“Your theory is crazy, but not crazy enough to be true”, as quantum physicist Niels Bohr said. The fall in oil prices has spawned numerous theories, some crazier than others, about how US shale oil will react and what, if anything, Opec should do in response.
One school of thought is that lower prices are already having an effect on shale oil production in the United States, and that production will begin to fall, perhaps by the end of the year.
Evidence includes the bankruptcy of companies such as producer Quicksilver Resources last Tuesday, and the continuing fall in US drilling rig counts, now down 761 from last year’s 1809 rigs.
On what happens beyond this point, opinions diverge. Long-term shale pessimists believe the bubble has now burst. An overleveraged sector will collapse and prices will rise much higher – the oft-foretold oil crisis just deferred by shale, not put off forever.
Others, perhaps more numerous, have their crazy theory. They think this is the dawn of an entirely new era for oil prices: where shale oil production can be turned on or off in a matter of months, depending on prices. Shale oil wells can be drilled and completed quickly, but their production also declines fast, so continuous drilling is necessary to maintain output.
This is quite different from traditional fields, such as in the Middle East or North Sea, which take years to develop but have low operating costs and continue cranking out barrels even when prices collapse.
In this theory, the US has replaced Saudi Arabia as the “swing producer”, able to vary production within months to rebalance the market.
Of course, this is not intentional but the accidental effect of thousands of companies responding individually to the dictates of the market. In this view, the oil market would come to behave more like the US gas market, with prices oscillating on a timescale of a few months, rather than years, around some moderate equilibrium level.
It is hard to say what that equilibrium is – a range of $60 to $80 per barrel might appear reasonable, with oil services companies surveyed by Nomura expecting prices at $75 per barrel by March next year. At that price, global oil demand would rise moderately, shale oil production would grow at a more measured pace, and there would be room for Opec output also to rise.
But this opens proponents to Mr Bohr’s accusation that, “You’re not thinking, you’re just being logical”. Another school of thought, for example Ed Morse’s at Citigroup, suggests that US prices could go as low as $20 per barrel, as storage fills to the brim. The US’s ban on most crude oil exports leads to a growing divergence with international prices. on Friday, the US’s West Texas Intermediate was at $48.87 per barrel, the North Sea’s Brent at $56.41.
Oil service costs have already fallen 20 to 25 per cent, drilling efficiency continues to increase, much basic infrastructure such as pipelines is already built, decline rates have been slowed by new technology, and a backlog of new wells are just waiting for higher prices to be hooked up. Shales that needed $80 per barrel prices last year may now be viable at $60 or less.
Private equity giants such as Blackstone, KKR, Carlyle and Apollo are raising billions of dollars to invest in distressed oil company debt and equity. Companies such as Encana and Noble Energy raised $8 billion of new equity in the first quarter of this year, to fund continued drilling or the acquisition of weaker competitors.
So the world of shale oil may obey one of the principles of quantum physics – the mere act of observing it changes the situation. If companies and investors believe oil prices are going higher, they can raise money to continue drilling – and thereby prolong the price slump.
Robin M. Mills is Head of Consulting at Manaar Energy, and author of The Myth of the Oil Crisis
On the menu
First course
▶ Emirati sea bass tartare Yuzu and labneh mayo, avocado, green herbs, fermented tomato water
▶ The Tale of the Oyster Oyster tartare, Bahraini gum berry pickle
Second course
▶ Local mackerel Sourdough crouton, baharat oil, red radish, zaatar mayo
▶ One Flew Over the Cuckoo’s Nest Quail, smoked freekeh, cinnamon cocoa
Third course
▶ Bahraini bouillabaisse Venus clams, local prawns, fishfarm seabream, farro
▶ Lamb 2 ways Braised lamb, crispy lamb chop, bulgur, physalis
Dessert
▶ Lumi Black lemon ice cream, pistachio, pomegranate
▶ Black chocolate bar Dark chocolate, dates, caramel, camel milk ice cream
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Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
2025 Fifa Club World Cup groups
Group A: Palmeiras, Porto, Al Ahly, Inter Miami.
Group B: Paris Saint-Germain, Atletico Madrid, Botafogo, Seattle.
Group C: Bayern Munich, Auckland City, Boca Juniors, Benfica.
Group D: Flamengo, ES Tunis, Chelsea, (Leon banned).
Group E: River Plate, Urawa, Monterrey, Inter Milan.
Group F: Fluminense, Borussia Dortmund, Ulsan, Mamelodi Sundowns.
Group G: Manchester City, Wydad, Al Ain, Juventus.
Group H: Real Madrid, Al Hilal, Pachuca, Salzburg.
Read more about the coronavirus
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
