Get 40% Off
🚨 Volatile Markets? Find Hidden Gems for Serious OutperformanceFind Stocks Now

Oil: ‘Drill, Baby, Drill' Isn't Gone, Much As Saudis Like To Think

Published 04/07/2021, 04:41 AM
Updated 09/02/2020, 02:05 AM

Saudi Oil Minister Abdulaziz bin Salman is known for his brand of swagger and humor when conducting business. To send a shiver up the spines of oil bears, he invoked Hollywood tough-guy cop Dirty Harry, telling them to “make my day.”

To let the world know that US shale oil isn’t a threat to OPEC anymore, he said “‘Drill, baby, drill’ is gone forever.” 

Oil Daily

That might have been pushing it—because just a month after his verdict, the prolific US oil industry is proving the minister wrong.

After producing 11 million barrels per day or below for months, drillers in America were projected to have pumped an additional 100,000 barrels a day in the final week of March, the Energy Information Administration said. 

But 11.1 million barrels daily is still nothing for a country that once led the world in producing as many as 13.1 million barrels a day, before the crippling demand destruction from the coronavirus pandemic.

There are more statistics that suggest the once booming industry may be taking on a new life. 

The US oil rig count, a measure of future production, stood at 337 during the week ended Mar. 26, nearly double from the August record low of 172. 

While that’s less than half of the pre-pandemic rig count of 683, it was further proof that the “Drill, baby, drill” phrase associated with the fracking revolution in US shale isn’t “gone forever,” as Abdulaziz triumphantly declared in early March. Not yet at least.

Past Saudi Ministers Also Envisioned End of US Threat to OPEC—To No Avail

3rd party Ad. Not an offer or recommendation by See disclosure here or remove ads .

Abdulaziz isn’t the first Saudi minister who has envisioned an end to the US oil threat to OPEC—the 13-member Organization of the Petroleum Exporting Countries led by Riyadh, which has morphed in recent years into a larger alliance called OPEC+, after a partnership with 10 other oil producing countries led by Russia.

Before OPEC+ was formed in 2014, then Saudi oil minister Ali Naimi had tried, in a subtle way, to kill off the US industry by turning his kingdom’s spigots all the way up in the hope of creating a crude glut and a resulting price crash that would drive most drillers out of business. He got his wish, but only partly.

By 2015, at least 67 US oil and natural gas companies filed for bankruptcy, a 380% spike from the previous year.

But the US fracking boom didn’t die. It consolidated after shaking off the weakest players in the game, then it began growing again. 

The US oil rig count went from a record high of 1,609 rigs in October 2014 to 316 by May 2016. From there, it would spike again, climbing to 873 in January 2019, before the COVID-19-induced crash of 2020. 

While Naimi couldn’t extinguish the threat of US oil, it was his reign that ended instead. He was replaced as oil minister in 2015 with Khalid al-Falih. Soft-spoken to a fault, with a fittingly-soft approach, al-Falih lasted barely three years on the job. 

Abdulaziz, one of the sons of Saudi King Salman, was appointed to the post in 2019. From Day One, he has made no bones of his wish to ensure US drillers never overproduce to crash the market.

3rd party Ad. Not an offer or recommendation by See disclosure here or remove ads .

There are mixed variables now that indicate US production could continue growing as dynamically as it has from the lows of the pandemic, or become suppressed along the way. 

Abdulaziz may also have partial control, at best, over the outcome, or he might not even be able to correctly predict its outcome.

It’s A Complicated Situation

A survey of US energy company executives carried out by the Federal Reserve Bank of Dallas at the end of March, shows how complicated the situation is. 

Activity and spending in US oil fields is soaring as the industry recovers from the market carnage caused by COVID-19, according to the optimistic-but-wary executives who responded to the Dallas Fed’s poll.

While improved oil prices have boosted expectations for 2021, the poll’s respondents were also cautious about the potential for devastating policy changes by the Biden administration or being stymied by a crafty OPEC. 

One executive quoted by Reuters said:

“While the price increases have been welcome news, OPEC+ is a sword of Damocles: if US operators raise capital expenditures, OPEC+ will open its taps and flood the market. There is a tense detente currently.”

But if OPEC raises its own production first, it will give US drillers a good excuse to hike their own in the spirit of competition.

After one year of output cuts, the enlarged OPEC+ alliance decided last week to pump an additional 350,000 barrels per day in May and June, and a further 400,000 daily in July.

More than half of those polled said they were not hiring more workers due to concerns about President Joseph Biden’s green-energy policies and how intense his White House energy team in in phasing out fossil fuels quickly to achieve a faster transition.

3rd party Ad. Not an offer or recommendation by See disclosure here or remove ads .

Another industry executive, referring to the White House, told Reuters: 

“I believe that it is their goal to effectively shut down our industry, and they will pursue that end with great energy.”

But US oil drillers still have one great thing going for them: oil prices north of $60 per barrel. That might convince shareholders—who’ve forced them into strict cash conservation in order to earn dividends off them—to give them a break in expanding output. 

The survey’s respondents said they did not expect oil prices to come off too much from their current highs. Some companies even reported a break-even price of $50 per barrel, $1 higher than last year, to drill in the Permian Basin, the top US shale field.

At current prices, that gives them a premium of almost $10 per barrel—enough to grow production, albeit slower, if not at its March pace.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

Latest comments

oil rig rise does not represent weekly oil production, but a sign of future oil production. drill baby drill is not gone yet so does the graveyard for lots of oil companies.
Yes, Inderjeet, as the story says, it's a measure of future production. It is usually at a five-week lag to the monthly production number reported by the EIA.
Hi Barani, but are these rigs coming online old ones? Or is there actuall driiling?
 Yes, that's a good point. But I also think electrification is still an Utopian thing -- it will happen but perhaps not as quickly as many of us think -- so bringing crude production back to 13 mln bpd (or even 14 million) in the next three years not unthinkable, sir.
so the US does have the capacitty to go back to those levels without further exploration? Just tapping into proven reserves ?
 That seems logical, yes sir.
It seems as though the oil and natural gas producers never really go away, no matter how poor their performance. Chesapeake Energy paid bonus money of $3,000 / acre in my area, where other companies were paying $500. Everyone knew it wasn't realistic. A few years later they were bankrupt. This February they exited bankruptcy. Even if a producer actually goes out of business, another company buys their assets and soldiers on. And with junk bonds at about 4%, there doesn't really seem to be a shortage of money. Contrary to the oil field saying, "Lord let there be just one more boom and I promise I won't blow it," there does seem to be a bit more constraint than after previous "busts." Per your thoughts, time will tell.
Thanks John for that wonderful bit of detail. Indeed, the late Aubrey McClendon started a trend in gas that goes on till today. I don't think the beast called shale can be put down for long, let alone be extinguished. There will probably a renaissance in the US oil numbers too, not too far from now, however, GREEN we get with Biden. Time will tell, as you say. Bests - B
Wti 55 target
Oil wont hold a bull
Its so stupid to buy oil in 3rd wave
hi sir today gold is bull or bears what is your expectations
70% probability BULL and 30% BEAR
Abbas, it's just trapped in na $15 range here. Hard to tell when the breakout will be.
Thanks 👍
Most welcome Rana.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.