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Is $40 the New $70 for Shale Crude Oil Producers?

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US crude oil production 

Yesterday, the EIA (U.S. Energy Information Administration) reported that US crude oil production fell in December 2015 for the third consecutive month. US crude oil production fell by 43,000 bpd (barrels per day) to 9.3 MMbpd (million barrels per day) in December 2015. US crude oil production peaked at 9.7 MMbpd in April 2015 but started to decline due to higher break-even costs and production costs. For more information on US energy companies’ financial woes, read US Oil and Gas Companies’ Debt Exceeds $200 Billion and Crude Oil’s Total Cost of Production Impacts Major Oil Producers.

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US crude oil production estimates 

The EIA estimates that US crude oil production could average 8.7 MMbpd in 2016. This could fall marginally to 8.5 MMbpd in 2017. The International Energy Agency estimates that US crude oil production could slow down by 600,000 bpd (barrels per day) and 200,000 bpd in 2016 and 2017, respectively. OPEC (Organization of the Petroleum Exporting Countries) also estimates that US crude oil production could slow down in 2016 and 2017. The falling crude oil rig count also suggests a slowdown. Read Will the US Crude Oil Rig Count Drop Affect Crude Oil Prices? for more on this.

Impact 

The slowing US production and non-OPEC production would narrow the supply and demand gap and boost crude oil prices marginally in 2016 and even higher in 2017. Higher crude oil prices would benefit US shale crude oil producers like Laredo Petroleum (LPI), Whiting Petroleum (WLL), Ultra Petroleum (UPL), and Stone Energy (SGY). For more on US crude oil production, read US Shale Oil Productivity Impacts the US and Global Oil Market.

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US crude oil production turnaround 

If crude oil prices stabilize above $40 per barrel, US shale crude oil producers like Hess (HES), Whiting Petroleum (WLL), and Continental Resources (CLR) could ramp up production by 2017. Why? The turmoil in the oil market has led to technological advancement, better planning, and resource optimization, thus reducing production and breakeven costs. Many key shale oil producers see $45–$50 per barrel as a more comfortable level for oil production. They could ramp up production if crude oil prices reach this level. However, if US crude oil production doesn’t slow down, we could see crude oil trade at low levels for the next two decades.

ETFs 

The ups and downs in oil prices affect ETFs and ETNs like the ProShares UltraShort Bloomberg Crude Oil ETF (SCO), the First Trust Energy AlphaDEX Fund (FXN), the Vanguard Energy ETF (VDE), and the VelocityShares 3x Long Crude Oil ETN (UWTI).

In the next part of this series, we’ll discuss Saudi Arabia’s crude oil production and its role in the global oil market.

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