Every Monday Douglas-Westwood in London use to present their DW Monday and today it’s it about “US Shale – Gearing Up for a price recovery”. The report describes how the US fracking industry is preparing to be a swing producer. The report by Iva Brkic:
OPEC members (predominately Saudi Arabia) have traditionally been the only countries with the ability to ramp-up production through spare oil supply capacity. Nowadays, however, following the shale revolution, the US onshore market is widely being touted as the industry’s new ‘swing’ producer.
DW expects significantly reduced OFS activity in the US in 2015, with 30% fewer wells drilled, and expenditure down 36% relative to 2014. In the current low price environment, there is a growing trend amongst operators to drill wells, but defer completion. Motivation for these wells – commonly referred to as ‘WOCs’ (waiting on completion) or ‘DUCs’ (drilled but uncompleted) – is multi-faceted, but fundamentally producers are holding out for a commodity price recovery, or an OFS cost reduction (or a combination of both). Whilst sinking capital in uncompleted wells is not a sustainable long-term strategy, the growing backlog of DUCs demonstrates an acknowledgement amongst US shale players of the importance of being ‘first past the post’ upon price recovery. EOG Resources, Apache and Chesapeake Energy are among those that have chosen to widely adopt this strategy.
As the proportion of DUCs grows, the resilience shown by US production may falter sooner than expected. When it does, and the underlying commodity recovers, the extent to which the nascent and fragmented US onshore industry can provide the sort of coordinated ‘swing’ response required to stabilise price, remains to be seen.
Whilst the oil industry has always been intrinsically cyclical, the control dials are now in the hands of a new market player. The rapid introduction of new supply in the volumes seen from the US onshore industry is unprecedented. Whilst DW believes that prices must recover in the long-term to support required activity, the market is still calibrating. Forecasting prices is more difficult than ever, but continued short-term volatility seems very likely as the market struggles to find balance.
Iva Brkic, Douglas-Westwood London
+44 207 397 3338 or Iva.Brkic@douglaswestwood.com
Aleklett's Energy Mix 
Bruce Stephenson
April 6, 2015
This article seems an attempt to put a bright face (swing producer of the future) on the current fracking industry. The swing producer has historically had power and influence. In this case, though, fracking will only be viable when the average price of oil remains above a certain figure. This number seems to be roughly $70 to $120 per barrel, depending on the circumstances of the specific shale play. So it’s really , “Fracking may be the new swing producer for oil, but only when the price of oil is at least X dollars per barrel.”
Notice how this article tacitly implies that Saudi Arabia is no longer the global swing producer. This has been true for some years, but has been obfuscated by Saudi Arabia’s ‘spare capacity’ in the form of especially sour oil. This spare capacity is real, but is not currently sufficient refinery capacity for it. Thus, Saudi Arabia no longer has real ‘swing producer’ status. Interesting how this article obliquely refers to this issue.
Perhaps the fracking indutry will recover from current low oil prices. Perhaps the fracking industry will collapse over the next few years, as debt comes due and oil prices remain low. We shall see.