HOUSTON (Reuters) – The decision by OPEC and allied countries to cut oil production by March delivered a delayed Christmas gift to U.S. shale companies that cut costs, but any price increase spurred by the unexpected change could be only modest stocks.
U.S. crude oil production fell 2 million barrels a day last year, as low prices and demand have forced shale producers to reduce their losses. Investors were already putting pressure on the industry to curb spending and increase returns before the pandemic came. Shale production was cut quickly, but could return quickly if prices continue to rise.
On Tuesday, Saudi Arabia, the world’s largest oil exporter, said it would voluntarily reduce its production by 1 million barrels a day (bpd) in February and March, after Russia pressed to increase production, concerned about American shale capitalizing on the group’s cuts.
Russia and Kazakhstan will increase their production, reluctant to cede market share to the United States. Overall, OPEC + should restore 500,000 bpd in each of the two months. Saudi officials fear that further increases will outweigh demand during new coronavirus blocks.
West Texas Intermediate prices on Friday reached $ 52 per barrel, and the 12-month future price, which producers use to plan spending on new wells, reached $ 51.37 a barrel, compared to $ 44 , 63 in early December.
BOTTOM LINES TO BENEFIT
Higher oil prices will fall directly on the financial results of US producers, given recent cost cuts and commitments to keep production stable. The companies have pledged to keep production stable and use any price increases to increase investor returns or pay off debt.
(For a graph of the decline in US oil production, click here 🙂
Price increases in recent years “tended to be a bit of a mirage,” said Thomas Jorden, chief executive of Cimarex Energy. “We will be highly disciplined in setting a budget,” he added at a Goldman Sachs conference on Thursday.
In the two largest shale fields in the U.S., oil and gas companies make profits in the range of $ 30 to $ 40 a barrel, according to data company Rystad Energy. Higher prices this year could raise the shale group’s operating cash by 32%, said Rystad.
Another factor that will benefit producers is the low costs of oilfield service. Overcapacity in companies that provide sand for fracking and services cut tariffs and have not been able to increase them.
“The margins are terrible,” said Chris Wright, chief executive of Liberty Oilfield Services, North America’s second largest hydraulic fracturing company. “They are a little better now than they were six months ago, but they are still terrible.”
ACTIVITY REMAINS DEPRESSED
Liberty kept existing customers during the pandemic, but prices remain so low that it makes no sense to go after new customers. Demand for fracking services is improving, but falls short of levels that would increase U.S. shale production, he said.
Shale producers have historically increased production budgets with rising oil prices, said Linda Htein, senior research manager at consultancy Wood Mackenzie. But “this time it may be a little different” because global demand remains uncertain, she said.
Oil would have to reach $ 60 to $ 65 a barrel to restore U.S. production by 1 million barrels a day, while improving investor returns, said Raoul LeBlanc, vice president of data provider IHS Markit.
Energy executives in Colorado, Oklahoma, Wyoming and northern New Mexico in a Kansas City Federal Reserve Bank survey released Friday that oil prices would average $ 56 a barrel for them to substantially increase drilling.
The industry retracted activity so much last year that working in the oil field this year will mean “mitigating declines instead of growth,” said Sarp Ozkan, senior director at analytics firm Enverus.
Jennifer Hiller reporting in Houston; edition by David Gregorio