Is the U.S. shale industry at a tipping point? Oil prices fell to a six-week low last Friday after the International Energy Agency warned that the U.S. may soon run out of room to store all the oil being pumped out of shale plays across the country. As oil starts to back up, the worry is that prices could fall like a rock. But despite this grave warning, bullish oil traders are keeping their cool. They believe that the low prices will ultimately decimate the U.S. shale industry, removing a large chunk of supply from the market indefinitely, similar to what happened during the last major oil price crash 30 years ago.
But is the shale industry really that vulnerable? Growing production levels in the face of lower prices seems to defy the view that the industry is on the edge of collapse. While oil prices fell nearly 50% from their peak last year in June, production across the seven major shale plays increased by 18% to 5.1 million barrels between June 2014 and February 2015. One reason is that the industry is financially more sophisticated than in the past, giving it greater access to the credit markets. This has allowed producers to remain financially solvent through the downturn and continue pumping despite the weak prices. At the same time, advances in drilling technology and engineering know how has allowed producers to respond quicker to price changes, helping to create both a floor and a ceiling to the oil price.
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