RE: oil market31 May 2021 11:27
Oofy / Nomlungu,
OPEC+ are playing the long game - they know that there will be a substantial demand for oil for decades to come, which is why they haven't changed their drilling and production plans at all.
Saudi's role as a swing producer has also been helped in the last 5 years by the collapse in production from Venezuela. This is mainly the very heavy oil (10 - 13 Deg API) - with much lower profit margins - which also makes up much of Saudi's excess production capacity.
As for US Frac production, it's not going to come back anything like before.
Until the last oil price crash, shale oil producers were targeting production above all else, which in the great majority of cases meant they were effectively on a giant hamster wheel, where all the cash flow from production went into drilling new wells. Because of this, debts were not paid down and no dividends were paid to investors.
When the hamster wheel stopped, they were left with combined debts of over $US 1 Trillion and the investors (Wall Street, Hedge Funds etc) lost their shorts.
So several things have now combined to greatly constrain any rise in shale oil;
A) Loans now come with much stricter conditions with respect to interest payments and payback criteria.
B) The biggest culprits in terms of over drilling their leases have gone.
C) Those left do not want to get back onto the hamster wheel.
D) Some of the more prolific plays (particularly the Bakken) are running out of steam due to depletion - not in the conventional sense of the word, but they are simply running out of the 'sweet spots' to drill. They are also seeing higher GOR's, which with the new gas venting / flaring regulations being pushed by the US Govt and States will be a natural brake on production.
E) The US Govt has essentially stopped issuing licences on Federal land - again acting as a brake.
F) During the last down turn, Frac fleets were not put into long term storage - they were scrapped. As a result capacity has plummeted, with most estimates putting fleet capacity at barely half what it was before (some estimates put it at less than 40%).
The last is particularly important as it acts as a giant brake on completions. This can be seen in the current completion rate of "DUC's" - i.e. wells that were drilled, but left uncompleted.
Despite the rise in the price of oil and that the captial for drilling is already a sunk cost, their numbers have only come down gradually over the last few months.
In addition, shale wells are now using many more fracs to come onto production (an average used to be in the 20's per well. For many it's now in the 50's or even more), so wells are taking longer to complete.
All this has meant that the US Shale rig count has risen very slowly. It's now around 450, which is about 40% less than two yeas ago when the oil industry was still in the biggest downturn it had seen in decades.
TL:DR US Shale isn't going to come back as fast or to the production rates seen befo
Sign In
Follow the stocks
