Bad news for U.S. oil producers, who are struggling to break even as drilling costs rise. Effectively, U.S. shale producers are making this rod for their own backs, by bringing so much supply online that the market never drains enough to force prices to a point that would deliver the profits they've come to expect.
"There is substantial agreement that U.S. fracking activity has moved too far and too fast, growing U.S. production at an uneconomic pace," wrote Bauer School of Business economist Bill Gilmer last month. "U.S. producers are again chasing equity gains at the expense of long-run profits, just as they did from 2012 to 2014."
Shale producers are acting in this "uneconomic" way, Gilmer explained, because of a combination of easy credit, still-depressed oil servicing costs, and the ability to hedge prices in the futures market. A few of those factors should fade, as low yields make drilling projects less attractive to investors and oilfield service companies start to charge more (especially considering the mounting difficulty of finding workers).
Unless we get a big supply shock or an unexpected economic boom, the price of oil is unlikely to rise much anytime soon.
Source: Houston Chronicle