Market Extra: Producers are putting the brakes on the shale boom — here’s what that means for oil prices

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U.S. shale oil, which was viewed as a key reason the U.S. became the world’s top oil producer last year, has seen a slowdown in production growth since late 2018. That may contribute to a rise in crude prices as other major oil producers look to adjust production levels to better balance the market.

U.S. crude-oil production reached a record of 10.96 million barrels a day in 2018, according to the U.S. Energy Information Administration. About 6.5 million barrels a day of crude oil, accounting for 59% of total domestic crude output in 2018, came from shale resources.

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There’s been a “gradual” slowdown from the historical peak in shale oil production growth of about 1.8 million barrels a day year-over-year in the third quarter of 2018, says Teodora Cowie, an analyst at Rystad Energy. Shale production is likely to grow by about one million barrels a day year-over-year for the fourth quarter of this year, she says.

Cowie attributes the slowdown to the “significant expansion in well activity during 2017-2018,” which came at the “cost of a steeper base decline.” So-called young wells produce large amounts of oil in their first few quarters, then see output rapidly decline, she explains.

Also, once oil prices started to drop at the end of 2018, investors pressured public exploration and production companies to adopt more “disciplined” spending and focus on cash flow generation. That led to a decrease in investments and fewer wells drilled, she says.

Rystad Energy expects the sluggish growth pace to last into next year as shale E&P companies feel pressure from investors to limit spending, Cowie says, adding that weak oil prices don’t help. WTI oil futures CLZ19, +3.51%  settled at $56.20 on Friday, down 15% from the year’s peak at $66.30 in April.

The Organization of the Petroleum Exporting Countries will have to take into account the outlook for U.S. shale production as it readies for the next meetings with allied non-OPEC producers, such as Russia, on Dec. 5-6 in Vienna. “OPEC is concerned with overall global inventories, global balances, global prices,” says Shin Kim, head of oil supply and production analytics at S&P Global Platts.

“They want to see the signals that the market is tightening,” she says. So OPEC is “watching the shale story and how that develops.” If “shale growth slows down, that is more bullish for oil prices.”

Other factors are driving oil prices, some of which have been bearish, with macroeconomic sentiment “worrisome,” says Kim. There’s a lot of “overhang on the risk of potential supply that could come back on the market,” from Iran and Venezuela—volumes that aren’t allowed on the market right now because of U.S. sanctions.

However, among the bullish price factors is “the potential for shale to disappoint faster than the industry thinks,” she says. U.S. shale has driven global oil supply growth for several years, Kim says. Nothing else out there that can match U.S. shale’s production growth rate of a million or a million and a half barrels of oil a day, and it’s a “consistent level of growth,” she says.

So “if shale slows down much faster than people think, then that would leave the market searching for other sources of big supply,” says Kim.

Given all that, global benchmark Brent crude prices BRNF20, -0.15%, which settled at $59.62 Thursday, may reach above $65 at year-end, and then retreat from that high through 2020, she says.