HOUSTON (Reuters) – A decision by OPEC and associated countries to cut crude oil production through March delivered a late Christmas gift to US shale companies that cut costs, but any price hike spurred by the unexpected move , can only be a humble stocking filler.
US crude oil production has fallen 2 million barrels per day in the past year as low prices and demand forced shale producers to cut their losses. Investors had already pressured the industry to curb spending and boost returns before the pandemic hit. Shale production was quickly scaled back, but could soon return if prices continue to rise.
On Tuesday, Saudi Arabia, the world’s largest oil exporter, said it would voluntarily cut its production by 1 million barrels per day (bpd) in February and March, after Russia pushed for more production, concerned about the US shale that would take advantage of the group’s cuts.
Russia and Kazakhstan will increase their production and are reluctant to relinquish market share to the United States. In total, OPEC + should have recovered 500,000 bpd in each of the two months. Saudi officials were concerned that new surges would outpace demand during new coronavirus closures.
Prices for West Texas Intermediate on Friday were $ 52 a barrel, and the 12-month futures price, which producers use to plan their spending on new wells, reached $ 51.37 a barrel, up from $ 44.63 early December.
LOWER LINES TO BENEFIT
Higher crude oil prices will fall directly to the profits of US producers, given recent cost cuts and pledges to sustain production. Companies pledged to keep production flat and to use any price increases to boost investor returns or pay down debt.
(For a chart of declining US oil production, go here 🙂
Rising prices in recent years “have usually been a bit of a mirage,” said Thomas Jorden, CEO of Cimarex Energy. “We will be very disciplined in setting a budget,” he added at a Goldman Sachs conference on Thursday.
According to data firm Rystad Energy, oil and gas companies in the top two US shale regions are profitable in the $ 30 a barrel to low $ 40 a barrel range. This year’s higher prices could boost cash from the shale group’s operations by 32%, Rystad said.
Another factor that will benefit producers is low oil field service costs. Overcapacity in the companies providing fracking sand and services has reduced fees and has not been able to increase them.
“Margins are terrible,” said Chris Wright, CEO of Liberty Oilfield Services, the second largest fracking company in North America. “They are slightly better now than they were six months ago, but they are still awful.”
THE ACTIVITY REMAINS DEPRESSED
Liberty has kept existing customers through the pandemic, but prices remain so low that it makes no sense to go after new customers. Demand for fracking services is on the rise, but is lagging behind the levels that would boost shale production in the US, he said.
Shale producers have historically increased their production budgets with rising oil prices, says Linda Htein, senior research manager at Wood Mackenzie consultancy. But “this time may be a bit different” as global demand remains uncertain, she said.
Oil would need to have $ 60 to $ 65 a barrel to restore US production by 1 million barrels a day while improving investor returns, said Raoul LeBlanc, a vice president at data provider IHS Markit.
Energy executives in Colorado, Oklahoma, Wyoming and northern New Mexico said in a poll by the Federal Reserve Bank of Kansas City on Friday that oil prices would have to average $ 56 a barrel to significantly boost drilling.
The industry scaled down activity so much last year that work on oilfields this year will mean “a reduction in decline rather than growth,” said Sarp Ozkan, a senior executive at analytics firm Enverus.
Reporting by Jennifer Hiller in Houston; edited by David Gregorio