As oil prices keep tumbling, frackers feel the pain

Oil prices are plummeting toward a threshold below which US oil faces serious economic headwinds. 

On Monday, CNBC released a new oil survey demonstrating that an overwhelming number of experts forecast that oil prices will continue to fall, and will remain so low for the remainder of the year that the cost of extracting shale oil will exceed what producers can get for it on the market. Although some questions remain about what the breakeven point is for producers, experts agree that the range falls somewhere between $30 per barrel, at the absolute lowest, to $65 per barrel.

US oil prices were down 10 cents to $42.40 in midday trading Monday, and Brent crude oil, a global benchmark, dropped 25 cents to $48.94.

Experts say US oil prices will drop to between $30 and $40 per barrel for the remainder of 2015. Meanwhile, a whole 71 percent of respondents to the CNBC survey said the Brent, the leading global price benchmark, would fall to between $40 and $50 per barrel. The impact of this drop could have long-term consequences for drilling companies, but hydraulic fracturing technology, also known as fracking, could help the industry bounce back more quickly, experts say.

“If they don’t reach the break-even point, if prices don’t rebound for them, they are facing bankruptcy, closures, default on loans, bond payments,” says Anthony Gristani, President of the financial consulting company GRZ Energy and one of the experts who responded to the CNBC survey. “And what that means if these companies start closing is that down the road you’ll have a problem getting supply ... When demand does pick up, you’ll see a lag in the supply for that demand, and then you’ll see prices start to rise again.”

For offshore drilling, it can take years and millions of dollars to bring wells back online again once demand picks up. But fracking is a different game, Mr. Gristani says. "For fracking, it takes weeks and just a couple of million dollars to set up a well, so the industry overall will be able to rebound a lot faster than in the past,” he says.

Still, the fracking industry is currently feeling significant effects from the drop in oil prices, especially in regions that saw a recent boom.

“Workers who migrated from far and wide to find work here, chasing new found oil riches, are being laid off, deserting their recreational vehicle parks and going home,” wrote Clifford Krauss for the New York Times, describing the threat low-oil prices pose to the fracking industry in Texas.

The economic impact of record low oil prices are being seen across the country in places like North Dakota, Louisiana, Colorado, Pennsylvania, Arkansas, and Ohio, where frackers had been finding new ways to tap into deep underground reserves despite the protests of environmental activists and concerned citizens who say fracking is poisoning the drinking water and injecting toxic chemicals into the ground.

“People didn’t have to work anymore,” Elliott Skloss, a sign maker for the county road and bridge department in Karnes county Texas, told the Times. “Now they’ll have to work or panhandle if the oil price doesn’t go back up.” 

And although experts say that prices will rebound come the spring, they are still expected to hover below profitability.

“It’s a seasonal thing," Gristani says. "Because we’re out of the summer, refiners have to gear up for the winter and to make winter gasoline and winter heating oil. That means [refiners] will cut back on the amount they’re producing, so ... crude oil supplies will start to build again rather than draw. Once those builds start to happen that’ll be the catalyst that pushes [oil prices] into the 30’s."

Fifty-seven percent of the CNBC survey respondents agreed that an overabundant global supply is currently driving prices down. In July, Oman produced a record breaking one-million barrels per day while the Organization of Petroleum Exporting Countries (OPEC) is filling global stockpiles by producing far above demand. Meanwhile, forecasts of overproduction peaked Monday as Japan announced its economy had slipped into recession over the recent months, signaling a possible end of the successes of “Abenomics” and a drop in demand from the world’s third largest oil consumer.

Now, some analysts suggest that OPEC could soon boost oil output to 33 million barrels a day, three million barrels per day over its usual quota, and one and a half million barrels more than it is currently producing. 

Nevertheless, Gristani says he believes OPEC will be forced to cut production as prices continue to fall.

“If US companies go out of business they only have to answer to shareholders, bond holders, and investors," he says. "Countries that own the oil companies have to answer to an angry citizenry. So it hurts countries like Saudi Arabia, Russia, Venezuela, Iran, a lot more than it hurts the US. And you’re already seeing it.”