As oil prices stabilize around $55 to $60 per barrel, the world is looking at U.S. shale…

Last week, I explained how the Organization of the Petroleum Exporting Countries (OPEC) is playing a global game of “chicken” right now… And its largest producer, Saudi Arabia, is setting up expensive oil projects to fail.

The Saudis are dumping oil into the market today for the same reasons they did it in the 1980s… They want to cling to their market share and continue to control oil prices.

[ad#Google Adsense 336×280-IA]Instead of reducing production to prop up a falling oil price, like it did in 2009, Saudi Arabia chose to let prices fall instead.

U.S. shale producers saw the benchmark West Texas Intermediate (WTI) oil price collapse from $107 per barrel in June 2014 to $43 per barrel in March 2015.

That’s a 60% fall in just nine months.

And while this fall in oil prices is killing off two parts of the shale plays – exploration into new shale and the marginal (less profitable) producers – I believe the Eagle Ford Shale in Texas will continue to be the best oil play in the U.S. and one of the top in the world.

But as I’ll explain in today’s essay, Eagle Ford producers aren’t a buy right now… We still need to be patient…

As you can see in the chart below, the price of oil has recently recovered a bit from its bottom. However, few analysts believe it will recover to its 2014 highs any time soon.

We’re only just now realizing the impact of lower crude-oil prices. In the first quarter of 2015, the average price of WTI was just $49 per barrel. The average price so far in 2015 is just $53 per barrel.

According to a Wall Street Journal article, companies are canceling projects and investments are being revised… Everything fell apart for the U.S. shale-oil-rig market when OPEC didn’t reduce its production…

And that’s evident even in the world’s best shale play – the Eagle Ford Shale.

The Eagle Ford holds about 4.2 billion barrels of oil reserves. It’s the second-largest “tight” oil field in the U.S. (after the Bakken Shale in North Dakota). Tight oil is the term we use for oil produced from shale, the thinly layered rock that requires hydraulic fracturing to produce oil and natural gas.

The problem is that demand for drilling services soared with the oil price. And so did the cost of drilling and completing wells. When the oil price plummeted, companies couldn’t produce the oil economically.

The oil companies quickly adjusted their plans to account for the falling oil prices… They quit spending money.

Drilling rates are down 25% for the best rigs – the newest units adapted specifically for the Eagle Ford. However, the day rates for older and less-specialized rigs are down by 50%, according to industry analysts at Hart Energy. Overall, about 65% of the drilling rigs are idle in the Eagle Ford today.

That means companies are drilling fewer wells.

Companies are saving money in another way… by not completing wells. Well completion is the process that happens after the well is drilled. It includes fracking (cracking the rocks), cleaning out the well bore, and hooking the well up to its pipeline.

Companies are only completing about half the wells they drill in the Eagle Ford today. They cap off the rest to wait for better oil prices. About 1,000 wells are currently uncompleted today. That’s a massive number of wells that are drilled but not producing oil.

That’s a huge cost savings for companies. But it means much less production. And the Eagle Ford trend is mirrored by the other two huge tight oil fields, the Bakken and the Permian Basin.

Due to fewer wells being drilled and many drilled wells remaining uncompleted, I expect to see U.S. oil production flatten or even fall over the next couple of months.

That’s why I’m not ready to buy Eagle Ford producers today… But I’m paying close attention to the sector.

As I said, the Eagle Ford is the best tight oil field in the world. It will be around long after this fall in oil prices is history. And the companies that do well today will make investors rich down the road.

The U.S. shale boom will not end due to low oil prices… And I’ll be patiently waiting to buy Eagle Ford producers in the coming months.

Good investing,

Matt Badiali


Source: Growth Stock Wire