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U.S. Shale Oil Production Growth Is Slowing Down

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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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U.S. Shale Growth Stalls As Oil Prices Fall

  • Growth in output in the U.S. shale patch next month is set to be the slowest in six months.
  • The last time business activity in the Permian stalled this much was in 2020.
  • Pioneer Natural Resources: shale firms have seen their margins squeezed over the past year. 
Permian rig

Softer oil and natural gas prices and rising costs are squeezing the profit margins in the U.S. shale patch, where the business activity growth stalled in the second quarter of the year. 

While the Energy Information Administration (EIA) continues to expect record production from the shale plays, growth in output next month is set to be the slowest in six months. With oil and gas prices currently lower than at this time last year, drilling activity is slowing down and could further slow amid uncertainties about the economy and the Administration's policies toward the industry.     

U.S. shale producers are no longer the world's swing producers as they are not boosting drilling activity too much, even when oil prices surge. Companies are now focused on returning more cash to shareholders and see profitability squeezed between lower commodity prices and higher costs, and higher interest rates for access to capital. 

Zero Growth In Business Activity 

The business activity index in Texas, New Mexico, and Louisiana – home to the biggest shale plays, including the Permian – fell to zero in the second quarter of 2023, down from 2.1 in the first quarter, according to executives of 152 energy firms who responded to the quarterly Dallas Fed Energy Survey. The business activity index is the survey's broadest measure of conditions facing Eleventh District energy firms, and it showed zero growth.  

The last time business activity in the Permian stalled this much was in 2020, when U.S. producers – and all other oil producers in the world – reduced output amid plunging demand with the lockdowns during the pandemic. 

This time, U.S. producers are holding back on drilling as costs continue to increase, although at a slower pace, while oil prices dropped from last year and from earlier this year and benchmark U.S. natural gas prices tumble.  Related: Heat Wave Pushes ERCOT To The Brink

The shale companies are also conscious of shareholder demands to boost returns to investors and reduce debt before reinvesting profits into new drilling. The Biden Administration's attitude to the industry isn't helping, either. In comments to the Dallas Fed Energy Survey, executives continue to slam the U.S. Administration for its "war" on the industry. 

In the survey, exploration and production (E&P) and oilfield services firms reported rising costs for the 10th consecutive quarter. The cost increases slowed but remained above the series averages. Larger firms generally expect their drilling and completion costs to be lower at year-end 2023 than year-end 2022, but smaller firms see their drilling and completion costs at year-end to be above where those costs were at year-end 2022.

Barely Breaking Even 

The U.S. benchmark, WTI Crude, was trading at $69 a barrel on Tuesday, suggesting that the average producer would turn a profit, but a small one, considering the cost inflation in the shale patch over the past year. 

"It seems as if the breakeven price for oil is in the mid-$70-per-barrel range at this point," an executive at an E&P firm said in comments to the survey. 

"I would drill if costs were not so high." 

The executive also noted that "Margins have been squeezed to the point that it is hard to commit to new projects, and all of the uncertain economic projections give no confidence as to what is going to happen going forward."

Earlier this month, the largest pure-play U.S. shale producer, Pioneer Natural Resources, noted that the shale firms have seen their margins squeezed over the past year. 

Higher labor and material costs are slowing U.S. shale production growth, Pioneer's Executive Vice President Beth McDonald said, noting that oil would likely trade in the $70-$100 range over the next three to five years as supply growth remains limited and OPEC+ continues to restrict output. 

"That squeeze in the margin is really keeping U.S. E&Ps (exploration and production companies) from moving forward in a significant way" despite OPEC's efforts to push up prices, McDonald told Reuters at an industry conference earlier this month.

In the Dallas Fed Energy Survey carried out in June, an E&P executive commented, "Commodity pricing continues to soften, while operating costs have continued to increase and stay at elevated levels, which has led to a continued narrowing of profitability. Regulatory uncertainty remains an issue."  

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Rig Count Drops 

The slowdown in activity is immediately evident in the weekly rig count numbers put out by Baker Hughes. Last week, the total rig count fell again – for the eighth consecutive week – to 682. This was 71 rigs below this time last year. Over the past two months, the number of active drilling rigs in the United States has fallen by more than 70. U.S. crude oil production levels are now up by 200,000 barrels per day (bpd) versus a year ago. This growth is one-tenth of the 2 million bpd growth in U.S. crude output between 2018 and 2019.

Slowing production growth from the U.S. shale patch could lead to higher oil prices down the road if the U.S. avoids a recession and global oil demand holds up to current expectations of more than 2 million bpd of growth this year. 

By Tsvetana Paraskova for Oilprice.com

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  • George Doolittle on June 28 2023 said:
    Demand for distillate fuels look set to plunge and plunge quite dramatically upon the coming weeks and Months as A: there remains a massive glut of all distillate fuels except natural gas which is now being used as a rocket fuel but also


    B: kerosene is still a very valuable and premium fuel whereas most certainly gasoline is not.

    Another wildcard is a collapsed now heading lower USA housing market which consumes an *INCREDIBLE* amount of commodities across all classes but in particular copper soooo that reduced demand from not just Lumber but all that goes into homebuilding and even commercial real estate now effectively *GONE* makes for a very good market for those say trying to price out a new Battery Electric vehicle production facility as Ford and Volkswagen are doing.

    If true and there be a sudden collapse in the cash market for gasoline futures doesn't suddenly mean *"gasoline is worthless"* in fact the exact opposite be true same with coal...very valuable because so so so incredibly dirt cheap and widely available to most US consumers.

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