Over the past quarter, U.S. oil producers have turned much more optimistic about oil prices and demand and have already increased drilling activity from last year’s trough.
Crude oil production has stabilized at around 11.1 million barrels per day (bpd) in December 2020 and January 2021, while current oil prices at over $60 per barrel WTI and rising numbers of oil-directed rigs point to monthly rises in output later this year.
Considering that there is a lag of several months before drilling activity begins to reflect higher oil prices and another six-month lag between drilling activity trends and changes in oil production, the U.S. is about to start seeing increased output as early as this quarter, Reuters columnist John Kemp says.
Output gains could further intensify in the second half of the year if U.S. oil prices hold around $60 a barrel. At this price point, many – if not all – areas in the U.S. shale patch are profitable to drill.
The rise in oil production is expected to be only gradual this year because many large listed producers would prefer to improve shareholder returns instead of investing beyond their cash flows into drilling. However, some private shale producers could continue to boost drilling for production growth’s sake. This is because $60-65 oil would give a sizable boost to their revenues at those increased production levels, especially since they don’t have Wall Street scrutinizing (and punishing) their output decisions.
The current pace of drilling activity is much lower than at the start of last year, and it is likely just enough to keep U.S. oil production stable, analysts say. But the ‘siren song’ of $60 oil shouldn’t be underestimated.
Across all U.S. oil-producing regions, average breakeven prices to profitably drill a new well range from $46 to $58 per barrel, with breakeven prices in the Permian averaging $50 a barrel, the latest Dallas Fed energy survey for Q1 showed last week. “There’s nothing that doesn’t work at $65 a barrel,” Ian Nieboer, a managing director at Enverus, told the Financial Times last month, noting that the newly-found discipline could fade away.
The U.S. oil rig count points to recovering drilling activity. American firms added last week the highest number of rigs, 13, in one week since January last year, the latest Baker Hughes Rig Count report showed.
During the first quarter of 2021, oil and gas activity expanded strongly, the Dallas Fed survey showed. Six-month outlooks also improved notably, with the index rising from 21.6 in Q4 2020 to 70.6 in Q1 2021, which was the highest reading in the survey’s five-year history.
As per the latest available EIA data, U.S. crude oil production stood at 11.08 million bpd in January 2021, compared to 11.1 million bpd in December 2020, with Texas oil production rising by 0.5 percent month over month to 4.663 million bpd in January.
The figures in February and March will be lower due to the Texas Freeze, which shut in millions of barrels of oil production per day for more than a week.
Beginning in the second quarter, warmer weather, $60-plus oil prices, and significantly improved outlooks are set to reinvigorate American drilling activity. This year’s gains could be minimal because of the lag from oil price hikes to drilling activity to production boost. Next year, however, U.S. production could average as much as 12 million bpd. That’s the latest EIA forecast from the March Short-Term Energy Outlook (STEO). The EIA raised its 2022 production outlook by 500,000 bpd compared to the estimate from February because of higher expected oil prices.
Of course, U.S. oil production and faster-than-expected increases will not go unnoticed by OPEC and its allies in the OPEC+ group.
Last month, the alliance essentially rolled over the production cuts into April, more or less betting on continued restraint from American producers. But this month, OPEC+ decided it is gradually returning to monthly production hikes over the next three months for a total of more than 1 million bpd. Much of the decision was based on expectations that global oil demand will strengthen with the start of the driving season and with major economies rolling out packages to support growth.
If U.S. drilling activity grows more than initially expected, OPEC+ could be caught between a rock and a hard place this summer, again: let oil prices slide by putting more oil on the market, or continue supporting oil prices with careful monthly increases, thus letting U.S. shale to take advantage.