale oil businesses is the market rather than technology.

Why did US Shale Oil Companies Exit?

According to Yahoo Finance, 41 shale oil explorers in business would close down or get sold at the end of this year because of the cut-down expenses of oil companies. Director Rob Fulkes of Weatherford said that probably only 20 companies remain to provide hydro fracturing services. Due to the low oil price, clients exit in halfway and the exploring demand of shale oil has declined.

Was the exit of shale oil companies resulted by continuous low oil price or the problem in supply relationship?Dong Xiucheng, Director of China Oil and Gas Industry Development Research Center of China University of Petroleum, told reporters of China Economic Times that the low oil price is the main reason of companies’ exit. Considering the cost of shale oil is more than 60 US dollars / barrel, business is difficult to bear long-term losses. About the anticipation that US oil companies will continue to close, Dong Xiucheng said, the anticipation would realize if oil price continued to drop before the end of this year. But it would not come true if oil price rose back to where these businesses could make fortune.

In this regard, Zhutong, Director of Energy Economic Research Department of Chinese Academy of Social Sciences Institute, told reporters that demand and price are two sides confirmed each other. Either the break of capital chains or financing problems resulted by increased operating pressure was ever exposed by some media before low oil prices have become a normal phenomenon. Some US shale oil enterprises were already at a loss, and the reason why they did not close down was that the market was expected to remain favorable. Today, however, oil prices have continued to drop for more than six months; at the same time, the current market is still unexpected to see any signs of a strong rebound in the short term. He said: ‘Whether US shale oil companies would close at the end of this year is a judgment made by the market and the media. In fact, the decline in demand and business failure due to increased cost is a normal phenomenon, which is a reaction process of various interrelated market chains. ’

How would the Exit affect the Market?

EIA claimed that oil price would achieve 150 US dollars / barrel without the production increase of US shale oil.

For this view, Zhu Tong said the US shale oil production growth is resulted by the superimposition of expected impact and actual impact. Like what the US Energy Information Administration said, it is not impossible that oil price reaches 150 US dollars / barrel without the output growth in US shale oil. Due to the particularity of oil price, it has always been subject to the superimposed interaction of immediate needs and future expectations. Anticipated demand and an enlarged role of some factors in financial market would lead to greater volatility.

Zhu Tong said, ‘The collapse of US shale oil prices will lead to short-term fluctuations in oil prices; once the news came out, the market will react.’ He believes that it needs some time to observe that whether the high oil price can return to the previous status. The reason why oil prices fell to the current state mainly lay in that the global economy has not fully recovered. The double pressure of slow economic growth and production increase of US shale oil lead to such a result, which affects its future yield to form a loop. Therefore, the collapse of US shale oil businesses would certainly affect the market. On the current term, oil production itself is no longer constrained by technology but subject to market factors; but market factors, especially price factor in some way belong to short-term factors. Once the pace of economic recovery in the US or other countries was accelerated, market demand would increase, along with price growth and quickly resumed production of these US shale oil companies. These companies’ respond to market is fast, because there’s no need for them to re-explore so they can resume production immediately.

In regard to what the US Energy Information Administration said, Dong Xiucheng theoretically agreed with the judgment that ‘Oil price would rise up to 150 US dollars / barrel without US shale oil output growth.’ He believed in the chance of this consequence, which however is quite slight. The current low oil price exceeds what some US shale oil companies can afford, but they would respond quickly and resume production immediately once oil price got recovered.

Would OPEC be the Winner?

Many reports said that OPEC would be the winner with the quit of a large number of US shale oil businesses. In regard to this view, Zhu Tong said that each company has its own judgment and interests planning and some may release certain information and statements from time to time in hope of guiding the market direction. OPEC is likely to become a ‘price war’ winner, but this ‘price war’ is definitely not what it can single-handedly manipulate. In his view, it is normal that OPEC can become a winner due to their relatively lower cost, and the price rebound is also in hope after the defeat of shale oil. But he also mentioned that OPEC would not expect the price to rebound to too high a level, resulting in shale oil recovery which may race to control its market share again.

Dong Xiucheng also believes that the market competition has always existed. With low oil prices, some businesses closed down, while they would soon come back with high oil prices. So it would be difficult to beat down some companies just through price war.



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