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Why shale could help to rebalance oil market

Shale oil could help rebalance global commodity prices as the sector looks to shrug off a tough couple of years, the chief executive of one the industry's leading services companies has told CNBC.

"The market will come back but the big challenge we all have is knowing when that will happen," Keith Cochrane, the chief executive of Weir Group, an engineering company based in Scotland that supplies services to the oil and gas industry, told CNBC on Wednesday.

"The days of $100 a barrel oil have gone for a long, long time but it's back to the simple maths around supply and demand," Cochrane added.

"We have a depleting resource, we have production being reduced, we have demand growing and there needs to be a price in the market to support ongoing investment and the reality is that shale will, be almost that lever that comes into play because it can react quickly, it's relatively inexpensive given the cost reduction and that will cap prices."

He added that shale had "substantially" reduced its cost break-even point so had become more competitive: "Therefore it has a part to play in that rebalancing but exactly when we reach that balancing point, who knows."


Pump jacks in an oil field over the Monterey Shale formation near Lost Hills, Calif.
Getty Images
Pump jacks in an oil field over the Monterey Shale formation near Lost Hills, Calif.

Cochrane's comments come at a time of persistent worry for those working in the oil industry. Prices have fallen from a high of $114 a barrel in June 2014 to currently trade around the low-thirties mark as demand has failed to keep up with a glut in supply.

Many blame that glut on the 12-member producer group OPEC, which decided not to cut production in a bid to maintain its market share in the face of rival non-OPEC producers such as the U.S. shale oil industry. The strategy has so far worked with many shale oil producers closing plants and cancelling projects. The most recent data from Baker Hughes shows that 796 oil rigs have closed since February 2015.

Cochrane believed that U.S. shale oil producers, who have been forced to drastically cut costs, had become more viable businesses going forward. "We've seen further rig count declines in the early part of this year but this is part of the market getting itself into balance and from our perspective we continue to believe U.S. shale is a fixture in the global energy mix."

Hopes dashed

Oil prices saw a brief rebound this week on hopes that a production cut could finally be agreed between OPEC and other non-OPEC producers, such as Russia, but those hopes were dashed on Tuesday when Saudi Arabia's oil minister Ali bin Ibrahim Al-Naimi signaled no cuts would happen to tackle the global supply glut.

Speaking at the CERAWeek conference in Houston, Naimi said cuts were "not going to happen because not many countries are going to deliver even if they say they will cut production — they will not deliver. So there is no sense in wasting our time seeking production cuts."

U.S. oil prices fell as much as 5 percent on Tuesday after the remarks. On Wednesday morning, international benchmark Brent crude futures were down $0.48, or 1.44 percent, at $32.79 a barrel. U.S. crude futures fell $0.76, or 2.38 percent, to $31.12 a barrel.

But Weir Group's Cochrane said Naimi's comments had to be seen in the context of an improving outlook for oil with both OPEC and the International Energy Agency (IEA) both having signaled a slowdown in supply growth and increasing demand, which should help to rebalance markets.

On Wednesday, Weir Group reported revenue of £1.9 billion and a pre-tax profit of £220 million ($308.1 million), down 46 percent from a year earlier. Cochrane said the company was expecting another "challenging" year in terms of profitability but the company was still investing in the business in order to "emerge stronger when markets do recover." Shares of the company were up 6.4 percent on Wednesday.

Correction: An earlier version misstated Weir Group's reported revenue.