U.S. Shale oil producers are not benefiting as they would expect from high crude oil prices due to pipeline bottlenecks and price hedging.
"Many of these slate companies spend more than themselves or nearby." said Matt Badiali, senior research analyst at Banyan Hill.
"These companies are not exposed to higher prices because many of them have hedged their oil production at $ 50 a barrel," he said – far below the $ 62.88 he set for the first quarter of this year.  Opinion: Two ways to play oil supplies while limiting risk
Prices have risen ever since. On the New York Mercantile Exchange, US benchmark West Texas Intermediate crude for June delivery
CLM8, + 0.10%
hit $ 71.49 a barrel on Wednesday, the highest since November 2014. Futures prices have risen nearly 19% since the beginning of the year.
Read Opinion: These US shale oil companies are poised to benefit as prices rise
But this price hike puts companies at a disadvantage against the potential of falling oil prices.
WPX Energy Inc.
WPX, + 1.83%
for example, reported an adjusted net loss of $ 30 million for the first quarter, driven by net losses of $ 69 million related to the hedges.
Profit per Bar
19659012] Determining the break-even cost per barrel for shale oil producers is a bit difficult, though experts agree that they are lower than current futures prices.
Jerry Bailey, President of Petroteq Energy Inc., said oil costs Slate production for most companies is between $ 30 and $ 50 a barrel. "If WTI is $ 70 and sales are close to that number, there is still a healthy profit margin."
However, shale oil production costs per barrel may depend on a number of factors.
No two holes in the ground are the same. Breakeven costs can vary widely with slate producers. "
"No two holes in the bottom are the same," said Denton Cinquegrana, senior oil analyst at the Oil Price Information Service. "The break-even costs can vary greatly with the slate producers."
He pointed out that one of the biggest problems lately has been "take-away capacity".
"The growth in production has exceeded the pipeline capacity of Gulf Coast refineries or Corpus Christi export terminals," said Cinquegrana. "As a result, the price you see on screen is not nearly on price based on local transactions."
In recent weeks, WTI crude oil in Midland, Texas, which is part of the Permian basin, "WTI futures prices were around $ 10-13 a barrel, and prices are barely $ 60," says he. This is one of the reasons why the market is breaking the WTI Brent spread "lately". Brent is currently trading more than $ 8 higher than WTI – the biggest spread in three years.
Read: For this reason, US oil is traded since 2015 with the largest discount to the global crude benchmark
Badiali said that oil from Permian Basin after production in 3½ years is the steepest Discount on US prices sold there, the record rose to about 3.2 million barrels a day.
"That means that even big operators are not yet aware of the benefits of higher prices, which will change as these companies leave or improve their hedges," he says.
Rising Investment Costs and Inflation
U.S. Slate producers have also increased their investment as oil prices have risen, said James Williams, energy economist at WTRG Economics.
Drilling at Bakken, covering parts of Montana and North Dakota and parts of Canada, has increased 28% year-on-year, and the Perm, covering parts of West Texas and Southeast New Mexico, has 31 %, to Williams.
For the year 2017, shale oil production in the US was estimated at 4.67 million barrels per day. This corresponds to about half of total domestic crude oil production, according to a monthly short-term energy outlook by the Energy Information Administration.
Regardless, in May, a monthly EIA report on drilling activity estimated oil production from seven large US shale deposits at 7.034 million barrels a day. It is expected to climb to a record 7.178 million barrels a day in June.
Shale oil producers "do not generate enough money to finance all their investment in new drilling," said the rest of investors and credit, Williams said. "But the money will flow over time after you spend the money for drilling the well."
Inflation is another important factor. When oil prices fell in 2014 and 2015, both employee and drilling costs fell sharply. However, this trend has reversed as the market has worsened significantly and high cost inflation returns, "said Matthew Parry, director of long-term energy issues
He estimates that the US shale oil industry is" likely to outpace most of these rising costs and would not be at all surprised if their cost inflation tests 20% in 2018. "That would" pull back. "A lot of the revenue that would otherwise have been earned at today's WTI price level of $ 70."
Time for pent-up demand
That is, slate producers can increase production quite quickly.
Cinquegrana estimates this will take about seven months to bring slate production online, while deep-sea Gulf of Mexico production may take seven years.
"Suffice it to say that onshore production can rise as well," he said. Shale oil producers may have time to catch up.
Bailey expects WTI to endure the $ 70 mark "in the wake of the Middle East's breakout" over the summer, and may see a rise of several dollars.
Saudi Arabia is likely to "fill up" most of Iran's production decline, he said after the US retreat from the nuclear deal with Tehran, adding that the Saudis will be satisfied with the $ 70 price range and thus the price level likely to be maintained in the coming months.
But Badiali has higher price expectations. He expects that lower production in Venezuela will further tighten the market, and "sanctions against Iran and problems in the Middle East will exacerbate the fear and increase the volatility of the oil price."
The average WTI oil price is expected to rise. with spikes over bad news that could send the price over $ 100 over the next 12 to 18 months, "said Badiali.