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With Oil Prices Rising, Why Isn't U.S. Shale Production Surging?

By Ellen R. Wald, Ph.D.CommoditiesSep 30, 2021 05:29AM ET
www.investing.com/analysis/with-oil-prices-rising-why-isnt-us-shale-production-surging-200603536
With Oil Prices Rising, Why Isn't U.S. Shale Production Surging?
By Ellen R. Wald, Ph.D.   |  Sep 30, 2021 05:29AM ET
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With oil prices at four-year highs and natural gas prices soaring in Europe and Asia, one key question is why has the American fracking industry failed to respond to higher prices by significantly increasing production?

WTI Weekly Chart
WTI Weekly Chart

After all, American fracking has been described as “nimble,” so where did that flexibility go?

The most common reason cited by prominent U.S. oil companies is that they plan to keep production flat in order to raise dividends for shareholders. A rather convenient answer, enabling them to focus their efforts on factors that make them more attractive to investors, but this answer doesn’t tell the whole story.

In a previous column earlier this year about the first quarter energy survey out of the Federal Reserve Bank of Dallas in March, I detailed 4 primary factors—industry consolidation, financing difficulties, pessimistic forecasting, and federal regulation—keeping oil companies from producing more oil.

The latest survey from the Dallas Fed reveals some new issues and a few surprises, including rising costs and an inability to hire qualified personnel. Here are 3 of the most important take-aways for oil traders from the latest survey:

1. Production Unaffected By Price And Price Forecasts

The biggest change between the first and second quarter surveys was in the revision in price forecasting. In March, many exploration and production (E&P) firms had pessimistic views about oil prices. At the time, WTI traded at about $61 per barrel. A majority of respondents in March expected that the price of WTI would decline by the end of December 2021.

Now, WTI is around $75 per barrel.

The latest survey reveals that 64% of respondents expect that the price of WTI will be between $65 and $75 per barrel by the end of December 2021, and 19% expect that the crude oil price could hit $80 per barrel by the end of December 2021. Yet, oil production has only marginally increased since March, despite a 25% increase in price and raised optimism seen in forecasts.

According to the EIA, U.S. oil production was at 11.1 million bpd at the end of March 2021, but it only increased by 400,000 bpd by the end of August. Note: the data for the end of August was before Hurricane Ida temporarily took out most of the offshore production in the Gulf of Mexico.

It was long believed that because of the nature of the fracking process and the relatively low capital expenditures per well, fracking companies could quickly deploy or scale back production based on oil prices. This may still be true in a technical sense, but the data shows this isn’t how shale oil producers are acting.

2. Rising Costs Are New Impediment

Many U.S. production companies that responded to the survey cited rising costs of raw materials, fuel and personnel as factors inhibiting production growth. For example, 39% of companies said their firm was having trouble hiring and that workers were looking for more pay than they were offering. Government restrictions and problems obtaining permits for pipeline construction were also seen as adding to company costs. Additionally, some cited ongoing issues with the supply chain.

For traders, the important takeaway is that the price producers say they need to profitably drill a new well is not a valuable metric for understanding whether shale oil producers will increase production. In March, producers reported that they could profitably drill wells in every shale oil region in the U.S. if the price of WTI was above $58 per barrel.

WTI prices have not only remained above $60 per barrel since then, but have climbed steadily to around $75 per barrel. Nevertheless, producers barely drilled any new wells and are now citing rising costs as a reason. This metric clearly isn’t helpful for understanding production growth at this time.

3. Financing Issues Could Change

Lack of access to traditional sources of capital remains an issue cited by oil producers, though some reported that they believe funders will be induced to return to the shale patch because companies are adhering to capital discipline, are paying off debt, and price forecasts are up. While some survey respondents still believe that the negative attitudes towards fossil fuel production espoused by the current administration will continue to suppress financing, this sentiment is not controlling.

In general, there is a new optimism amongst firms that they will soon be able to attract new investment. This may be overly optimistic, but traders will want to keep an eye on financing deals in the shale patches as a way of gauging when crude oil production in the U.S. might be ready for real growth.

With Oil Prices Rising, Why Isn't U.S. Shale Production Surging?
 

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With Oil Prices Rising, Why Isn't U.S. Shale Production Surging?

