Last week witnessed a significant uptick in United States crude oil prices, hitting their peak for the year. Despite this, the combination of a floundering natural gas market, escalating costs, and a prioritization of shareholder returns over new exploration has restrained shale drillers from substantially increasing their output in what stands as the world’s leading oil and gas producer.
In the global market, Brent crude oil benchmark prices surged above $91 a barrel last week. Concurrently, in the U.S., West Texas Intermediate (WTI) futures exceeded $86 a barrel, marking their highest point since October. These price escalations are largely attributed to supply uncertainties stemming from attacks on Russian oil infrastructure and international shipping disruptions, as well as sustained production reductions by the Organization of the Petroleum Exporting Countries and their allies (OPEC+).
Early April saw Bank of America revise its 2024 Brent and WTI price projections upward to $86 and $81 per barrel, respectively, with anticipations of them reaching a zenith of around $95 a barrel during the summer. Nevertheless, these heightened prices have yet to lure U.S. drillers into amplifying their production levels. According to statements from operators and executives of service firms, this reluctance is partly due to a significant drop in the valuation of gas produced concurrently with oil.
In regions like Texas, Louisiana, and New Mexico, production cutbacks were initiated in the first quarter as operational costs surged. Notably, in the Permian Basin, the premier U.S. shale field, the breakeven price for drilling new wells escalated by $4 per barrel over the previous year, as reported by the Federal Reserve Bank of Dallas.
The current scenario is further complicated by depressed gas prices. Henry Hub futures, a standard for U.S. gas pricing, have been trading below $1.80 per million British thermal units (mmBtu), plummeting to a three-and-a-half-year low earlier this year due to mild weather conditions and a glut in supply. Mark Marmo, CEO of Deep Well Services, highlighted the necessity for gas prices to reach $2.50 to stimulate a broader increase in drilling activities, especially for Permian customers dealing with associated gas.
In West Texas, the situation has reached a point where producers are compensating shippers to offload their gas, with prices at the Waha hub frequently dipping below zero since March. This scenario indicates a significant surplus in supply over demand and pipeline capacity, prompting producers to either curtail their output or incur costs to continue extraction.
Tim Roberson, president of Texas Standard Oil, emphasized that constrained gas pipeline and processing capacities are major bottlenecks for oil production in parts of the Permian Basin. He noted that while high oil prices can offset gas price concerns, they have not sufficiently motivated increased drilling activity.
Despite projections of U.S. oil production growth by 260,000 barrels per day (bpd) to a record 13.19 million bpd this year, this is considerably less than the over 1 million bpd growth recorded between 2022 and 2023, as per the U.S. Energy Information Administration. Although U.S. shale production has consistently outperformed predictions, market analysts remain hesitant to adjust their growth forecasts upward in response to the price increases.
Energy technology company Enverus recently forecasted a 255,000 bpd increase in U.S. production for the year. However, Alex Ljubojevic, an analyst at Enverus, pointed out that the stagnation in rig activity levels suggests that the current price levels are not sufficiently stimulating increased operations. Data from Baker Hughes revealed a decrease in the U.S. oil drilling rig count to 508, down 82 from the previous year, with the active gas rigs count at its lowest since January 2022 at 110.
Challenges such as reduced access to financing and investor demands for higher returns are further hampering oil production expansions, according to Brad James, CEO of Enterprise Offshore Drilling. Additionally, impending fees for methane emissions exceeding certain limits are a concern for producers, with these fees set to start at $900 per metric ton and increase to $1,500 per ton by 2026.
A Dallas Fed survey last month indicated that 80% of the 129 executives surveyed perceived the methane fee as somewhat or significantly detrimental to their operations. James also highlighted the constrained access to capital, attributing it to various factors including environmental, social, and governance (ESG) considerations, political dynamics, the energy transition, and biases against fossil fuels. Consequently, this has led to clients exhibiting greater capital discipline compared to previous years.
