A decision by OPEC (The Organization of Petroleum Exporting Countries) and allied nations to decrease crude oil production by March brought a Christmas gift for US shale oil firms, which have dropped the costs. However, any increment in oil prices by an unpredicted move will be just a modest stocking stuffer.
The United States crude oil production has dropped 2 million barrels per day in 2020 as low prices and demand forced shale producers to trim their losses. The investors had already been pressuring the industry to curb spending and increase returns before the coronavirus hit. The shale output was rapidly cut; however, it might return quickly if prices keep growing.
Saudi Arabia said it would voluntarily reduce its production by 1 million bpd in February and March this year. USSR and Kazakhstan will increase their output, unwilling to yield market share to the United States of America. Overall, OPEC+ had been due to bring back 0.5 million bpd in each of the two months. Saudi officials were concerned new growths would outpace demand during new COVID-19 lockdowns.
On Friday, the prices for West Texas Intermediate topped 52 dollars per barrel. The 12-month futures’ price (spending on new wells) hit $51.37 per barrel, up from $44.63 at the start of December.
US Producer’s Bottom Lines
Higher crude prices will drop directly to US producers’ bottom lines given recent cost cuts and commitments to keeping output flat. The companies pledged to keep production flat and use any price rises to increase investor returns. Thomas Jorden, CEO of Cimarex Energy, said that the rising prices in previous years have tended to be a bit of a mirage. Moreover, he added at Goldman Sachs conference on Thursday that they aim to be well-organized in setting a budget.
Rystad Energy said oil and gas companies are profitable in the top two US shale oil fields in the $30 per barrel to low $40 per barrel range. Rystad said that higher prices this year could push the shale group’s cash from processes up by 32 percent. An additional factor that will advantage producers is low oilfield servicing costs.
Chris Wright, CEO Liberty Oilfield Services, North America, said that margins are dreadful. He also stated that they are slightly better now than they were six months ago, but oil fields are still terrible.
Liberty has kept existing customers through the COVID-19 pandemic, but pricing remains so low it has not made logic to go after new clients. Moreover, Wright said that demand for fracking services is improving but failed to reach the level that would increase US shale oil production.
Raoul LeBlanc, a vice-president at IHS Markit, said that shale oil would have to rise $60 to $65 per barrel to restore US production by 1 million bpd while improving investor returns.