1 week Ago By Irina Slav
Drilling in the U.S. shale patch is starting to slow down amid weaker oil prices and cost uncertainty stemming from the tariff war.
Smaller producers are suspending new drilling in anticipation of a turnaround. Perhaps larger producers will follow. The question now is how long until that turnaround.
A month ago, Citigroup said that if U.S. oil prices fall below $60 drillers will start drilling less, which is what happens every time oil prices take a dip.
At $65 per barrel of West Texas Intermediate , the bank’s analysts said, shale producers will likely shut down 25 rigs, essentially eliminating production growth. At below $60 per barrel of WTI, rigs would go down by as many as 75 and production will reverse into decline, Citi also predicted. Right now, WTI is trading at below $65 per barrel, and the rig count is down , too, on an annual basis, reflecting price trends.
This time last year, there were 511 active rigs in the shale patch. Last week, there were 481. On a weekly basis, however, drillers added one rig, which might suggest the industry is not yet busy hunkering down to wait the price rout out.
Be that as it may, forecasters are busy revising their outlook for U.S. oil production.
The Energy Information Administration now expects U.S. oil production to grow by 300,000 barrels daily this year, which is down by 100,000 bpd from its earlier forecast.
The EIA motivated its prediction with expectations of lower demand growth because of the uncertainty sparked by Trump’s tariff offensive, the agency said in its latest Short-Term Energy Outlook. Related: Solar Power Surge Sinks Europe’s Electricity Prices Deep Below Zero The International Energy Agency is also forecasting lower U.S.
production growth in crude oil as it predicted the lowest oil demand growth in five years, again citing tariffs. Tariffs, it appears, are the new “supply chain bottlenecks” that will be used to explain every adverse development in various industries until they are removed or the market adjusts around them. While agencies and banks rush to revise their outlooks for U.
S. shale, prices have recouped some of their initial losses following the launch of the tariff offensive. Some from the sector have compared the current price situation to the 2020 lockdowns that decimated oil prices and caused a lot of bankruptcies and fears of a repeat will probably linger for a while.
But the fact that WTI dipped below $60 for only a short while should infuse industry sentiment with at least some optimism. There are good reasons for it. The bearish factors at play are pretty strong, at least according to forecasters.
The impact of tariffs on economic growth prospects is by far the most cited of these factors with all others essentially resulting from it. Yet most of the countries that Trump targeted with a tariff barrage are eagerly looking to seal new trade deals that will eliminate the tariff danger. This means that the threat to economic growth—and oil demand consequently—may well be exaggerated.
And this, in turn, means that fears about weak oil demand are likely to be exaggerated as well. Then there is the factor of price itself. Lower prices tend to stimulate demand, especially for a commodity as fundamental as crude oil.
That was why China, for all its severe lockdowns in 2020, stocked up on crude oil while it was dirt cheap. That is why Russia has become India’s single largest oil supplier, overtaking OPEC producers that were traditionally the subcontinent’s top oil suppliers. The tricky thing about U.
S. shale, however, is that President Trump has promised cheap gas to his voters. Cheap gas means cheap oil, and cheap oil means less drilling—until supply tightens enough to push prices higher.
As a self-professed supporter of the energy industry, Trump is unlikely to insist that shale producers keep drilling when there is no business case for it, and there is no way to pressure them into drilling while oil is cheap. What he appears to be doing is encouraging growth in the industry by reducing red tape and, consequently, certain costs. Whether this would be enough to offset the effect of international trade developments on prices remains to be seen.
For now, drillers are curbing spending, which was another thing that was only to be expected in the current price environment. According to oilfield services major Baker Hughes, the spending decline and drilling slowdown could extend into the second half of the year—unless the tariff situation is resolved by June. Ultimately, it is a matter of time.
Given long enough, drillers will tighten supply enough to push prices higher. Forecasters don’t seem to take account of this in their forecasts but that’s understandable—these forecasts change on a sometimes weekly basis depending on the latest price swings and the momentary causes for these swings. The long-term industry cycles, meanwhile, remain inexorable.
By Irina Slav for Oilprice.com More Top Reads From Oilprice.com.
