$80 Oil Is Too Enticing For U.S. Drillers To Ignore

Despite multiple signals from the U.S. oil industry that it will continue treating the oil price recovery cautiously, signs are emerging that production growth is accelerating in some key locations, notably the Permian.

Reuters reported this week, citing frac spread data from Tudor, Pickering, Holt and Co, that the rate of oil well completions in the Permian had risen by 5 percent in December. Frac spreads, or the pumping of water and chemicals into the wells to release the oil—the actual hydraulic fracturing—are one of the last stages in a well completion, the report noted.

What this likely means is that consistently higher oil prices have finally proven too alluring to resist. Financial discipline and shareholder returns are all respectable priorities, but with global demand for oil seen strong despite the surge in new Covid-19 cases and with supply disruptions elsewhere, U.S. oil is gaining further prominence. And so is Permian oil.

"Contrary to typical seasonal norms, U.S. frac spread count posted healthy month on month improvement during the month of December, driven near entirely by continued strength in the Permian," said Tudor, Pickering, Holt and Co analyst Taylor Zurcher in a note, as quoted by Reuters.

Indeed, according to the Energy Information Administration, the Permian will continue driving overall U.S. oil production growth. The shale play already accounts for the bulk of oil output in the Lower 48, which will this month exceed 5 million bpd, bringing the total Lower 48 output to 8.44 million bpd.

This will, in turn, contribute to U.S. oil production reaching a record-high next year, again according to the Energy Information Administration. In its latest Short-Term Energy Outlook, the authority forecast that total U.S. oil output will reach an annual average of 12.4 million bpd in 2023, which will be the highest on record, after in 2019, the country booked an annual average of 12.3 million bpd. Last year, the annual average dropped to 11.2 million bpd because of the pandemic.

Bank of America seems to concur with the Tudor, Pickering, Holt and Co data. The bank this week forecast a 22-percent increase in drilling and completions spend this year in the United States and a 25-percent increase globally. According to the bank, U.S. onshore oil production will rise by 900,000 bpd in 2022, all coming from the Lower 48.

At some point, this growing U.S. oil production might begin to weigh on oil prices, but it will be a while before this happens, it seems. Right now, prices are getting a boost from production and export disruptions in Libya, the unrest in Kazakhstan, and worries about OPEC running out of spare production capacity.

However, the EIA has forecast that the average annual prices this year will be lower than last year's. In its STEO, the EIA forecast Brent crude averaging $75 per barrel this year and WTI trading at $71.32 per barrel. This will further decline to $68 per barrel for Brent and $63.50 per barrel in 2023. The agency cited rising global oil inventories and an expected slowdown in demand growth.

According to the EIA, the gap between supply and demand this year will be 1.9 million barrels daily, with supply growing by 5.5 million bpd and demand by 3.6 million bpd. The agency did not provide the basis for this forecast.

One of the biggest achievements of the shale oil industry was boosting production efficiency considerably between the last two cycles. Oil that wasn't profitable ten years ago is profitable now. This means that more U.S. shale drillers will be comfortable with lower oil prices now than they were before. Still, the cautious approach is likely to continue: the memory of the demand destruction that the pandemic wrought on the global industry is still fresh.

By Irina Slav for Oilprice.com