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Comments (11)
Dennis Mcconaghy
Dennis Mcconaghy Oct 04, 2021 11:33AM ET
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the prospect of Bidenism and the extremism of "build back better" is the real impediment
Ioannis Lazaridis
Ioannis Lazaridis Oct 01, 2021 4:29AM ET
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Thank you for the rich in valid information article. The more I read it , the more I see that is like a central planned project to keep prices high so to get inflation , which in combination with negative returns will reduce the DEBT/GDP ratio.
Rodney Dangerfield
Rodney Dangerfield Sep 30, 2021 2:42PM ET
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I tell you what it is awesome that we use 100-year-old technology just like our electrical grid .... but we're still getting rich.... thanks peasants
Jimmy Smith
Jimmy Smith Sep 30, 2021 11:10AM ET
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As your president, my first act is to kill thousands of great paying Keystone pipeline jobs, increase the every day fuel expense on all Americans and reward our enemies by purchasing all of our oil from them. I am the greatest.
Arthur Lynn
Hoppel Sep 30, 2021 10:33AM ET
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Thank you for the article.
Diedrich Fehr
Diedrich Fehr Sep 30, 2021 10:19AM ET
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Good article. Dig for the truth. Recall what was said earlier. Point out reversals of position. I like it. Good information.
milena villa escobar
milena villa escobar Sep 30, 2021 10:19AM ET
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The article fails to address OPEC  Monopoly and the failure of the United States to maintain energy Independence.  Like huh let's see....last year
mike Panaggio
mike Panaggio Sep 30, 2021 10:18AM ET
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Compensation direct behaviour. Youre missing something. They are doing well making great profits. They have cut costs including labor. Yes fule prices are up and that costs more but ********thats why they are making money. I dont see any real big production increases even if wti goes to 90. They like winning even if its not as big as they could get. But limited risk and its their new game.
Sam Se
Sam Se Sep 30, 2021 10:06AM ET
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Not surprised at all knowing how 'progressive' they are.
Michael Munson
Michael Munson Sep 30, 2021 10:05AM ET
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Bone head Biden and the dems hate fossil fuels.
Drew Antone
Drew Antone Sep 30, 2021 10:04AM ET
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why isn't shale surging? probably because a lot of people are fed up with trying to work in the oil business and then getting their jobs taken away so now they avoid them. yours truly writing this sure is after entering the industry in 2007 creating a lot of headway including making the companies that I was working for wealthy then getting my job taken away because of oil prices. why would I want to go work for that again
milena villa escobar
milena villa escobar Sep 30, 2021 7:36AM ET
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Don't post on this site they delete your comments.  It's a waste of time
Show previous replies (2)
milena villa escobar
milena villa escobar Sep 30, 2021 7:36AM ET
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Mojo Snake  amen brother
Barani Krishnan
Barani Krishnan Sep 30, 2021 7:36AM ET
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Mojo Snake  This is not in defense of Ellen, me or any of the writers on Investing. But we have a team of administrators who routinely trawl the site for off-color comments that pass their filters and that's what gets deleted. We do not (at least I don't) directly ask for intervention, unless, of course, what's posted is extremely abusive. I, in fact, enjoy interacting (parrying) with my readers. Bests.
Mojo Snake
Mojo Snake Sep 30, 2021 7:36AM ET
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Barani Krishnan  I know you do and I totally appreciate that.  I got rejected for calling the oil bulls P1gs the other day, that is a common term in the stock world.  As we all know P1gs get slaughtered and the oil bulls have pushed the bounds of reality with nothing to back this run. It has no business being where it is and even today is another manipulation.  I never assumed it was the authors doing the moderating more likely algos or woke college interns.
Barani Krishnan
Barani Krishnan Sep 30, 2021 7:36AM ET
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Mojo Snake  Hah ... I've been victim of that, myself, mate. It's combination of algo and sometimes, a well-meaning member of that team. If there's one thing you can be certain of, that team has no politics or any other agenda than enforcing the guidelines for commenting. They are recalibrating their filters and hopefully more market speak will make it to the site. Alternatively, you can try "bacon" ... :) (I do at times, coz it's the only way to get thru the filters)
Mojo Snake
Mojo Snake Sep 30, 2021 7:36AM ET
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Barani Krishnan  Thanks for the advice, I will try that in the future. Good to hear there is no agenda, I don't want to see this site go the way of Google, Youtube, Twitter, Facebook and every other censoring company.  We have enough of that on the web these days.  Opinions should be heard no matter how wrong or right they may be.  Take care
 
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