“End Game” – America’s Shale Oil Industry Begins to Shut Down
In the end, physics and not government intervention is forcing the end of large amounts of shale oil production across the U.S. With a forced shutdown of the world’s economy (including the U.S. economy) due to the coronavirus pandemic, some 30 million barrels per day of oil the world would have used (out of a previous 100 million bpd) has disappeared. Demand has dried up. Yes, the oil apocalypse is here. Welcome to Hades. Some of our favorite oil superheroes will not make it out alive.
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As the price of oil continues to crash and burn, U.S. shale oil companies are “living a nightmare.” Companies are now laying off employees by the thousands and beginning to shut-in wells. Everyone is holding their collective breath waiting for a tidal wave of bankruptcies, hoping it won’t come, fearing it will. What is it like living inside the oil price crash bubble in Texas? Believe it or not, an article in the well known fake news source New York Times does a pretty good job of describing the hell that America’s shale oil companies are now living through. A quote from one operator: “April is going to be terrible, but May is going to be impossible.” And, “I’m just living a nightmare.” That about sums it up.
Frankly, we’re speechless. Yesterday the price of West Texas Intermediate (WTI) oil for near-term May contracts went from trading at $18.27 per barrel (bbl) to minus $37.63, a drop of $55.90 in a single day. This is the first time in history sellers of oil in the U.S. (more properly the contracts to buy oil) are paying buyers to accept it–because the sellers have no place to store physical oil should they keep the contracts. This is a complete and utter meltdown in the oil market. Trading for May contracts ends today, thank God. The June contract is (so far) showing deals trading at $15.59/bbl. That’s still a disaster, but not as bad as paying someone else to take the oil! What caused this price crash, and where does it go from here?
Although the NYMEX futures price for natural gas zoomed up to $1.92 per thousand cubic feet (Mcf) yesterday, the price for natgas didn’t go up everywhere. As you know, there is no one price for natural gas, although the most quoted price is the Henry Hub benchmark. Yesterday at the Waha trading hub in West Texas (the Permian Basin), the traded price for natgas sunk to a new, historic low: -$7.67/Mcf. It closed the day at -$5.79/Mcf. That is, sellers were paying buyers to take their gas. Why?
We’ve previously brought you various articles, and comments on articles, describing how Marcellus/Utica drillers may benefit from the current crash in global oil prices. How? A number of oil drillers in Texas, Oklahoma, North Dakota and other oil states are not only not drilling new wells right now, but they’re also not completing previously drilled wells and in some cases, they are shutting in existing/flowing wells. All of which means there will be a rapid decline in the amount of “associated gas” being produced in those states. Less associated gas means less supply and less supply means higher prices–for M-U drillers. We spotted an article that does a good job at defining how this will likely play out. How much less associated gas can we expect? What does that mean for natgas prices (when will they go higher)? What if the price of oil is $40/barrel rather than $30/barrel?
Last week MDN highlighted an article from the Pittsburgh Post-Gazette about the low low prices Marcellus/Utica condensate has fetched since the beginning of the year (see 
To say that history (in the world oil market) was made this past week is an understatement. The United States of America, under the direction of Donald J. Trump, threw in its lot with both Saudi Arabia and Russia in order to salvage a deal to cut oil production worldwide by 9.7 million barrels per day. The fact that Trump leaned on/cajoled/pressured the Saudis and Russians is not the historical part. What is history is that the U.S. itself pledged to cut a portion of its production in cooperation with those bad actors–a pledged to cut 300,000 bbl/d, because Mexico wouldn’t. We’ll explain.
We’ve preached “lower for longer” for a long time now–the theory that natural gas prices are low and will remain low for the foreseeable future. Not because we want it to be that way, but because it is that way, and we want you, our beloved MDN readers, to know the truth. We live for the day when we can tell you natgas prices are heading higher. Are we finally beginning to see some hope in that regard? Maybe! We’ve outlined the latest thinking across several recent posts that given the crash in oil prices, less associated natural gas will be produced leading to less supply on the market and (eventually) higher prices for gas. When will that happen? We have some new speculation to share.
If you’ve read MDN for any length of time you know we’ve preached the gospel of “lower for longer”–that natural gas prices will remain low, quite low, for a long period of time. How low? Likely in the $2/Mcf range (or just under, or just over). Gone are the days of $3 and $4 gas–at least for a period of years. Although that may have now changed with the double shock of too much oil and the coronavirus destroying demand, which affects natural gas prices. How? Less oil drilling in American shale means less associated gas produced by oil drilling. Less supply equals higher prices. But let’s not go down that rabbit trail right now. We spotted a couple of articles by analysts who predict the current oil price crash will have a profound and long-term effect not only on the oil industry but also on the petrochemical industry–the downstream recipient and user of oil (and gas).
America is in danger of losing ownership of our shale oil companies to bad actors including Saudi Arabia, Russia and other foreign countries. Those countries are actively, aggressively, purposely waging a price war against us, trying to drive American shale companies into bankruptcy. Why? So they can turn around and buy up our companies and once again control the world market for oil. It is a *hostile* action. President Trump, please don’t let it happen!
Enverus, a leading oil and gas SaaS and data analytics company, has just released its latest FundamentalEdge report called, “
Is your head spinning yet with all the news about the oil price crash and what the U.S. may or may not do to “fix” it? Ours is! Last week President Trump tweeted to the world he had a conversation with his “friend” the Crown Prince of Saudi Arabia and the Prince told Trump the Saudis and Russians are close to announcing a major cut in world oil production (see 
Is relief on the horizon for Marcellus/Utica drillers in the form of higher prices for natural gas? According to several analysts, due to several factors coming later this year and next year (a rebound in the economy, lower natgas production), we will see “significantly higher prices next year” for natgas. How much higher? “We expect an average Henry Hub price of $3.50[/MMBtu] for next year and anticipate gas reaching the $4 threshold in [the fourth quarter of 2021].” Between now and then it’s a game of Survivor…until higher prices get here.
Is this an April Fool’s joke? Bloomberg is reporting comments from Damien Courvalin, Head of Energy Research & Senior Commodity Strategist at Goldman Sachs, saying U.S. shale oil drillers will emerge from the current oil price crash as “a winner.” This is the opposite of every other analyst we’ve read. What does Courvalin see that’s different from everyone else?
President Trump had a phone conversation with Russia’s dictator Vladimir Putin on Monday. The topic? The Saudi-Russian oil price war, which Trump calls “crazy.” The result of the call was to tee up each country’s top energy officials, getting them to discuss ways to prop up the price of oil. Energy Secretary Dan Brouillette will talk with Russian Energy Minister Alexander Novak about “ways the world’s largest producers can address volatility in the global oil markets during this unprecedented period of turmoil.”