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Now That Oil Prices Are Up, What’s Keeping U.S. Production Down?

By Ellen R. Wald, Ph.D.CommoditiesMar 25, 2021 06:32AM ET
www.investing.com/analysis/now-that-oil-prices-are-up-whats-keeping-us-production-down-200569380
Now That Oil Prices Are Up, What’s Keeping U.S. Production Down?
By Ellen R. Wald, Ph.D.   |  Mar 25, 2021 06:32AM ET
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Oil prices have remained solidly above the $55 per barrel range (both Brent and WTI) since the beginning of February, and traders should be wondering why we are not seeing new production from the U.S. oil industry.

Brent Weekly TTM
Brent Weekly TTM

In fact, both crude benchmarks seem to be safely within the $60 range now, with Brent recently spiking above $70 for a moment, and WTI hovering a little lower.

WTI Weekly TTM
WTI Weekly TTM

In recent years, this level of oil pricing would have led to more U.S. production, particularly from the shale fields, so why aren’t we seeing that right now?

According to the EIA, U.S. oil production is averaging about 10.9 million bpd and has been for some time. Production has increased from 9.7 million bpd last August, but it is still below the average production of 13.1 million bpd that we saw this time last year. The oil rig count in the U.S. rose by 9 last week, and it has basically remained in the 300-318 range since January. Even with productivity gains, shale oil producers will likely need to increase the rate of drilling wells just to keep production steady.

But based on recent experiences, we might expect shale oil companies to ramp up drilling and increase production at these crude price points. However, many shale firms seem to have no plans to expand this year. The first quarter energy survey out of the Federal Reserve Bank of Dallas, a government department, provides insights into the current strategies of shale oil companies.

The survey data were collected March 10-18, and 155 energy firms responded, including 104 exploration and production firms and 51 oilfield services firms. According to respondents, the average price needed to cover operating expenses currently ranges from $17 to $34 per barrel (depending on the region). Firms reported needing an average price of $52 per barrel to profitably drill a new well. Of the firms, 80% could profitably drill new wells at or below the Mar. 19 spot price ($61 per barrel) for WTI. Therefore, it would appear that the current higher prices would incentivize higher production.

But the survey provided some surprising news, too. The number of firms planning to grow their operations this year is not high, despite the elevated oil prices. 53% of executives reported that they don’t plan to hire any new employees in 2021. 34% expect to increase their number of employees only slightly in 2021.

In pre-pandemic times, U.S. oil producers would have been quick to ramp up production and take advantage of whatever profits could be made. But now, firms are hesitant.

Here are some reasons why producers may not be ramping up production:

1. Industry Consolidation: When oil prices plunged last year, many smaller, less profitable producers went bankrupt or sold their assets to larger producers. The industry has gone through several periods of consolidation in recent years, but last spring saw the end of several smaller and weaker firms. The remaining firms are larger, better capitalized and don’t see a reason to rush to bring production back online. They aren’t worried about competition from smaller firms, they don’t need the revenue right away, and they would rather wait and see what happens.

2. Financing Difficulties: Even if producers can afford to drill wells profitably at current prices, they would likely still be using financing to do so. Banks may be reluctant to lend money to oil producers to drill new wells for a variety of reasons including the new administration in the White House. Banks are cautious because of sentiment around the Biden team’s seemingly anti-oil policies and fears that Saudi Arabia could decide crash the oil market again like it did last spring.

3. Pessimistic Forecasting: According to the Dallas Fed survey, most firms have a fairly pessimistic view of oil prices. Of the respondents, 56% expect that the price of WTI will be between $50 and $62 by the end of December 2021. 25% expect that WTI will be in the $62 to $68 range by then. Most firms believe that crude prices will be lower than it was when the survey was conducted in mid-March. Firms are hesitant to expand their drilling operations if they expect that WTI is heading lower rather than higher.

4. Federal Regulation: The Biden administration’s moratorium on new oil and gas leases on federal land isn’t a significant factor for production right now (because it does not impact existing wells), it is clear that firms are already concerned about their ability to expand in the future. 58% of executives reported that they are concerned that “increased federal regulation will make their business unprofitable.” These concerns are reflected in the comments many executives offered. With such a pessimistic outlook, it isn’t surprising that firms are hesitant to make large cash outlays now. That keeps the rig count depressed and means the increase in production is muted, at best, unless sentiment changes.

Now That Oil Prices Are Up, What’s Keeping U.S. Production Down?
 

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Now That Oil Prices Are Up, What’s Keeping U.S. Production Down?

