Nowhere is this more clearly demonstrated than the enormous drop off in onshore rig counts for the major shale basins, based on data from oil services firm Baker Hughes. As the graph shows below, the number of rigs has cratered by more than three-quarters since the end of 2014, with many unconventional producers already in bankruptcy courts, and others locked out of capital markets and facing an uncertain future.
This has serious implications. The Energy Information Association (EIA) is forecasting for non-OPEC production (predominantly US-based) to decline by 400,000 barrels a day this year and by a further 500,000 barrels in 2017. This is a swift reversal from the 1.5 million barrel increase in 2015, most of which was also attributable to the US. As the rig count appears to still be falling, a further downgrade in shale production could be damaging for future supply.
Shale has a trump card. Between 2013 and 2015, the average wellhead break-even price declined by 40 per cent for the main US plays. Of course, some of this will be down to lower pricing from contractors and oil services companies, and break-even prices of $40 are hardly enticing given current spot prices. But if technological advancements can continue amid an improvement in prices this year, 2016 may not finish as terribly as it has started for shale producers. How quickly any of this happens, will be a key determinant in the volatility of oil prices in the next 12 months.
