The US shale industry has failed to crack as expected. North Sea oil drillers and high-cost producers off the coast of Africa are in dire straits, but America's "flexi-frackers" remain largely unruffled.
One starts to glimpse the extraordinary possibility that the US oil industry could be the last one standing in a long and bitter price war for global market share, or may at least emerge as an energy superpower with greater political staying-power than Opec.
It is 10 months since the global crude market buckled, turning into a full-blown rout in November when Saudi Arabia abandoned its role as the oil world's "Federal Reserve" and opted instead to drive out competitors.
If the purpose was to choke the US "tight oil" industry before it becomes an existential threat - and to choke solar power in the process - it risks going badly awry, though perhaps they had no choice. "There was a strong expectation that the US system would crash. It hasn't," said Atul Arya, from IHS.
"The freight train of North American tight oil has just kept on coming. This is a classic price discovery exercise," said Rex Tillerson, head of Exxon Mobil, the big brother of the Western oil industry.
Mr Tillerson said shale producers are more agile than critics expected, which means that the price war will go on. "This is going to last for a while," he said, warning that any rallies are likely to prove false dawns.
The US "rig count" - suddenly the most-watched indicator in global energy - has fallen from 1,608 in October to 747 last week. Yet output has to continued to rise, stabilizing only over the past five weeks.
There is no doubt that US fracking is a very adaptable business and the combination of technology and experience is making the industry much more efficient. Nevertheless, today’s higher production will wane at current prices, as the yield from shale formations inevitably declines rapidly, necessitating additional drilling slightly further along the shale formation. Companies will be less willing to continue drilling with WTI crude in the $50s region, especially as their hedged prices at higher levels begin to expire in 2016. Additionally, plenty of oil industry workers have been laid off this year and it will take a little longer to get them back if the price of oil does rise.
Can the price of crude rise? Absolutely, despite increased production from most large suppliers in recent months. Offshore operations in deep waters are currently uncompetitive, as are some of the less efficient producers. They are producing less oil. Moreover, I would not be surprised to see some evidence in the second half of this year that the global economy is actually picking up, helped by accommodative monetary policies, lower oil prices, improving employment and gradually returning confidence.
I have been saying for several weeks that prices of Brent and WTI oil were in the early stages of base formation development. The only question was the likely duration of ranging near the lower levels of the patterns shown above. That is difficult to answer but Brent probably has the potential to reach the $80 region later this year, with WTI moving to the $70s. That would help oil producers to maintain dividends and it could encourage some addition production.Back to top