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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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OPEC’s Biggest Fear Is Becoming A Reality

U.S. oil drillers are no longer sitting in the trenches, waiting for the pandemic storm to pass. They are once again in growth mode, according to the first-quarter energy survey by the Dallas Federal Reserve. As oil prices rebound, activity in the oil patch is expanding, respondents to the Dallas Fed Energy Survey said. And it is expanding strongly: from a reading of just 18.5 for the fourth quarter of 2020, the business activity index of the survey soared as high as 53.6 over the first quarter of this year.

The data supports evidence from other agencies: the number of active drilling rigs is steadily rising. So is production: according to the latest weekly report by the Energy Information Administration, oil production last week averaged 11 million bpd. That’s still 2 million bpd below the average for this time last year, but above the average for a week earlier and the four-week average for the period ending on March 19. The signs seem to point to what OPEC feared the most: U.S. shale is returning.

Capital spending is returning, the Dallas Fed reported in its survey. From an index of 12.5 for the fourth quarter of 2020, it has now gone up to 31. What’s more, the industry is upbeat about the future, too, planning to boost spending further next year.

In a bit of bad news, costs are also on the rise, the Dallas Fed said. On the flip side, jobs are returning to the oil patch, mostly in oilfield services, thanks to renewed drilling activity. The index for OFS jobs stood at 23.5 in the first quarter, although for exploration and production companies, it stood at just 1.

Back to costs: respondents in the survey said drilling a new well in the Permian (except the Delaware Basin) would breakeven at $53/barrel. This compares with $49 this time last year. The breakeven price for a well in the Permian, according to the survey, stood at $50, which was $1 higher than last year.

Related: Oil Industry Hit Hard By New Travel Restrictions

Yet the costs of profitably drilling a new well were lower in the Delaware Basin and the Midland part of the Permian play, as well as in the Eagle Ford play, at $49, $46, and $46, respectively. The profitability levels for existing wells were much lower.

So, U.S. drillers are back to drilling, with West Texas Intermediate comfortably higher than breakeven prices, even in the costliest parts of the shale patch. What would OPEC do?

“While the price increases have been welcome news, OPEC+ is a sword of Damocles: if U.S. operators raise capital expenditures, OPEC+ will open its taps and flood the market,” one industry executive said. “There is a tense detente currently.”

This tense détente will likely continue as OPEC cannot really afford to open its taps right now—not when oil prices are still lower than what Saudi Arabia needs to balance its budget. If the respondents in the Dallas Fed survey are right, they will continue to be lower for a while longer.

In their price forecasts, industry insiders gave an average price projection for West Texas Intermediate of $61.13 per barrel. This compared with an average of $49.77 last quarter. The range of price forecasts was telling, too: projections varied from a low of $45 per barrel to a high of $85 per barrel, reflecting the return of price optimism in one of the industries that suffered the worst blow from the pandemic.

The optimism is in part fuelled by expectations that Biden administration policies will lead to tighter oil supply, which will automatically push prices higher. Yet, some executives are not focusing on the pros.

“With the current political sentiment being against oil and gas, I am beginning to question how much longer I will continue to risk capital in this business. I am waiting to see what tax law changes come out of Washington, D.C.,” one executive told the Dallas Fed.

By Irina Slav for Oilprice.com

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Leave a comment
  • George Doolittle on March 25 2021 said:
    Planters in the USA aren't waiting around no matter the price.

    And there is nothing a US farmer can't grow and grow a lot of...and that obviously includes ethanol at on or about one million barrels produced per day.

    The USA only consumes on or about 5 million barrels of gasoline a day and for obvious reasons that number is now plunging. Good luck owning a US based gasoline "station" at the moment and trying to make money on that.

    Nor should they be making money given the prices they charge on literally everything.
  • Mamdouh Salameh on March 26 2021 said:
    The crucial situation for the US shale oil industry is that its fate is now in the hands of OPEC+.
    Let us hope US shale oil drillers have learnt a salutary lesson not to mess with OPEC+ by undermining its efforts to bolster oil prices by producing recklessly as before and trying to gain market share at its expense.

    If they do start to produce recklessly, OPEC+ could go for a market share strategy causing the price to decline below the Shale industry’s breakeven price and thus force it to cut its production steeply.

    The days when the shale industry could confront OPEC+ with impunity have gone forever.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

Leave a comment




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