OPEC Challenges Bakken Shale Drillers

Bakken Stock Declines |Click to Enlarge
Bakken Stock Declines |Click to Enlarge

In a decision that caused energy stocks to plunge on Friday, OPEC announced last week that it will not decrease production in order to curb the falling price of crude.

Viewed by many as a sort of Thanksgiving Day game of ‘chicken’, this effort is meant to drive oil prices down further in order to force U.S. shale drillers to fold in the face of falling profits. This announcement comes as the boom in shale production has produced a growing worldwide oil surplus, thus changing the global energy landscape and status quo. Some are making dire predictions about what this may mean for U.S. interests, including one Russian oil tycoon who announced to Bloomberg that he predicts a huge crash in the industry that will necessarily weed out the weaker players.

Whether this tactic by OPEC will be effective remains to be seen. In October, Continental Resources CEO, Harold Hamm, announced that prices would have to fall another 20% before Continental would cut back significantly. That precise scenario happened Friday as crude hit its lowest rate since 2010 and energy stock plummeted. Other Bakken interests similarly affected include Apache (- 11%), Marathon (-11%), EOG (- 8%) and ExxonMobil (-4.2%).

Read more: Continental Resource’s Harold Hamm on Falling Oil Prices

Read more: IHS: U.S. Shale Production Growth Will Slow, but Still Remain High

While these numbers are alarming, the IEA estimates that most production in the Bakken play are profitable at or below $42 per barrel, (which is significantly lower than the ~$70 per barrel price we see today).  It is our opinion that this $42 number is certainly shy of a threshold number on which to continue investing significant capital.