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Oil Should Stay In Triple Digits: Analyst

Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Shale Growth Constrained By Supply Chain Bottlenecks

  • The U.S. shale industry is racing to ramp up production, “but it won’t be quick.”
  • Supply chain bottlenecks are putting a cap on short term output growth.
  • At this rate, the United States will not be able to close the global oil supply gap caused by the ban of Russian oil. 

All those who have hoped that the U.S. shale patch could ramp up oil production quickly to fill the gap that Russian supply is leaving in the Western oil market are in for a disappointment—at least this year.  Supply chain bottlenecks from workforce to frac sand and equipment are holding back a surge in America’s oil production, even as the White House has changed the tune in recent weeks and called on U.S. producers to increase output. Production is indeed growing, but not at a fast enough pace to offset losses of global supply elsewhere. Not even $120 a barrel oil can prompt shale producers to embark on a surge in output. That’s not only because of capital discipline, which investors demand. Constraints in the supply chain are also hindering massive growth in U.S. oil production. 

So, America’s oil production—while growing—will be unable to offset an expected decline in Russian seaborne oil exports amid a “buyers’ strike” to purchase cargoes from Russia after Putin invaded Ukraine. 

U.S. Production Growth Insufficient To Close Supply Gap 

Rising American oil production is one of the options for closing the global supply gap, “but it won’t be quick,” Claudio Galimberti, Senior Vice President of Oil Markets, Head of Americas Research at Rystad Energy, wrote earlier this month. 

“Any material change is unlikely in the country’s current growth profile in 2022, even amid extremely high oil prices. US oil production will come close to its pre-pandemic levels by growing by about 900,000 bpd from December 2021 to December 2022,” Galimberti added. 

The big difference in U.S. production could be in 2023 if oil prices remain well above $100 a barrel. American production could rise then by up to 2 million bpd, far exceeding the pre-pandemic peak of 12.9 million bpd, according to Rystad. 

Related: Unsold Oil Forces Russian Operator To Cap Pipeline Flows

Driven by rising oil prices, crude production in the United States is expected to rise in 2023 to a record-high on an annual-average basis of 13.0 million bpd, the EIA said in its Short-Term Energy Outlook (STEO) for March earlier this month. The current estimate is now raised from the 12.6 million bpd forecast for 2023 in the February outlook.

More recently, Ryan Hassler, senior analyst at Rystad Energy, told the Financial Times, “You can’t just immediately turn on the taps.” 

“It will take some time to reactivate the equipment and staff the crews and bring on the additional sand capacity,” Hassler added.   

Frac sand in the biggest U.S. shale play, the Permian, is in short supply, threatening to slow drilling programs at some producers and sending sand prices skyrocketing. This adds further cost pressure to American oil producers, who are already grappling with cost inflation in equipment and labor shortages.  

The U.S. oil industry cannot boost supply significantly right now, as the U.S. Administration wants. 

 For example, even if ConocoPhillips decided to pump more oil today, the first drop of new oil would come within eight to 12 months, CEO Ryan Lance told CNBC earlier this month. 

Despite its flexibility to respond to soaring oil prices, the U.S. shale patch cannot come to the rescue of the increasingly tightening oil market in the short term, commodity intelligence firm Kpler said earlier this month.

Supply Chain Bottlenecks Hinder Massive Near-Term Growth

“Labor and equipment shortages, along with inflation in oil country tubular goods and shortages of key equipment and materials, will limit growth in our business and U.S. oil production. In particular, truck drivers are in critical shortage, perhaps due to competition from delivery services,” an executive at an exploration and production firm wrote in comments to the quarterly Dallas Fed Energy Survey published last week. Another executive noted: “The largest cost increase over the past 12 months for the oil and gas industry is from tubular steel. The inventory has shrunk and lead times have increased. Steel availability and pricing are also delaying quick activity ramp-up among several operators. This is impairing the ability to bring production online faster.” 

Related: Rationing Looms As Diesel Crisis Goes Global

Yet another comment reads: “Elevated geopolitical risk, persistent supply-chain issues, continued labor shortages, shrinking capital availability and rising inflation have impacted the ability of small upstream producers to undertake projects that they would otherwise be readily engaged in at current commodity price levels.” 

Supply chain issues, continued limited sources of capital and debt, and severe workforce shortages impact growth prospects. 

Several E&P executives also noted the U.S. Administration’s policies toward fossil fuels that hinder growth and weigh on both the short-term and long-term visibility, with one saying, “The regulatory environment is not friendly.” 

“Washington’s immature “finger-pointing” attitude of blaming the oil industry is sickening and tiring. I wish our administration would wake up and start doing some of the right things. We could use some leadership,” another E&P executive said. 

All in all, U.S. production is growing, but not as fast as the share of global oil supply that may come off the market in the coming weeks and months.   

By Tsvetana Paraskova for Oilprice.com

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