The prices of energy commodities have tanked considerably today, with WTI crude fell 8.68% to trade at $24.47 and Brent dropped by 4.93% trading at $.27.38 levels a barrel.

A tighter capital frame on shale economics means greater asymmetry to oil prices; significant downside risk was forecasted to volume growth at WTI <$45/bbl as a larger proportion of Permian growth diminishes than in previous oil routs.

With productivity and technology-led efficiency gains slowing, breakeven economics will be key in assessing the second order of volume growth linked to prevailing lower oil prices. Our Shale team have taken a deep dive into the estimated remaining inventory for each major oil basin and for each underlying county, and conclude that the US has about 19 years of inventory remaining at the current drilling pace. Ultimately, their analysis concludes that the Permian Basin, which has the most surface acreage and can handle the highest number of wells/DSU has the largest outstanding inventory.

However, while inventory levels appear sufficient to fuel a growth runway to 2030, when comparing full- cycle breakevens against spot WTI, the majority of basins screen as uncommercial. We believe breakevens range between $45/bbl in the Midland Basin to $55/bbl in the Delaware, suggesting WTI <$45/bbl should have a significant negative impact on future volume growth as returns, and hence spending, diminish. In contrast to previous periods of lower oil and when it was previously <$30/bbl in early 2016, we expect marginal FCF to be prioritized to the shareholder over defending base levels of capex/volumes.

Nevertheless, participating in the prevailing bearish rout we also advocated derivatives trades on WTI crude which comprises of shorts in CME WTI futures of April’2020 deliveries and longs in January’2020 month deliveries on hedging grounds seeing value at the current market pricing. Courtesy: JPM