Oil sold off sharply Friday, as U.S. producers again added drilling rigs, but it's those very drillers that could be the reason oil prices may find a bottom around $40, analysts say.
The U.S. shale oil industry has become a swing producer, affecting prices globally, and its output has become a lever as other major producers, like Saudi Arabia and Russia, cut back on production. Analysts say the U.S. industry is expected to continue adding oil to the market this year, but because of low prices, its growth for next year may slow. U.S. oil output last week reached 9.34 million barrels, including growth from U.S. offshore drillers.
Francisco Blanch, head of commodities and derivatives strategy at Bank of America Merrill Lynch, said the shale industry may actually be the force that locks oil prices into a range, with a bottom just above $40 per barrel. Blanch recently cut his forecast for average West Texas Intermediate prices to $47 per barrel for this year and $50 for next year.
"The bottom line is if oil falls below $40 per barrel on average, which is why I don't see a lot of downside, we start to lose shale," Blanch said. "In the context of OPEC not waging a price war, we need prices high enough to encourage some amount of shale drilling."
Blanch said between $40 and $60 a barrel, there is a potential 2 million-barrel-a-day swing in U.S. shale supply. "If prices are $55, we think shale supply grows by 1.1 million barrels a day," he said. For every dollar the price moves, the supply is affected by 100,000 barrels, he said. "Under $45, you're now moving into contraction territory on a forward basis."