A year after the pandemic and the disagreement within OPEC+ over supply management crushed oil prices, the industry finds itself at an all-too-familiar crossroads: Will OPEC’s bet that U.S. shale’s “drill, baby, drill” is gone forever be right this time? Analysts seem to concur that this is a safe bet, at least for this year, as U.S. shale overall will keep the promised spending discipline. In a sign that spending beyond cash flows is a thing of the past, major listed producers now say that growing production for growth’s sake would be a big mistake. Instead, they have vowed to return more cash to shareholders.
U.S. oil production may never return to the weekly peaks of 13 million barrels per day (bpd) just before last year’s market crash. But it is already steadying at around 11 million bpd, which is 1 million bpd above the May 2020 lows when producers curtailed output in response to impossibly low—and negative for a day—oil prices.
Drilling activity has been on the rise since the fall of 2020, and considering the lag between rising oil prices, the addition of oil rigs, and actual oil production, expectations are that U.S. oil production will gradually increase through the end of this year.
Granted, average 2021 American production is set to be lower than the average production in 2020 by nearly 300,000 bpd, as per EIA’s latest estimates. However, this year—with WTI Crude prices expected to remain above $55 per barrel—U.S. oil production is set to increase from an average 10.9 million bpd in the second quarter to nearly 11.4 million bpd by the fourth quarter, the EIA said in its April Short-Term Energy Outlook (STEO). In the fourth quarter next year, U.S. oil production is expected to average above 12 million bpd—at 12.18 million bpd.
Even if American production doesn’t return to 13 million bpd—ever—U.S. producers could undermine, once again, the oil market management plans of the OPEC+ group.
Large listed producers promise restraint, and the market, and even OPEC+, believe restraint will indeed be the case for the U.S. oil industry this year.
However, $60 oil makes boosting production too tempting for the private operators, since higher production and cash flows help them grow and pay off debts, without Wall Street breathing down their necks whether they are spending within their means.
Spending discipline, or how long U.S. producers can resist the siren song of $60 oil, will determine whether American oil production will overshoot projections later this year.
“If prices remain flat, at around US$60/bbl for the remainder of 2021, operators will have a chance to generate free cash flow and prove to investors that they are able to return money to shareholders after poor results in 2020. However, since prices have risen, the rig count in the US Lower 48 has also increased significantly, along with the US production levels,” Andrew Folse, Oil & Gas Analyst at data and analytics company GlobalData, said this week.
Discipline holds so far this year, with U.S. operators more disciplined than other oil companies globally.
“Amazingly, this means that U.S. E&Ps are being more disciplined in 2021 than their international counterparts,” Raymond James analysts said in a survey on spending, as carried by Natural Gas Intelligence.
“Nobody is going to change course just yet. We are only one quarter into the year”, Robert Polk, a principal analyst with Wood Mackenzie’s US Corporate Research team, said last month.
“The second quarter earnings announcements in July and August will probably be the earliest we might see companies start to revise up their capital spending plans, if their discipline doesn’t hold,” Polk added.
OPEC+ also seems to bet that U.S. production growth for growth’s sake is over, to the point that Saudi Energy Minister, Prince Abdulaziz bin Salman, said in early March that “‘Drill, baby, drill’ is gone forever.”
“Drill, baby, drill” may be gone forever, but “Every U.S. oil and gas company are appreciating” the “brilliant” way OPEC+ has been handling market balances, Occidental’s chief executive Vicki Hollub said this week.
Oil at $60 is undoubtedly a comfortable price level for U.S. shale. The longer OPEC+ is careful not to sink prices by easing the cuts too much, the more comfortable U.S. producers will be in their spending and drilling activity. OPEC+ will be closely watching and responding with production hikes to the potentially faster-than-expected recovery of American production. But the alliance will also need to be careful not to further ease the cuts sooner than the market requires, because sinking U.S. shale again by crashing oil prices will also sink the budgets of the OPEC producers, who continue to be too dependent on oil revenues and haven’t yet recovered from last year’s price collapse.