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Comments (9)
Siv Sokha
Siv Sokha Mar 29, 2021 6:24AM ET
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I want to make acc but how
Sh KOD
Sh KOD Mar 25, 2021 10:39AM ET
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You voted for Biden
Ron Love
Ron Love Mar 25, 2021 10:13AM ET
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Biden’s asinine energy policy? Start there.
Notvery Goodathis
Peteymcletey Mar 25, 2021 10:06AM ET
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Biden hates America
TJF Denver
TJF Denver Mar 25, 2021 10:03AM ET
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Government
Rusty Jabour
RBull Mar 25, 2021 7:40AM ET
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Interesting you didnt mention the increase in electric vehicles or anything on the demand side as factors in decreased production. This story is i complete without an examination of factors that are lessening demand, which is another major factor for pessimistic production forecasts. The PhD that you’re so proud to put after your name should mean you are a thorough researcher. This is not a thorough report without a discussion about the forces behind lessening demand and forecasts for decreases in global oil use in the future. Your editor should have demanded a rewrite.
Maria Webb
Maria Webb Mar 25, 2021 7:40AM ET
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I really enjoyed the article and found it enlightening as to what is currently happening. I don't think that we are anywhere near the point of eliminating gas. Most homes do not have charging stations and the batteries have not gotten to the point that makes them feasible. Who wants to wait nine hours for their overpriced electric car to charge? I sure cannot even afford one! We are an impatient people. Natural gas is an affordable way to heat homes, and efficient for cooking. Also, after freezing windmills, like what just happened in Texas, and snow covered solar panels, gas is still more reliable. Also, with people tired of being locked up due to Covid, I think people will be eager to travel this summer. I look forward to a future with better options in electricity, but I think we are nowhere close at this point.
Rusty Jabour
RBull Mar 25, 2021 7:40AM ET
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At least YOU talked about EV and demand. Its a shame you weren’t the author. Thanks for rounding out an otherwise incomplete story. Also, i didnt say oil/gas are going away. I said the author didn’t include a single mention of demand for EV, fleets moving to EV, etc. Im a bull for oil/gas, but not blind to the red cape of the emerging electric markets — and i KNOW it takes oil and gas and coal to make electricity.
Sheldon Revis
Sheldon Revis Mar 25, 2021 7:40AM ET
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you are 100% FOS or just totally ill-informed if you think there are enough electric vehicles in existence or even forecast in the next decade to effect oil production and reserves.
Rusty Jabour
RBull Mar 25, 2021 7:40AM ET
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I didn’t say there were enough EVs to cause a demand shift. I simply said the writer didn’t mention EV or demand issues in her article, thus it was incomplete only to talk about production. I agree thst oil will continue to play strong, but the production side is only one aspect. An analysis should include supply (production) and demand. Thats all i was saying. Are you opposed to an overall review of issues? And anyone with PHD behind their name ought to know better than to write an unbalanced examination of markets.
André Uruguay
André Uruguay Mar 25, 2021 7:40AM ET
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Rusty Jabour she didn't mention EVs because, as already said, in the short/medium term, is irrelevant. And, YES, the article is all about PRODUCTION, as you can deduct...from the title!!!! Finally, please, stop trying to offend the Author. At least show some respect for an article that showed the main factors acting on the US oil production in a so well structured way.
michael engel
michael engel Mar 25, 2021 7:27AM ET
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1) Dr. Vald, SPX was in trading rang between 1966 to 1982. 2) The Suez canal closure between June 1967 to June 1975 caused the commodity osc. 3) Faisal ARAMCO confiscation, the oil embargo and Iraq Iran war sent oil prices higher. 4) While the country was in a deep recession in 1980 & 1982, the oil sector lifted SPX to a higher low. 5) WTI plunged to a selling climax in Mar 15 2015 @ 42.03.  6) The quick response was to 62.58 in May 4 2016. 7) WTI trading range is : 42.05 and 62.58. A bubble up in Oct 2018. A bubble down in 2020. Now  back in the TR until the next plunge. Oil co executives measure caution.  8) There will be a test to the previous low, a higher low, a spring, that will send WTI back to the TR for several years, that will lead to a jump. 9) The huge cause will send prices higher for many years. 10) Until then, oil co main job is to survive !!
michael engel
michael engel Mar 25, 2021 6:43AM ET
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1) The paper WTI was down 115 from 147 to 32 in 2008 and down 115 from 77 in Oct 2018 to minus 40. 2) The paper oil is up 100 from minus 40 to 60. 3) The energy market will have to stabilize from it's wild osc. It will take years. 6) There will be a test to the previous low, in real oil, in the next 3Y to 7Y. 7) Those who innovate, squeeze capex and cost will survive.  8) The will absorb the guppies, subsidized by the gov. 9) New innovations, like more efficient batteries and molten salt mini nukes, will grow to improve efficiencies and distribution.
Timochin Khan
Timochin Khan Mar 25, 2021 6:33AM ET
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Excellent report...Still Iran selling very cheap oil to China and unofficially to Turkey and Pakistan....
 
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