If The Oil Plunge Continues, "Now May Be A Time To Panic" For US Shale Companies

Tyler Durden's picture

Over the past 5 years, the shale industry, fabricated or real reserves notwithstanding, has been a significant boon to the US economy for four main reasons: it has been the target of billions in fixed investment and CapEx spending, it has resulted in tens of thousands of high-paying jobs, its output has been a major tailwind for the US trade deficit, and has generally been a significant contributor to GDP (not to mention various Buffett-controlled or otherwise railway corporations). And perhaps, most importantly, it has become a huge buffer to the price of global oil, as the cost curve of US shale is horizontal, with a massive 10,000 kbls/day available within pennies of $85/bl.

Goldman's explanation:

We believe that the vast reserves that have been opened for development through shale oil in the US have flattened the cost curve meaningfully, at around a US$85/bl Brent oil price. We estimate shale reserves from the top three fields in the US onshore (the Permian, Bakken and Eagle Ford) at around 91bn boe, which to put it in context, is equivalent to roughly one third of Saudi Arabia’s current stated reserves (ZH: this number may be vastly overstated). Most of this resource has become available in the past five years, with few barriers to exploiting the reserves. Production in the US as a result is growing strongly, by more than 1mbpd currently, and we expect this pace of growth to continue over the coming three years as capital continues to be drawn in to these developments. The consequence is that costs of production and E&P capex/bl should stabilise as the marginal cost of production remains stable. We believe that shale oil has become effectively the marginal source of supply, providing the bulk of non- OPEC production growth. This is also the key driver of our oil price view: we continue to expect Brent oil to stay at c.US$100/bl for the coming few years.

For once, Goldman is spot on (even if their Brent price target may be a bit off): with shale oil profitable only above its virtually horizontal cost curve, it means that a whopping 11,000 kbls/day are available as long as Brent is above $85, a clear "red line" for all OPEC producers.

The red line is conveniently shown on the chart below:


Furthermore, in the following chart, it is clear how lower rates of Fed-sponsored cheap-funding have enabled more and more mal-invested wells to drill chasing 'only-increasing' shale oil... if rates rise (high-yield credit spreads broke 400bps today - the highest in 13 months) then the breakevens become even more expensive and that cost curve even more compromising to the marginal producer.


However, should the price drop below $85, and very bad things start to happen, not the least of which is what we warned about in May that "Shale Boom Goes Bust As Costs Soar." That was when Brent was $110. It is now at $85 and sliding lower.

As a further reminder, we noted two days ago that shale is now in a bear market:


But that is nothing compared to the no bid market the (very, very levered) shale companies will find themselves in if and when, for whatever reason, Brent drops below $85 to a price where only Qatar is profitable on the global Brent cost curve.

So while we understand if Saudi Arabia is employing a dumping strategy to punish the Kremlin as per the "deal" with Obama's White House, very soon there will be a very vocal, very insolvent and very domestic shale community demanding answers from the Obama administration, as once again the "costs" meant to punish Russia end up crippling the only truly viable industry under the current presidency.

As a reminder, the last time Obama threatened Russia with "costs", he sent Europe into a triple-dip recession.

It would truly be the crowning achievement of Obama's career if, amazingly, he manages to bankrupt the US shale "miracle" next.

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knukles's picture

He said he wanted energy prices to go up.
So what better way to do it than bankrupt everybody.

The guy's doing exactly what he said he was gonna

Clue : Cloward Piven

ZH Snob's picture

EROI be damned!  We can make it even worse with a little manipulation.

post turtle saver's picture

if the reserves aren't actually there, no big loss shutting down wasted effort

if the reserves are there, they'll be there when the price that makes them worth getting out of the ground shows back up again

I fail to see the problem here

junction's picture

The American West is filled with ghost towns that were once mining boom towns in the late 19th century.  If the Bakken shale oil deposits become uneconomical to extract through fracking, that should wreck the state of North Dakota.  A ghost state.  It will be fun to watch North Dakota self destruct as the quick buck drillers leave North Dakota with plenty of Superfund sites.

walküre's picture

EPA steps in and ... where's the problem? /sarc

Good luck liquidating a Superfund site or finding investors to step in. When EPA rolls in it's game over.

Dakota Kid's picture

Plans are being worked out to build a $4 Billion plant to convert ethane into polyethylene in North Dakota. It will only create about 500 jobs. I'm originally from Bismarck and they are building housing units like there's no tomorrow. I doubt it will become a ghost state due to all of the agriculture.  However, if the price of crude drops much more and stays low, I  believe real estate prices there will take a major hit. People will be leaving in droves because it's too cold in the winter for most people to tolerate, especially if you don't have a job and aren't from there.


CASTBOUND's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do...


mkkby's picture

That's disgusting!  Poor donkeys

Manthong's picture

..but there might be a lot of happy countryside residents in the U.K.

Spungo's picture

Obama should destroy Russia by trying to help it.

emersonreturn's picture

brilliant spungo.  obola is in the position of the old soviet regime, and NK presently, that is afraid that if there is a greater interchange with the other side, the populace will observe the difference, and it will not be altogether favourable for hitlary, jeb or obola.  

crazyroadlizard's picture

I remember when they said NG needed $8 to break even - it later went below $2.

post turtle saver's picture

oddly enough, NG reserves were still developed under those market conditions... funny that

Flakmeister's picture

Becuase the associated liquids were paying the freight...

netpounder's picture

Shale Boom shakalaka.

limacon's picture

When faith fails .

"A fierce price-war between Clathrate and Fracking energy production will drive the Petroleum price down to the $36-$72 per barrel range much sooner than previously estimated ."





syntaxterror's picture

If you like your high oil prices, you can keep your high oil prices.

