HOUSTON (Reuters) – The decision by OPEC and allied countries to cut crude production until March delivered a Christmas present in late US slate companies that have cut costs, but any rise in prices caused by the unexpected measure may be just a modest sausage.
U.S. crude production has fallen 2 million barrels a day over the past year as low prices and demand forced shale producers to reduce their losses. Investors had already been pressuring the industry to curb spending and boost yields before the pandemic hit. Slate production declined rapidly, but could return quickly if prices continue to rise.
On Tuesday, Saudi Arabia, the world’s largest oil exporter, said it would voluntarily cut production by a million barrels a day (bpd) in February and March, after Russia pushed for increased production, worried that the American shale would capitalize on the group’s cuts.
Russia and Kazakhstan will increase their production, reluctant to cede market share to the United States. Overall, OPEC + had to restore 500,000 bpd in each of the two months. Saudi officials were concerned that the new increases would outpace demand during the new coronavirus blockades.
West Texas Intermediate prices on Friday topped $ 52 a barrel and the price of 12-month futures, which producers use to plan spending on new wells, reached $ 51.37 a barrel, up from $ 44. $ 63 early December.
BOTTOM LINES TO BENEFIT
Higher crude oil prices will fall directly on the results of US producers, given recent cost cuts and commitments to keep production flat. Companies pledged to keep production flat and to use any price increase to increase investor returns or repay debt.
(For a chart on declining US oil production, go here 🙂
Rising prices in recent years “have tended to be a bit of a mirage,” said Thomas Jorden, chief executive of Cimarex Energy. “We will be very disciplined when it comes to setting a budget,” he added at a Goldman Sachs conference on Thursday.
According to data firm Rystad Energy, in the two major slate fields in the United States, oil and gas companies are profitable at between $ 30 per barrel and $ 40-40 per barrel. This year’s higher prices could increase shale group cash from operations by 32%, Rystad said.
Another factor that will benefit producers is the low costs of field service. The overcapacity of companies that provide sand fracking and services reduce rates and have not been able to increase them.
“The margins are terrible,” said Chris Wright, executive director of Liberty Oilfield Services, North America’s second-largest fracking company. “They’re a little better now than they were six months ago, but they’re still terrible.”
THE ACTIVITY IS DEPRESSED
Liberty has kept existing customers through the pandemic, but prices remain so low that it makes no sense to go looking for new customers. Demand for fracking services is improving, but it is not reaching levels that would increase slate production in the United States, he said.
Historically, shale growers raised production budgets with rising oil prices, said Linda Htein, senior research manager at consulting firm Wood Mackenzie. But “this time maybe it’s a little different” because global demand remains uncertain, he said.
Oil should fetch between $ 60 and $ 65 a barrel to restore U.S. production of one million barrels a day and improve investor returns, said Raoul LeBlanc, vice president of data provider IHS Markit.
Energy executives in Colorado, Oklahoma, Wyoming and northern New Mexico, in a survey by the Federal Reserve Bank of Kansas City, reported Friday that oil prices would average $ 56 a barrel to substantially increase drilling .
The industry withdrew so much activity last year that work on oil fields this year would mean “mitigating falls rather than growth,” said Sarp Ozkan, senior director of analytics firm Enverus.
Report by Jennifer Hiller in Houston; edition by David Gregorio