U.S. shale “unlikely” to fill gap left by surprise OPEC production cuts
(Bloomberg) — This time, U.S. shale isn’t coming to the rescue.
Even though drillers are flush with cash after record profits last year, U.S. producers are unlikely to accelerate oil growth enough to make up for OPEC+’s surprise cuts, analysts and executives said.
Management teams aren’t showing signs they’ll break a three-year trend of prioritizing dividends and share buybacks over new drilling. And even if they wanted to pump more, a shortage of top-tier well locations, workers and equipment would limit their ability. Taken together, this means U.S. shale is no longer the disruptive force in global oil markets that it was for the decade before Covid-19.
“There’s not a coordinated response that comes out of here,” said Brendan McCracken, Chief Executive Officer of Permian basin producer Ovintiv Inc. “We’re now into several years of players like us running these businesses for returns and free cash flow, and that’s not going to change in the short term or the long term.”
U.S. production growth is less than half of what it was before 2020, with overall output yet to return to pre-pandemic levels. Major forecasters see growth of just 500,000 bpd or so this year from the Permian basin, the country’s fastest-growing shale field, less than half of the more than 1 MMbpd of cuts announced by OPEC+ on Sunday.
“The OPEC cut was only possible because of the inability/unwillingness of the U.S. shale oil sector to grow at the same rate as it was in 2016-2020,” Houston-based trader and billionaire John Arnold said on Twitter. “With much less supply elasticity in the market today, OPEC is less worried about losing market share if it defends higher prices.”
It’s a sharp contrast from much of the last decade, when U.S. shale was a thorn in OPEC’s side, using cheap money to revitalize old and thought-to-be tapped-out oil fields with new fracking technologies. The U.S. oil sector’s spectacular growth added more crude to global markets from 2012 to its 2020 peak than the entire current production of Iraq and Iran combined. That irked the Organization of Petroleum Exporting Countries and its allies, which saw its market dominance threatened like never before.
But that surging U.S. production growth did little for shareholders, who routinely saw executives ratchet up debt as they plowed more money into new wells. The plunge in oil demand during the pandemic sent many smaller drillers into bankruptcy, and those that survived vowed never to repeat the strategy of chasing production growth at any cost.
Last year, when oil prices spiked to more than $100 a bbl after Russia’s invasion of Ukraine, the new discipline was put to the test — and it held. Executives refused to accelerate production plans despite desperate pleas from the Biden administration. They were eventually proved correct, as they made record profits even as prices tumbled in the latter half of the year.
“The U.S. is unlikely to fill in the OPEC gap anytime soon,” said Peter McNally, global head of energy at Third Bridge, a provider of market intelligence. “The stock market has punished those producers who have committed to more aggressive spending plans.”