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

By Investing.com (Barani Krishnan/Investing.com)CommoditiesApr 07, 2021 04:41AM ET
www.investing.com/analysis/oil-drill-baby-drill-isnt-gone-much-as-saudis-like-to-think-200571652
Oil: ‘Drill, Baby, Drill' Isn't Gone, Much As Saudis Like To Think
By Investing.com (Barani Krishnan/Investing.com)   |  Apr 07, 2021 04:41AM ET
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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
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

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.

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.

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.

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

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

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Comments (10)
Ivan Radusic
Castor8888 Apr 09, 2021 3:24AM ET
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Mr. Krishnan thank you so much for this article. You are always great.
Barani Krishnan
Barani Krishnan Apr 09, 2021 3:24AM ET
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Castor8888, it's readers like you who keep me going. Thanks much for the appreciation. Bests.
Golden Berg
goldenberg Apr 07, 2021 6:30PM ET
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While overall sentiment for oil is Bear, the smart money is quietly buying O&G stocks. I see oil goes back to $50 and hover over there in order to keep US oil from booming.
inderjeet virk
inderjeet virk Apr 07, 2021 11:18AM ET
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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.
Barani Krishnan
Barani Krishnan Apr 07, 2021 11:18AM ET
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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.
Robert Flores
Robert Flores Apr 07, 2021 10:51AM ET
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Hi Barani, but are these rigs coming online old ones? Or is there actuall driiling?
Barani Krishnan
Barani Krishnan Apr 07, 2021 10:51AM ET
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Hello Robert, the rig numbers have climbed persistently since the week ending Sept 18. Certainly, some of that would be old rigs put back into commission as well as new ones put in for drilling. Interestingly, the EIA has pared down production estimates again this week to 10.9 million bpd from the previous week's 11.1 million. This is certainly a suspicious figure given the climbing rig count. I won't be surprised to see the EIA revise up the production number again by next week.
Robert Flores
Robert Flores Apr 07, 2021 10:51AM ET
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Barani Krishnan we can have a scenario where rigs go up or steady as production goes down because these old wells start getting depleted - i just dont see the incentive of companies pooring billions into fracking and risking not getting their money back as prices will stay suppressed by over supply and the new electric car frontier
Barani Krishnan
Barani Krishnan Apr 07, 2021 10:51AM ET
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Robert Flores  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.
Robert Flores
Robert Flores Apr 07, 2021 10:51AM ET
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Barani Krishnan so the US does have the capacitty to go back to those levels without further exploration? Just tapping into proven reserves ?
Barani Krishnan
Barani Krishnan Apr 07, 2021 10:51AM ET
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Robert Flores  That seems logical, yes sir.
John Brannon
John Brannon Apr 07, 2021 8:00AM ET
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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.
Barani Krishnan
Barani Krishnan Apr 07, 2021 8:00AM ET
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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
Rehman Aziz
Rehman Aziz Apr 07, 2021 7:39AM ET
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Wti 55 target
Barani Krishnan
Barani Krishnan Apr 07, 2021 7:39AM ET
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Possibly.
Rehman Aziz
Rehman Aziz Apr 07, 2021 7:37AM ET
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Oil wont hold a bull
Rehman Aziz
Rehman Aziz Apr 07, 2021 7:36AM ET
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Its so stupid to buy oil in 3rd wave
Abbas Khan
Abbas Khan Apr 07, 2021 6:35AM ET
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hi sir today gold is bull or bears what is your expectations
Joco Gorenc
Joco Gorenc Apr 07, 2021 6:35AM ET
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70% probability BULL and 30% BEAR
Rehman Aziz
Rehman Aziz Apr 07, 2021 6:35AM ET
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Bear
Barani Krishnan
Barani Krishnan Apr 07, 2021 6:35AM ET
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Abbas, it's just trapped in na $15 range here. Hard to tell when the breakout will be.
Rana Azam
Rana Azam Apr 07, 2021 4:44AM ET
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Thanks 👍
بهمن قدمی
بهمن قدمی Apr 07, 2021 4:44AM ET
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Barani Krishnan
Barani Krishnan Apr 07, 2021 4:44AM ET
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Most welcome Rana.
 
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