The US oil sector is emerging gingerly from this year’s price crash and may even start increasing output again — so long as an increasingly fractious Opec agrees this week to keep propping up crude prices.
West Texas Intermediate, the US crude benchmark, has risen to $45 a barrel in recent days, buoyed by coronavirus vaccine news and expectations that Opec and its partners will keep curbs on supply deep into 2021.
The rally has raised hopes that America’s worst oil crash in decades is coming to an end. A modest recovery in drilling and well-completion activity is under way.
“Oil at $45 takes you out of the ICU,” said Ian Nieboer, head of research at consultancy Enverus. “But there is still a ways to go before you declare shale healthy again. That’s why Opec is so important.”
Opec and partners including Russia agreed record-breaking supply cuts this year under pressure from US politicians. But at current prices not all cartel members believe such deep supply reductions are still necessary.
Members are also wary of allowing another surge in shale output that could overwhelm the market, as happened after the price crash of 2014-15.
US operators added another 10 rigs across the country last week, according to services company Baker Hughes, marking the fourth straight month of rises. But the total remains 60 per cent beneath the level of a year ago.
After Donald Trump’s proclamation early in his presidency of an era of “American energy dominance” based on rising fossil fuel output and exports, the humbling of the country’s oil sector this year has been stunning.
US production hit a record high near 13m barrels a day in the first quarter, before the pandemic hit global demand and a Saudi-Russian oil price war brought a wave of discounted supply into the market.
The subsequent price crash bankrupted many American producers, while others slashed spending, sacked workers and idled rigs. Output is now around 11m barrels a day, according to the US Energy Information Administration.
Forced into survival mode, many operators curtailed new drilling and have spent recent months instead bringing into production an extensive inventory of wells — the so-called Ducs, or drilled-but-uncompleted wells.
Artem Abramov, head of shale research at consultancy Rystad Energy, said this activity and current drilling was sufficient to staunch production losses. But he added that $45 oil — if it lasted — would support modest increases next year, as operators raised the number of rigs in the coming months.
Even so, no one expects a return to the bumper growth phase of before, when crude oil output more than doubled between 2008 and 2019 — helped by a US oil price that averaged $74 a barrel.
Scott Sheffield, head of Pioneer Natural Resources, told the Financial Times recently that output would grow at best by 2 per cent a year in the next decade, but could also fall if US president-elect Joe Biden moved to limit new drilling.
Wall Street financed shale’s supercharged growth years. But capital markets have now largely closed to an industry that failed to generate profits even as it yielded geostrategic gains for the US by reducing its dependence on foreign oil imports.
Some analysts believe a more robust sector is now emerging from the crash, as costs fall and management teams promise to prioritise free cash flow and shareholder returns above production growth.
Matt Portillo, analyst at investment bank Tudor, Pickering, Holt & Company, estimates that most producers could now generate dividends and hold output flat at an oil price of $35-40 a barrel, down about $10 in the past year.
If prices keep rising in line in market expectations, “this is going to be an extremely healthy industry”, he said.
But much still depends on Opec, which has the power to bring the oil it is withholding back to the market. Another move to open the taps — as the cartel did in March — would send prices hurtling lower, snuffing out the US oil sector’s tentative recovery.
“Opec’s spare production capacity means they hold all the cards” said Mr Nieboer. “Shale’s fate sits in their hands.”
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