- The Institute for Economics and Peace warned on Wednesday the US
shale industry could collapse if oil prices do not recover to pre-pandemic levels. - IEP said
markets were already affected by an over-supply resulting from Russia and Saudi Arabia's price war that began in March. - US oil prices turned negative for the first time in April, but they have rallied since.
- OPEC+ extended production cuts until July this weekend, but IEP says prices must return to prior levels for any change to be achieved.
Oil prices remaining at current levels could spark the shale industry to collapse, a think-tank warned in a report published Wednesday.
The Institute for Economics and Peace (IEP) said in its COVID-19 and Peace Report: "The sharp fall in oil prices will affect political regimes in the Middle East, especially in Saudi Arabia, Iraq and Iran, which may result in the collapse of the
The IEP added that these markets were already affected by an over-supply resulting from Russia and Saudi Arabia's price war, and their failure to agree on long-term production cuts.
OPEC and its allies extended production cuts over the weekend. The international coalition announced in April it would cut production by 9.7 million barrels per day in May and June. Those cuts will now continue until July. The cuts have helped stabilize oil prices somewhat in recent days, but prices remain subdued compared to the levels seen in early 2020.
Low oil prices can be particularly costly for shale producers, who extract oil by fracking, a process by which high pressure water and sand underground is pumped to fracture rock and release oil stored in the earth's crust.
Fracking is generally less costly than drilling, but the break-even point is usually considered to be range between $30-50 a barrel, meaning the oil price war could make it unviable for shale producers to exist.
US banking giant JPMorgan warned in March that the oil price war has risked financial contagion for US shale companies.
JPMorgan said in a note in March: "A reason for Saudi flooding the oil market is to squeeze out US oil production, which has become a major supplier in recent years."
In 2015-2016, it continued, the collapse of oil from $110 to $30 per barrel "did considerable damage" as investors pulled out and many workers were laid off.
West Texas Intermediate, the US benchmark, turned negative for the first time in history on April 20, in part due to lack of demand during the pandemic, and extremely scarce storage space, particularly at a key hub in Cushing, Oklahoma.
Prices have surged since, but many voices in the industry have questioned whether the oil rally will last or not.
On Wednesday, WTI is trading around $38 a barrel, 1% lower and Brent, the international bellwether is just above $45 a barrel, 1% lower.