SandiaMan's picture

They don't care what it takes to mine an ounce of silver or gold.

Beam Me Up Scotty's picture

Well, if diesel goes back to $2 a gallon, maybe silver can be mined for $10 an ounce again.  Or $5 like Methman always said.  Wonder what ever happened to him?  They will pencil whip gold and silver down if nothing else, until all the miners are standing in line at the food shelf.

MsCreant's picture

During war, there will be some casualties.

Bangalore Equity Trader's picture

Listen Zero's.

Don't get caught on the short side of this bear trap!

flyonmywall's picture

Why is this so hard to figure out?

Obama gets two birds with one stone by persuading the Saudis to open the spigots and lower oil prices. He stresses the Russian budget, and destroys the financing for shale companies, thus shutting down fracking, while making his leftist enviro-wackos happy.

Then it's off to tee time.

Win-win-win for the Obamanator.

kaiserhoff's picture

Obama/Kerry couldn't sell beer at the ball park.

sylviasays's picture

"Obama gets two birds with one stone by persuading the Saudis to open the spigots and lower oil prices. He stresses the Russian budget, and destroys the financing for shale companies, thus shutting down fracking, while making his leftist enviro-wackos happy. Then it's off to tee time. Win-win-win for the Obamanator."

He also destroys the one segment of the economy that has been producing well paying jobs. Direct employment in the oil and gas industry rose 40% from 2007 through 2013, as compared to a decline of about 3% in the overall U.S. economy.


Beam Me Up Scotty's picture

Moar people to cling to the government tit then!  Thats the way progressives like Obama think.  The moar people that are dependent on them, the moar votes they get!

flyonmywall's picture

I'm not saying I agree with what he's doing.

I think at this point, the "system" has been fucked with so much, and pulled and manipulated in so many ways, that I think it's close to going totally haywire.

The only thing needed is a catalyst, like Ebola, or some stray significant mass casualty, or the fall of half of Baghdad, for everything to either freeze up (liquidity, etc) or go totally ballistic (think knee jerk military reactions by non-US actors).

And then, watch the fireworks fly. With some Ebola icing on the cake thrown in. Better get you and yours ready, it's gonna be a doozy (totally off the cuff remark, I don't know any specifics and do not have inside knowledge of anything. Just my intuition of what is going on).

Quinvarius's picture

Oil could not even rise on WW3 and total carnage in the ME.  That was a pretty good tell on the future.  

Theta_Burn's picture

Unless they are plunging the price on purpose to cushion an out of left field shock...

The Israelis have been very quiet...

Beam Me Up Scotty's picture

Well, if 4 or 5 billion people die in a few months because of WW3, peak oil will get pushed out a long way into the future won't it.  Maybe thats why its dropping like a rock.

q99x2's picture

People have to band together to stop Goldman Sachs from digging up the earth, creating earthquakes and poisoning the water, all in a Koyaanisqatsi fasion just to make a buck with FRAUD. They are killing people by way of a crime.

css1971's picture

It's easy. Install solar panels and buy an electric vehicle.

Volkodav's picture

so us your math on that....

Jack Burton's picture

I said this in some posts earlier. What about Canadian Tar Sands. Fuck, Canada staked the near future of it's western provinces on the jobs and revenues that Tar Sands would bring in for the next 50 years. These kind of oil prices will nuke the Tar Sands Mines and Refiners.

emersonreturn's picture

well, JB, fort mcmurray was going to take a hit, if it's true ebola likes cold temps, a lot of the workers are imports from the african coast.   i agree it's not great news for the oil sands or the small companies, they have been hit several times over the last few decades by 'govt', the same regan hit to take out russia, and then the income trusts...the oil will stay where it is until it is needed.  and unless we come up with something other than oil and lng the play will return.  i wish them luck.  it's always sad to see a stupid law wipe out a company or an entire sector and a couple provinces and a state or two.

cornflakesdisease's picture

There goes their real estate market and $600,000 for piece of crap $50,000 farm house up there.

Volkodav's picture

Oil sands is higher expense energy, but way longer production that frack quick fade.


F0ster's picture

is it possible that the Saudi's are f'ing with the US?

Barnaby's picture

If they are, thank you Saudis! These fracking shitheads come to my beautiful valley, rape the soil and crap on the bitches.

XqWretch's picture

they crap on your bitches? thats rough

Karlus's picture

Look, I happen to like crappin on bitches. I pay alot of money to do so.

Bangalore Equity Trader's picture

Listen F0ster.

It's an idea I've kicked around quite often, ever since the USSA started depending more on internal production.

Anyhow. Today I tried to pick the scabs that I enjoyed chewing on yesterday but to my surprise I couldn't even get 1 scab. I guess it takes 2 to 3 days for them to regenerate so I can harvest a little me-jerky.

Pazuzu's picture

Thanks for killing my appetite. You should offer a service to help people with vivid imaginations lose weight. You could call it 'ScabScarfers'.

If only I could unread what I just read...

Babaloo's picture

Wait!  So now lower oil and gasoline prices are a bad thing?  And here I thought all along that millions of Americans paying less at the pump was a good thing.


Thanks Tyler for educating me...

MsCreant's picture

Manipulation sucks. Free markets should be free markets. 

Tyler Durden's picture

Yes, it was precisely our intention that your conclusion from this post is that low prices are a bad thing. Well done.

new game's picture

either way, it would be nice if the price discovery was by market forces of greed(supply) and demand(slowing economy), with spoils and despair sorted out by winners and losers(marketplace). how can anybody laud a lower manipulated price?

RaceToTheBottom's picture

Exactamundo, you cannot just like the system when it is in your favor