STANDING FIRM: US Energy Industry Well-Positioned to Ward Off OPEC Squeeze Play

OPEC’s recent decision not to curb oil production is widely seen as an attempt to dampen the US shale boom. Last week, the oil cartel announced that, despite rapidly falling oil prices worldwide, it would keep oil production at current levels. OPEC likely hopes that the low oil prices will eventually force U.S. producers—especially those engaged in expensive hydraulic fracturing or horizontal drilling—to throw in the towel. Some commentators speculate that those operators, particularly ones heavily leveraged or already teetering on the edge of bankruptcy, could cut production and jobs, and possibly spark worry in the financial markets.

OPEC has reason to be concerned about the competition. Oil producers in the Western Hemisphere are largely responsible for the supply increase that led to the price drop. According to one recent article, “the U.S. is producing the most crude oil in 30 years, and prices would need to get much worse before the shale boom dies off.” See  http://money.cnn.com/2014/12/02/investing/oil-fight-opec-us-shale-boom/

The larger drilling operators seem well positioned for now. The article cites a recent report by the International Energy Agency that shows that most producers in North Dakota’s Bakken shale formation, an area central to the shale boom, can remain profitable even if oil falls to $42 per barrel. Other industry insiders point to the resiliency of the US energy market. Per Magnus Nysveen of Rystad Energy is quoted as saying “[U.S. Shale producers] will drill as long as they have cash flow from their operations.”

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