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.
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.