The US Shale Industry Hoax

That didn’t take long.

Oil futures were up 3% on Friday night on the back of two different reports. One was a note that Exxon Mobil Corporation [NYSE:XOM] had shut down a unit at the second largest refinery plant in the US. The other was the latest Baker Hughes Rig Count, which tracks the number of operating oil rigs. The active rig count fell by five for the week, making it the largest drop since January this year.

The back-to-back weekly falls bring down the active rig count in the US to 763.

But Friday’s oil futures gains didn’t last very long. Come Monday, frustrated oil traders were jumping out of the market, with the Brent crude price falling 2.01% overnight. West Texas Intermediate prices remained relatively stable, gaining 0.11%.

Last week’s data adds to the story that everything is rosy in the US shale industry.

In fact, there’s plenty of evidence coming from the mainstream to suggest that the US oil industry is setting itself up for higher prices.

Phil Flynn, a senior market analyst at The Price Futures Group says massive spending cuts on exploration are holding the industry back from expanding. Flynn adds that the discovery of new oil fields has ‘plunged’ to its lowest point since 1947. And, according to Flynn, it’s not because oil discoveries are a high point; it’s because of a massive amount of underinvestment in the industry.

Backing this up is Wood Mackenzie, an energy consultancy. In 2015, Wood Mackenzie expected global energy exploration and production capital expenditures to fall by US$740 billion (AU$932 billion) per year until 2020. They’ve recently come out and bumped that figure up to US$1 trillion (AU$1.26 trillion) per year.

There’s been plenty of talk about OPEC’s (Organization of the Petroleum Exporting Countries) attempts to support the oil price. For the past two years, OPEC has tried to convince its 14 member countries to agree on a production level that would support the oil price.

It hasn’t worked.

The majority of oil-producing nations have continued doing what they’re doing, pumping out oil. Initially, Saudi Arabia was accused of trying to bankrupt US shale producers by pushing the oil price as low as possible.

But, as Citigroup pointed out in a new report, that doesn’t matter. The US shale industry learned to adapt to low prices. Rather than flounder, US crude producers adapted to the low prices and continued to pump out as much oil as they could.

Whether the US shale industry has ‘adapted’ to the low prices is up for debate. The industry is virtually broke. Oilprice.com recently declared that the shale industry has been losing as much as US$20 billion per year since 2008. Suggesting that the industry has never been profitable.

A Number of Bankruptcies

The substantial number of bankruptcies coming out of the shale industry tells a similar story. From the start of 2015 through to October 2016, 213 oil and gas companies filed for Chapter 11 bankruptcy in the US, which is akin to being placed in administration in Australia.

Perhaps the one thing that kept the US shale industry alive all this time has more to do with generous bankruptcy laws in the US than a solid industry.

The Financial Times wrote in May: ‘Of the 10 largest US exploration and production companies to have gone into Chapter 11, eight have emerged and are still operating, having shed billions of dollars of debt.

Nonetheless, that which is driving the price of US crude higher — good news coming out of the US shale industry — might not matter in the next six months.

What if US shale — the very commodity that was supposed to make the US energy independent — is nothing more than a hoax? And what if drillers have in fact been pumping away drilling at the ‘low hanging fruit’?

My colleague Greg Canavan, editor of Crisis & Opportunity, certainly thinks that’s the case. Writing to his readers recently, he noted that the US shale industry is nothing more than an illusion:

From the research I’ve conducted, it appears that US oil independence is a complete mirage. And the power of the US tight oil industry — to keep oil prices — low is fleeting, to say the least.

Low oil prices over the past few years mean the producers have targeted the sweet spots in the fields to access the cheapest oil. This process still has some way to run.

I don’t expect the oil market to change immediately, or even anytime this year. But by 2018, I think the market’s view on oil, and the power of the US tight oil producers, will have shifted markedly.

Based on Greg’s extensive research, the short-term price movements in oil may not matter. The entire US shale industry may be nothing more than a house of cards.

Greg says it may only be a matter of months before the problems in the US shale industry start to crop up.

However, there’s an upside here.

Problems in the US shale industry will mean one thing: oil stocks are likely going to move higher, and quickly. You’ll want to get on board with this trend. Details here.

Kind regards,

Shae Russell,
Editor, Markets & Money


Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.


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