HOUSTON (Reuters) – A decision by OPEC and allies to cut crude oil production by March has provided a late Christmas present for US shale companies that have cut costs but any price hike caused by an unexpected move it could just be a modest storage filler.
US crude oil production has fallen by 2 million barrels a day in the past year as low prices and demand have forced shale producers to reduce their losses. Investors had already put pressure on the industry to cut spending and increase profitability before the pandemic hit. Shale production has declined rapidly, but may return quickly if prices continue to rise.
On Tuesday, Saudi Arabia, the world’s largest oil exporter, said it would voluntarily cut production by 1 million barrels a day (bpd) in February and March, after Russia pressed pressure to increase production, worried about the American shale that will capitalize on the group’s reductions.
Russia and Kazakhstan will increase their production, reluctant to cede market share to the United States. Overall, OPEC + was to restore 500,000 bpd in each of the two months. Saudi officials were worried that new increases would exceed demand during the blockade of the new coronavirus.
Prices for West Texas Intermediate on Friday exceeded $ 52 a barrel, and the 12-month futures price that manufacturers use to plan spending on new wells reached $ 51.37 a barrel, up from 44.63 dollars in early December.
BENEFIT BOTTOM LINES
Higher crude oil prices will fall directly on the bottom line of US producers, given recent cost reductions and commitments to maintain fixed production. The companies undertook to maintain flat production and use any price increase to increase investor profitability or pay off debts.
(For a chart of declining US oil production, go here 🙂
Rising prices in recent years “have tended to be a bit of a mirage,” said Thomas Jorden, Cimarex Energy’s chief executive. “We will be very disciplined in setting a budget,” he told a Goldman Sachs conference on Thursday.
In the first two shale fields in the US, oil and gas companies are profitable in the range of $ 30 per barrel to $ 40 per barrel, according to data company Rystad Energy. This year’s higher prices could increase the shale group’s cash in operations by 32 percent, Rystad said.
Another factor that will benefit producers is the low costs of oil services. Excessive capacity of companies providing sand and fracking services reduces taxes and has failed to raise them.
“The margins are terrible,” said Chris Wright, chief executive of Liberty Oilfield Services, North America’s second-largest fracking company. “They’re a little better now than they were six months ago, but they’re still terrible.”
ACTIVITY REMAINS DEPRESSED
Liberty has kept existing customers through the pandemic, but prices remain so low that it made no sense to pursue new customers. Demand for fracking services is improving, but it is not reaching levels that would increase U.S. shale production, he said.
Shale producers have historically raised production budgets with rising oil prices, said Linda Htein, senior research manager at Wood Mackenzie Consulting. But “this time it’s maybe a little different,” because global demand remains uncertain, she said.
Oil should reach $ 60-65 a barrel to restore US production by 1 million barrels a day, while improving investor performance, said Raoul LeBlanc, vice president of data provider IHS Markit.
Energy executives in Colorado, Oklahoma, Wyoming and northern New Mexico, in a poll released Friday by the Federal Reserve Bank of Kansas City, said oil prices should average $ 56 a barrel for them to rise substantially. drilling.
The industry withdrew so much last year that working in the oil fields this year will mean “dampening declines rather than economic growth,” said Sarp Ozkan, senior director at analytics firm Enverus.
Report by Jennifer Hiller in Houston; edited by David Gregorio