Shale gas revolution – Shot in the foot

20140915_Oil_FoNo doubt US identified huge Shale gas reserves, which in itself was a revolution. But, they missed in recognising the law of supply and demand!

The problem started when Shale drillers spent money faster than they have made it. Shale industry has been a big swing factor in supply of oil, with output rising from 0.5% of the global total in 2008 to around 4% in 2015. Analysts estimate $65-$75 is the break-even price for Shale producers and internationally crude oil price was hovering around $100. It was obvious that any producer wants to supply more at higher price, hence this sensational growth in supply.

Lucrative margins promoted many mid size oil rig companies, but global economic slowdown kept the oil demand low. As a result of this over supply, oil prices corrected more than 40% leaving most of the Shale producers under stress. Since 2009, Shale producers have floated more than $260 billion debt backed by oil wells. As per Bloomberg, more than 10% of revenue for 27 of 62 drillers is devoted for interest payment.

Like a perfect storm, now comes the OPEC assault, OPEC says it will not reduce the output to restore the oil prices, meaning it wants the Shale producers to shut their shops which would help OPEC nations to regain the lost market share

While Shale producers are finding a way to be cost efficient; OPEC continues its conscious price war on US Shale. Where two are fighting, the third wins. In this case the winner was emerging markets, especially us, as oil price is going to stay low for a while.

 

AUTHOR: Pavan Kumar Kopparam , Associate Principal – Research & TopValue

 

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