Even with a dramatic more than 50 percent drop in rig count, U.S. oil production remains close to 40-year highs. The industry exceeded 9 million barrels in November, and production has been about 9.3 million barrels a day recently. While U.S. production remains high, Saudi Arabian output has increased to 10.3 million barrels, and Russian output reportedly has remained steady, a bearish formula for prices.
Hundreds of global industry executives, regulators and other officials will convene in Houston this week for the annual IHS CERAWeek Energy Conference. Last year the U.S. shale industry was the youthful upstart at the influential conference, taking the stage as high oil prices fueled unprecedented growth. This year in Houston the industry has faced its first bumps, and the discussion for U.S. oil producers—some profitable, others not—will be how to control costs in an uncertain price environment.
Gheit said low prices are an advantage for some companies and a hardship for others. For instance, a cash-rich major like Exxon Mobil could be well placed to do a major acquisition in a low price environment.
Royal Dutch Shell and BG Group, the two biggest producers of liquefied natural gas, announced this month that they are hooking up in a near-$70 billion deal in a weak LNG pricing environment.
More deals are expected in the oil sector. "The longer oil prices remain low, the more likely more and more companies will throw in the towel. The reason we haven't seen a lot of mergers and acquisitions is, the potential seller is eyeing $100 oil, and the potential buyer is thinking oil prices could get stuck at $50," Gheit said.
Gheit said oil will probably settle in the $70-a-barrel range, and the U.S. unconventional industry will emerge from the collapse in prices as a changed industry.
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"Oil prices will recover, but they are unlikely to go where they were before the collapse. Near term, it's very slushy … but the dust has not settled yet, because the fracking industry is young. It has not gone through a crisis before," Gheit said. He added, "Out of the crisis, it will be more grown up, more efficient, more responsible. Lower oil prices will force more discipline. They need $65 oil to survive, not to make money or break even."