As crude-oil futures are descending toward seven-year lows, U.S. shale-oil producers are getting walloped.
West Texas Intermediate crude-oil futures for January delivery
dropped 5.4% to below $38 a barrel Monday and were looking at their worst levels since 2009, after the Organization of the Petroleum Exporting Countries decided last week to keep crude-oil production at its current levels despite a price plunge of more than 60% from the 2014 summer peaks.
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Also read: OPEC squeezing shale producers, but also feels pain of oil rout
Saudi Arabia, OPEC’s largest oil producer and exporter, “is clearly betting on two things: a pickup in 2016 global demand, and the long-awaited impact of production cuts from nonconventional U.S. projects,” said Katrina Lamb, head of investment strategy and research at MV Financial.
‘We believe Saudi Arabia will stay the course, forcing high-priced production out of the market.’
Jay Hatfield, co-founder and president of InfraCap and portfolio manager of its MLP exchange-traded fund
Since the November 2014 OPEC meeting, the Saudis have made their strategy to defend market share regardless of price very clear.
And it is a strategy that appears to be working, according to Jay Hatfield, co-founder and president of InfraCap and portfolio manager of its MLP exchange-traded fund
“We believe Saudi Arabia will stay the course, forcing high-priced production out of the market,” he said in recent comments.
Hatfield said the Saudi’s share of global production has edged up to about 10.5% currently from 10.4% in April 2015, while the U.S.’s share has declined to 9.5% from 10.1% over that period.
On Monday, U.S. monthly government data showed that total domestic shale-oil production is expected to fall by 116,000 barrels a day to 4.861 million barrels a day in January.
“Production is declining in the United States,” Brian Milne, energy editor and product manager at Schneider Electric. “Producers have different breakeven price points, but under $40-a-barrel oil will force some out of the market.”
Winners and losers
Tom Kloza, global head of energy analysis at the Oil Price Information Service, pointed out some other “big losers” from the oil-price plunge.
They include mostly Master Limited Partnerships that invested in upstream oil logistics, such as transportation and other infrastructure, as well as the banks that lent money to high-leverage domestic producers, he said.
“Canada with expensive oil sands’ output, and Venezuela, are two of the biggest losers” and high-cost producers in Northern Africa, Angola, Southeast Asia, and the North Sea are also suffering, said Kloza.
But eventually, oil refiners may become the big winners.
Hatfield expects demand for motor gasoline to grow by 3% in 2016 as consumers “continue to respond to lower retail gasoline prices.”
And with higher demand for the fuel, he’s looking for the U.S. to consume an additional 250,000 barrels of oil a day, which will help to “balance the global oil market.”
Meanwhile, Kloza said refiners are likely to benefit in the spring “when crude is widely available and [refinery] maintenance begins.” Refinery maintenance tends to choke supplies of refined products, such as gasoline.
In the mid-February to mid-May period, he expects retail gasoline prices to climb by 60 cents to 80 cents a gallon from prices possibly in the $1.75 to $1.99 range.