The U.S. shale industry is being hit by the crash in oil prices, which have slumped since President Donald Trump’s tariff announcement last week.
Despite the strong relief rally on Wednesday, following President Trump’s 90-day pause of tariff hikes on most countries except China, the U.S. benchmark oil price is now lower than the breakeven for the shale industry to profitably drill a new well.
WTI Crude prices were down nearly 1% at $61.76 per barrel in Asian trading on Thursday. That level is already below the average $65 per barrel price U.S. producers need to profitably drill a new well, as they indicated in the Dallas Fed Energy Survey for the first quarter.
Even though equity markets rallied on Wednesday after the tariff pause, the further increase in tariffs on China – at 125% as of early Thursday – continues to spook the oil market as concerns about the Chinese and U.S. economies haven’t gone away. Slowing economies or recessions would hit global oil demand, keeping oil prices depressed.
Caught in the middle of the recession fears and concerns about oversupply with OPEC+ opening the taps even more in May, the U.S. shale industry fears the times ahead could be similar to the Covid-related crash in oil prices.
Analysts and investment banks have not only downgraded their oil price forecasts, but they have also slashed their demand growth outlooks.
With risks skewed to the downside and heightened uncertainty about global economic and oil demand growth, U.S. shale producers may be priced out of profitable drilling and forced to curtail activity, industry executives say.
“This reminds me exactly of Covid,” Kirk Edwards, president of Odessa, Texas-based Latigo Petroleum, told the Financial Times.
In early 2020, the market and U.S. producers were hit by the demand crash and the price war between Saudi Arabia and Russia.
“We are facing a double whammy again,” Edwards told FT.
By Tsvetana Paraskova for Oilprice.com