Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

OPEC crude output cuts should help U.S. shale profits in 2021

CommoditiesJan 10, 2021 02:25AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters.

By Jennifer Hiller

HOUSTON (Reuters) - A decision by OPEC and allied countries to cut crude production through March delivered a late Christmas present for U.S. shale firms that have slashed costs, but any rise in prices spurred by the unexpected move may be just a modest stocking stuffer.

U.S. crude oil production has fallen 2 million barrels per day in the last year as low prices and demand forced shale producers to cut their losses. Investors had already been pressuring the industry to curb spending and boost returns before the pandemic hit. Shale output was quickly cut, but might return quickly if prices keep rising.

On Tuesday, Saudi Arabia, the world's biggest oil exporter, said it would voluntarily reduce its production by 1 million barrels per day (bpd) in February and March, after Russia pushed to increase output, worried about U.S. shale capitalizing on the group's cuts.

Russia and Kazakhstan will increase their output, reluctant to cede market share to the United States. Overall, OPEC+ had been due to restore 500,000 bpd in each of the two months. Saudi officials were concerned new increases would outpace demand during new coronavirus lockdowns.

Prices for West Texas Intermediate on Friday topped $52 per barrel, and the 12-month futures' price, which producers use to plan spending on new wells, hit $51.37 a barrel, up from $44.63 at the start of December.

BOTTOM LINES TO BENEFIT

Higher crude prices will fall directly to U.S. producers' bottom lines given recent cost cuts and commitments to keeping output flat. Companies pledged to keep production flat and use any price increases to boost investor returns or pay down debt.

(For a chart on declining U.S. oil output, go here: https://graphics.reuters.com/OIL-OUTLOOK/xklvyjajmpg/chart.png)

Rising prices in recent years have "tended to be a bit of a mirage," said Thomas Jorden, chief executive of Cimarex Energy (NYSE:XEC). "We're going to be highly disciplined in setting a budget," he added at a Goldman Sachs (NYSE:GS) conference on Thursday.

In top two U.S. shale fields, oil and gas companies are profitable in the $30 per barrel to low $40s per barrel range, according to data firm Rystad Energy. This year's higher prices could push the shale group's cash from operations up by 32%, Rystad said.

Another factor that will benefit producers is low oilfield service costs. Excess capacity at the companies that provide fracking sand and services cut fees and have not been able to raise them.

"Margins are terrible," said Chris Wright, chief executive of Liberty Oilfield Services (NYSE:LBRT), the second-biggest fracking company in North America. "They're slightly better now then they were six months ago, but they're still terrible."

ACTIVITY REMAINS DEPRESSED

Liberty has kept existing customers through the pandemic, but pricing remains so low it has not made sense to go after new clients. Demand for fracking services is improving but falls short of levels that would boost U.S. shale production, he said.

Shale producers historically lifted production budgets with rising oil prices, said Linda Htein, senior research manager at consultancy Wood Mackenzie. But "this time is maybe a little bit different" because global demand remains uncertain, she said.

Oil would have to hit $60 to $65 per barrel to restore U.S. output by 1 million barrels per day while improving investor returns, said Raoul LeBlanc, a vice president at data provider IHS Markit.

Energy executives in Colorado, Oklahoma, Wyoming and northern New Mexico in a Federal Reserve Bank of Kansas City poll released Friday the said oil prices would have to average $56 per barrel for them to substantial increase drilling.

The industry pulled back activity so much last year that oilfield work this year will mean "mitigation of declines rather than growth," said Sarp Ozkan, a senior director at analytics firm Enverus.

OPEC crude output cuts should help U.S. shale profits in 2021
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email