Will Shale Keep Booming At Low Oil Prices?

Friday June 23, 2016

In the latest edition of the Numbers Report, we'll take a look at some of the most interesting figures put out this week in the energy sector. Each week we'll dig into some data and provide a bit of explanation on what drives the numbers.

Let's take a look.

1. U.S. shale breakevens could be tested

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- Oil prices plunged this week to their lowest levels since the third quarter of 2016.
- Oil prices are deep into bear market territory, approaching $40 per barrel. That will put the shale industry to the test.
- Many shale companies have dramatically reduced their breakeven prices, but some weaker, smaller companies operating in less-than-optimal areas could face pressure.
- A survey from the Dallas Fed says the average breakeven prices for the major shale basins range from the mid-$20s to the upper-$30s.
- However, that is just an average. Outside of the sweet spots, companies could fall below water.

2. Bakken activity up sharply

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- The rebound in drilling over the past year has provided a jolt in economic activity to North Dakota, as seen by the Federal Reserve data above.
- The rig count in the Bakken has more than doubled from a year ago, and production has climbed over 1 million barrels per day.
- Some Bakken companies are even struggling to find enough workers as they step up drilling plans.
- However, this data does not capture the recent plunge in oil prices. It remains to be seen if the surge in drilling activity will come to a halt.
- For example, Whiting Petroleum (NYSE: WLL), the Bakken's largest producer, saw its share price plummet by over 9 percent on Thursday amid fears that the indebted company will come under financial strain as oil prices drop.
- In February, Whiting announced that it would nearly double its 2017 spending plans as it hoped to ramp up production, but it will face severe pressure if oil prices fall further.

3. Floating storage on the rise

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- Data from Paris-based tracking company Kpler SAS finds that oil stored on tankers at sea has climbed to its highest level so far this year at 111.9 million barrels.
- The increase in floating storage is an extremely bad sign for oil prices. Floating storage is typically the most expensive form of storage, meaning that it is the last to fill up.
- The futures market is in a state of contango, allowing traders to turn a profit by storing oil now and selling it later.
- Ultimately, floating storage will only dissipate as the oil market starts to heal. But the recent uptick suggests that the supply problems are far from over.

4. Prices too low for producer hedging

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- Oil prices have dropped too low for shale producers to lock in their production with hedges.
- Hedging activity from producers has declined, according to the Brent 12-month put skew, which "tends to rise when producers of oil are locking in their supply and fall when consumers, including shippers and airlines, hedge their output," according to Bloomberg.
- The put skew is at its lowest level since late 2015.
- Prices are so low that instead of oil companies being the ones locking in hedges, it is major consumers.
- Airlines and shipping companies are actively taking advantage of the dip in crude prices to lock in cheap fuel.

5. U.S. Refiners running at record levels

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- U.S. refineries are operating at record high levels. Refinery runs averaged 17.7 million barrels per day for the week ending on May 26, a record high.
- Since 1990, refinery runs have surpassed 17 mb/d on a weekly basis only 24 times.
- All of those instances have occurred since July 2015.
- All of that gasoline and diesel produced can either be stored, consumed domestically, or exported.
- All three of those end uses have been higher than average over the past year.

6. Gasoline demand weak, with some surprising causes

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- Retail gasoline sales look weak in the U.S., with demand falling every month so far in 2017, year-on-year.
- Prices at the pump are higher than they were last year, which might be cutting into demand.
- But Barclays offers an unexpected explanation: an immigrant crackdown under the Trump administration is deterring immigrant communities from driving at all for fear of traffic stops and deportation.
- Barclay's researchers say that West Coast gasoline demand is down by as much as 0.8 percent because of lower demand in immigrant communities. There are an estimated 2.35 million immigrants in California and 1.65 million in Texas, for example.
- Immigrant arrests are up, deportations are up, and border crossings in the southwest are down by an estimated 47 percent so far this year.
- Other analysts are skeptical of the link between fuel demand and immigration policy. They point to gasoline prices being 44 cents per gallon higher this year than in 2016.

7. Falling oil prices hit Russian rouble

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- Oil prices dropped to ten-month lows on Wednesday, levels that could start putting pressure on the finances of not just oil companies but oil-producing countries.
- The Russian rouble dropped to its weakest level in over four months, trading at 60 roubles to the U.S. dollar.
- The rouble has gradually strengthened over the past year and a half, after coming under severe pressure in early 2016. Not coincidentally, that was when oil prices dropped below $30 per barrel, which pushed the rouble into highly volatile territory.
- Falling oil prices will hurt government finances, and a weaker currency will put a strain on Russian consumers.
- The weaker rouble is not all bad for Russia, however. It allows Russian oil companies to sell crude at higher prices relative to their costs (selling in USD while costs are in roubles).

That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.