The export of crude oil from the United States has rose since Russia invaded Ukraine last year, with Europe becoming the largest buyer of US crude oil. The story is pretty much the same as in gas. And so is the production side of this story.
As gas prices plummeted in December amid softer-than-expected weather despite a few seasonal cold spells, U.S. gas companies began to curb production. Now oil companies are doing the same, and it could have even bigger consequences because oil prices are still quite high and because these companies generally plan to spend more money this year. Just not on production growth.
Reuters’ market analyst John Kemp reported earlier this month that we are currently witnessing the US oil industry’s response to the drop in oil prices that began last summer, noting the lag between the onset of a price drop and the resulting decline in drilling activity.
Kemp said this decline means the U.S. oil industry will see lower production growth this year and next, before possibly returning to stronger growth as prices rise. However, prices are by no means the only factor determining investment decisions in the oil sector.
The Wall Street Journal reported last week that many US oil companies are planning to spend more money this year, but keep production the same or slightly higher. The report listed two main reasons for this: maturing fields and inflation.
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With natural depletion, the cost of drilling increases and adds to the already higher costs of equipment, services and materials that have resulted from global inflationary trends. These, in turn, are driven by central bank policies that are not likely to change anytime soon in the US, particularly as indicated by the Fed at its most recent meeting.
The industry thus faces natural exhaustion on the one hand and higher costs on the other, while the Fed fights inflation by raising borrowing costs. Meanwhile, the federal government is offering billions in incentives for alternative energy sources, even as President Biden acknowledged that oil and gas will continue to be needed for decades to come.
In such a context, there is probably little motivation for the oil industry to try to expand production substantially, so it does not. The industry is spending more on lower growth, despite their record profits in 2022; or maybe because of them.
For years, American drillers poured all their money into more and more drills. This made the US the largest producer of crude oil in the world, but it also turned many companies into dead companies as oil prices collapsed between 2014 and 2016.
Four short years later, the pandemic dealt another blow to the industry and taught a valuable lesson: that it is sometimes wiser to focus on something other than production growth, even when prices are high. Thus, producers focused on returning money to investors and maintaining production at current levels or only slightly higher.
There is another reason for this measured, cautious attitude to output growth. No drilling stock is infinite. a judgement of analytical data by the WSJ showed a year ago that many companies in the shale patch have less than 10 years of drilling untapped. The largest players are worth about 10 years. Smaller ones have about three to seven years of top-drill inventory. It makes sense not to empty that inventory too quickly.
“You just can’t keep growing 15% to 20% a year,” said Scott Sheffield, CEO of Pioneer Natural Resources. said last year. “You tap into your supplies. Even the good companies.’
According to Evercore ISI, U.S. shale companies will spend 46 percent more this year than in 2022. Last year, spending was 30 percent higher than a year earlier. Yet it only led to a production increase of 4 percent. This year seems to be playing out in a similar fashion, with inflation driving up costs and, to top it off, resources not always delivering expected productivity.
While this is happening, US crude demand is likely to remain robust, especially in Europe. Whether or not this could entail a price increase similar to that of natural gas prices we saw last year is unclear. After all, the international oil market is a lot more mature than the LNG market, with a lot more competition between sellers which, in theory, would constitute some sort of price drop.
However, with global production set to decline later in the year and no substantial increase in production coming from anywhere, that lid could fall off. But even if that’s the case, one thing’s for sure: It looks like U.S. oil producers won’t rush production, if ever again.
By Irina Slav for Oilprice.com
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