Cheap Crude Tests U.S. Shale’s Breaking Point

U.S. shale drilling is slowing down due to lower oil prices and uncertainties over costs related to tariffs. The decline in oil prices below $65 per barrel has resulted in a reduction in rig count. However, concerns about a significant collapse may be overstated. Producers are cutting back on spending, and drilling activity could remain subdued in the latter half of the year unless tariff issues are resolved.

The slowdown in drilling in the U.S. shale region is a response to weakening oil prices and cost uncertainties arising from the tariff dispute. Smaller producers are halting new drilling operations in anticipation of a turnaround. It is possible that larger producers may follow suit. The key question now is how long it will take for this anticipated turnaround to materialize.

A month ago, Citigroup had warned that if U.S. oil prices fell below $60, drilling activity would decrease, as typically observed during oil price declines. The bank’s analysts indicated that at $65 per barrel of West Texas Intermediate, shale producers might shut down 25 rigs, essentially halting production growth. Below $60 per barrel of WTI, Citigroup predicted a decline in rigs by as many as 75, leading to a reversal in production growth. Currently, WTI is trading below $65 per barrel, and the rig count is also down compared to the previous year, reflecting the price trends. Despite a slight increase in rigs on a weekly basis, the industry may not yet be fully preparing for the impact of the price decline.

As forecasters adjust their expectations for U.S. oil production, there is a revised estimate from the Energy Information Administration, forecasting a daily production growth of 300,000 barrels this year, down by 100,000 bpd from its earlier projection. The EIA attributed this revision to lower demand growth due to uncertainties related to the tariff actions initiated by Trump. Similarly, the International Energy Agency projected reduced U.S. production growth in crude oil, citing the lowest oil demand growth in five years, once again pointing to tariffs as a key factor.

Despite the challenges posed by tariffs and other bearish factors, there are reasons for cautious optimism. The impact of tariffs on economic growth prospects is a major concern, but the potential for new trade deals to eliminate tariff risks suggests that fears of weak oil demand may be exaggerated. Lower prices could stimulate demand, particularly for essential commodities like crude oil. President Trump’s policies aimed at promoting growth in the energy industry may help offset some of the challenges posed by international trade developments.

In the current price environment, drillers are cutting spending as expected. Major oilfield services provider Baker Hughes anticipates that the decline in spending and drilling activity could continue into the second half of the year unless there is a resolution to the tariff situation by June. Ultimately, the industry may see a tightening of supply over time that could push prices higher. Despite the short-term fluctuations in forecasts based on price swings, the long-term cycles of the industry remain constant.