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Shale races to block oil rally as OPEC + Rift shakes up the market

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Shale races to block oil rally as OPEC + Rift shakes up the market

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(Bloomberg) – As soon as the OPEC + negotiations flopped on Monday, stoking fears of a supply cut and sending oil prices skyrocketing, U.S. shale executives began calling on the phone. .

They were not ordering their crews to drill for more oil. They weren’t planning a miraculous comeback in US crude production. They were securing hedges: setting prices for the oil they plan to produce next year and guarding against a possible market downturn, said people familiar with the operations, who asked not to be identified because the information is not public.

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Hedging is about the only sure thing about the shale’s response to the OPEC + crisis so far. The cartel’s failure to reach an agreement in various meetings since last week has raised the question of whether US oil drillers will reappear and seize the moment to steal market share. Some, on the other hand, fear that the rupture of the cartel could trigger a price that would flood the oil market.

It certainly represents the greatest proof yet of Shale’s newfound determination to act with discipline and focus on investor returns rather than obsessing over growth. Whether the industry will manage to stay the course or get hundreds of underserved rigs back online is a subject of much debate.

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Shirin Lakhani, senior oil analyst at Rapidan Energy Group, said publicly traded shale producers are “even more focused on capital discipline, increasing returns for shareholders and maintaining positive free cash flow.” Meanwhile, energy analyst Paul Sankey described the industry as “alcoholics spending in a fully stocked bar right now.”

The head of Patterson-UTI Energy Inc., the second-largest owner of drilling rigs in the shale patch, said in an interview Tuesday that he believes shale drillers are capable of doing both: increasing production in response to high oil prices and keep yours. promise of discipline in spending to investors.

What is clear at the moment is that US producers have yet to show significant signs of returning to growth in shale patches from Texas to North Dakota. And it could very well be that the industry waits for the OPEC + storm to pass, see how it all plays out, and gauge investor sentiment before deciding its next move.

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American scouts “have said they are going to maintain fiscal discipline, and I think they will, I think they should,” said Patterson CEO Andy Hendricks. But investor mindsets could be what changes, he said: “With oil trading at $ 73 a barrel, they’re going to say, ‘Why don’t you drill a little more? Let’s produce a little more. ‘

Until that happens, they are hedging: Open interest in New York oil futures, which indicates the total number of contracts held by the market at the end of a trading day, has risen sharply in the last week, mostly in aggregate. with gains in oil prices in the United States. Part of this is because shale drillers take up new positions as a means of covering or protecting their spending budgets in case prices weaken in the coming months.

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The uncertainty that hit the market is clear in the price changes that followed the OPEC + impasse during the last two sessions.

In New York, West Texas Intermediate oil futures, which briefly hit their highest level since 2014 on Tuesday, just 2 cents below $ 77 a barrel, later in the day plunged to less than 73. Dollars. In London, Brent crude fell below $ 75 a barrel after breaking above $ 77 for the first time since 2018 on Monday.

Raoul LeBlanc, an analyst at IHS Markit Ltd., says shale producers likely need a sustained price of around $ 85 a barrel to increase production by 8-10% annually and adequately reward shareholders.

“In reality, the United States can grow faster than ever without much trouble, it’s just that they are choosing not to do so at the behest of shareholders,” he said. “The temptation is growing stronger for the United States to restart growth in a way that materially impacts the global balance.”

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See also: Shale will wait for OPEC before turning on taps, says Conoco

For the most part, American producers have set their 2021 drilling plans in stone and have spent months assuring investors that they won’t overspend on their budgets, unlike much of the debt-driven boom of the last decade.

Most producers will only publicly disclose their drilling budgets in the fourth quarter or first quarter of next year, so there is time for them to adjust to a new period of higher prices.

Daniel Yergin, oil historian and vice president of IHS Markit, expects shale to add about 200,000 barrels a day to US production this year, and up to 400,000 next year if prices stay above $ 65 a barrel.

At a stable $ 75 a barrel, much of the US shale could increase spending by 30% while still meeting the low capital reinvestment rates promised to shareholders, according to Artem Abramov of Rystad Energy.

The momentum “would be delivered with a very low reinvestment of around 50%” of cash flows, Abramov said. Big producers like EOG Resources Inc., Devon Energy Corp. and Pioneer Natural Resources Co. could even get a “much lower” rate than this, he said.

OPEC and its allies will be aware of the production power of US shale, even as they promise not to overwhelm global markets. The United States added 7.1 million barrels per day between 2011 and 2019, roughly equivalent to the current production of the Unite Arab Emirates, Kuwait and Iran combined.

© 2021 Bloomberg LP

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