The Most Ignored Oil Price Influencer

It is a given that the price for crude oil on the global market for the rest of this year and into 2018 will be influenced by a variety of factors. Global supply, global demand, economic growth or contraction, regional conflicts, export limitation agreements, even the weather; all these factors and more will no doubt have a temporary or ongoing influence on the oil price in coming months, as they always have in the past.

But there is another factor, one that has become an increasingly influential determinant in recent years, that receives little attention from market analysts or the energy media: Internal corporate processes within U.S. shale producers. We do see lots of coverage in the media of the reality that U.S. shale producers have effectively displaced OPEC as the global "swing producer", but little to no analysis of why that is the case.

Mid-size to large corporate independent producers drill the vast majority of shale oil wells in the U.S. Companies like Apache Corporation, Anadarko Petroleum, EOG Resources, XTO, Pioneer Resources, Continental Resources, Concho Resources, WPX, Oasis Petroleum, Noble Energy, Whiting Petroleum, Encana, Devon Energy, Newfield, Chesapeake and EP Energy dominate the shale landscape. The internal processes these corporations employ to cut costs, increase efficiencies, take advantage of economies of scale, refine drilling and fracking programs and deploy advancing technologies have over the last two years led to dramatic reductions in finding and lifting costs, and phenomenal increases in per-well ultimate recoveries.

Over the last nine months, I have interviewed senior executives at several of these companies - as well as Halliburton's new CEO, Jeff Miller - and listened to them talk about how their internal processes and their employees' deployment of them have enabled their companies to adjust to the lower price environment and often thrive within it. At Apache Corporation, it was the company's willingness to encourage outside-the-box thinking by their employees that led to the discovery of the massive new Alpine High resource in the Delaware Basin.

Related: Clash Between Qatar And The Saudis Could Threaten OPEC Deal

Thus, the deployment of corporate processes such as these has allowed the U.S. shale industry to not just survive the downturn in oil prices, but to once again begin to thrive within it. But it is another internal corporate process - the process of budgeting and allocating capital resources to drilling programs - that has played a big role in influencing oil prices in the first half of 2017, and will continue to do so for the rest of this year and into 2018.

Last November, OPEC and Russia thought they had come up with a fine plan to re-balance global oil supply and demand with their agreement to limit production and exports, which went into effect on January 1. What they did not plan on, however, was the fact that, in response to the higher crude price that came about in December, U.S. shale producers - which already had a pent-up demand to drill more wells after two years of cutting back - would deploy dramatically higher drilling budgets for the first half of the year. Over the first six months of 2017, U.S. rig counts, well completions and new drilling permits have soared, and the resulting dramatic increase in U.S. production has spoiled the OPEC/Russia hopes of raising the price for crude into the $60 range.

As a part of their budgeting and capital allocation processes, these corporations also engage in mid-year reviews, adjusting their plans for the second half of each year as prices and other market conditions change. Although they are largely responsive in nature, these mid-year review processes will have a big impact on what oil prices look like during the final six months of 2017. Related: How A $200,000 Well Could Drastically Change The Oil Industry

Because the U.S. industry has managed over the last six months to drill itself into a lower price paradigm than it faced at the beginning of 2017, we can expect the mid-year reviews at these corporate shale producers to be scaled back to some extent, though not overwhelmingly so, given that these companies still have a big incentive to drill more wells to increase their reserves bases. We should expect to see a leveling-off of the U.S. rig count, or even a slight reduction in coming months, as new drilling permit applications decline. That in turn will likely result in slower growth in overall U.S. production, although it will almost certainly continue to rise to some extent.

Slower growth in U.S. production, combined with steadily-rising global demand and the ongoing OPEC/Russia export limitations should result in a stronger crude price by year's end, all other factors being equal. Of course, if that higher price should come about, U.S. shale producers will almost certainly respond with another round of very robust drilling budget allocations for 2018, and the see-sawing of prices within a $40-$60/bbl range we've seen thus far in 2017 will repeat itself once again.

So long as the U.S. shale industry remains the "swing producer" in the global picture, we should expect this cycle to endure. In a world newly-awash in easily-tapped oil, these corporate processes pretty much ensure it.

By David Blackmon for Oilprice.com

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