John Kemp is a Reuters market analyst. The views expressed are his own
By John Kemp
LONDON, June 15 (Reuters) - Some U.S. shale producers claim they can produce oil profitably with prices well below $50 per barrel or even $45 per barrel; the oil market is likely to put those claims to the test.
Shale firms have hired an extra 425 rigs to drill for oil since the end of May 2016, more than doubling the active rig count, oilfield services company Baker Hughes says.
Producers have continued adding rigs even though benchmark oil prices have fallen almost $10 per barrel since the middle of February and are now almost $4 below year ago levels.
Rigs have been added at rates comparable to the height of the shale boom between 2012 and 2014 ensuring output will continue growing significantly through the rest of 2017 and into 2018.
The U.S. Energy Information Administration forecasts onshore production from the Lower 48 states will grow by 340,000 barrels per day (bpd) in 2017 and another 500,000 bpd in 2018.
As a result, U.S. shale producers together with other non-OPEC suppliers are expected to capture all of the increase in global oil demand in 2018 and raise their share of the market significantly at the expense of OPEC.
Shale producers and OPEC are now on a collision course, with OPEC curbing production to try to raise prices and shale drillers adding rigs to boost output.
The contradiction will likely be resolved through a drop in oil prices to rein in shale growth.
Oil prices have already declined significantly to curb the drilling boom and put output on a more sustainable trajectory.
Past experience shows changes in the U.S. oil rig count typically lag 15-20 weeks behind changes in WTI oil prices (http://tmsnrt.rs/2svJfUd).
The decline in WTI prices since February should cause the rig count to level out or even start to fall sometime between the middle of June and the end of July (http://tmsnrt.rs/2s4kBZ8).
If the rig count starts to level off or fall in the next few weeks, it could offer some support to beleaguered oil prices.
However, if the rig count continues rising relentlessly, fears about overproduction will grow, and prices are likely to come under even more pressure.
Many shale producers hedged a large proportion of their planned production in 2017 at prices above $50 per barrel which has given them some protection from the recent downturn.
Shale firms have benefited from the plentiful availability of fresh capital from private equity investors taking an optimistic long-term view of the prospects for both prices and output.
But only a small proportion of output has been hedged for 2018, which will leave shale producers progressively more exposed to low prices as existing hedges mature.
The calendar strip of monthly WTI futures prices for 2018 is trading just below $47 per barrel ensuring any new hedges for 2018 executed now will be well below $50.
The calendar strip for 2018 has fallen by more than $9 from its recent high over $57 per barrel at the start of the year and has fallen to its lowest level for more than a year (http://tmsnrt.rs/2s4ut5m).
The low level of forward prices is likely to discourage hedging -- unless shale producers really are profitable at much lower prices, or fear prices will slide even further.
Eventually the reduction of both spot and forward prices should curb the drilling boom, which will in turn provide a floor for oil prices.
But until the boom shows real signs of moderating, oil prices are likely to remain under pressure.
(Edited by David Evans)
Senior Market Analyst