The United States’ Oil Power Could Be Nearing Its Optimum

Sun Feb 18 2024
Ramesh Sridharan (922 articles)
The United States’ Oil Power Could Be Nearing Its Optimum

Suppressing oil-price rises during the previous two years, a U.S. shale boom is already showing signs of diminishing.

Official government data shows that after a 1 million barrel/day increase in 2023, crude oil production is projected to rise by only 170,000 barrels/day in 2024. This is the lowest yearly growth rate seen since 2016, excluding the impact of the epidemic.

In spite of OPEC’s output cuts and worldwide unrest, particularly in the Middle East, a flood of fresh U.S. petroleum has helped bring oil prices down. Following Russia’s invasion of Ukraine, which sent prices rising to over $120 a barrel in early 2022, private producers drove the gains by commandeering rigs.

It is now anticipated that growth would decelerate significantly. Producers laid down rigs last year as a result of falling oil prices. Larger companies seeking expansion opportunities in the United States eventually bought up many of the operators who had been drilling carelessly. Instead of focusing on digging new wells, those large public businesses have prioritized returning cash to shareholders.

Paul Horsnell, head of commodities research at Standard Chartered Bank, stated, “The ease in growth has gone, unless somebody comes up with a very dramatic new technical innovation.”

The oil production prediction for the United States was reduced by Morgan Stanley analysts last week, who instead projected a range for Brent crude of $80 to $85 per barrel, up from $75 to $80.

This happened just one day after Diamondback Energy announced its intention to acquire privately held Endeavor Energy and prioritize cost control.

In the past few years, private enterprises like Endeavor have acted as the country’s swing producers, increasing output when prices are high and decreasing it when prices are low. S&P Global Commodity Insights reports that from 2019 to 2023, ten private producers, including Endeavor, contributed 50% of the increase in output from the Permian Basin.

Since the epidemic, almost all of the increase in the country’s oil production has come from the Permian Basin, which is located in southeastern New Mexico and west Texas. At an estimated 12.9 million barrels per day last year, the United States surpassed all other countries in oil production.

On the other hand, oil-field services provider Baker Hughes reports that the number of active oil rigs in the United States has decreased by around 20% from the end of 2022 to 500.

The steep fall in output at the beginning of a shale well’s lifecycle, along with the large number of wells drilled recently, suggests a significant slowdown in growth, according to Horsnell of Standard Chartered.

According to analytics firm Enverus, public firms also purchased 39 private exploration and production companies in 2023. Among these are four of the major ten that helped the Permian recover from the epidemic.

The country’s stock of untapped wells has been diminished due to the dealmaking mania. Companies in the market for a sale would often frack wells that have already been drilled in order to increase production and make themselves seem better to potential purchasers. For instance, prior to Chevron’s announcement of its acquisition of Hess in October, energy research firm Energy Aspects found that Hess had significantly increased fracking in the Bakken region of North Dakota.

Larger companies, meanwhile, need to focus on incorporating their acquisitions. According to Michael Oestmann, CEO of the Permian-based private operator Tall City Exploration, they also have a tendency to zero in on the greatest opportunities of the merging companies.

What Oestmann meant was that the buyer “gets it” and is now starting to prioritize.

Nonetheless, there are many who think the American oil sector might shock everyone once more. Macquarie energy strategist Walt Chancellor predicts a 660,000 barrels per day increase in output for December compared to the same month in 2023, on the basis that drilling efficiencies improve with fewer rigs in the field. It was his opinion that both the existing private enterprises and any new ones could increase output.

Chancellor mentioned that one of the important things to keep an eye on in 2024 is the re-emergence of these individuals.

Fracking company Liberty Energy CEO Chris Wright remarked that even big public businesses will find a way to increase output if prices are high enough and last long enough.

“The U.S. capacity to grow oil production, that’s not gone,” Wright said, adding, “but people are not going to change plans for short-term blips.”

Ramesh Sridharan

Ramesh Sridharan

Ramesh Sridharan is our Stock Market Correspondent covering events and daily movements of stock markets in Asia. He is based in Mumbai