Earlier this month, the Dallas Fed reported that the local oil industry was getting more upbeat about the future, expecting higher prices and expanding production. In fact, the Dallas Fed reported that production growth had sped up in the third quarter.
The Energy Information Administration, however, had a different message: it forecast a continued decline across the shale patch, led by the Permian—the most prolific shale play in the U.S. right now.
On the face of it, these messages were conflicting. Below the face, however, they still paint the same picture of an industry that has matured to the point where even a substantial price rally does not spur more activity because the industry has other priorities.
West Texas Intermediate has been trading above $90 per barrel for a week now, and few analysts expect it to reverse course anytime soon, especially as OPEC+ is this week seen maintaining its production caps.
Inventories at Cushing, Oklahoma, are at a historic low, close to the critical minimum, adding fuel to the price rally. And they may dip further, which would likely intensify the price climb.
Yet, while some large producers such as Chevron and Pioneer Natural Resources expect higher production from their shale acreage, this is not the default setting of the industry. The rig count is still considerably lower than it was this time last year, with no signs of a fast and meaningful reversal. In fact, the number of rigs fell last week to the lowest since February 2022. All this while WTI trades above $90 per barrel.
If anyone had lingering doubts that the U.S. shale industry has changed, it is time to put these to bed. The industry has changed, and it no longer adds rigs the moment prices rise above a certain level. Caution is the name of the game now. Caution and efficiency, along with capital discipline. It is valid for players large and small.
"If you think about capital efficiency, and you want to make sure you're thinking long-term about your business, moving [drilling rigs] up and down a lot is not a good idea," Exxon senior VP Jack Williams told the Wall Street Journal.
At the same time, "Investors still do not want oil and gas exposure despite healthy risk-adjusted returns. I don't think they are coming back. It's different this time," according to a respondent to the Dallas Fed's survey.
Also, "Outside capital for small independents remains almost nonexistent, which limits investment to organic cash flow. Interest in non-shale conventional production is very limited," another Dallas Fed survey respondent said, while a third said the company's bank had eliminated the position of the bank officer in charge of business with the oil industry.
An outflow of investors, at least for smaller players in the shale field, and limited sources of funding are both serious reasons not to boost production, whatever oil prices on international markets.
On top of these challenges, cost inflation remains a problem, too, despite some easing earlier this year. Inventory is also a problem, as noted earlier in the year by industry executives, as the best drilling locations get depleted.
Government policies in the energy sector are also not conducive to more production at this time, not only directly through fewer lease sales, but also because they have a lot to do with banks' decision to shun clients from the oil patch. It would be interesting to see whether, in case of a Republican win next year, this would change, but as things stand now, the oil industry is at odds with the federal government, and it shows in production plans.
The picture of the U.S. shale industry right now is one of an industry hunted and in defense mode. It is quite unfortunate for the federal government because it can no longer repeat the inventory draw move it made last year to calm prices at the pump and mend the President's collapsing approval ratings. It is additionally unfortunate because next year is an election year.
The shale industry is unlikely to change its new approach to production, based on recent reports and surveys. It has zero motivation to do that. Shareholders in the public players insist on more cash, not more barrels; the private players need to be careful with their spending; and both are wary of a federal government that does not like them very much, to put it mildly.
In such a situation, it would have been nothing short of a miracle—or a not very bright decision—to boost production just because prices are higher. Since this is not a fairytale, there will be no miracles. What there will be is higher prices for longer. In the absence of additional supply, price regulation will come down to demand, and demand for oil is notoriously inelastic, which means it will take a while.
By Irina Slav for Oilprice.com
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