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Oil Should Stay In Triple Digits: Analyst

Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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What Is Holding U.S. Oil Production Back?

  • Oil prices are sitting well above the $100 mark and show no sign of falling back any time soon, but that doesn’t mean that a wave of new production will come online.
  • U.S. oil producers are struggling with rising costs caused by inflation, a labor shortage, and investor sentiment, all of which impact their ability to boost production.
  • In a recent survey of oil and gas firms by the Dallas Fed, nearly a third of respondents said growth would not be dependent on the price of oil.

The U.S. energy sector continues to be an outlier in this bear market, gaining +6.6% last week thanks to riding a rally in crude prices after Yemen's Houthi rebels claimed a series of attacks on Saudi Aramco oil storage facilities.

May Brent crude (CO1:COM) settled +12% at $120.65/bbl while May WTI crude (CL1:COM) closed +10.5% for the week at $113.90/bbl.

The attacks have come at a time when supply risk is higher than it has been in years, with Price Futures Group's Phil Flynn telling MarketWatch the supply-demand deficit is only going to get worse.

Meanwhile, U.S. natural gas (NG1:COM) soared 15% for the week to $5.571/MMBtu, boosted by bullish sentiment from the news that the U.S. will increase shipments of LNG to Europe in an effort to lower the continent's dependency on Russian gas.

With the oil and gas markets decidedly bullish, and the Biden administration uncharacteristically encouraging it amid a global energy crisis and sky-high fuel prices, you would think that U.S. producers would be scrambling to make hay while the sun still shines by opening up the oil and gas taps.

However, it appears that it will take a lot more to coax more output from long-suffering U.S. producers.

A recent survey by the Dallas Fed has found that Big Oil intends to grow its median crude production by a mere 6% Y/Y while smaller firms aim to expand theirs by 15%. 

But it's not all about the money this time around: 41% of respondents believe the WTI price between $80 and $99/bbl is enough to boost production growth; an additional 20% believe $100 to $119 is sufficient, while a small portion said $120/bbl or higher. Nearly one-third of the respondents (29%) said growth would not be dependent on the price of oil.

In fact, ConocoPhillips (NYSE:COP) CEO Ryan Lance says oil prices are so high that "we are encroaching upon the area of demand destruction."

More than half of the respondents have attributed the restraint in growth to investor pressure to maintain capital discipline, indicating that some hard lessons were learned over the past few years.

Increasing costs

Another big reason why Big Oil is only looking to modestly ramp up production is inflation and the resultant rising costs.

According to the report, first-quarter oil and gas business activity is already showing record highs across several indicators. Prices received for services, oilfield service (OFS) companies' operating margins, and industry labor indicators have all hit new high marks in the Dallas Fed survey's 6-year history.

Unfortunately, dampening those numbers are record highs in OFS companies' input costs and exploration and production (E&P) companies' costs for finding, developing resources, and operating their leases. Costs for OFS and E&P firms have increased for a fifth straight quarter, as did E&P's lease operating expenses and finding and development costs. A record-high index for input costs was seen for OFS.

"We're dealing with the same inflation and supply chain every other manufacturer is dealing with in the U.S. You're seeing double-digit inflation rates across a range of commodities and categories, including land, trucking and chemicals imported from Europe. All those supply chain issues are impacting our ability," ConocoPhillips Ryan Lance told CNBC earlier this month. Lance says drilling for new oil now will not bring immediate relief to the elevated prices seen around the globe for at least a year.

 "We've never faced a scenario where we need to grow production, when actually supply chains not only in our industry but every industry in the world [are] being impacted by the pandemic," Occidental Petroleum (NYSE:OXY) CEO Vicki Hollub has also told CNBC, saying the industry was "in a really dire situation."

Another growing problem is labor shortages.

"We have the rigs but can't find employees. However, oil companies have to understand that oilfield services and, in particular, onshore land drilling contractors have to be paid a livable rate to justify the enormous capital cost of running, upgrading and crewing a modern onshore drilling rig. The lack of people to work, and the delivery and cost of pipe, frac sand, cement, etc., are all concerns for our business. It will take quite a bit of time for growth to happen. There is also investor pressure," said one respondent.

Alex Kimani for Oiprice.com

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Leave a comment
  • Lee James on March 28 2022 said:
    This is the expectation of every American: Let&#039;s ramp up production, given the price of oil!

    With articles such as this, Americans will realize that there are no silver bullets in American energy, including good ole American apple pie-oil. Other forms of energy will experience much the same thing,

    Demand destruction was mentioned briefly in the article. It is gonna happen. Let it happen as much as possible as a result of wiser use of energy. That means good old-fashioned conservation efforts, improved energy efficiency in equipment and buildings, and careful decisions about whether or not to go ahead and burn fuel.

    Feels like a new era.
  • Mamdouh Salameh on March 29 2022 said:
    US shale oil is a spent force. What is holding US oil production back has far less to do with capital discipline and far more to do with inability to lift production meaningfully.

    The reason is that the rich and sweet spots in the shale plays have already been used forcing drillers to move to costly and less productive spots. Another reason is that well profitability has been declining adding to costs of production.

    I estimate the maximum shale production could add this year is 200,000-300,000 barrels a day (b/d) to the EIA's claimed average of 11.0 million barrels a day (mbd) in 2021. I say claimed average because I estimate shale production averaged 10.3-10.4 mbd in 2021 and not 11.0 mbd.

    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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