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American Shale-Oil Producers Are On A Roll

The Economist

Surprisingly, they have not yet roiled the oil markets

JUST over a year ago Harold Hamm, billionaire boss of Continental Resources, one of the biggest shale-oil producers in America, issued a stern warning to his fellow frackers. Drill with restraint or we will “kill the market”, he said. This month the 72-year-old Mr Hamm, son of an Oklahoma cotton sharecropper who went on to become one of the founding fathers of the shale revolution, had a different message. Restraint is working.

The price of West Texas Intermediate (WTI), the light, “sweet” (or low-sulphur) crude that is a benchmark for American producers, rose to $71 a barrel on May 9th, its highest level since November 2014. OPEC, which Mr Hamm once called a “toothless tiger”, is successfully leading efforts to balance the market. Oil prices are partly rallying because President Donald Trump this week pulled America out of the nuclear deal with Iran and said he would reimpose sanctions on a big oil producer. Meanwhile a free fall in Venezuelan production may be further exacerbated by the move of ConocoPhillips, a large American producer, to freeze some Caribbean assets of PDVSA, Venezuela’s state oil company, as part of a long-running legal dispute.

But arguably the most remarkable development is that the rise in the oil price has not yet unleashed a flood of new shale-oil supply, as many market experts had predicted (and Mr Hamm had feared). The reasons for this are threefold: pressure from shareholders more interested in a steady stream of dividends than a gush of oil; production bottlenecks in pipelines and ports in America; and the fast depletion of shale wells after bountiful beginnings.

The question, as producers begin to savour higher profits and investors’ appetite for them increases, is whether the restraint will endure.

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