The shale boom has become a check on the market's long-term volatility
Add Axios as your preferred source to
see more of our stories on Google.
The array of producers in the U.S. oil patch is pretty much the opposite of a cartel, but a new report distills a key reason why companies' individual decisions have together become such a powerful market force.
Driving the news: "The emergence of U.S. shale production seems to be playing a large role in anchoring long-term oil prices," notes the Dallas Fed analysis.
- A big takeaway is that shale now acts as a check on long-term volatility.
- Shale producers "represent strong forces that should keep long-dated futures prices from rising too high or falling too low," per the report.
Why it matters: The trajectory and range of oil prices is important for many reasons, like: consumer costs at the pump, planning decisions for crude oil buyers, and analyses of future energy demand and emissions.
What they did: The report explores the reduction in the price point for drilling profitable new wells in recent years, called breakeven prices, and their link to oil futures' markets.
- It looks at breakevens in the Kansas City Fed and Dallas Fed regions, which together include Texas, Oklahoma, New Mexico and other producing areas.
What they found: Shale and other U.S. production can sand down the market's volatile edges over time, because small price increases spur a lot of new production, even at a modest price. That's because shale wells can be drilled and brought online really fast compared to conventional projects.
- "[S]hale production means there is a much larger amount of supply that can be called into action given a much smaller price increase than in the past," the report notes.
- “There’s a significant number of projects that can be called upon in this $50-$60 [per barrel] range,” economist and co-author Kunal Patel tells me.
By the numbers: The average breakeven price in the Dallas Fed region, which includes the surging Permian Basin, has come down 4% over the past year to $50-per-barrel, although there's lots of variation.
- Costs have been falling for offshore and non-shale onshore wells too.
The big picture: The U.S. is now the world's largest oil producer at over 12 million barrels per day, and the shale boom is a big reason why, with roughly a third of that production coming from the Permian Basin alone.
What's next? Look for U.S. shale to keep influencing the market even as OPEC and Russia collaborate on production levels.
- The International Energy Agency projects that the U.S. will account for the largest share of global production increases over the next 5 years.
