Tough talk or a cry for help?

Saudi oil minister Ali Naimi’s message to the horde of energy executives and journalists gathered in Houston this week is being portrayed by some as a dose of cold, hard reality from the world’s largest crude producer.

High-cost producers “must find a way to lower their costs, borrow cash or liquidate”, Naimi said during his speech at the annual IHS CeraWeek gathering. “It sounds harsh, but it is the most efficient way to rebalance markets.”

Yet something seems amiss to an audience of US oil producers when the de facto leader of an organisation designed to distort open oil markets lectures them about market efficiency, especially now that those US producers are allowed by their government to freely export crude. Perhaps his speech was less tough love for his fellow petroleum producers and more of a plea for them to give up, go away, throw in the towel and let Opec maintain its standing.

For the most part, US producers have been slow to oblige over the past year. But, finally, US crude production is finally starting to drop. By some estimates up to one-third of oil and gas producers — or even half of them — may go bankrupt in the coming year, as the outlook for any meaningful price recovery has been put off until 2017 at the earliest.

As if on cue, a litany of woe followed Naimi’s talk early in the week.

Fitch lowered its crude outlook for 2016 yet again, to $35/bl. JP Morgan added another $500mn to its reserve for bad oil and gas loans. Chesapeake Energy announced yet another round of spending cuts and even more asset sales — but maintains it isn’t about to file for bankruptcy. And Mark Papa, the former EOG Resources chief executive-turned-partner at private equity giant Riverstone, said it will be “really, really ugly” in the industry over the next 6-12 months.

“From those ashes, companies that survive, management teams that survive will act in a more mature fashion,” Papa said. “They will be much more balance sheet focused.”

IEA executive director Fatih Birol projected during the conference that US shale production will be able to bounce back quickly once prices start to rise, likely within six months of crude prices returning to $50-60/bl. Others, such as Tudor Pickering Holt’s David Pursell, say it will take $85-90/bl to grow shale output again. But the potential rebound is there, ready and waiting.

As Carl Larry, head of business development at consultancy Frost & Sullivan said in a note to investors this week, Opec leaders should know better than to lecture the US oil and gas industry on lower costs. “This is the country that created the Kardashian craze,” Larry said. “We know better than anyone how to make something out of nothing.”

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