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As oil prices rally, the rig count in the Permian is ticking up and oil production in the basin is set to reach pre-pandemic levels soon. 

The rig count in the top oil-producing shale play is now 136 rigs above what it was this time last year. The Permian is leading the U.S. rig additions and is the key driver of America’s oil production growth, while the other shale basins show either stagnant or slightly declining output. 

Most analysts expect the Permian oil production to reach pre-COVID levels of 4.9 million barrels per day (bpd) by 2022, some say even as early as this month. 

Yet, despite the recovering top shale basin, total U.S. oil production is unlikely to unsettle the global oil market in a meaningful way in the short term. The OPEC+ alliance continues to rule the markets. 

Control over the market’s marginal oil supply and oil prices is firmly in the hands of OPEC+ as U.S. shale producers continue to stick to discipline in spending. Even the largest U.S. shale operator itself—Pioneer Natural Resources—thinks so

This time around, unlike in previous boom-and-bust cycles, the U.S. shale patch is not chasing the high oil prices to increase production to records. This time, listed U.S. oil producers look to regain the trust of investors rather than to “drill themselves into oblivion,” as Harold Hamm warned his fellow oil and gas producers back in 2017. 

This time, it is private oil producers that are ramping up drilling activity and production. But not enough to flood the market with as much oil as to eliminate OPEC+’s firm control over supply balances. At least not yet.  

Every estimate points to rising U.S. oil production next year. OPEC itself sees America adding 800,000 bpd to its oil production, although “uncertainty regarding the financial and operational aspects of US production remains high,” the cartel said in its monthly report this week. 

The EIA currently sees U.S. oil production averaging 11.0 million bpd this year, and rising to 11.7 million bpd in 2022. That’s 700,000 bpd growth on average for next year. 

Overall, America’s production growth next year is expected to be modest, especially compared to the surges in output in 2018 and 2019, which led to a record U.S. oil production of 13 million bpd in February 2020, just before the pandemic crippled demand and crashed oil prices. 

Public shale producers continue to exercise caution in capital budgets for drilling activity, prioritizing returns to shareholders. 

But privately-held drillers—not constrained by investors to ‘show them the money’—are adding more rigs at a faster pace. In recent months, the number of rigs in the U.S. operated by private producers has exceeded the rig count deployed by public oil firms for the first time ever, as per Enverus data cited by Bloomberg

In an odd turn of events, privately held Mewbourne Oil Company had 17 operating rigs as of October 1, more than the 16 rigs operated by ExxonMobil and Chevron combined, Lium LLC rig data quoted by Bloomberg shows. 

At $80 oil, private firms are making handsome profits after having increased drilling in recent months, but some are not replicating this year’s production growth into next year.  

For example, Colorado-based Tap Rock Resources, which operates in the Permian, has nearly tripled its oil production in a year, but it doesn’t see another surge in output next year. 

“We know that you can’t count on $80 forever, so it’d be pretty shortsighted to go chase $80, and by the time you get [the wells] flowing, it’s $60,” Tap Rock Resources’ CEO Ryan London told The Wall Street Journal.

For those private drillers who choose to chase the $80 oil, there is one stumbling block right around the corner. Cost inflation, combined with supply chain and labor constraints, could spoil the private producers’ party by raising the breakeven price for drilling new wells. 

As early as July, Jeff Miller, CEO at top fracking services provider Halliburton, said the company was raising its pricing.

“[W]e saw inflation in many parts of our business, whether it’s maintenance in particular, cost parts, and people to do it,” Miller said on the Q2 earnings call. 

“As our equipment reaches sustained levels of higher utilization in North America, we are now moving from passing on inflationary cost increases to setting net pricing higher. And we expect this trend to accelerate into 2022,” Halliburton’s top executive said.  

Questions remain about the pace of U.S. oil production growth, especially how long the public firms’ discipline will hold and how much privately-held producers will be able to boost their production in light of higher costs. 

Right now, it looks like the U.S. shale patch will not have a say in where global oil prices are going, with OPEC+ firmly in control of the market. OPEC expects 800,000-bpd U.S. growth next year, which likely was one of the reasons why OPEC+ continues to ignore pleas—including from the U.S.—to boost production faster than planned.  

By Tsvetana Paraskova for Oilprice.com

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Tsvetana Paraskova

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