U.S. oil producers, especially those active in shale, have been hailed for sticking to a strict financial discipline amid the pandemic-driven crisis and for changing their focus from production growth to shareholder returns. Now, things may be about to change—and for the worse.
The latest Dallas Fed Survey found that costs in the industry have continued rising sharply for the second quarter in a row between July and September. Another finding of the report, likely related to the first one, was a slowdown in production growth in both oil and gas. Oilfield service sector input costs, the survey said, were at a record high.
This is not all the bad news, either. In addition to the higher costs, oilfield service providers are struggling to hire all the workers they need amid growing demand from production companies as prices improve and make most shale oil profitable again. Taken together, all these factors suggest that U.S. oil and gas are in a challenging place, which could push international prices even higher.
The picture outlined by the Dallas Fed is quite different from a picture energy analysts painted earlier this month: Reuters reported in mid-September that analysts expected U.S. shale drillers to boost new drilling again, potentially upsetting their shareholders as the inventory of drilled but uncompleted wells shrunk considerably.
For now, this boost is not happening, at least not at rates that could have any bearish effect on prices. In fact, prices have added some 10 percent over the month of September, prompting the White House to renew its calls on OPEC+ to increase production by more than its agreed 400,000 bpd.
The situation is ironic in more than one way. On the one hand, the greenest president in U.S. history is asking for more fossil fuels. On the other, the last time President Biden asked OPEC to raise production to rein in gasoline prices in the United States, the request prompted a strong reaction from Texas Governor Gregg Abbott, who said in a tweet that Texas oil producers could easily step in and fill the gap if the administration “will just stay out of the way”.
Yet the latest data from the Dallas Fed suggests the stepping in and filling the gap may not be done as easily as Gov. Abbott would like. In fact, unless all the industry’s problems with the rising input costs and labor shortage are miraculously and speedily solved, oil and gas production in the United States may remain constrained for the observable future.
The Financial Times reported last month that small independent drillers were going all-in on production growth with no shareholders to worry about and try to please. According to that report, total U.S. production could add as much as 800,000 bpd next year thanks to small private independents. Yet the Dallas Fed Survey data suggests the problems encountered by its respondents are not only limited to large public oil industry players. And this may interfere with the 800,000-bpd prospect.
All this adds to a growing body of evidence that the world is tipping into an oil shortage, and while that may be good news for traders betting on higher prices, it is not good news for any economy trying to get back on the normal path after the pandemic disruptions.
Goldman Sachs last month upgraded its price target for Brent crude at end-2021 to $90 from $80, citing demand recovery and insufficiently fast production growth in non-OPEC producers, including the United States. Barclays also raised its oil price outlook, expecting Brent to average $77 next year, up by $9 from the bank’s previous forecast.
The reason the price is lower than $80 is the potential for the U.S. and Iran reaching a deal about Iran’s nuclear program, which would mitigate the deficit Barclays expects next year. But if the U.S. and Iran fail to reach a deal, the deficit could get much worse.
“OPEC+ tapering would not plug the oil supply gap through at least Q1 2022 as demand recovery is likely to continue to outpace this, due partly to limited capacity of some producers in the group to ramp up output,” the bank said in a note at the end of September.
Based on what the Dallas Fed has found about U.S. producers, these are constrained in their production growth ambitions, too. This paints one bigger and grimmer picture for the immediate future of oil markets, at least from the perspective of buyers. It means that oil prices have further to go, even if OPEC+ decides to step in and boost production by more than 400,000 bpd. And this means that economic recoveries will stumble in many key markets.
It looks that despite assurances from eminent economists that the worst is behind us and it’s all economic growth from here on out, the situation may remain difficult for quite some time yet.
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