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Why U.S. Shale Is Right To Choose Shareholders Over Production

American shale producers are right to avoid the temptation of pumping oil with WTI in the $1100-$110 range. Rewarding shareholders isn’t just about appeasement, which is long overdue, it’s about the elephant in the oil production room: Refining capacity. 

Refining capacity was falling even before the pandemic. Since January 2020, we’ve lost 3 million bpd in refining capacity, worldwide. In 2020, we lost 410,000 bpd in net global refining capacity. In 2021, there were more refinery closures than there was new capacity, leading the IEA to announce that global refining capacity had fallen for the first time in three decades. In 2021, global refining capacity fell by 730,000 barrels per day–accounting for losses after new capacity was added. 

For June, according to the EIA, the U.S. will be refining at 95% of its capacity because refining margins (crack spreads) are so high and refiners are extremely motivated to refine. Still, that’s a million bpd less than pre-pandemic 2019. Those refineries that the pandemic shut completely won’t be coming back; others are only recovering slowly. There’s little investment in refineries right now. No one has the long-term appetite for this. 

Now, more than ever, oil supply is a geopolitical game from which traders are getting rich espousing an oil supply shortage when the physical market really suggests that the bigger problem is refining capacity. 

Yes, OPEC…

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