Shale Oil Will Face Trouble As Oil Prices Fall Below The Magic Threshold

Earlier this week, the price of oil dropped below $50 per barrel for the first time in over a year. The U.S. benchmark, WTI, now hovers just above $45 per barrel. This threatens to be a dangerous situation for the U.S. oil industry going into the new year.

Many experts have touted $50 as a threshold, the minimum the shale industry needs to break even. But in reality, it is more complicated. $50 is an average, and although some wells, in certain areas of the Permian, can break even at prices between $32 and $47 per barrel, other wells, even in the same areas, need as much as $65 to break even. Outside of the Permian region, breakeven prices are even higher.

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Even for those oil producers that need to sell their oil for $50 per barrel, that’s just to break even. No one runs a business just to break even. The purpose of a business is to make a profit, and, on average, most shale oil companies need to sell their oil for more than $50 per barrel to be successful. There is also reason to believe that the break even prices shale oil companies report only take into account well-head costs and do not include the costs that go into running the business.

Aside from large and well established oil majors, the shale industry operates largely on debt and investor capital. When shale oil companies are not making a profit they require new influxes of debt and investment to operate. The big question, of course, is when will Wall Street tire of poor performance? If Wall Street will not wait for a turnaround in prices, it will begin refusing new funds. Shale producers would have to shutter some operations and may be unable to pay bills.  If low prices continue, we could see some producers go under or sell their assets for cheap , similar to the period of consolidation in 2015 and 2016.

As we prepare for 2019, the low oil prices are weighing heavily on shale producers . Thanks to the shale oil industry, the U.S. is now producing and exporting more oil than ever before, but the great ride cannot last unless oil prices rise.