Paisie: Note to US E&Ps—Brace for OPEC+ Impact

The roller coaster ride that is the oil market continues.

Last month, we put forward the view that the price of Brent crude would stay above $60/bbl and would move back toward $70/bbl as we progress through the second quarter.

Additionally, we stated that from an upside perspective, a favorable resolution of the tariffs would push the price of Brent crude to $75/bbl and the price of WTI to $70/bbl—and from a downside perspective, a spiraling trade war could lead to the price of Brent crude breaking below $50/bbl with it becoming more difficult for members of OPEC+ to maintain cooperation—while noting that the probability of this downside was substantially less the 50%.

These views were written in the immediate aftermath of two surprises: the announcement of major tariff increases by the Trump administration coupled with members of OPEC+ agreeing to unwind their supply cuts to a greater extent in May than previously expected (411,000 bbl/d vs. 135,000 bbl/d), and when the price of Brent crude had fallen from around $75/bbl to below $65/bbl in in less than a week.

At mid-May, the price of Brent crudes stands at $66.59/bbl, and has stayed above $60, though it reached $60.23/bbl on May 5.

Oil prices have been provided a boost by the advancement of trade deals, first with the U.K. and then with China. The positive news about the trade deals has helped to alleviate concerns about the supply/demand fundamentals for the time being.

The concerns, however, remain valid. At the last OPEC+ meeting on May 3, members agreed to increase supply by 411,000 bbl/d in June after increasing supply by a similar amount in May. OPEC+ is also indicating that a similar supply increase will take place in July—and will continue in August, September and October—unless the chronic overproducers (including Kazakhstan, Iraq and Russia) not only comply with previously agreed quotas but also reduce supply further to account for early oversupply.

If OPEC+ moves forward with this accelerated plan, the unwinding of the voluntary cuts of 2.2 MMbbl/d will be completed in November of this year, instead of September 2026, which was agreed to last December. Even if the tariff issue goes away, demand will not be sufficient to soak up this level of additional supply. Therefore, for oil prices not to move significantly downward, some supply will have to be removed.

Financial struggles

Even before the latest downturn in oil prices, there were signs of financial pressures on Saudi Aramco, with its net income for the first quarter decreasing by nearly 5% from the same period in 2024. In response to the falloff in net income, Saudi Aramco announced that its quarterly dividend would be cut by $10 billion.

The financial struggles of Saudi Aramco directly impact the kingdom of Saudi Arabia, with oil revenue representing more than 60% of government revenue in 2024. Regardless, it seems that Saudi Arabia is intent on increasing supply to put pressure on other producers, including U.S. shale producers.

Stratas Advisors’ upstream team recently completed a breakeven analysis of U.S. shale oil producers operating in the major oil plays of the Permian Basin, Eagle Ford Shale, Bakken Shale and Denver-Julesburg (D-J) Basin. The breakeven analysis was done for the following tiers: operating breakeven, debt service breakeven, capex-sustaining breakeven and dividend-sustaining breakeven.

The analysis highlights the Permian’s competitive advantage, with the next-to-lowest operating breakeven of $42.90/bbl, the lowest capex-sustaining breakeven of $68.17/bbl, and the lowest dividend-sustaining breakeven of $75.80/bbl.

In contrast, higher-cost basins such as the Bakken and D-J present more fragile financial structures. The Bakken’s capex-sustaining breakeven of $83.88/bbl and dividend-sustaining breakeven of $92.74/bbl indicate that most operators are currently unable to maintain drilling and dividend distributions without relying on debt or cash from higher-margin assets.

Similarly, the D-J, while lower-cost than the Bakken—still struggles with a dividend-sustaining breakeven of $80.58/bbl.

The $60/bbl red line

The key takeaway, however, is that all the shale plays, on average, require a WTI price much higher than $60/bbl to support capital expenditures and much higher than $70/bbl to maintain current dividend distributions. Consequently, low oil prices will likely lead to reduced rig activity, delayed completions and a pullback in oil production.

It is possible that Saudi Arabia and OPEC+ will moderate their supply increases if demand growth continues to lag, which will provide a reprieve for U.S. shale oil producers. The other possibility is that the Trump administration will be effective in reducing Iranian oil exports, which are running more than 1.5 MMbbl/d in similar fashion to the first Trump administration, when Iran’s oil exports declined from 1.85 MMbbl/d to around 500,000 bbl/d.

The U.S. Treasury Department recently imposed sanctions on a network of companies that it says help Iran ship oil to China, which has emerged as the largest buyer of Iranian oil. The effectiveness of these sanctions is in doubt, however, since China does not recognize unilateral sanctions imposed by the U.S. Additionally, the movement and sale of the Iranian oil to China is done without the involvement of western shipping companies or the U.S. dollar.