A new report by UK-based analyst firm Douglas-Westwood said investors should expect more short term price volatility as the global crude market adjusts to increased U.S. shale production.
The report, titled “U.S. Shale – Gearing up for a price recovery,” found that the United States has replaced OPEC as the industry’s most important swing producer thanks to the shale boom.
The “unprecedented” introduction of new supply volumes from the U.S. will likely contribute to more short term price volatility as the market adjusts, the report said.
“Whilst the oil industry has always been intrinsically cyclical, the control dials are now in the hands of a new market player….Whilst DW believes that prices must recover in the long-term to support required activity, the market is still calibrating,” Douglas-Westwood said.
The report also found that dropping well completion rates may mean that U.S. production will slow down “sooner than expected.”
Douglas-Westwood expects U.S. upstreams to drill 30 percent fewer wells in 2015 and drop expenditures by 36 percent from last year.
Reduced U.S. drilling activity along with a growing number of wells that are either waiting on completion or are drilled but uncompleted could curb production enough to bolster prices.
The report warned that the preponderance of smaller players in the shale sector could make it difficult to coordinate the type of “swing response” needed to stabilize prices.
“Forecasting prices is more difficult than ever, but continued short-term volatility seems very likely as the market struggles to find balance,” the report said.
Crude prices have fallen by about 50 percent since June as global supply growth continues to outpace demand.
Last month U.S crude stores hit an 80 year high of 448.9 billion barrels excluding the Strategic Petroleum Reserve, thanks in part to the nearly 1 million extra barrels per day the U.S. has been adding to stores through production and importing.
The U.S. rig count fell for the seventeenth straight week last Thursday after drillers shed another 20 rigs despite adding rigs in three states.
The newest count suggests that the U.S. rig decline may be picking up steam again after seeing the smallest drop in four months during the week of March 31.