Downward Pressure Risks A Shutdown Of US Shale

Oil price plunge threatens US shale production amid Opec supply boost

Executives in America’s shale sector say they face their most severe test since the Covid-19 crisis, as a sudden slide in oil prices—prompted by President Donald Trump’s intensifying trade war—pushes parts of the industry close to collapse.

Shale producers warn they may be forced to halt rigs and cut workers if the downturn persists. US crude has dropped by 12 per cent since Trump announced his “liberation day” tariffs last week. Many operators in Texas are now selling oil below their break-even level and fear further damage if Opec’s recent decision to boost output keeps pushing prices down.

North Dakota’s Bakken fields and other mature basins are thought to be especially at risk if low prices continue. The memories of 2020, when Covid-19 demolished demand and sent benchmark US crude below zero, linger over the sector. Kirk Edwards, president of Latigo Petroleum in Odessa, Texas, summed up the mood: “This is exactly like Covid all over again. Back then, we had a wave of bankruptcies, and it looks like we’re heading in that direction if we don’t see a rebound soon.”

The twofold threat back then—a demand collapse and a supply surge from Saudi Arabia—appears to be returning. Saudi officials last week signalled they would raise production more quickly than expected. “We’re facing a double whammy again,” added Edwards. “If the price stays down for a couple of months, the Permian Basin could see devastating effects.” The Permian is America’s top oil-producing region and a vital source of employment and investment.

Tariff war fuels investor panic

Investors have also been rattled by the fallout from Trump’s global trade war. Bill Smead, chief investment officer at Smead Capital Management, which holds shares in several shale drillers, called the situation a “bloody mess” that could choke off fresh capital for oil and gas. “Trump wants crude at $50, but that would halve the number of companies in this industry,” he said. “Stronger outfits would buy up weaker ones—it would be a frenzy of mergers and takeovers.”

The latest oil sell-off has been swift and comes in tandem with big swings in share markets, after Trump opened a broad trade confrontation with key US partners. On Wednesday, he tried to calm the storm by softening some of his harshest tariff plans, which briefly lifted global equities. Oil prices rose too—West Texas Intermediate reached $63 a barrel that day—but they remain well below the highs of this year, leaving many producers in jeopardy.

Analysts point to Trump’s choice to keep tariffs on China, the world’s biggest buyer of crude, as a major concern for future demand. Bill Farren-Price, of the Oxford Institute for Energy Studies, thinks forecasts for oil consumption this year have all “gone in the bin” in light of this shift in trade policy. At below $60 a barrel, many US producers stop making money in older fields, forcing them to mothball drilling rigs and lay off staff.

High break-even costs

Rystad Energy estimates that, once debt and dividends are factored in, many shale operators need about $62 WTI to break even. A price much below that level could trigger fresh bankruptcies, especially if Saudi Arabia and Opec keep flooding the market to undercut rivals.

The decision by Opec to add 400,000 barrels a day of supply was already weighing on crude prices, even before the trade war news shook confidence further. The slump has hammered shares of US shale drillers, which typically face higher costs than traditional oil wells. Occidental Petroleum and Devon Energy both lost more than 12 per cent in share value in the five days after Trump outlined his “reciprocal tariffs.”

Still, the crash is nowhere near as catastrophic as the 2020 collapse, when the US benchmark dipped into negative territory as the pandemic paralysed global demand. That crisis wiped out thousands of jobs and sent many firms into bankruptcy. This time, the sector is in better financial health, having embraced stricter spending rules and reduced debt loads. A new era of “capital discipline,” encouraged by Wall Street, has made producers less vulnerable to sudden price drops—at least in theory.

US production has also rebounded from its 2020 lows, surpassing 13mn barrels per day last year. Yet early forecasts for continued gains have started to fade. Some analysts now reckon the first post-Covid decline in US output could occur this year if prices stay weak, thwarting the Trump administration’s goal of rapidly lifting output to curb petrol prices nationwide. Research from S&P Global Commodity Insights suggests that $50 oil might cut American production by more than 1mn b/d.

Growing criticism of Trump’s energy agenda

Many shale executives cheered Trump’s rise to office, hoping his “America First” stance would keep energy a priority. Yet some have turned sharply critical in light of the recent price crash and the government’s tariff strategy. Kaes Van’t Hof, president of Diamondback Energy, took to social media to challenge US energy secretary Chris Wright: “The only industry that truly built itself here at home, added jobs here, and improved our trade balance, is now being hit by more tariffs. Smart move.”

Van’t Hof did not respond to queries for further comment. But other executives echo his view that new levies on steel will drive drilling costs higher. They note that higher input costs, combined with lower oil prices, pose a grave risk for the US industry. Adrian Carrasco, who runs Premier Energy Services in the Midland-Odessa area of Texas, remains somewhat calm because many producers hedge oil sales for several months. “Still,” he adds, “it’s a worry. Pipe prices have climbed by 25 per cent. If your crude price isn’t going up, you have to make tough adjustments.”

Waiting for a price rebound

For now, the drilling sector is keeping a watchful eye on oil markets. Industry leaders say a short slump may be bearable, but a prolonged dip below $60 would likely curtail drilling, slash jobs, and dent investment across large parts of Texas and North Dakota. Whether Trump’s partial retreat on tariffs can lift prices and prevent more turmoil remains to be seen.

What is plain is that American shale, an engine of global supply growth for much of the past decade, faces growing challenges. A renewed price war between Opec and US producers cannot be ruled out, while shaky trade policies add another layer of doubt about where demand is headed. If the market steadies soon, the sector’s improved financial footing may avert a repeat of 2020’s meltdown. If it does not, the “double whammy” of weaker demand and higher Opec supply might do lasting harm to the US oil heartlands.