May 23, 2019

The shale boom has become a check on the market's long-term volatility

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.

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Reproduced from Federal Reserve Bank of Dallas; Chart: Axios Visuals

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.

Go deeper: A closer look at the oil boom's climate effect

Go deeper

World coronavirus updates

Data: The Center for Systems Science and Engineering at Johns Hopkins; Map: Axios Visuals

Japan's economy minister outlined plans on Monday to end the nationwide state of emergency as the number of new novel coronavirus cases continues to decline to less than 50 a day, per Bloomberg. Japan has reported 16,550 cases and 820 deaths.

By the numbers: Over 5.4 million people have tested positive for the virus as of Monday, and more than 2.1 million have recovered. The U.S. has reported the most cases in the world (over 1.6 million from 13.7 million tests). The U.K. is reporting over 36,800 deaths from the coronavirus — the most fatalities outside the U.S.

Coronavirus dashboard

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  1. Global: Total confirmed cases as of midnight ET: 5,401,701 — Total deaths: 345,060 — Total recoveries — 2,149,407Map.
  2. U.S.: Total confirmed cases as of midnight ET: 1,643,238 — Total deaths: 97,720 — Total recoveries: 366,736 — Total tested: 14,163,195Map.
  3. World: White House announces travel restrictions on Brazil, coronavirus hotspot in Southern Hemisphere Over 100 coronavirus cases in Germany tied to single day of church services — Boris Johnson backs top aide amid reports that he broke U.K. lockdown while exhibiting symptoms.
  4. Public health: Officials are urging Americans to wear masks headed into Memorial Day weekend Report finds "little evidence" coronavirus under control in most statesHurricanes, wildfires, the flu could strain COVID-19 response
  5. Economy: White House economic adviser Kevin Hassett says it's possible the unemployment rate could still be in double digits by November's election — Public employees brace for layoffs.
  6. Federal government: Trump attacks a Columbia University study that suggests earlier lockdown could have saved 36,000 American lives.
  7. What should I do? Hydroxychloroquine questions answeredTraveling, asthma, dishes, disinfectants and being contagiousMasks, lending books and self-isolatingExercise, laundry, what counts as soap — Pets, moving and personal healthAnswers about the virus from Axios expertsWhat to know about social distancingHow to minimize your risk.
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Updated 52 mins ago - Politics & Policy

U.S. coronavirus updates

Data: The Center for Systems Science and Engineering at Johns Hopkins; Map: Andrew Witherspoon/Axios. This graphic includes "probable deaths" that New York City began reporting on April 14.

President Trump doubled down on his push to reopen schools, tweeting late Sunday: "Schools in our country should be opened ASAP."

Zoom in: Trump pushed back on NIAD Director Anthony Fauci cautioning against the move earlier this month, calling his concerns "not an acceptable answer."