With WTI prices flirting with $20/barrel or even lower, many U.S. tight oil producers are considering shut-ins. Which types of producers are at the greatest risk of shut-ins, and why? While COVID-19 is injecting uncertainty into the market, we believe that many U.S. and international producers are at very high risk of facing shut-ins. World oil supply appears to exceed demand by 20-30 million barrels a day, and world storage levels are quickly nearing capacity. The recent OPEC+ supply cut will reduce but not relieve pressure on storage. Physical and ultimately financial criteria will lead many producers to involuntarily shut-in their wells, barring an unlikely balancing of supply and demand. The next few weeks and months could be very, very ugly.

Financial shut-ins: onshore and offshore

Shut-in prices vary from region and by project. Some operators manage their wells more effectively, and some producers simply have better rock to work with. The Federal Reserve Bank of Dallas collects operator breakevens and shut-in prices. It then reports the anonymized data and categorizes it by basin. The most recent reported shut-in prices are displayed below:

A few features in this graph are notable. First, the simple average displayed above isn’t weighted by production – so the variance within each basin is significant; the Dallas Federal Reserve Bank doesn’t provide the volume-weighted breakeven price. Second, the Permian basin is thought to be most efficient area in the country. Still, several producers claim they cannot cover operating expenses at a WTI price of $50 per barrel. Other producers, scattered in different basins, also claim they cannot produce at prices below $50 per barrel. These producers will be hammered if low prices are sustained. Finally, notice the range on the “Other U.S. (Non-shale)” – at least one producer claims they can operate at prices close to $5 per barrel! What kind of producer can continue to operate single-digit prices?

We think some offshore producers, specifically located in the Gulf of Mexico (GoM), could continue to produce even in an ultra-low price environment. Offshore projects are massive, complex, and expensive projects that often require billions of dollars of investment before a barrel of oil is ever produced. Nevertheless, their post-construction operating expenses are often quite low: we’ve heard that GoM shut-in breakevens generally range from about $15-20. Project breakevens on the newest offshore brownfield projects can fall below $30/barrel. Obviously, shut-in breakevens on the newest offshore projects will be very, very low – potentially close to $5/barrel.  

An unprecedented storage build-out

The most recent EIA data show declining refinery runs and sharply steeper inventory builds in the U.S. According to the EIA, U.S. refinery runs have not been this low since the late September 2008 – the weeks of the beginning of the Great Financial Crisis.