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Should Oil Markets Brace for A U.S. Shale Comeback?

The 2020 crisis put an abrupt end to the growth in U.S. crude oil production, which had just hit 13 million barrels per day (bpd) before oil prices and demand collapsed with the spread of the pandemic.   Between March and May 2020, U.S. oil production plunged by over 2.5 million bpd as companies slashed spending on drilling and curtailed output in response to the low oil prices. In May, U.S. oil production hit 10 million bpd—its lowest monthly level since late 2017. 

After the trough in May, oil output in the United States has been gradually growing as producers restore curtailed volumes and oil prices recover part of the losses from earlier in 2020, due to encouraging news about vaccines, which gave the market hopes that the long-awaited oil demand recovery was finally in sight.   

EIA estimates point to U.S. oil production staying at around 11 million bpd for at least another year, as production rates from existing wells in the U.S. shale patch will fall faster than production gains from fewer newly drilled wells.

But some analysts say that the market has been too quick to write off U.S. shale again, and will be surprised by the rebound in American oil production in 2021. 

Some even suggest that the U.S. shale patch and the EIA are deliberately painting a gloomier picture than reality in order to ‘fool’ the OPEC+ alliance to continue withholding large volumes from the market and sustain oil prices at levels around $50 a barrel that would help U.S. production to jump this year. 

According to energy economist Philip K. Verleger, the EIA is under-reporting U.S. crude oil production in recent months, thus helping the narrative of some U.S. oil executives—such as Pioneer Resources’ chief executive Scott Sheffield—that American production will only see modest gains this year and next. 

Verleger’s energy consultancy PKVerleger estimates that U.S. oil production was 12.4 million bpd at the end of November, while the EIA has estimated it at 11 million bpd. 

“One might say EIA officials are deliberately underestimating the rise in US production to boost prices and facilitate hedging by US producers, thereby helping to strengthen and perpetuate the industry,” PKVerleger said in the ‘Fracking Comeback’ note in early December. 

“Oil-exporting countries have been fooled. Their agreement to limit output increases to support oil prices has laid the foundation for a renewed boost in US production. Once again, OPEC and other oil-exporting nations have wasted the gains of a price war,” the note says. 

In its latest Short-Term Energy Outlook (STEO), the EIA sees U.S. crude oil production declining on an average annual basis from 12.2 million bpd in 2019 to 11.3 million bpd in 2020 and 11.1 million bpd in 2021. Rising drilling activity in response to higher oil prices is set to push monthly output to 11.4 million in December 2021, according to EIA estimates.  Related: The Middle East Needs To Wake Up To Renewables

The outlook of the U.S. oil industry itself has considerably improved in recent months, the Dallas Fed Energy Survey for Q4 showed. The business activity index moved into positive territory, rising from -6.6 in Q3 to 18.5 in Q4. This was the first positive reading for the business activity index since the first quarter of 2019, with the increase driven by both E&P and oilfield services firms, according to the survey. Moreover, most E&P executives—72 percent—expect their firm will have access to capital from nonbank sources over the next 12 months. 

“E&P and supplier consolidation needs to increase to reduce substantial costs from the system,” one E&P executive said in the Dallas Fed survey. 

Pressured by plunging oil prices and the need to adjust to the lower oil demand, U.S. oil producers have slashed costs and managed to bring down their average breakeven costs over the past year by nearly 20 percent to $45 a barrel on average, BloombergNEF (BNEF) said in a report last month. 

Declining costs could additionally help the U.S. shale rebound this year, Dan Eberhart, chief executive at privately held U.S. oilfield services company Canary, writes in Forbes.

“Don’t write off the great shale story just yet. The final chapter — maybe its best — is still being written,” Eberhart says. 

Not everyone is so optimistic about U.S. shale, with bankruptcy filings still rising and consolidation deferring smaller-scale developments. 

“It’s going to be hard for the shale development in the U.S. to get U.S. production back to 13 MMbd. Now, especially as consolidation occurs and as people really focus on full-cycle returns and net present value of their developments, the economics is going to drive a lot of decisions to not do these smaller-scale developments,” Occidental CEO Vicki Hollub told IHS Markit Vice Chairman Daniel Yergin in mid-November. 

The worst for U.S. oil production is over. Still, the fate of the shale patch in 2021 and 2022 will depend on access to capital, cost reductions, and spending discipline, as much as it will hinge on global oil demand and the OPEC+ policies to support oil prices. 

By Tsvetana Paraskova for Oilprice.com

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  • Mamdouh Salameh on January 05 2021 said:
    I can neither see any prospects of growth for US shale oil production nor a comeback soon (or may be ever) to previous levels.

    I estimated that the US shale oil industry has lost an estimated 6.33 million barrels a day (mbd) as a result of the COVID-19 pandemic but the US Energy Information Administration (EIA) has been grudgingly admitting the loses in a piecemeal fashion. It started by announcing a loss of 1 mbd, then 2 mbd and then 3.4 mbd.

    Therefore it was a great surprise to me to read that the respected energy economist Philip K. Verleger is saying that the EIA has been under-reporting U.S. crude oil production in recent months and that U.S. oil production was 12.4 mbd at the end of November when the EIA itself has estimated it at 11 mbd. Is it then the same Philip K. Verleger who few months ago accused the EIA of disguising disastrous data on the decline in shale oil production when he said that his latest research showed a decline of 4 mbd by the 10th of May at the time the EIA was projecting only a 0.5 mbd decline in 2020.

    Moreover, it will be a new thing for the books that the EIA who has always hyped about US shale oil production claiming that US production hit 13 mbd would be so modest to under-report in order to fool OPEC+ alliance to continue withholding large volumes from the market and sustain oil prices at levels around $50 a barrel that would help U.S. production to jump this year.

    The US shale oil industry will eventually emerge from the COVID-19 pandemic smaller and leaner but it will continue to need a life support machine provided by US taxpayers to survive to keep it alive. With outstanding debts approaching $1 trillion and a breakeven price of between $60 and $65 a barrel for most drillers, US shale oil could hardly expect to show any growth.

    The truth of the matter is that US shale oil hasn’t only lost a sizeable production but also its importance in the global oil market. OPEC+ has finally won the war against the US shale oil industry.

    The United States’ crude oil imports will eventually rise from 9 mbd in 2019 to an estimated 12-mbd-13 mbd in coming years.

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

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