U.S. Shale Boom Will Sink Oil Prices: J.P. Morgan

Oil’s relentless rally since mid-2016 is at risk of reversal thanks to a booming U.S. shale industry. Recently, analysts at J.P. Morgan attempted quantify that impact in a new forecast.

$50 Oil

Oil prices could be headed for $50 a barrel in the foreseeable future, according to a recent forecast by J.P. Morgan analyst Christian Malek. In an interview with CNBC, Malek said “everything is gravitating” toward that level by the end of next year.

Malek identified a “break-even dual” among global energy players as the main culprit for the decline. This is likely to extend far beyond U.S. companies to include producers in Russia and the oil-rich Middle East. This battle will “drive a vicious cycle for oil prices, with medium-term pricing likely to gravitate to the low-$50s.”

Oil prices finished higher on Thursday to round out another positive quarter. The U.S. West Texas Intermediate (WTI) benchmark for U.S. crude rose 53 cents, or 0.8%, to $64.91 a barrel. For the quarter, the benchmark added more than 7%.

ICE Brent futures climbed 74 cents, or 1.1%, to $70.27 a barrel Thursday. The international benchmark added more than 5% for the quarter.

OPEC’s Growing Conundrum

The U.S. shale industry’s war on OPEC, or the Organization of Petroleum Exporting Countries, reached a tipping point in 2016 after the cartel essentially capitulated to America’s growing influence in the market. Endowed with abundant natural gas supplies, Gulf states have proven no match for innovative U.S. producers, which have managed to lower their break-even point significantly since the last bear market.

At least six U.S. producers have lowered their break-even rates over the past three years. Now, Exxon, Shell, Conoco Phillips, EOG, Chevron, Pioneer and Continental can maintain market share with prices at or below $40 a barrel. By comparison, OPEC’s break-even points are in the mid-$60 range, according to their recent budgets.

If Malek’s forecast is any indication, OPEC may be forced to deepen its production cuts as prices dip below $60 a barrel en route to $50.

The United States pumped more than 10 million barrels per day in November, the highest in nearly 50 years. With the gain, the world’s largest economy also became the world’s second-largest oil producer, surpassing even Saudi Arabia. As the forward curve remains above the cost curve, there’s strong reason to believe output will rise steadily in the coming years.

These market conditions have left OPEC with very little choice but to meet (and even exceed) the production limits agreed to in 2016 and extended last year. Russia has also shown a willingness to work with the Arab-led cartel, but going forward, Moscow will likely pursue its own energy policy. This means agreeing on a range in production rather than hard caps on output.

Saudi Arabia is aggressively pursuing an economic revitalization plan, but troubles finding suitable buyers for its multi-trillion-dollar IPO has already pushed back the timeline of the proposed launch. With funding costs rising, Saudi maturities now must pay about 75 basis points more for 10-year debt than it did just six months ago.

Featured image courtesy of Shutterstock. 


Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi