Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

With Oil Prices Rising, Why Isn't U.S. Shale Production Surging?

By Ellen R. Wald, Ph.D.CommoditiesSep 30, 2021 17:29
ph.investing.com/analysis/with-oil-prices-rising-why-isnt-us-shale-production-surging-92885
With Oil Prices Rising, Why Isn't U.S. Shale Production Surging?
By Ellen R. Wald, Ph.D.   |  Sep 30, 2021 17:29
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

With oil prices at four-year highs and natural gas prices soaring in Europe and Asia, one key question is why has the American fracking industry failed to respond to higher prices by significantly increasing production?

WTI Weekly Chart
WTI Weekly Chart

After all, American fracking has been described as “nimble,” so where did that flexibility go?

The most common reason cited by prominent U.S. oil companies is that they plan to keep production flat in order to raise dividends for shareholders. A rather convenient answer, enabling them to focus their efforts on factors that make them more attractive to investors, but this answer doesn’t tell the whole story.

In a previous column earlier this year about the first quarter energy survey out of the Federal Reserve Bank of Dallas in March, I detailed 4 primary factors—industry consolidation, financing difficulties, pessimistic forecasting, and federal regulation—keeping oil companies from producing more oil.

The latest survey from the Dallas Fed reveals some new issues and a few surprises, including rising costs and an inability to hire qualified personnel. Here are 3 of the most important take-aways for oil traders from the latest survey:

1. Production Unaffected By Price And Price Forecasts

The biggest change between the first and second quarter surveys was in the revision in price forecasting. In March, many exploration and production (E&P) firms had pessimistic views about oil prices. At the time, WTI traded at about $61 per barrel. A majority of respondents in March expected that the price of WTI would decline by the end of December 2021.

Now, WTI is around $75 per barrel.

The latest survey reveals that 64% of respondents expect that the price of WTI will be between $65 and $75 per barrel by the end of December 2021, and 19% expect that the crude oil price could hit $80 per barrel by the end of December 2021. Yet, oil production has only marginally increased since March, despite a 25% increase in price and raised optimism seen in forecasts.

According to the EIA, U.S. oil production was at 11.1 million bpd at the end of March 2021, but it only increased by 400,000 bpd by the end of August. Note: the data for the end of August was before Hurricane Ida temporarily took out most of the offshore production in the Gulf of Mexico.

It was long believed that because of the nature of the fracking process and the relatively low capital expenditures per well, fracking companies could quickly deploy or scale back production based on oil prices. This may still be true in a technical sense, but the data shows this isn’t how shale oil producers are acting.

2. Rising Costs Are New Impediment

Many U.S. production companies that responded to the survey cited rising costs of raw materials, fuel and personnel as factors inhibiting production growth. For example, 39% of companies said their firm was having trouble hiring and that workers were looking for more pay than they were offering. Government restrictions and problems obtaining permits for pipeline construction were also seen as adding to company costs. Additionally, some cited ongoing issues with the supply chain.

For traders, the important takeaway is that the price producers say they need to profitably drill a new well is not a valuable metric for understanding whether shale oil producers will increase production. In March, producers reported that they could profitably drill wells in every shale oil region in the U.S. if the price of WTI was above $58 per barrel.

WTI prices have not only remained above $60 per barrel since then, but have climbed steadily to around $75 per barrel. Nevertheless, producers barely drilled any new wells and are now citing rising costs as a reason. This metric clearly isn’t helpful for understanding production growth at this time.

3. Financing Issues Could Change

Lack of access to traditional sources of capital remains an issue cited by oil producers, though some reported that they believe funders will be induced to return to the shale patch because companies are adhering to capital discipline, are paying off debt, and price forecasts are up. While some survey respondents still believe that the negative attitudes towards fossil fuel production espoused by the current administration will continue to suppress financing, this sentiment is not controlling.

In general, there is a new optimism amongst firms that they will soon be able to attract new investment. This may be overly optimistic, but traders will want to keep an eye on financing deals in the shale patches as a way of gauging when crude oil production in the U.S. might be ready for real growth.

With Oil Prices Rising, Why Isn't U.S. Shale Production Surging?
 

Related Articles

Shaun Downey
Gold Breaks Down Monday   By Shaun Downey - Nov 29, 2021

Highlights for the week: Stock markets collapse Friday This causes buying of the EuroDollar Gold Fails at daily resistance Friday Gold and silver get no benefit from dollar...

With Oil Prices Rising, Why Isn't U.S. Shale Production Surging?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email