Less than two years ago, the United States was the world’s largest producer of crude oil. It was the new major swing producer that moved prices up or down with a shrug of the shoulder, challenging OPEC’s long-standing role as price-setter.
And then it all changed as the pandemic struck.
The second pandemic year is drawing to a close, and oil is rising fast thanks to tight supply combined with stronger than expected demand resulting from a set of favorable circumstances that have pushed West Texas Intermediate to the highest in eight years. But the swing producer is not swinging anymore. It is asking OPEC to pump more.
The Biden administration first asked the oil cartel to step up the supply of crude in the summer. OPEC ignored the plea, just as it did t its last two meetings where the members of the extended group OPEC decided to keep adding 400,000 bpd to global supply every month and not more. Washington remains concerned.
“Joe Biden knows that high gasoline prices are not good for incumbents,” Daniel Yergin, oil historian and vice chairman of IHS Markit, told Bloomberg in an interview this week. “We’ll certainly be hearing more from the administration.”
Less than two years ago, it would have been ridiculous to even think the world’s new swing producer, the world’s biggest producer, pumping some 13 million barrels of crude daily three months before the coronavirus spread, would need to ask OPEC to bring more oil to the market. Yet this is exactly what the White House is doing. So, what happened?
One of the things that happened was capital discipline. The U.S. oil industry had only just recovered from the 2014 price crash. It was still lavishing every dollar on production growth when the pandemic hit, reinforcing an already simmering disgruntlement among shareholders. Pressure ensued, which added onto the pressure from banks that were increasingly unwilling to lend so generously to exploration and production companies amid the rise of the green transition agenda.
Yet, it wasn’t only ESG considerations that caused banks to cool towards oil companies. It was also underperformance of oil fields that added to the increasingly negative sentiment, as did consistent failure to amass any considerable amounts of cash for much of the industry. Shareholders were unhappy. Lenders were unhappy.
And then, in April, WTI turned negative.
The only path that made sense in that situation was to tighten belts. This is exactly what U.S. oil companies did and what they are still doing. And this, in turn, is why the Biden administration has to ask OPEC to help bring prices at the pump down.
The chief executive of Pioneer told the FT earlier this month that U.S. shale drillers cannot boost supply to curb the price rally even if they wanted to, so price remained “under OPEC control.”
“Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent,” Scott Sheffield said. “All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.”
“I don’t think the world can rely much on US shale,” he also said. “It’s really under Opec control.”
That’s a sad end to a short rise-and-fall story, but the story in no way means U.S. oil is dead as a swing producer. Despite the strict discipline that public shale producers are maintaining, smaller private companies are not bound by the constraint of keeping any shareholders happy. And these producers are drilling.
The FT wrote in September how small private drillers were ramping up production and how some observers forecast that led by these drillers, U.S. production could add 800,000 bpd in output to the U.S. total over 2022. That would make the U.S. the producer with the fastest-growing output outside OPEC+.
Then, earlier this week, Bloomberg reported that production levels in the Permian were close to pre-pandemic ones. The companies responsible for the increase are the smaller, private players, funded by private equity or family money. However, the ramp-up will not be strong enough to have any meaningful bearish impact on oil prices, according to the report.
“It’s a win for the privates without being a loss for the oil markets,” Raoul LeBlanc, an analyst at IHS Markit, told Bloomberg. “The big takeaway is that private growth won’t ruin the party.”
Meanwhile, the bigger, public players that spearheaded the previous production growth spurts remain reluctant to boost production as they still face hypersensitive shareholders.
How long this hypersensitivity will continue is anyone’s guess and will largely depend on the progress of the energy transition. In Europe, we are seeing the first signs that not all is going well and that mistakes may have been made along the way. It will take a while before we see the same in the United States, if ever. Meanwhile, the United States remains a country with the substantial potential to return to swing-producer status.
Whether its oil industry will ever again have the necessary motivation remains to be seen.
By Irina Slav for Oilprice.com
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